**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

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

 

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

 

**Or**

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

 

**Commissionfile number  001-32609**

 

**RockwoodHoldings, Inc.**

(Exact name ofRegistrant as specified in its charter)

 

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

 

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

 

**(609)514-0300**

(Registrant’stelephone number, including area code)

 

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

 

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

 

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

 

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

 

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

 

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

 

As of August 3,2009, there were 74,096,119 outstanding shares of common stock, par value $0.01per share, of the Registrant.

 

 

 

----

 

 

**TABLE OF CONTENTS**

 

**FORM 10-Q**

 
|    | PART I-  FINANCIAL INFORMATION                                                                              |
|---------|------------------------------------------------------------------------------------------------------------------|
| Item 1  | Financial Statements  (Unaudited)                                                                                |
|    | Condensed  Consolidated Statements of Operations for the three and six months ended  June 30, 2009 and 2008 |
|    | Condensed  Consolidated Balance Sheets as of June 30, 2009 and December 31,  2008                      |
|    | Condensed  Consolidated Statements of Cash Flows for the six months ended June 30,  2009 and 2008           |
|    | Condensed  Consolidated Statements of Equity for the six months ended June 30, 2009  and 2008               |
|    | Notes  to Condensed Consolidated Financial Statements                                                            |
| Item 2  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                      |
| Item 3  | Quantitative  and Qualitative Disclosures about Market Risk                                                      |
| Item 4  | Controls and Procedures                                                                                          |
|    |                                                                                                             |
|    | PART II-  OTHER INFORMATION                                                                                 |
| Item 1  | Legal Proceedings                                                                                                |
| Item 1A | Risk Factors                                                                                                     |
| Item 2  | Unregistered  Sales of Equity Securities and Use of Proceeds                                                     |
| Item 3  | Defaults  Upon Senior Securities                                                                                 |
| Item 4  | Submission  of Matters to a Vote of Security Holders                                                             |
| Item 5  | Other Information                                                                                                |
| Item 6  | Exhibits                                                                                                         |
|    |                                                                                                             |
|    | Signatures                                                                                                       |

 

2

----

 

**PART I — FINANCIAL INFORMATION**

 

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

 

**ROCKWOODHOLDINGS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

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

**sharesin thousands)**

**(Unaudited)**

 
| ** **                                                                       | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                       | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                                                       | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net  sales                                                                       |       | $                      | 730.4      |                 | $          | 923.2 |   | $ | 1,390.4 |   | $ | 1,767.0 |   |
| Cost  of products sold                                                           |       | 527.2                  |       | 639.9                |       | 1,005.1 |   | 1,211.2 |   |
| Gross  profit                                                                    |       | 203.2                  |       | 283.3                |       | 385.3 |   | 555.8 |   |
| Selling,  general and administrative expenses                                    |       | 151.0                  |       | 175.8                |       | 296.1 |   | 342.4 |   |
| Restructuring  and other severance costs                                         |       | 4.0                    |       | 1.5                  |       | 11.8 |   | 2.3 |   |
| Loss  on sale of assets and other                                                |       | —                 |       | 0.8                  |       | 0.1 |   | 0.9 |   |
| Operating  income                                                                |       | 48.2                   |       | 105.2                |       | 77.3 |   | 210.2 |   |
| Other  expenses, net:                                                            |       |                   |       |                 |       |   |   |   |   |
| Interest  expense (a)                                                            |       | (28.9                  | )          | (9.7                 | )          | (78.6 | ) | (83.4 | ) |
| Interest  income                                                                 |       | 0.4                    |       | 1.4                  |       | 0.8 |   | 3.6 |   |
| Loss  on early extinguishment of debt, net                                       |       | (27.9                  | )          | —               |       | (25.7 | ) | — |   |
| Foreign  exchange gain (loss), net                                               |       | 16.5                   |       | (0.8                 | )          | 10.9 |   | 14.3 |   |
| Other,  net                                                                      |       | 0.3                    |       | 0.1                  |       | 0.4 |   | 0.5 |   |
| Other  expenses, net                                                             |       | (39.6                  | )          | (9.0                 | )          | (92.2 | ) | (65.0 | ) |
| Income  (loss) from continuing operations before taxes                           |       | 8.6                    |       | 96.2                 |       | (14.9 | ) | 145.2 |   |
| Income  tax provision (benefit)                                                  |       | 10.6                   |       | 20.6                 |       | (6.1 | ) | 40.3 |   |
| (Loss)  income from continuing operations                                        |       | (2.0                   | )          | 75.6                 |       | (8.8 | ) | 104.9 |   |
| Income  from discontinued operations, net of tax                                 |       | 1.1                    |       | 2.4                  |       | 3.4 |   | 1.4 |   |
| Net  (loss) income                                                               |       | (0.9                   | )          | 78.0                 |       | (5.4 | ) | 106.3 |   |
| Net  loss (income) attributable to noncontrolling interest                       |       | 2.6                    |       | —               |       | 5.6 |   | (0.6 | ) |
| Net  income attributable to Rockwood Holdings, Inc.                         |       | $                      | 1.7        |                 | $          | 78.0 |   | $ | 0.2 |   | $ | 105.7 |   |
|                                                                             |       |                   |       |                 |       |   |   |   |   |
| Amounts  attributable to Rockwood Holdings, Inc.:                           |       |                   |       |                 |       |   |   |   |   |
| Income  (loss) from continuing operations                                        |       | $                      | 0.6        |                 | $          | 75.6 |   | $ | (3.2 | ) | $ | 104.3 |   |
| Income  from discontinued operations                                             |       | 1.1                    |       | 2.4                  |       | 3.4 |   | 1.4 |   |
| Net  income                                                                      |       | $                      | 1.7        |                 | $          | 78.0 |   | $ | 0.2 |   | $ | 105.7 |   |
|                                                                             |       |                   |       |                 |       |   |   |   |   |
| Basic  earnings (loss) per share attributable to Rockwood Holdings, Inc.:   |       |                   |       |                 |       |   |   |   |   |
| Earnings  (loss) from continuing operations                                      |       | $                      | 0.01       |                 | $          | 1.02 |   | $ | (0.04 | ) | $ | 1.41 |   |
| Earnings  from discontinued operations                                           |       | 0.01                   |       | 0.04                 |       | 0.04 |   | 0.02 |   |
| Basic  earnings per share                                                        |       | $                      | 0.02       |                 | $          | 1.06 |   | $ | — |   | $ | 1.43 |   |
|                                                                             |       |                   |       |                 |       |   |   |   |   |
| Diluted  earnings (loss) per share attributable to Rockwood Holdings, Inc.: |       |                   |       |                 |       |   |   |   |   |
| Earnings  (loss) from continuing operations                                      |       | $                      | 0.01       |                 | $          | 0.98 |   | $ | (0.04 | ) | $ | 1.36 |   |
| Earnings  from discontinued operations                                           |       | 0.01                   |       | 0.03                 |       | 0.04 |   | 0.02 |   |
| Diluted  earnings per share                                                      |       | $                      | 0.02       |                 | $          | 1.01 |   | $ | — |   | $ | 1.38 |   |
|                                                                             |       |                   |       |                 |       |   |   |   |   |
| Weighted  average number of basic shares outstanding                             |       | 74,082                 |       | 73,933               |       | 74,073 |   | 73,916 |   |
| Weighted  average number of diluted shares outstanding                           |       | 74,347                 |       | 77,019               |       | 74,073 |   | 76,870 |   |

 

----

| (a) Interest  expense includes:         |   |   |   |   |   |   |   |   |   |
|----------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Interest  expense on debt                    |   | $      | (38.9  | )      | $      | (41.3  | )      | $      | (76.6  | ) | $ | (81.9 | ) |
| Mark-to-market  gains on interest rate swaps |   | 12.2   |   | 34.0   |   | 2.6    |   | 3.2    |   |
| Deferred  financing costs                    |   | (2.2   | )      | (2.4   | )      | (4.6   | )      | (4.7   | )      |
| Total                                        |   | $      | (28.9  | )      | $      | (9.7   | )      | $      | (78.6  | ) | $ | (83.4 | ) |

 

See accompanyingnotes to condensed consolidated financial statements.

 

3

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**ROCKWOODHOLDINGS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

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

**sharesin thousands)**

**(Unaudited)**

 
| ** **                                                                                                                                                                                                                                            | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                            | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| **ASSETS**                                                                                                                                                                                                                                            |       |              |       |                  |       |
| Current assets:                                                                                                                                                                                                                                       |       |              |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                                                                             |       | $                 | 203.0      |                  | $          | 468.7 |   |
| Accounts receivable, net                                                                                                                                                                                                                              |       | 476.0             |       | 464.6                 |       |
| Inventories                                                                                                                                                                                                                                           |       | 543.6             |       | 641.0                 |       |
| Deferred income taxes                                                                                                                                                                                                                                 |       | 26.7              |       | 22.1                  |       |
| Prepaid expenses and other current assets                                                                                                                                                                                                             |       | 70.9              |       | 65.9                  |       |
| Total current assets                                                                                                                                                                                                                                  |       | 1,320.2           |       | 1,662.3               |       |
| Property, plant and equipment, net                                                                                                                                                                                                                    |       | 1,715.7           |       | 1,752.2               |       |
| Goodwill                                                                                                                                                                                                                                              |       | 919.5             |       | 917.8                 |       |
| Other intangible assets, net                                                                                                                                                                                                                          |       | 720.2             |       | 754.8                 |       |
| Deferred  debt issuance costs, net of accumulated amortization of $7.5 and $39.2,  respectively                                                                                                                                                       |       | 28.2              |       | 39.1                  |       |
| Deferred income taxes                                                                                                                                                                                                                                 |       | 22.6              |       | 11.6                  |       |
| Other assets                                                                                                                                                                                                                                          |       | 37.3              |       | 39.5                  |       |
| Total assets                                                                                                                                                                                                                                          |       | $                 | 4,763.7    |                  | $          | 5,177.3 |   |
| **LIABILITIES**                                                                                                                                                                                                                                       |       |              |       |                  |       |
| Current liabilities:                                                                                                                                                                                                                                  |       |              |       |                  |       |
| Accounts payable                                                                                                                                                                                                                                      |       | $                 | 211.5      |                  | $          | 260.8 |   |
| Income taxes payable                                                                                                                                                                                                                                  |       | 1.1               |       | 4.1                   |       |
| Accrued compensation                                                                                                                                                                                                                                  |       | 61.4              |       | 92.6                  |       |
| Restructuring liability                                                                                                                                                                                                                               |       | 11.9              |       | 18.9                  |       |
| Accrued expenses and other current liabilities                                                                                                                                                                                                        |       | 199.6             |       | 198.5                 |       |
| Deferred income taxes                                                                                                                                                                                                                                 |       | 8.6               |       | 9.0                   |       |
| Long-term debt, current portion                                                                                                                                                                                                                       |       | 58.9              |       | 90.9                  |       |
| Total current liabilities                                                                                                                                                                                                                             |       | 553.0             |       | 674.8                 |       |
| Long-term debt                                                                                                                                                                                                                                        |       | 2,450.8           |       | 2,720.3               |       |
| Pension and related liabilities                                                                                                                                                                                                                       |       | 358.2             |       | 352.0                 |       |
| Deferred income taxes                                                                                                                                                                                                                                 |       | 84.8              |       | 97.6                  |       |
| Other liabilities                                                                                                                                                                                                                                     |       | 186.1             |       | 191.6                 |       |
| Total liabilities                                                                                                                                                                                                                                     |       | 3,632.9           |       | 4,036.3               |       |
| Restricted stock units                                                                                                                                                                                                                                |       | 0.9               |       | 2.1                   |       |
| **EQUITY**                                                                                                                                                                                                                                            |       |              |       |                  |       |
| Rockwood Holdings, Inc. stockholders’ equity:                                                                                                                                                                                               |       |              |       |                  |       |
| Common  stock ($0.01 par value, 400,000 shares authorized, 74,182 shares issued and  74,088 shares outstanding at June 30, 2009;  400,000 shares authorized, 74,155 shares  issued and 74,061 shares outstanding at December 31, 2008) |       | 0.7               |       | 0.7                   |       |
| Paid-in capital                                                                                                                                                                                                                                       |       | 1,165.9           |       | 1,163.5               |       |
| Accumulated other comprehensive income                                                                                                                                                                                                                |       | 219.4             |       | 204.0                 |       |
| Accumulated deficit                                                                                                                                                                                                                                   |       | (543.1            | )          | (543.3                | )          |
| Treasury stock, at cost                                                                                                                                                                                                                               |       | (1.4              | )          | (1.4                  | )          |
| Total Rockwood Holdings, Inc. stockholders’  equity                                                                                                                                                                                         |       | 841.5             |       | 823.5                 |       |
| Noncontrolling interest                                                                                                                                                                                                                               |       | 288.4             |       | 315.4                 |       |
| Total equity                                                                                                                                                                                                                                          |       | 1,129.9           |       | 1,138.9               |       |
| Total liabilities and equity                                                                                                                                                                                                                          |       | $                 | 4,763.7    |                  | $          | 5,177.3 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

4

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**ROCKWOODHOLDINGS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

**(Dollarsin millions)**

**(Unaudited)**

 
| ** **                                                                                               | ** ** | **Six months ended** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                               | ** ** | **June 30,**    | ** ** |
| ** **                                                                                               | ** ** | **2009**             | ** ** | **2008** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                                                |       |                 |       |   |   |
| Net  (loss) income                                                                                       |       | $                    | (5.4       | ) | $ | 106.3 |   |
| Adjustments  to reconcile net (loss) income to net cash provided by operating activities:                |       |                 |       |   |   |
| Income  from discontinued operations, net of tax                                                         |       | (3.4                 | )          | (1.4 | ) |
| Depreciation  and amortization                                                                           |       | 137.0                |       | 125.0 |   |
| Deferred  financing costs amortization                                                                   |       | 4.6                  |       | 4.7 |   |
| Loss  on early extinguishment of debt, net (a)                                                           |       | 25.7                 |       | — |   |
| Foreign  exchange gain, net                                                                              |       | (10.9                | )          | (14.3 | ) |
| Fair  value adjustment of derivatives                                                                    |       | (2.6                 | )          | (3.2 | ) |
| Bad  debt provision                                                                                      |       | 0.4                  |       | 1.0 |   |
| Stock-based  compensation                                                                                |       | 1.5                  |       | 4.1 |   |
| Deferred  income taxes                                                                                   |       | (16.4                | )          | 16.7 |   |
| Loss  on sale of assets and other                                                                        |       | 0.1                  |       | 0.4 |   |
| Changes  in assets and liabilities, net of the effect of foreign currency translation  and acquisitions: |       |                 |       |   |   |
| Accounts  receivable                                                                                     |       | (6.5                 | )          | (90.0 | ) |
| Inventories                                                                                              |       | 100.4                |       | (14.7 | ) |
| Prepaid  expenses and other assets                                                                       |       | (3.2                 | )          | 7.8 |   |
| Accounts  payable                                                                                        |       | (40.7                | )          | (13.1 | ) |
| Income  taxes payable                                                                                    |       | (3.6                 | )          | (0.1 | ) |
| Accrued  expenses and other liabilities                                                                  |       | (41.1                | )          | (8.8 | ) |
| Net  cash provided by operating activities of continuing operations                                      |       | 135.9                |       | 120.4 |   |
| Net  cash provided by operating activities of discontinued operations                                    |       | —               |       | 3.3 |   |
| **Net cash provided by operating activities**                                                            |       | 135.9                |       | 123.7 |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                                                |       |                 |       |   |   |
| Acquisitions,  including transaction fees paid, net of cash acquired                                     |       | (0.3                 | )          | (11.4 | ) |
| Post  closing purchase price consideration                                                               |       | —               |       | 29.1 |   |
| Capital  expenditures, excluding capital leases                                                          |       | (81.2                | )          | (104.2 | ) |
| Proceeds  on sale of assets                                                                              |       | 6.8                  |       | 2.9 |   |
| Net  cash used in investing activities of continuing operations                                          |       | (74.7                | )          | (83.6 | ) |
| Net  cash used in investing activities of discontinued operations                                        |       | (0.4                 | )          | (4.9 | ) |
| **Net cash used in investing activities**                                                                |       | (75.1                | )          | (88.5 | ) |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                                                |       |                 |       |   |   |
| Issuance  of common stock, net of fees                                                                   |       | —               |       | 1.4 |   |
| Prepayment  of 2014 Notes                                                                                |       | (146.8               | )          | — |   |
| Prepayment  of senior secured debt                                                                       |       | (102.3               | )          | — |   |
| Repayment  of senior secured debt                                                                        |       | (36.8                | )          | (33.5 | ) |
| Payments  on other long-term debt                                                                        |       | (5.4                 | )          | (5.6 | ) |
| Deferred  financing costs                                                                                |       | (13.7                | )          | (3.0 | ) |
| Fees  related to early extinguishment of debt                                                            |       | (8.3                 | )          | — |   |
| Loan  from Viance noncontrolling shareholder                                                             |       | 2.0                  |       | — |   |
| Contractual  advance to Titanium Dioxide Pigments noncontrolling shareholder                             |       | (1.3                 | )          | — |   |
| Distribution  to noncontrolling shareholder                                                              |       | —               |       | (2.9 | ) |
| Net  cash used in financing activities of continuing operations                                          |       | (312.6               | )          | (43.6 | ) |
| Net  cash used in financing activities of discontinued operations                                        |       | —               |       | — |   |
| **Net cash used in financing activities**                                                                |       | (312.6               | )          | (43.6 | ) |
| Effect  of exchange rate changes on cash and cash equivalents                                            |       | (13.9                | )          | (0.2 | ) |
| Net  decrease in cash and cash equivalents                                                               |       | (265.7               | )          | (8.6 | ) |
| Cash  and cash equivalents of continuing operations, beginning of period                                 |       | 468.7                |       | 350.1 |   |
| Cash  and cash equivalents of continuing operations, end of period                                       |       | $                    | 203.0      |   | $ | 341.5 |   |

 

----

| (a) | Includes the write-off  of deferred financing costs of $20.9 and lender fees related to the early  extinguishment of debt of $11.1, partially offset by a discount on the  prepayment of the 2014 Notes of $6.3. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| Supplemental  disclosures of cash flow information: |   |   |   |   |   |
|-----------------------------------------------------|--------|--------|--------|--------|--------|
| Interest  paid                                      |   | $      | 78.5   |   | $      | 82.8 |   |
| Income  taxes paid, net of refunds                  |   | $      | 14.8   |   | $      | 23.6 |   |
| Non-cash  investing activities:                     |   |   |   |   |   |
| Acquisition  of capital equipment                   |   | $      | 12.3   |   | $      | 8.4 |   |
| Fees  related to early extinguishment of debt       |   | $      | 3.7    |   | $      | — |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

5

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**ROCKWOODHOLDINGS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFEQUITY**

**(Dollarsin millions)**

**(Unaudited)**

 
| ** **                                                                                        | ** ** | **2009**                      | ** ** | **2008**           | ** ** |
|---------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|--------------------|------------|
| ** **                                                                                        | ** ** | **Rockwood**                  | ** ** | ** **         | ** ** | ** ** | ** ** | **Rockwood** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                        | ** ** | **Holdings, Inc.**       | ** ** | **Noncontrolling** | ** ** | **Total** | ** ** | **Holdings, Inc.** | ** ** | **Noncontrolling** | ** ** | **Total** | ** ** |
| ** **                                                                                        | ** ** | **Stockholders’ Equity** | ** ** | **Interest**       | ** ** | **Equity** | ** ** | **Stockholders’ Equity** | ** ** | **Interest** | ** ** | **Equity** | ** ** |
| Balance  at January 1                                                                        |       | $                             | 823.5      |               | $          | 315.4 |   | $ | 1,138.9 |   | $ | 1,571.6 |   | $ | 175.3 |   | $ | 1,746.9 |   |
|                                                                                              |       |                          |       |               |       |   |   |   |   |   |   |   |   |
| Net  income (loss)                                                                                |       | 0.2                           |       | (5.6               | )          | (5.4 | ) | 105.7 |   | 0.6 |   | 106.3 |   |
| Other  comprehensive income (loss)                                                                |       | 15.4                          |       | (4.2               | )          | 11.2 |   | 87.6 |   | — |   | 87.6 |   |
| Comprehensive  income (loss)                                                                      |       | 15.6                          |       | (9.8               | )          | 5.8 |   | 193.3 |   | 0.6 |   | 193.9 |   |
| Change  in estimate of fair value of assets contributed to the Titanium Dioxide  Pigments venture |       | —                        |       | (16.5              | )          | (16.5 | ) | — |   | — |   | — |   |
| Distribution  to noncontrolling shareholder                                                       |       | —                        |       | —             |       | — |   | — |   | (2.9 | ) | (2.9 | ) |
| Foreign  currency translation                                                                     |       | —                        |       | (0.7               | )          | (0.7 | ) | — |   | — |   | — |   |
| Issuance  of common stock                                                                         |       | —                        |       | —             |       | — |   | 1.4 |   | — |   | 1.4 |   |
| Deferred  compensation                                                                            |       | 2.4                           |       | —             |       | 2.4 |   | 2.0 |   | — |   | 2.0 |   |
| Balance  at June 30                                                                          |       | $                             | 841.5      |               | $          | 288.4 |   | $ | 1,129.9 |   | $ | 1,768.3 |   | $ | 173.0 |   | $ | 1,941.3 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

6

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** **

**ROCKWOODHOLDINGS, INC. AND SUBSIDIARIES**

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

 

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

 

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

 

Rockwood was formed inconnection with an acquisition of certain assets, stock and businesses fromLaporte plc (“Laporte”) on November 20, 2000 (the “KKR Acquisition”) byaffiliates of Kohlberg Kravis Roberts & Co. L.P. (“KKR”). Thebusinesses acquired focus on specialty compounds, iron-oxide pigments,timber-treatment chemicals and clay-based additives.  Effective November 2007,affiliates of KKR control less than a majority of the voting power of theCompany’s outstanding common stock.

 

On July 31, 2004,the Company completed the acquisition of certain businesses of Dynamit Nobelfrom mg technologies ag, now known as GEA Group Aktiengesellschaft (“GEA Group”).  The remaining businesses acquired are focusedon highly specialized markets and consist of: surface treatment and lithiumchemicals; advanced ceramics and titanium dioxide pigments.

 

***Basis of Presentation***—The accompanying condensed financial statements ofRockwood are presented on a consolidated basis. All significant intercompanyaccounts and transactions have been eliminated in consolidation. Certain prior-periodamounts related to reporting the sale of the pool and spa chemicals business inOctober 2008 as discontinued operations and the adoption of Statement ofAccounting Standards (“SFAS”) No. 160,*Noncontrolling Interests in Consolidated Financial Statements, an amendment ofARB No. 51*,have been reclassified to conform to the current-year classification.

 

The interim financialstatements included herein are unaudited. The results of operations for theinterim periods are not necessarily indicative of the results of operations forthe full year. The condensed consolidated financial statements arepresented based upon accounting principles generally accepted in the UnitedStates of America (“U.S. GAAP”), except that certain information and footnotedisclosures, normally included in financial statements prepared in accordancewith U.S. GAAP, have been condensed or omitted. The accompanying condensedconsolidated financial statements should be read in conjunction with theconsolidated financial statements and the notes thereto contained in theCompany’s 2008 Form 10-K. In the opinion of management, thisinformation contains all adjustments necessary, consisting of normal andrecurring accruals, for a fair presentation of the results for the periodspresented.

 

The Company’snoncontrolling interest (formerly minority interest) represents the total ofthe noncontrolling party’s interest in certain investments (principally theViance, LLC timber treatment joint venture and the Titanium Dioxide Pigmentsventure) that are consolidated but less than 100% owned.

 

Unless otherwise noted,all balance sheet related items which are denominated in euros are converted atthe June 30, 2009 exchange rate of €1.00 = $1.4033.

 

***Stock-Based Compensation***— The Company has previously granted awards under the2008 Amended and Restated Stock Purchase and Option Plan of Rockwood Holdings, Inc.and Subsidiaries (the “Plan”). Under the Plan, the Company granted stockoptions, restricted stock and other stock-based awards to the Company’semployees and directors and allowed employees and directors to purchase sharesof its common stock. There were 10,000,000 authorized shares available forgrant under the Plan. However, the Company will no longer issue equity awardsunder this Plan.  In April 2009, the Company adopted the 2009 StockIncentive Plan (the “New Plan”), which has 11,000,000 authorized shares. Effective January 1, 2006, the Company adopted SFAS No. 123R,*Share-Based Payment*, and relatedinterpretations and began expensing the grant-date fair value of stock options.

 

The aggregate compensationcost for stock options, restricted stock units and Board of Director stockgrants recorded under the Plan caused income from continuing operations beforetaxes to decrease by $0.7 million and $2.2 million for the three months ended June 30,2009 and 2008, respectively and $1.5 million and $4.1 million for the sixmonths ended June 30, 2009 and 2008, respectively.  The total taxbenefit recognized related to stock options was $0.1 million and $0.2 millionfor the three months ended June 30, 2009 and 2008, respectively and $0.1million and $0.4 million for the six months ended June 30, 2009 and 2008,respectively.

 

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

 

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period January 1,2009 through December 31, 2009. However, in accordance with SFAS No. 123R,the Company did not recognize any compensation cost in 2008 for this issuancebecause the performance targets that form the basis for vesting of theserestricted stock units were not known as of December 31, 2008. Theseperformance targets were established on February 20, 2009, when suchperformance targets were approved by the Compensation Committee, and as aresult, the Company began recording compensation cost on a ratable basis overthe vesting period. The grant date fair value of these restricted stock unitswas $7.59 per stock unit.

 

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

 

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

 

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

 

In December 2007,SFAS No. 160,*Noncontrolling Interestsin Consolidated Financial Statements, an amendment of ARB No. 51*, was issued. Per this statement, theaccounting and reporting for minority interests was recharacterized asnoncontrolling interests and classified as a component of equity (but separatefrom parent’s equity). This statement also establishes reporting requirementsthat provide sufficient disclosures that clearly identify and distinguishbetween the interests of the parent and the interests of the noncontrollingowners. This statement was adopted as of January 1, 2009 andprimarily relates to the Company’s Viance, LLC joint venture and TitaniumDioxide Pigments venture.

 

In February 2008,the FASB issued FASB Staff Position (“FSP”) Financial Accounting Standard (“FAS”)FSP FAS 157-2,  *Effective Date of FASB Statement No. 157*. FSP FAS 157-2 delays the effective date of SFAS No. 157 from 2008 to 2009for all nonfinancial assets and nonfinancial liabilities, except those that arerecognized or disclosed at fair value in the financial statements on arecurring basis (at least annually). The Company applied the provisions ofFSP 157-2 on January 1, 2009 and this FSP did not have a material impacton its financial statements.

 

In March 2008, SFAS No. 161,*Disclosures about Derivative Instruments and HedgingActivities - an Amendment of FASB Statement 133*, was issued. This statement changesthe disclosure requirements for derivative instruments and hedging activities,including enhanced disclosures about (a) how and why an entity usesderivative instruments, (b) how derivative instruments and related hedgeditems are accounted for under SFAS No. 133,  *Accounting for DerivativeInstruments and Hedging Activities*, and its relatedinterpretations, and (c) how derivative instruments and related hedgeditems affect an entity’s financial position, financial performance, and cashflows.  The Company adopted SFAS No. 161 on January 1, 2009.This standard did not have a material impact on the Company’s financial statements. See Note 5, “Derivatives,” for the disclosure requirements of this newstandard.

 

In April 2008, theFASB issued FSP No. 142-3,*Determination of the Useful Life of Intangible Assets*. This FSPamends the factors that should be considered in developing renewal or extensionassumptions used to determine the useful life of a recognized intangible assetunder FASB Statement No. 142,*Goodwilland Other Intangible Assets*. The intent of this FSP is to improvethe consistency between the useful life of a recognized intangible asset underStatement 142 and the period of expected cash flows used to measure the fairvalue of the asset under FASB Statement No. 141 (revised 2007),*Business Combinations*, and other U.S.GAAP. This FSP is effective for recognized intangible assets acquired after January 1,2009 and did not have a material impact on the Company’s financial statements.

 

In December 2008,the FASB issued FSP No. 132 (R) — 1,  *Employers’ Disclosures aboutPostretirement Benefit Plan Assets*. This FSP amends FASBStatement No. 132 (revised 2003),*Employers’ Disclosures about Pensions and Other Postretirement Benefits*, to provide guidance on an employer’sdisclosures about plan assets of a defined benefit pension or otherpostretirement plan.  This includes disclosing objectives about howinvestment allocation decisions are made, the major categories of plan assets,the inputs and valuation techniques used to measure the fair value of planassets, the effect of fair value measurements using significant unobservableinputs (Level 3) on changes in plan assets, and significant concentrations ofrisk within plan assets.  The disclosures about plan assets required bythis FSP are effective for the Company for the 2009 fiscal year end.

 

In April 2009, theFASB issued FSP No. 141 (R) — 1,*Accounting for Assets Acquired and Liabilities Assumed in a BusinessCombination That Arise from Contingencies*. This FSP amends and clarifies FASB Statement No. 141(revised 2007), Business 

 

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Combinations, to address application issues raised bypreparers, auditors, and members of the legal profession on initial recognitionand measurement, subsequent measurement and accounting, and disclosure ofassets and liabilities arising from contingencies in a businesscombination.  This FSP was adopted as of January 1, 2009 and iseffective for acquisitions completed on or after January 1, 2009.

 

In April 2009, theFASB issued FSP No. 107-1 and APB 28-1,*Interim Disclosures about Fair Value of Financial Statements*. This FSP amends FASB Statement No. 107,*Disclosures about Fair Value of FinancialInstruments*, torequire disclosures about fair value of financial instruments for interimreporting periods of publicly traded companies as well as in annual financialstatements.  This FSP also amends APB Opinion No. 28,*Interim Financial Reporting*, to require disclosures insummarized financial information at interim reporting periods.  This FSPis effective for the Company beginning with its Form 10-Q for the periodended June 30, 2009 and relates to disclosures made about the fair valueof its debt instruments and cash and cash equivalents.

 

In April 2009, theFASB issued FSP No. 157-4,*DeterminingFair Value When the Volume and Level of Activity for the Asset or LiabilityHave Significantly Decreased and Identifying Transactions That Are Not Orderly*. This FSP provides additionalguidance for estimating fair value in accordance with FASB Statement No. 157,*Fair Value Measurements*, when the volumeand level of activity for the asset or liability have significantlydecreased.  This FSP also includes guidance on identifying circumstancesthat indicate a transaction is not orderly.  This FSP is effective for theCompany beginning with its Form 10-Q for the period ended June 30,2009 and did not have a material impact on its financial statements.

 

In May 2009, SFAS No. 165,*Subsequent Events*, was issued.  This Statement establishes general standardsof accounting for and disclosure of events that occur after the balance sheetdate but before financial statements are issued.  This Statement applies to both interim andannual financial statements and is effective for the Company beginning with itsForm 10-Q for the period ended June 30, 2009.  The Company has performed an evaluation ofsubsequent events through August 7, 2009, which is the date thesefinancial statements were filed with the Securities and Exchange Commission (“SEC”).

 

In June 2009, SFAS No. 166,*Accounting for Transfers and Servicing of FinancialAssets,*was issued.  ThisStatement amends SFAS No. 140, *Accounting for Transfersand Servicing of Financial Assets and Extinguishments of Liabilities,*andwill require more information about transfers of financial assets, includingsecuritization transactions, and where entities have continuing exposure to therisks related to transferred financial assets. It also eliminates the concept of a “qualifying special purpose entity,”changes the requirements for derecognizing financial assets and will requireadditional disclosures.  This Statementis effective for financial asset transfers occurring after January 1, 2010for the Company. The Company does not expect this statement to have a materialimpact on its financial statements.

 

In June 2009, SFAS No. 167,*Amendments to FASB Interpretation No. 46 (R),*wasissued.  This Statement amends FASBInterpretation 46 (R), *Consolidation of VariableInterest Entities,*and requires an enterprise to perform an analysisto determine whether the enterprise’s variable interest entity or interestsgive it a controlling financial interest in a variable interest entity. It alsowill require additional disclosures about involvement with variable interestentities and any significant changes in risk exposure due to that involvement.  This Statement is effective for the Companyas of January 1, 2010.  The Companyis currently evaluating the impact this statement will have on its financialstatements primarily relating to its Viance LLC joint venture and its TitaniumDioxide Pigments venture with Kemira.

 

In June 2009, SFAS No. 168,*The FASB Accounting Standards Codification and theHierarchy of Generally Accepted Accounting Principles, a replacement of FASBStatement No. 162,*was issued. This Statement establishes the FASB Accounting Standards Codification (“Codification”)as the source of authoritative accounting principles recognized by the FASB tobe applied to nongovernmental entities in the preparation of financialstatements in conformity with Generally Accepted Accounting Principles (“GAAP”).  Rules and interpretative releases of theSEC under authority of federal securities laws are also sources ofauthoritative GAAP.  The Codificationdoes not change current GAAP.  Instead,it introduces a new structure that reorganizes the thousands of U.S. GAAPpronouncements into roughly 90 accounting Topics.  The Codification supersedes all accountingstandards in existing FASB, Emerging Issues Task Force (“EITF”), AmericanInstitute of Certified Public Accountants (“AICPA”), and relatedstandards.  This Codification iseffective for the Company’s financial statements beginning with its Form 10-Qfor the period ended September 30, 2009. As a result, the Company began to follow the guidelines in theCodification beginning with its third quarter commencing on July 1, 2009.

 

**2. COMPREHENSIVE INCOME**

 

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

 

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Comprehensive income(loss) is summarized as follows:

 
| ** **                                                           | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|----------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                           | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| **($ in millions)**                                             | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net  (loss) income                                                   |       | $                      | (0.9       | )                    | $          | 78.0 |   | $ | (5.4 | ) | $ | 106.3 |   |
| Pension  related adjustments, net of tax                             |       | (0.2                   | )          | (0.1                 | )          | (0.1 | ) | 0.4 |   |
| Foreign  currency translation                                        |       | 69.4                   |       | 2.7                  |       | 7.4 |   | 119.5 |   |
| Intercompany  foreign currency loans                                 |       | 41.0                   |       | (1.3                 | )          | 3.4 |   | 61.5 |   |
| Net  investment hedges, net of tax                                   |       | (48.7                  | )          | 3.0                  |       | 0.6 |   | (93.8 | ) |
| Foreign  exchange contracts, net of tax                              |       | 0.2                    |       | —               |       | (0.1 | ) | — |   |
| Comprehensive  income                                                |       | 60.8                   |       | 82.3                 |       | 5.8 |   | 193.9 |   |
| Comprehensive  loss (income) attributable to noncontrolling interest |       | 2.9                    |       | —               |       | 9.8 |   | (0.6 | ) |
| Comprehensive  income attributable to Rockwood Holdings, Inc.   |       | $                      | 63.7       |                 | $          | 82.3 |   | $ | 15.6 |   | $ | 193.3 |   |

 

**3. DISCONTINUED OPERATIONS:**

 

On October 10, 2008,the Company completed the sale of its pool and spa chemicals business andreceived net proceeds of $122.0 million in cash.  The net gain on the pooland spa chemicals business sale recorded in the fourth quarter of 2008 was$40.5 million (net of $25.7 million of taxes). In connection with SFAS No. 144,*Accounting for the Impairment or Disposal ofLong-Lived Assets*, the Company’s financial statements have beenreclassified to reflect this business as a discontinued operation for allperiods presented.

 

For the three months endedJune 30, 2009, income from discontinued operations, net of tax, was $1.1million and was related to the reversal of certain reserves in connection withthe sale of the Electronics business in December 2007.  For the six months ended June 30, 2009,income from discontinued operations, net of tax, was $3.4 million and wascomprised of income of $2.3 million due to the favorable resolution of a claimagainst the Company’s former Group Novasep business and the Electronicsbusiness reserve reversal of $1.1 million.   For the three and six months ended June 30,2008, income from discontinued operations, net of tax, of $2.4 million and $1.4million, respectively, related to operating the pool and spa chemicalsbusiness.

 

**4. SEGMENT INFORMATION:**

 

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

 

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

 

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

 

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

 
| ** **                                | ** ** | ** **    | ** **  | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** **  | ** **    | ** ** | ** **    | ** ** | ** **           | ** **  |
|-------------------------------------------|------------|---------------|-------------|-----------------|------------|--------------|------------|--------------|-------------|---------------|------------|---------------|------------|----------------------|-------------|
| ** **                                | ** ** | **Specialty** | ** **  | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** **  | **Specialty** | ** ** | **Corporate** | ** ** | ** **           | ** **  |
| **($ in millions)**                  | ** ** | **Chemicals** | ** **  | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** **  | **Compounds** | ** ** | **and other** | ** ** | **Consolidated (a)** | ** **  |
| **Three months ended June 30, 2009** |       |          |        |            |       |         |       |         |        |          |       |          |       |                 |        |
| Net  sales                                |       | $             |  236.2 |            | $          |  180.1  |       | $            |  164.3 |          | $          |  97.1    |       | $                    |  51.6  |   | $ |  1.1 |   | $ |  730.4 |   |
| Total  Adjusted EBITDA                    |       | 57.5          |        | 22.3            |       | 19.5         |       | 26.1         |        | 8.9           |       | (9.0          | )          | 125.3                |        |
| **Three months ended June 30, 2008** |       |          |        |            |       |         |       |         |        |          |       |          |       |                 |        |
| Net  sales                                |       | $             |  335.5 |            | $          |  242.3  |       | $            |  124.3 |          | $          |  145.3   |       | $                    |  73.2  |   | $ |  2.6 |   | $ |  923.2 |   |
| Total  Adjusted EBITDA                    |       | 82.1          |        | 37.2            |       | 14.1         |       | 44.9         |        | 10.1          |       | (13.3         | )          | 175.1                |        |
| **Six months ended June 30, 2009**   |       |          |        |            |       |         |       |         |        |          |       |          |       |                 |        |
| Net  sales                                |       | $             |  461.5 |            | $          |  335.4  |       | $            |  303.3 |          | $          |  185.0   |       | $                    |  102.7 |   | $ |  2.5 |   | $ |  1,390.4 |   |
| Total  Adjusted EBITDA                    |       | 107.8         |        | 42.9            |       | 41.0         |       | 43.9         |        | 16.7          |       | (17.8         | )          | 234.5                |        |
| **Six months ended June 30, 2008**   |       |          |        |            |       |         |       |         |        |          |       |          |       |                 |        |
| Net  sales                                |       | $             |  647.2 |            | $          |  453.6  |       | $            |  240.2 |          | $          |  278.5   |       | $                    |  142.2 |   | $ |  5.3 |   | $ |  1,767.0 |   |
| Total  Adjusted EBITDA                    |       | 162.6         |        | 70.9            |       | 36.3         |       | 83.4         |        | 18.8          |       | (27.7         | )          | 344.3                |        |

 
| ** **                  | ** ** | ** **    | ** **    | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** **  | ** **    | ** ** | ** **         | ** ** | ** **            | ** **  | ** **       | ** ** |
|-----------------------------|------------|---------------|---------------|-----------------|------------|--------------|------------|--------------|-------------|---------------|------------|--------------------|------------|-----------------------|-------------|------------------|------------|
| ** **                  | ** ** | **Specialty** | ** **    | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** **  | **Specialty** | ** ** | **Corporate**      | ** ** | ** **            | ** **  | ** **       | ** ** |
| ** **                  | ** ** | **Chemicals** | ** **    | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** **  | **Compounds** | ** ** | **and  other (b)** | ** ** | **Eliminations  (c)** | ** **  | **Consolidated** | ** ** |
| Identifiable  assets as of: |       |          |          |            |       |         |       |         |        |          |       |               |       |                  |        |             |       |
| June 30,  2009         |       | $             |  2,032.0 |            | $          |  817.5  |       | $            |  921.1 |          | $          |  872.5        |       | $                     |  137.6 |             | $          |  264.2 |   | $ |  (281.2 | ) | $ |  4,763.7 |   |
| December 31,  2008     |       | 2,030.9       |          | 829.8           |       | 990.0        |       | 879.9        |        | 130.2         |       | 541.4              |       | (224.9                | )           | 5,177.3          |       |
|                             |            |               |               |                 |            |              |            |              |             |               |            |                    |            |                       |             |                  |            |  |  |  |  |  |  |  |  |

 

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| (a)    | This amount does not  include $3.2 million and $2.4 million of Adjusted EBITDA for the three and  six months ended June 30, 2008, respectively, from the pool and spa chemicals  business sold in October 2008.                                                                                                                                                                                                                                           |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (b)    | The decrease is  primarily related to lower cash balances as a result of debt payments in the  first half of 2009.  This amount  includes $47.5 million and $50.7 million of assets from legacy businesses at  June 30, 2009 and December 31, 2008, respectively. These businesses  were formerly owned primarily by Dynamit Nobel.                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (c)    | Amounts contained in  the “Eliminations” column represent the individual subsidiaries’ retained  interest in their cumulative net cash balance (deposits less withdrawals)  included in the corporate centralized cash system and within the identifiable  assets of the respective segment. These amounts are eliminated as the  corporate centralized cash system is included in the Corporate and other  segment’s identifiable assets. |

 

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

 

On a segment basis, theCompany defines Adjusted EBITDA as operating income excluding depreciation andamortization, certain non-cash gains and charges, certain other special gainsand charges deemed by senior management to be non-recurring gains and chargesand certain items deemed by senior management to have little or no bearing onthe day-to-day operating performance of its business segments and reportingunits. The adjustments made to operating income directly correlate with theadjustments to net income in calculating Adjusted EBITDA on a consolidatedbasis pursuant to the senior secured credit agreement, which reflects management’sinterpretations thereof. The indenture governing the senior subordinated notes,due in 2014 (“2014 Notes”) and the facility agreement related to the TitaniumDioxide Pigments venture excludes 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.  Because the Company views AdjustedEBITDA on a segment basis as an operating performance measure, the Company usesincome (loss) from continuing operations before taxes as the most comparableGAAP measure.

 

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

 
| ** **                                             | ** ** | ** **    | ** **  | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** **  | ** **    | ** ** | ** **    | ** ** | ** **       | ** ** |
|--------------------------------------------------------|------------|---------------|-------------|-----------------|------------|--------------|------------|--------------|-------------|---------------|------------|---------------|------------|------------------|------------|
| ** **                                             | ** ** | **Specialty** | ** **  | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** **  | **Specialty** | ** ** | **Corporate** | ** ** | ** **       | ** ** |
| **($ in millions)**                               | ** ** | **Chemicals** | ** **  | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** **  | **Compounds** | ** ** | **and other** | ** ** | **Consolidated** | ** ** |
| **Three months ended June 30, 2009**              |       |          |        |            |       |         |       |         |        |          |       |          |       |             |       |
| Income  (loss) from continuing operations before taxes |       | $             |  13.1  |            | $          |  (5.2   | )          | $            |  (4.3  | )             | $          |  (2.7    | )          | $                |  3.2  |   | $ |  4.5 |   | $ |  8.6 |   |
| Interest  expense (a)                                  |       | 15.6          |        | 7.2             |       | 4.9          |       | 8.3          |        | 2.3           |       | (9.4          | )          | 28.9             |       |
| Interest  income                                       |       | (0.5          | )           | 0.1             |       | (0.1         | )          | (0.1         | )           | —        |       | 0.2           |       | (0.4             | )          |
| Depreciation  and amortization                         |       | 17.8          |        | 15.4            |       | 18.8         |       | 12.8         |        | 2.6           |       | 1.5           |       | 68.9             |       |
| Restructuring  and other severance costs               |       | 0.5           |        | 1.7             |       | (0.1         | )          | 1.7          |        | 0.1           |       | 0.1           |       | 4.0              |       |
| Systems/organization  establishment expenses           |       | 0.1           |        | 0.6             |       | 0.3          |       | 0.1          |        | —        |       | (0.1          | )          | 1.0              |       |
| Loss  on early extinguishment of debt, net             |       | 10.1          |        | 2.2             |       | —       |       | 6.6          |        | 0.7           |       | 8.3           |       | 27.9             |       |
| Foreign  exchange (gain) loss, net                     |       | (1.3          | )           | 0.1             |       | —       |       | (0.6         | )           | —        |       | (14.7         | )          | (16.5            | )          |
| Other                                                  |       | 2.1           |        | 0.2             |       | —       |       | —       |        | —        |       | 0.6           |       | 2.9              |       |
| Total  Adjusted EBITDA                                 |       | $             |  57.5  |            | $          |  22.3   |       | $            |  19.5  |          | $          |  26.1    |       | $                |  8.9  |   | $ |  (9.0 | ) | $ |  125.3 |   |
| **Three months ended June 30, 2008**              |       |          |        |            |       |         |       |         |        |          |       |          |       |             |       |
| Income  (loss) from continuing operations before taxes |       | $             |  51.5  |            | $          |  10.0   |       | $            |  (8.4  | )             | $          |  24.1    |       | $                |  4.7  |   | $ |  14.3 |   | $ |  96.2 |   |
| Interest  expense (a)                                  |       | 13.6          |        | 7.5             |       | 8.9          |       | 9.2          |        | 2.3           |       | (31.8         | )          | 9.7              |       |
| Interest  income                                       |       | (1.2          | )           | 0.1             |       | —       |       | (0.1         | )           | (0.1          | )          | (0.1          | )          | (1.4             | )          |
| Depreciation  and amortization                         |       | 17.1          |        | 17.0            |       | 12.8         |       | 11.9         |        | 2.8           |       | 1.9           |       | 63.5             |       |
| Restructuring  and other severance costs               |       | 0.2           |        | 1.0             |       | —       |       | 0.3          |        | —        |       | —        |       | 1.5              |       |
| Systems/organization  establishment expenses           |       | 0.5           |        | 1.5             |       | —       |       | 0.1          |        | 0.1           |       | —        |       | 2.2              |       |
| Acquisition  and disposals costs                       |       | —        |        | —          |       | —       |       | —       |        | 0.3           |       | 0.4           |       | 0.7              |       |
| Inventory  write-up charges                            |       | 0.1           |        | —          |       | —       |       | —       |        | —        |       | —        |       | 0.1              |       |
| Loss  on sale of assets and other                      |       | —        |        | —          |       | 0.8          |       | —       |        | —        |       | —        |       | 0.8              |       |
| Foreign  exchange loss (gain), net                     |       | 0.3           |        | (0.2            | )          | —       |       | (0.6         | )           | —        |       | 1.3           |       | 0.8              |       |
| Other                                                  |       | —        |        | 0.3             |       | —       |       | —       |        | —        |       | 0.7           |       | 1.0              |       |
| Total  Adjusted EBITDA (b)                             |       | $             |  82.1  |            | $          |  37.2   |       | $            |  14.1  |          | $          |  44.9    |       | $                |  10.1 |   | $ |  (13.3 | ) | $ |  175.1 |   |
| **Six months ended June 30, 2009**                |       |          |        |            |       |         |       |         |        |          |       |          |       |             |       |
| Income  (loss) from continuing operations before taxes |       | $             |  26.3  |            | $          |  (10.6  | )          | $            |  (11.7 | )             | $          |  (9.5    | )          | $                |  6.0  |   | $ |  (15.4 | ) | $ |  (14.9 | ) |
| Interest  expense (a)                                  |       | 30.6          |        | 14.3            |       | 14.9         |       | 16.3         |        | 4.6           |       | (2.1          | )          | 78.6             |       |
| Interest  income                                       |       | (0.7          | )           | 0.2             |       | (0.3         | )          | (0.1         | )           | —        |       | 0.1           |       | (0.8             | )          |
| Depreciation  and amortization                         |       | 36.6          |        | 30.5            |       | 36.7         |       | 24.7         |        | 5.3           |       | 3.2           |       | 137.0            |       |
| Restructuring  and other severance costs               |       | 2.1           |        | 4.6             |       | —       |       | 4.8          |        | 0.1           |       | 0.2           |       | 11.8             |       |
| Systems/organization  establishment expenses           |       | 0.4           |        | 1.1             |       | 1.4          |       | 0.2          |        | —        |       | —        |       | 3.1              |       |
| Loss  on early extinguishment of debt, net             |       | 10.5          |        | 2.2             |       | —       |       | 6.9          |        | 0.7           |       | 5.4           |       | 25.7             |       |
| Loss  on sale of assets and other                      |       | 0.1           |        | —          |       | —       |       | —       |        | —        |       | —        |       | 0.1              |       |
| Foreign  exchange (gain) loss, net                     |       | (0.6          | )           | 0.1             |       | —       |       | 0.6          |        | —        |       | (11.0         | )          | (10.9            | )          |
| Other                                                  |       | 2.5           |        | 0.5             |       | —       |       | —       |        | —        |       | 1.8           |       | 4.8              |       |
| Total  Adjusted EBITDA                                 |       | $             |  107.8 |            | $          |  42.9   |       | $            |  41.0  |          | $          |  43.9    |       | $                |  16.7 |   | $ |  (17.8 | ) | $ |  234.5 |   |
| **Six months ended June 30, 2008**                |       |          |        |            |       |         |       |         |        |          |       |          |       |             |       |
| Income  (loss) from continuing operations before taxes |       | $             |  104.2 |            | $          |  18.0   |       | $            |  (7.4  | )             | $          |  42.2    |       | $                |  8.3  |   | $ |  (20.1 | ) | $ |  145.2 |   |
| Interest  expense (a)                                  |       | 26.4          |        | 14.9            |       | 17.9         |       | 17.9         |        | 4.6           |       | 1.7           |       | 83.4             |       |
| Interest  income                                       |       | (1.9          | )           | 0.1             |       | —       |       | (0.2         | )           | (0.3          | )          | (1.3          | )          | (3.6             | )          |
| Depreciation  and amortization                         |       | 33.2          |        | 33.9            |       | 25.0         |       | 23.8         |        | 5.7           |       | 3.4           |       | 125.0            |       |
| Restructuring  and other severance costs               |       | 0.2           |        | 1.6             |       | —       |       | 0.5          |        | —        |       | —        |       | 2.3              |       |
| Systems/organization  establishment expenses           |       | 0.8           |        | 2.2             |       | —       |       | 0.2          |        | 0.2           |       | —        |       | 3.4              |       |
| Acquisition  and disposals costs                       |       | —        |        | —          |       | —       |       | —       |        | 0.3           |       | 0.4           |       | 0.7              |       |
| Inventory  write-up charges                            |       | 0.5           |        | —          |       | —       |       | —       |        | —        |       | —        |       | 0.5              |       |
| Loss  on sale of assets and other                      |       | —        |        | —          |       | 0.8          |       | 0.1          |        | —        |       | —        |       | 0.9              |       |
| Foreign  exchange gain, net                            |       | (0.3          | )           | (0.2            | )          | —       |       | (1.1         | )           | —        |       | (12.7         | )          | (14.3            | )          |
| Other                                                  |       | (0.5          | )           | 0.4             |       | —       |       | —       |        | —        |       | 0.9           |       | 0.8              |       |
| Total  Adjusted EBITDA (b)                             |       | $             |  162.6 |            | $          |  70.9   |       | $            |  36.3  |          | $          |  83.4    |       | $                |  18.8 |   | $ |  (27.7 | ) | $ |  344.3 |   |

 

----

| (a)    |   | Includes gains of $12.2  million and $34.0 million for the three months ended June 30, 2009 and  2008, respectively, and gains of $2.6 million and $3.2 million for the six  months ended June 30, 2009 and 2008, respectively, representing the  movement in the mark-to-market valuation of the Company’s interest rate and  cross-currency hedging instruments. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| (b)    |   | This amount does not  include $3.2 million and $2.4 million of Adjusted EBITDA for the three and  six months ended June 30, 2008, respectively, from the pool and spa  chemicals business sold in October 2008.                                                                                                                                                         |

 

The summary of segment informationabove includes “Adjusted EBITDA,” a financial measure used by the Company’schief decision 

 

12

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maker and seniormanagement to evaluate the operating performance of each segment.

 

*Itemsexcluded from Adjusted EBITDA*

 

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

 

·                  *Restructuring and other severancecosts*: Restructuring and other severance costs of $4.0 million and $1.5 million wererecorded in the three months ended June 30, 2009 and 2008, respectively,and $11.8 million and $2.3 million were recorded in the six months ended June 30,2009 and 2008, respectively, for miscellaneous restructuring activities,including headcount reductions and facility closures (see Note 15, “Restructuringand Other Severance Costs,” for further details).

 

·                  *Systems/organization establishmentexpenses*: For the three and six months ended June 30, 2009, expenses of $1.0 millionand $3.1 million, respectively, were recorded related to the integration ofbusinesses acquired, primarily related to the completion of the TitaniumDioxide Pigments venture on September 1, 2008 and the acquisition of theElementis plc business in the Performance Additives segment in August 2007. Forthe three and six months ended June 30, 2008, expenses of $2.2 million and$3.4 million, respectively, were recorded related to the integration ofbusinesses acquired, primarily related to the acquisition of the Elementis plcbusiness in the Performance Additives segment.

 

·                  *Inventory write-up charges*:  Under SFAS No. 141,*Business Combinations*, all inventoriesacquired in an acquisition must be revalued to “fair value.” In connection withacquisitions, the Company allocates a portion of the total purchase price toinventory to reflect manufacturing profit in inventory at the date of theacquisitions. This resulted in a reduction of gross profit of $0.1 millionand $0.5 million for the three and six months ended June 30, 2008,respectively, in the Specialty Chemicals segment as the inventory was sold inthe normal course of business.

 

·                  *Loss on early extinguishment ofdebt, net*: In the second quarter of 2009, the Company recorded a loss on earlyextinguishment of debt, net of $27.9 million primarily in connection with theamendment of the Company’s senior secured credit facility. This included thewrite-off of deferred financing costs of $19.5 million and lender fees of $11.1million.  This was partially offset by a discountof $2.7 million related to the repurchase at a discount of $137.7 million inaggregate principal amount of the 2014 Notes. For the six months ended June 30, 2009, the Company recorded a losson early extinguishment of debt, net of $25.7 million related to write-off ofdeferred financing costs of $20.9 million and lender fees related to the earlyextinguishment of debt of $11.1 million, partially offset by a discount of $6.3million related to the repurchase of $153.2 million in aggregate principalamount of the 2014 Notes.

 

·                  *Foreign exchange (gain) loss, net*:  For the three and six monthsended June 30, 2009, the Company recorded foreign exchange gains of $16.5million and $10.9 million, respectively, primarily due to the impact of thestronger pound sterling as of June 30, 2009 versus March 31, 2009 andDecember 31, 2008, respectively, in connection with non-operatingEuro-denominated transactions.  For the six months ended June 30,2008, gains of $14.3 million were recorded due to the impact of the strongereuro as of June 30, 2008 versus December 31, 2007, related tonon-operating Euro-denominated transactions.

 

·                  *Loss on sale of assets and other*. The Company recorded a charge of $0.8 million in the second quarter of2008 related to the liquidation of a joint venture in the Titanium DioxidePigments segment.

 

·                  *Other*:  For the three and six months ended June 30,2009, the Company recorded expenses of $2.9 million and $4.8 million,respectively, primarily related to an increase in reserves covering legacyobligations assumed in connection with the KKR acquisition in 2000 and theacquisition of the Dynamit Nobel businesses in 2004.

 

**5. DERIVATIVES:**

 

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

 

**InterestRate Risk**

 

The Company had $1,866.9million ($1,510.7 million of which is subject to a Libor or Euribor floor of2.00%) and $2,007.9 million of variable rate debt outstanding as of June 30,2009 and December 31, 2008, respectively. Any borrowings under the seniorsecured revolving credit facility and the Titanium Dioxide Pigments venturerevolving credit facility will also be at a variable rate (with the seniorsecured revolving credit facility subject to a Libor or Euribor floor of2.00%). Historically, the Company has entered into 

 

13

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interest rate swaps tomanage its exposure to changes in interest rates related to variable-rate debt.As of June 30, 2009, these contracts cover notional amounts of $610.0million (at interest rates ranging from 4.864% to 5.038%) and €493.0 million(at interest rates ranging from 2.995% to 4.416%). These derivative contractseffectively convert a majority of the senior secured credit obligations and theobligations under the Titanium Dioxide Pigments term loan facility to fixedrate obligations. These swaps will mature between November 2009 and July 2012.The Company has elected not to apply hedge accounting for these interest rateswaps and has recorded the mark-to-market of these derivatives as a componentof interest expense in the Condensed Consolidated Statements of Operations.

 

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

 

**ForeignCurrency Risk**

 

In December 2008,the Company entered into foreign currency forward contracts to manage itsexposure to fluctuations in currency rates on certain forecasted salesdenominated in a currency other than the functional currency of the legalentity. The instruments were designated as foreign exchange cash flow hedgesand are effective at generating offsetting changes in the fair value or cashflows of the hedged item or transaction. As of June 30, 2009, the Companyhad notional amounts outstanding for these foreign currency forward contractsof $6.0 million. It is expected that cumulative losses of $0.2 million as of June 30,2009 will be reclassified into earnings within the next six months. There wasno gain or loss reclassified from accumulated other comprehensive income intoearnings as a result of the discontinuance of cash flow hedges due to theprobability of the original forecasted transaction not occurring. As of June 30,2009, the maximum length of time over which the Company has hedged its exposureto movements in foreign exchange rates for forecasted transactions is sixmonths.

 

In March 2009, theCompany entered into foreign currency forward contracts to manage its exposureto fluctuations in currency rates on forecasted sales denominated in a currencyother than the functional currency of the legal entity. As of June 30,2009, the Company had notional amounts outstanding for these foreign currency forwardcontracts of $2.5 million. The Company has elected not to apply hedgeaccounting for these foreign currency forward contracts.

 

In connection with theoffering of the 2014 Notes, the Company entered into a cross-currency interestrate swap with a five-year term expiring in November 2009 and a notionalamount of €155.6 million that effectively converts the U.S. dollar fixed ratedebt in respect of the 2014 dollar-denominated notes sold into euro fixed ratedebt.  The Company designated this contract as a hedge of the foreign currencyexposure of its net investment in its Euro-denominated operations. There was noineffective portion of the net investment hedge as of June 30, 2009. Inaddition, the Company has designated the remaining portion of itsEuro-denominated debt that is recorded on its U.S. books as a net investmenthedge of its Euro-denominated investments (euro debt of €515.8 million at June 30,2009; $723.8 million). As a result, any foreign currency gains and lossesresulting from the Euro-denominated debt discussed above is accounted for as acomponent of accumulated other comprehensive income for as long as the hedgeremains effective. There was no ineffective portion of the net investment hedgeas of June 30, 2009.

 

14

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

 
| ** **                                                                         | ** ** | ** **                                      | ** ** | **Asset Derivatives**  | ** ** | **Liability Derivatives**  | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                                                                         | ** ** | ** **                                      | ** ** | **Fair Value as of**   | ** ** | **Fair Value as of**       | ** ** |
| **(in millions)**                                                                  | ** ** | **Balance Sheet Location**                      | ** ** | **June 30, 2009** | ** ** | **December 31, 2008** | ** ** | **June 30, 2009** | ** ** | **December 31, 2008** | ** ** |
| **Derivatives designated as hedging****instruments  under SFAS No. 133:**     |       |                                            |       |                   |       |                       |       |   |   |   |   |
| Foreign  exchange contracts                                                        |       | Prepaid  expenses and other current assets      |       | $                      | 0.6        |                       | $          | 1.1 |   | $ | — |   | $ | — |   |
| Cross-currency  interest rate swaps - net investment hedge                         |       | Accrued  expenses and other current liabilities |       | —                 |       | —                     |       | 18.4 |   | 16.4 |   |
| Total derivatives  designated as hedging instruments under SFAS No.133             |       |                                            |       | $                      | 0.6        |                       | $          | 1.1 |   | $ | 18.4 |   | $ | 16.4 |   |
|                                                                               |       |                                            |       |                   |       |                       |       |   |   |   |   |
| **Derivatives not designated as hedging****instruments  under SFAS No. 133:** |       |                                            |       |                   |       |                       |       |   |   |   |   |
| Foreign  exchange contracts                                                        |       | Prepaid  expenses and other current assets      |       | $                      | 0.1        |                       | $          | — |   | $ | — |   | $ | — |   |
| Interest  rate swaps                                                               |       | Accrued  expenses and other current liabilities |       | —                 |       | —                     |       | 9.3 |   | 6.5 |   |
|                                                                               |       | Other  liabilities                              |       | —                 |       | —                     |       | 59.7 |   | 58.9 |   |
| Cross-currency  interest rate swaps                                                |       | Accrued  expenses and other current liabilities |       | —                 |       | —                     |       | 0.1 |   | 0.1 |   |
|                                                                               |       | Other liabilities                               |       | —                 |       | —                     |       | 4.6 |   | 4.7 |   |
| Total derivatives not  designated as hedging instruments under SFAS No. 133   |       |                                            |       | $                      | 0.1        |                       | $          | — |   | $ | 73.7 |   | $ | 70.2 |   |
| **Total derivatives**                                                              |       |                                            |       | $                      | 0.7        |                       | $          | 1.1 |   | $ | 92.1 |   | $ | 86.6 |   |

 

The following tableprovides the gains and losses reported in “Other Comprehensive Income” (“OCI”) withinEquity for the three and six months ended June 30, 2009 and 2008:

 
| ** **                                                            | ** ** | **Amount of Gain or (Loss) Recognized in OCI on  Derivatives** | ** **  |
|-----------------------------------------------------------------------|------------|----------------------------------------------------------------|-------------|
| ** **                                                            | ** ** | **and Other Financial Instruments (Effective Portion)**        | ** **  |
| ** **                                                            | ** ** | **Three months ended**                                         | ** **  | **Six months ended** | ** ** |
| ** **                                                            | ** ** | **June 30,**                                              | ** **  | **June 30,** | ** ** |
| **(in millions)**                                                     | ** ** | **2009**                                                       | ** **  | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Derivatives in SFAS No. 133**                                  |       |                                                           |        |   |   |   |   |   |   |
| **Cash Flow Hedging Relationships:**                                  |       |                                                           |        |   |   |   |   |   |   |
| Foreign  exchange contracts                                           |       | $                                                              | 0.3         |   | $ | — |   | $ | (0.2 | ) | $ | — |   |
|                                                                  |       |                                                           |        |   |   |   |   |   |   |
| **Derivatives and Other Financial Instruments in SFAS  No. 133** |       |                                                           |        |   |   |   |   |   |   |
| **Net Investment Hedging Relationships:**                             |       |                                                           |        |   |   |   |   |   |   |
| Cross-currency  interest rate swaps - net investment hedge            |       | $                                                              | (12.2       | ) | $ | 0.8 |   | $ | (2.1 | ) | $ | (15.9 | ) |
| Euro-denominated  debt                                                |       | (43.3                                                          | )           | 2.2 |   | 4.1 |   | (77.9 | ) |
|                                                                  |       | $                                                              |  (55.5 | ) | $ | 3.0 |   | $ | 2.0 |   | $ | (93.8 | ) |

 

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

 

15

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The following tableprovides the gains and losses reported in the Condensed Consolidated Statementsof Operations for the three and six months ended June 30, 2009 and 2008:

 
| ** **                                                                     | ** ** | **Amount of Gain or (Loss) Recognized in Income on  Derivatives** | ** ** | ** **           | ** ** |
|--------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                     | ** ** | **Three months ended**                                            | ** ** | **Six months ended** | ** ** | **Location of Gain or (Loss)** | ** ** |
| ** **                                                                     | ** ** | **June 30,**                                                 | ** ** | **June 30,**    | ** ** | **Recognized in Income on** | ** ** |
| **(in millions)**                                                              | ** ** | **2009**                                                          | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** | **Derivatives** | ** ** |
| **Derivatives Not Designated as Hedging Instruments under  SFAS No. 133** | ** ** | ** **                                                        | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest  rate contracts                                                       |       | $                                                                 | 12.8       |                 | $          | 33.8 |   | $ | 2.0 |   | $ | 5.0 |   | Interest expense |   |
| Cross-currency  interest rate swaps                                            |       | (0.6                                                              | )          | 0.2                  |       | 0.6 |   | (1.8 | ) | Interest expense |   |
|                                                                           |       | $                                                                 | 12.2       |                 | $          | 34.0 |   | $ | 2.6 |   | $ | 3.2 |   |   |   |

 

**6. FAIR VALUE MEASUREMENTS:**

 

On January 1, 2008,the Company adopted SFAS No. 157,*FairValue Measurements*, for financial assets and liabilities, as well asfor any other assets and liabilities that are carried at fair value on a recurringbasis in the financial statements. The FASB had deferred the implementation ofSFAS No. 157 by one year for non-financial assets and liabilities, whichthe Company adopted on January 1, 2009. Under SFAS No. 159,*The Fair Value Option for Financial Assets andFinancial Liabilities**— Including an Amendment of FASB Statement No. 115*, entities are permitted to choose tomeasure many financial instruments and certain other items at fairvalue. The Company has elected not to measure any additional instrumentsat fair value under SFAS No. 159.

 

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

 
| Level 1 — | Inputs are unadjusted  quoted market prices in active markets for identical assets or liabilities  that the Company has the ability to access at the measurement date.                                                                                                                                                                                                                                                                  |
|----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| Level 2 — | Inputs are directly or  indirectly observable, which include quoted prices for similar assets and  liabilities in active markets, quoted prices for identical or similar assets  or liabilities in markets that are not active, inputs other than quoted  prices that are observable for the asset or liability and inputs that are  derived principally from or corroborated by observable market data by  correlation or other means. |
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| Level 3 — | Inputs are unobservable  inputs that are used to measure fair value to the extent observable inputs  are not available. The Company does not have any financial assets or  liabilities that are classified as Level 3 inputs as of June 30, 2009 or  December 31, 2008.                                                                                                                                                  |

 

16

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

 
| ** **                                                     | ** ** | **As of**              | ** ** | **Fair Value Measurements** | ** ** |
|----------------------------------------------------------------|------------|------------------------|------------|-----------------------------|------------|
| **(in millions)**                                              | ** ** | **June 30, 2009** | ** ** | **Level 1**                 | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Assets                                                         | ** ** | ** **             | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Marketable  securities (a)                                     |       | $                      | 105.4      |                        | $          | 105.4 |   | $ | — |   | $ | — |   |
| Foreign  exchange contracts (b)                                |       | 0.7                    |       | —                      |       | 0.7 |   | — |   |
| Total  assets at fair value                                    |       | $                      | 106.1      |                        | $          | 105.4 |   | $ | 0.7 |   | $ | — |   |
|                                                           |       |                   |       |                        |       |   |   |   |   |
| Liabilities                                                    | ** ** | ** **             | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest  rate swaps (b)                                       |       | $                      | 69.0       |                        | $          | — |   | $ | 69.0 |   | $ | — |   |
| Cross-currency  interest rate swaps (b)                        |       | 4.7                    |       | —                      |       | 4.7 |   | — |   |
| Cross-currency  interest rate swaps - net investment hedge (b) |       | 18.4                   |       | —                      |       | 18.4 |   | — |   |
| Total  liabilities at fair value                               |       | $                      | 92.1       |                        | $          | — |   | $ | 92.1 |   | $ | — |   |

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

 

----

| (a)    |   | These primarily  represent money market funds with an original maturity of three months or  less.       |
|--------|--------|---------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                    |
| (b)    |   | See Note 5,  “Derivatives,” for further details of the Company’s derivative instruments. |

 

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

 

***Counter-partyrisk -***TheCompany manages counter-party risk by entering into derivative contracts withonly major financial institutions of investment grade quality and by limitingthe amount of exposure to each financial institution. The Company hasconsidered credit adjustments in its determination of the fair value of itsderivative assets and liabilities as of June 30, 2009 and December 31,2008 based on market participant assumptions. In addition, based on the creditevaluation of each institution comprising its derivative assets as of June 30,2009 and December 31, 2008, the Company believes the carrying values ofthese assets as of June 30, 2009 and December 31, 2008 to be fullyrealizable.

 

***Debt*****-**The Company estimates that its debt underthe senior secured credit facility and Titanium Dioxide Pigments venturefacility agreement, based on current interest rates and terms, approximatesfair value.  Based on quoted marketprices at June 30, 2009, the Company estimates the fair value of its 2014Notes approximated $511.7 million.  As ofJune 30, 2009, the aggregate principal carrying amount of the 2014 Noteswas $551.0 million.

 

***Cashand Cash Equivalents -***All highly liquid instruments and money market fundswith an original maturity of three months or less are considered to be cashequivalents.  The carrying amountapproximates fair value because of the short maturities of these instruments.

 

17

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**7. ACQUISITIONS:**

 

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

 

On August 11, 2008,the Company completed the acquisition of Holliday Pigments, the leading globalmanufacturer of technical grade ultramarine blue and manganese violet pigments,from Yule Catto & Co. plc for a purchase price of approximately €46.0million ($68.6 million using an August 11, 2008 exchange rate of $1.4909).Holliday Pigments manufactures inorganic ultramarine pigments for a wide rangeof applications, including plastics, cosmetics, coatings and inks. HollidayPigments was incorporated into the Color Pigments and Services business, whichis part of the Performance Additives segment. The allocation of the purchaseprice to the identifiable assets acquired is preliminary and is subject tochange, with expected completion during 2009.

 

On September 1,2008, the Company completed the formation of a venture with Kemira that focuseson specialty titanium dioxide pigments. The venture combines the Company’stitanium dioxide pigments and functional additives businesses, which are partof the Titanium Dioxide Pigments segment, including its production facility inDuisburg, Germany, and Kemira’s titanium dioxide business, including Kemira’stitanium dioxide plant in Pori, Finland.  The Company has consolidatedthis venture and has reported Kemira’s interest as noncontrolling interest inthe condensed consolidated financial statements. The Company owns 61% of theventure with Kemira owning the remaining portion.  The venture’sacquisition of the shares of the Rockwood and Kemira entities was facilitatedby the borrowings under a term loan of €250.0 million on September 3, 2008($362.5 million using a September 3, 2008 exchange rate of1.4498). The venture made a payment of €97.5 million ($141.4 million usinga September 3, 2008 exchange rate) to the venture’s noncontrollingshareholder. In addition, the venture obtained a €30.0 million ($42.1 million)revolving credit facility to finance its operations and the venture has assumeddebt of €24.0 million ($33.7 million) from Kemira, primarily due to a definedbenefit pension plan. The Company estimates that the potential exposure rangefor assumed environmental liabilities is from $13.6 million to $25.3 million.At June 30, 2009, $13.6 million of related reserves were recorded. Theallocation of purchase price to the identifiable assets acquired is preliminaryand is subject to change, with expected completion during 2009.

 

On September 4,2008, the Company completed the acquisition of Nalco Holdings, Inc.’s (“Nalco”)Finishing Technologies business for a purchase price of approximately $75.0million. Nalco’s Finishing Technologies business provides chemicals andservices for pre-treating of metal and is part of the Surface Treatmentbusiness within the Specialty Chemicals segment.  The allocation of the purchase price to theidentifiable assets acquired is preliminary and is subject to change, withexpected completion during 2009.

 

In addition to theacquisitions described above, the Company had completed other smaller acquisitionsin 2008. Depending on the timing and complexity involved, the purchaseprice allocation to the net assets acquired for certain acquisitions completedwithin the last year was preliminary as of June 30, 2009.

 

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

 

**8. INVENTORIES:**

 

Inventories are comprisedof the following:

 
| ** **               | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------|------------|-------------------|------------|-----------------------|------------|
| **($ in millions)** | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| Raw  materials           |       | $                 | 162.7      |                  | $          | 203.8 |   |
| Work-in-process          |       | 69.7              |       | 74.2                  |       |
| Finished  goods          |       | 303.9             |       | 355.3                 |       |
| Packaging  materials     |       | 7.3               |       | 7.7                   |       |
| Total                    |       | $                 | 543.6      |                  | $          | 641.0 |   |

 

18

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**9. GOODWILL:**

 

Below are goodwillbalances and activity by segment:

 
| ** **                       | ** ** | **Specialty** | ** ** | **Advanced** | ** ** | ** ** | ** ** |
|----------------------------------|------------|---------------|------------|--------------|------------|------------|------------|
| **($ in millions)**         | ** ** | **Chemicals** | ** ** | **Ceramics** | ** ** | **Total**  | ** ** |
| Balance,  December 31, 2008 |       | $             | 648.0      |         | $          | 269.8      |       | $ | 917.8 |   |
| Acquisitions                     |       | (1.5          | )          | 0.5          |       | (1.0       | )          |
| Foreign  exchange                |       | 2.1           |       | 0.6          |       | 2.7        |       |
| Balance,  June 30, 2009     |       | $             | 648.6      |         | $          | 270.9      |       | $ | 919.5 |   |

 

**10. OTHER INTANGIBLE ASSETS:**

 

Other intangible assets,net consist of:

 
| ** **                               | ** ** | **As of June 30, 2009** | ** ** | **As of December 31, 2008** | ** ** |
|------------------------------------------|------------|------------------------------|------------|----------------------------------|------------|
| ** **                               | ** ** | **Gross**                    | ** ** | ** **                       | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Carrying**                 | ** ** | **Accumulated**                  | ** ** | ** ** | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| **($ in millions)**                 | ** ** | **Amount**                   | ** ** | **Amortization**                 | ** ** | **Net** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Net** | ** ** |
| Patents  and other intellectual property |       | $                            | 415.9      |                             | $          | (156.8 | ) | $ | 259.1 |   | $ | 411.9 |   | $ | (142.0 | ) | $ | 269.9 |   |
| Trade  names and trademarks              |       | 143.1                        |       | (30.7                            | )          | 112.4 |   | 141.5 |   | (27.1 | ) | 114.4 |   |
| Customer  relationships                  |       | 373.7                        |       | (96.4                            | )          | 277.3 |   | 372.2 |   | (79.1 | ) | 293.1 |   |
| Supply  agreements                       |       | 58.2                         |       | (9.3                             | )          | 48.9 |   | 57.3 |   | (6.3 | ) | 51.0 |   |
| Other                                    |       | 61.6                         |       | (39.1                            | )          | 22.5 |   | 61.7 |   | (35.3 | ) | 26.4 |   |
| Total                                    |       | $                            | 1,052.5    |                             | $          | (332.3 | ) | $ | 720.2 |   | $ | 1,044.6 |   | $ | (289.8 | ) | $ | 754.8 |   |

 

Amortization of otherintangible assets was $20.0 million and $19.8 million for the three monthsended June 30, 2009 and 2008, respectively, and $39.5 million and $38.5million for the six months ended June 30, 2009 and 2008, respectively.

 

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

 
| **($ in millions)** | ** ** | **Amortization** | ** ** |
|--------------------------|------------|------------------|------------|
| **Year ended**           | ** ** | **Expense**      | ** ** |
| 2009                     |       | $                | 79.9       |   |
| 2010                     |       | 78.3             |       |
| 2011                     |       | 75.2             |       |
| 2012                     |       | 71.3             |       |
| 2013                     |       | 68.4             |       |
|                          |            |                  |            |  |

 

19

----

 

**11. LONG-TERM DEBT**

 

Long-term debt and loanspayable are summarized as follows:

 
| ** **                                                                                | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **($ and € in millions)**                                                       | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| Senior  secured credit facilities:                                                        |       |              |       |                  |       |
| Tranche  A-1 term loans (€4.6 and €22.8, respectively)                          |       | $                 | 6.4        |                  | $          | 31.9 |   |
| Tranche  A-2 term loans (€39.8 and €99.4, respectively)                         |       | 55.9              |       | 138.9                 |       |
| Tranche  E term loans                                                                     |       | 140.1             |       | 1,104.9               |       |
| Tranche  G term loans (€65.4 and €265.2, respectively)                          |       | 91.8              |       | 370.5                 |       |
| Tranche  H term loans                                                                     |       | 942.0             |       | —                |       |
| Tranche  I term loans (€195.6 as of June 30, 2009)                              |       | 274.5             |       | —                |       |
| 2014  Notes (€250.1 and $200.0 and €364.0 and $200.0, respectively)             |       | 551.0             |       | 708.5                 |       |
| Titanium  Dioxide Pigments venture term loans (€245.0 and €250.0, respectively) |       | 343.8             |       | 349.3                 |       |
| Capitalized  lease obligations (€33.0 and €34.3, respectively)                  |       | 46.3              |       | 47.9                  |       |
| Other  loans                                                                              |       | 57.9              |       | 59.3                  |       |
|                                                                                      |       | 2,509.7           |       | 2,811.2               |       |
| Less  current maturities                                                                  |       | (58.9             | )          | (90.9                 | )          |
|                                                                                      |       | $                 | 2,450.8    |                  | $          | 2,720.3 |   |

 

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

 

On June 15, 2009,the Company entered into the amended and restated credit agreement (“RestatedCredit Agreement”), which amends and restates in its entirety the Company’ssenior secured credit agreement.  TheRestated Credit Agreement extends the maturity of certain term loans byproviding for (i) approximately $942.0 million of new tranche H term loanswith a maturity date of May 15, 2014, the aggregate amount of which isdeemed to convert a like amount of outstanding principal of existing tranche Eterm loans (that had a maturity date of July 30, 2012) under the existingcredit agreement and (ii) approximately €195.6 million ($274.5 million) ofnew tranche I term loans with a maturity date of May 15, 2014, theaggregate amount of which is deemed to convert a like amount of outstandingprincipal of existing tranche G term loans (that had a maturity date of July 30,2012) under the existing credit agreement. In the third quarter of 2009, theCompany extended the maturity of $180 million of availability under therevolving credit facility from 2010 to 2012 bearing interest at its option ofeither (i) Libor (subject to Libor floor of 2.00%) plus 4.50% or (ii) ABRplus 3.25%. There were no outstanding borrowings under this revolving creditfacility as of June 30, 2009.

 

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

 

In addition, the RestatedCredit Agreement replaces the consolidated total debt to consolidated AdjustedEBITDA ratio covenant with a senior secured debt to consolidated AdjustedEBITDA ratio covenant such that the Company may not permit its senior secureddebt ratio to exceed 4.40 to 1.00 on the last day of any fiscal quarter throughand including March 31, 2010, 4.25 to 1.00 on the last day of any fiscalquarter thereafter through and including September 30, 2010, and 4.00 to1.00 on the last day of any fiscal quarter thereafter.  The Restated Credit Agreement also resets theasset sales basket, increases the available amount basket that applies tocertain investment, debt and capital expenditure negative covenants and certainother baskets.

 

**12. INCOME TAXES:**

 

The effective tax ratefor the six months ended June 30, 2009 and 2008 was 40.9% and 27.8%,respectively. The difference between the effective rate and the U.S. statutoryrate of 35.0% in the six months ended June 30, 2009 primarily relates to anonrecurring tax benefit related to foreign currency changes, partially offsetby the domestic valuation allowance. The difference between the effective taxrate and the U.S. statutory rate of 35.0% for the six months ended June 30,2008 is primarily a function of favorable foreign rate differentials and theimpact of the valuation allowance on domestic earnings.

 

20

----

 

In the six months ended June 30,2009, the Company increased its worldwide valuation allowances by $16.0million. The increase in the valuation allowance was due to domestic andforeign losses, reduced by a decrease in other comprehensive income. The changein the valuation allowance for the six months ended June 30, 2009increased the tax provision by $17.3 million. The following table reflects theactivity in the valuation allowance for worldwide net operating losses andother deferred income tax assets:

 
| ** **                                               | ** ** | **Valuation** | ** ** |
|----------------------------------------------------------|------------|---------------|------------|
| **($ in millions)**                                 | ** ** | **Allowance** | ** ** |
| Balance  as of December 31, 2008                    |       | $             | 84.7       |   |
| Increase  as reflected in income tax expense             |       | 17.3          |       |
| Decrease  as reflected in other comprehensive income (a) |       | (1.3          | )          |
| Balance  as of June 30, 2009                        |       | $             | 100.7      |   |

 

----

(a)                Primarily related to temporarydifferences of hedges, as well as mark-to-market of the Company’sEuro-denominated debt.

 

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

 

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

 

Unrecognized tax benefitsat June 30, 2009 were $29.2 million. This includes $28.8 million of taxbenefits that, if recognized, would affect the effective tax rate, and $0.4million of tax benefits that, if recognized, would result in an adjustment toother tax accounts.

 

The Company recognizesinterest and penalties related to unrecognized tax benefits in its income taxprovision. The Company had accrued $7.1 million for interest and penalties at December 31,2008. During the six months ended June 30, 2009, the accrual for interestand penalties was increased by $0.8 million to $7.9 million.

 

During the next twelvemonths, it is reasonably possible that resolution of uncertain tax liabilitiescould result in a benefit of up to $8.6 million or a cost of up to $15.2million. Audit outcomes and the timing of audit settlements are subject to significantuncertainty.

 

The Company is subject totaxation in the U.S., various states, and foreign jurisdictions. The Company’stax filings in major jurisdictions are open to investigation by taxauthorities; in the U.S. from 2000, in the U.K. from 2006, and in Germany from2000.

 

**13. EMPLOYEE BENEFIT PLANS:**

 

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

 
| ** **                            | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|---------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                            | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| **($ in millions)**              | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| Service  cost                         |       | $                      | 2.2        |                 | $          | 1.9 |   | $ | 4.2 |   | $ | 3.7 |   |
| Interest  cost                        |       | 8.8                    |       | 7.3                  |       | 17.2 |   | 14.3 |   |
| Expected  return on assets            |       | (3.8                   | )          | (2.8                 | )          | (7.4 | ) | (5.5 | ) |
| Net  amortization of actuarial losses |       | 0.2                    |       | (0.1                 | )          | 0.4 |   | (0.1 | ) |
| Net  periodic pension cost            |       | 7.4                    |       | 6.3                  |       | 14.4 |   | 12.4 |   |
| Settlement/curtailment                |       | (0.2                   | )          | —               |       | (0.2 | ) | — |   |
| Total  pension cost                   |       | $                      | 7.2        |                 | $          | 6.3 |   | $ | 14.2 |   | $ | 12.4 |   |

 

21

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**14. EARNINGS PER COMMON SHARE:**

 

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

 
| ** **                                                                                     | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                                     | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| **($ in millions, except per share  amounts; shares in thousands)**                       | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| **EPS Numerator - Basic:**                                                                     |       |                   |       |                 |       |   |   |   |   |
| Amounts  attributable to Rockwood Holdings, Inc.:                                         |       |                   |       |                 |       |   |   |   |   |
| Income  (loss) from continuing operations                                                      |       | $                      | 0.6        |                 | $          | 75.6 |   | $ | (3.2 | ) | $ | 104.3 |   |
| Income  from discontinued operations                                                           |       | 1.1                    |       | 2.4                  |       | 3.4 |   | 1.4 |   |
| Net  income                                                                                    |       | $                      | 1.7        |                 | $          | 78.0 |   | $ | 0.2 |   | $ | 105.7 |   |
|                                                                                           |       |                   |       |                 |       |   |   |   |   |
| **EPS Denominator - Basic:**                                                                   |       |                   |       |                 |       |   |   |   |   |
| Weighted  average number of common shares outstanding                                          |       | 74,082                 |       | 73,933               |       | 74,073 |   | 73,916 |   |
|                                                                                           |       |                   |       |                 |       |   |   |   |   |
| **Basic earnings (loss) per common share****attributable to Rockwood  Holdings, Inc.:**   |       |                   |       |                 |       |   |   |   |   |
| Earnings  (loss) from continuing operations                                                    |       | $                      | 0.01       |                 | $          | 1.02 |   | $ | (0.04 | ) | $ | 1.41 |   |
| Earnings  from discontinued operations, net of tax                                             |       | 0.01                   |       | 0.04                 |       | 0.04 |   | 0.02 |   |
| Basic  earnings per common share                                                               |       | $                      | 0.02       |                 | $          | 1.06 |   | $ | — |   | $ | 1.43 |   |
| ** **                                                                                     |       |                   |       |                 |       |   |   |   |   |
| **EPS Numerator - Diluted:**                                                                   |       |                   |       |                 |       |   |   |   |   |
| Amounts  attributable to Rockwood Holdings, Inc.:                                         |       |                   |       |                 |       |   |   |   |   |
| Income  (loss) from continuing operations                                                      |       | $                      | 0.6        |                 | $          | 75.6 |   | $ | (3.2 | ) | $ | 104.3 |   |
| Income  from discontinued operations                                                           |       | 1.1                    |       | 2.4                  |       | 3.4 |   | 1.4 |   |
| Net  income                                                                                    |       | $                      | 1.7        |                 | $          | 78.0 |   | $ | 0.2 |   | $ | 105.7 |   |
|                                                                                           |       |                   |       |                 |       |   |   |   |   |
| **EPS Denominator - Diluted:**                                                                 |       |                   |       |                 |       |   |   |   |   |
| Weighted  average number of common shares outstanding                                          |       | 74,082                 |       | 73,933               |       | 74,073 |   | 73,916 |   |
| Effect  of dilutive stock options and other incentives                                         |       | 265                    |       | 3,086                |       | — |   | 2,954 |   |
| Weighted  average number of common shares outstanding and common stock equivalents             |       | 74,347                 |       | 77,019               |       | 74,073 |   | 76,870 |   |
|                                                                                           |       |                   |       |                 |       |   |   |   |   |
| **Diluted earnings (loss) per common share****attributable to Rockwood  Holdings, Inc.:** |       |                   |       |                 |       |   |   |   |   |
| Earnings  (loss) from continuing operations                                                    |       | $                      | 0.01       |                 | $          | 0.98 |   | $ | (0.04 | ) | $ | 1.36 |   |
| Earnings  from discontinued operations, net of tax                                             |       | 0.01                   |       | 0.03                 |       | 0.04 |   | 0.02 |   |
| Diluted  earnings per common share                                                             |       | $                      | 0.02       |                 | $          | 1.01 |   | $ | — |   | $ | 1.38 |   |

 

Stock-based awards underemployee compensation plans representing common stock of 5,234,758 shares and7,557,920 shares were outstanding during the three and six months ended June 30,2009, respectively, and 1,031,258 shares and 1,031,244 shares were outstandingduring the three and six months ended June 30, 2008, respectively, butwere not included in the computation of diluted earnings per common sharebecause their inclusion would have had an anti-dilutive effect.

 

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

 

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

 

During the three and sixmonths ended June 30, 2009, the Company expensed $1.2 million and $2.6million, respectively, of restructuring charges.  In addition, “restructuring and otherseverance costs” in the Condensed Consolidated Statements of Operations for thethree and six months ended June 30, 2009 and 2008 included otherseverance-related costs of $2.8 million and $9.2 million, respectively, relatedto headcount reductions undertaken throughout the Company.

 

For the six months ended June 30,2009, the Company expensed $2.6 million of restructuring charges.  In the Color Pigments and Services businesswithin the Performance Additives segment, $0.2 million of asset write-offs wererecorded in the six months ended June 30, 2009 related to a 2009 restructuringplan.  In the Performance Additives segment,the Company recorded $1.2 million primarily related to a restructuring planimplemented in March 2008 in the Color Pigments and Services business inconnection with the integration of the businesses acquired from Elementis plc,which included the reorganization and relocation of the North American Financeand IT services, and the closure of three manufacturing facilities in 

 

22

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2008. This included$0.6 million of severance costs and $0.6 million of facility closurecosts. In the Specialty Chemicals segment, $1.0 million was recorded inthe six months ended June 30, 2009 primarily for headcount reduction andfacility closure costs as part of restructuring plans in 2008 and 2007. Headcountreduction and facility closure costs of $0.2 million were recorded in the sixmonths ended June 30, 2009 at Corporate related to a 2007 restructuringplan. 

 

During the three and sixmonths ended June 30, 2008, the Company expensed $1.5 million and $2.3million, respectively, of restructuring charges. In the Performance Additivessegment, the Company implemented a restructuring plan in its Color Pigments andServices business in connection with the integration of the business acquiredfrom Elementis plc. For the six months ended June 30, 2008, the Companyrecorded $1.6 million of severance costs related to this restructuring plan. Inthe Advanced Ceramics and Specialty Chemicals segments, $0.5 million and $0.2million, respectively, were recorded in the six months ended June 30, 2008for miscellaneous headcount reductions.

 

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

 

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

 

Selected information forthe 2008 restructuring actions follows:

 
| ** **                                 | ** ** | ** **    | ** ** | **Facility** | ** ** | ** **     | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|---------------|------------|--------------|------------|----------------|------------|------------|------------|
| **($ in millions)**                   | ** ** | **Severance** | ** ** | **Closure**  | ** ** | **Relocation** | ** ** | **Total**  | ** ** |
| **2008**                                   | ** ** | ** **    | ** ** | ** **   | ** ** | ** **     | ** ** | ** ** | ** ** |
| Liability  balance, December 31, 2008 |       | $             | 13.2       |         | $          | 0.1            |       | $          | 0.2        |   | $ | 13.5 |   |
| Restructuring  charge in 2009              |       | 0.9           |       | 0.4          |       | —         |       | 1.3        |       |
| Utilized                                   |       | (7.4          | )          | (0.4         | )          | (0.1           | )          | (7.9       | )          |
| Foreign  exchange and other                |       | 0.2           |       | —       |       | 0.1            |       | 0.3        |       |
| Liability  balance, June 30, 2009     |       | $             | 6.9        |         | $          | 0.1            |       | $          | 0.2        |   | $ | 7.2 |   |

 

These actions areexpected to be completed during 2009.

 

Selected information forthe 2007 restructuring actions follows:

 
| ** **                                 | ** ** | ** **    | ** ** | **Facility** | ** ** | ** **     | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|---------------|------------|--------------|------------|----------------|------------|------------|------------|
| **($ in millions)**                   | ** ** | **Severance** | ** ** | **Closure**  | ** ** | **Relocation** | ** ** | **Total**  | ** ** |
| **2007**                                   | ** ** | ** **    | ** ** | ** **   | ** ** | ** **     | ** ** | ** ** | ** ** |
| Liability  balance, December 31, 2008 |       | $             | 1.3        |         | $          | 1.5            |       | $          | 0.2        |   | $ | 3.0 |   |
| Restructuring  charge in 2009              |       | 0.7           |       | 0.3          |       | —         |       | 1.0        |       |
| Utilized                                   |       | (0.9          | )          | (0.8         | )          | (0.1           | )          | (1.8       | )          |
| Foreign  exchange and other                |       | —        |       | (0.1         | )          | 0.2            |       | 0.1        |       |
| Liability  balance, June 30, 2009     |       | $             | 1.1        |         | $          | 0.9            |       | $          | 0.3        |   | $ | 2.3 |   |

 

These actions areexpected to be completed during 2009.

 

23

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Selected information forthe 2006 restructuring actions follows:

 
| ** **                                 | ** ** | ** **    | ** ** | **Facility** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|---------------|------------|--------------|------------|------------|------------|
| **($ in millions)**                   | ** ** | **Severance** | ** ** | **Closure**  | ** ** | **Total**  | ** ** |
| **2006**                                   | ** ** | ** **    | ** ** | ** **   | ** ** | ** ** | ** ** |
| Liability  balance, December 31, 2008 |       | $             | 0.1        |         | $          | 2.3        |       | $ | 2.4 |   |
| Restructuring  charge in 2009              |       | —        |       | 0.1          |       | 0.1        |       |
| Utilized                                   |       | (0.1          | )          | (0.3         | )          | (0.4       | )          |
| Foreign  exchange and other                |       | —        |       | 0.3          |       | 0.3        |       |
| Liability  balance, June 30, 2009     |       | $             | —     |         | $          | 2.4        |       | $ | 2.4 |   |

 

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

 

Restructuring reserves bysegment are as follows:

 
| ** **                 | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------|------------|-------------------|------------|-----------------------|------------|
| **($ in millions)**   | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| Specialty  Chemicals       |       | $                 | 5.8        |                  | $          | 8.1 |   |
| Performance  Additives     |       | 1.5               |       | 2.3                   |       |
| Titanium  Dioxide Pigments |       | 1.1               |       | 1.4                   |       |
| Advanced  Ceramics         |       | 0.8               |       | 4.5                   |       |
| Specialty  Compounds       |       | 0.3               |       | 0.5                   |       |
| Corporate  and other       |       | 2.4               |       | 2.1                   |       |
|                       |       | $                 |  11.9 |                  | $          | 18.9 |   |

 

**16. COMMITMENTS AND CONTINGENCIES:**

 

***Legal Proceedings***—The Company is involved in various legal proceedings,including commercial, intellectual property, product liability andenvironmental matters of a nature considered normal to its business. It is theCompany’s policy to accrue for amounts related to these matters in accordancewith SFAS No. 5,  *Accounting for Contingencies*, if itis probable that a liability has been incurred and an amount can be reasonablyestimated. It is the Company’s policy to disclose such matters when there is atleast a reasonable possibility that a material loss may have been incurred.

 

**Hospira Matter**

 

In April 2005,Hospira Incorporated filed suit in Mecklenburg County, North Carolina SuperiorCourt against one of the Company’s wholly-owned subsidiaries in its SpecialtyCompounds segment alleging claims for negligence, negligent misrepresentation,estoppel, fraud, third party beneficiary breach of contract and unfair tradepractices as a result of the subsidiary providing PVC compound to its customer.Hospira is seeking damages of approximately $16.0 million for costs allegedlyrelated to its recall and destruction of intravenous administration kits thatincorporated components made with this compound, and further seeks trebledamages of approximately $48.0 million, plus attorneys’ fees and interest,under the North Carolina unfair trade practice statute. The Court dismissedHospira’s negligence and estoppel claims, but initially denied the subsidiary’smotion to dismiss the other claims. Following discovery, the Company’ssubsidiary filed a motion for summary judgment to dismiss the remaining claimsand, on November 9, 2007, the trial court granted the Company’s motion forsummary judgment and dismissed all of the plaintiff’s claims. The plaintiffappealed this decision and, in early 2009, the appellate court affirmed on allcounts with the exception of the negligence claim, which it reversed andremanded to the trial court. The Company’s subsidiary filed a petition with theNorth Carolina Supreme Court for review of the appellate court’s ruling. The Company will continue to vigorously defend this matter.  While theCompany believes its subsidiary has meritorious defenses against Hospira’sclaims and does not believe that resolution of this matter will have a materialadverse effect on its business or financial condition, the Company cannotpredict the ultimate outcome of this litigation and resolution of this claimmay have a material adverse effect on its results of operations or cash flowsin any quarterly or annual reporting period.

 

**AdvertisingMatter**

 

On March 3, 2009,Osmose, Inc. (“OI”) filed an action against Viance LLC (“Viance”), thejoint venture in the Timber Treatment Chemicals business, Rockwood Holdings, Inc.,and certain individuals, in the U.S. District Court, Northern District ofGeorgia, 

 

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claiming that recentadvertisements by Viance comparing its ACQ product and OI’s MCQ product werefalse and misleading in violation of the Lanham Act, constituted unfaircompetition, violated the Georgia Deceptive Trade Practices Act, were defamatoryand that Viance tortiously interfered with OI’s business relationships. OI isseeking damages related to their attorney’s fees and costs and punitivedamages. OI also sought a temporary restraining order (“TRO”) and a preliminaryinjunction prohibiting Viance from continuing to make certain claims inadvertisements related to their MCQ product.  On March 20, 2009, thedistrict court granted Osmose’s motion for a TRO and set a preliminaryinjunction hearing for May 19, 2009. Viance raised certain counterclaimsrelated to OI’s advertisements and both parties’ claims were heard at a recenthearing. The parties are awaiting the court’s ruling. The Company willcontinue to vigorously defend this matter.  While the Company believes thedefendants have meritorious defenses against OI’s claims and does not believethat resolution of this matter will have a material adverse effect on itsbusiness or financial condition, the Company cannot predict the ultimateoutcome of this litigation, and the resolution of this matter may have amaterial adverse effect on its results of operations or cash flows in anyquarterly or annual reporting period.

 

**CeramicHips**

 

In the first quarter of2009, a customer of the Company’s Advanced Ceramics segment initiated a globalvoluntary recall of a specific model of ceramic ballheads manufactured byAdvanced Ceramics, and in July 2009, another customer initiated a recallof certain ceramic components.  The first recall was initiated afterreceiving reports of ceramic fractures and it relates only to the specificcustomers’ designs and no other product of this segment.  The subsidiaryis cooperating with its customers in investigating these matters. Although the Company does not believe these recalls will have a materialadverse effect on its business or financial condition, the Company cannotpredict the ultimate outcome of these matters, and the resolution of thesematters may have a material adverse effect on its results of operations or cashflows in any quarterly or annual reporting period.

 

**EC HeatStabilizers Investigation**

 

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

 

**FormerGlass Sealants Business**

 

A subsidiary in theSpecialty Chemicals segment that formerly manufactured sealants for insulatingglass and resins for laminated glass prior to and after the sale of thisbusiness has been named as a defendant in several lawsuits relating to allegednegligent manufacturing of those products. Pursuant to the sale and purchaseagreement with respect to the divested “glass” business, this subsidiary may berequired to pay indemnity claims related to these lawsuits. Although theCompany expects its subsidiary to have coverage under its product liabilityinsurance policies should damages ultimately be awarded or agreed to, in suchan event, its insurance may not cover such claims and, if not, its subsidiarymay not have sufficient cash flow to pay these claims. Although the Companydoes not believe that resolution of these matters will have a material adverseeffect on its business or financial condition, the Company cannot predict theultimate outcome of these claims, and the resolution of one or more of theseclaims may have a material adverse effect on its results of operations or cashflows in any quarterly or annual reporting period.

 

**OtherMatters**

 

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

 

Reserves in connectionwith product liability matters do not individually exceed $3.0 million and inthe aggregate $8.2 million as of June 30, 2009. The Company’s reserveestimates are based on available facts, including damage claims and input fromits internal and external legal counsel, past experience, and, in someinstances where defense costs are being paid by its insurer, known insurancerecoveries. The Company is unable to estimate the amount or range of anypotential incremental charges should facts and circumstances change and may inthe future revise its estimates based on new information becoming available.Further, the Company cannot predict the outcome of any litigation or thepotential for future litigation.

 

***Indemnity Matters***— The Company may be indemnified by third parties inconnection with certain matters related to acquired businesses.   Although the Company has no reason to believethat the financial condition of those parties who may have 

 

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indemnificationobligations to the Company is other than sound, in the event the Company seeksindemnity under any of these agreements or through other means, there can be noassurance that any party who may have obligations to indemnify the Company willadhere to their obligations and the Company may have to resort to legal actionto enforce its rights under the indemnities. In cases where the Company’sindemnification claims to such third parties are uncontested, the Companyexpects to realize recoveries within the short term.

 

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

 

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

 

***Safety, Healthand Environmental Matters***

 

**General**

 

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

 

**Safety, Health and Environmental Management Systems**

 

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

 

**SHE Capital Expenditures**

 

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

 

**Regulatory Developments**

 

On June 1, 2007, theRegistration, Evaluation and Authorization of Chemicals (“REACH”) legislationbecame effective in the EU. REACH requires manufacturers and importers ofcertain chemicals to register those chemicals, perform health and environmentalrisk analyses of those chemicals, and in certain instances, obtainauthorizations for the use of the chemicals. Covered substances werepre-registered by December 31, 2008. REACH is expected to be implementedin three phases over an eleven year period based on known product hazardsand/or volume of product in commerce. Under REACH, where warranted by a riskassessment, specified uses of some hazardous substances may be restricted. As aspecialty chemicals company, it is possible that the Company is the onlymanufacturer of one or more substances to be regulated under REACH and thuscould potentially bear the full cost of compliance with REACH for some or allof the Company’s products. The Company estimates it has approximately 350products that are subject to REACH. The Company is taking steps to comply withREACH, which included the pre-registration of its products. The Company doesnot believe these costs will have a material impact on its results ofoperations, financial position or liquidity. In addition, it is possible thatREACH may affect raw material supply, customer demand for certain products andthe Company’s decision to continue to 

 

26

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manufacture and sellcertain products.

 

In addition, the Companyis subject to the Homeland Security Agency’s regulations, which addresschemical plant safety, the Kyoto Protocol, which relates to the emission ofgreenhouse gases and the European Union Integrated Pollution Prevention and ControlDirective, which relates to environmental permitting programs for individualfacilities.  The Company does not believe, based upon currently availableinformation, that these regulations will have a material adverse impact on itsresults of operations, financial position or liquidity.

 

**Remediation Liabilities**

 

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

 

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

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

 

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| (a)    |   | The Company is  currently operating groundwater monitoring and/or remediation systems at these  locations.                                                                 |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                       |
| (b)    |   | The Company is  currently operating groundwater monitoring and/or remediation systems at  these locations for which prior owners or insurers have assumed  responsibility. |
|   |   |                                                                                                                                                                       |
| (c)    |   | The Company is  currently conducting investigations into additional possible soil and/or  groundwater contamination at these locations.                                    |

 

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| (d)    |   | The Company has land  restoration obligations relating to landfill activities or surface mining at  these locations. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                 |
| (e)    |   | The Company is  responsible for liabilities related to environmental matters at these closed  facilities.            |

 

The Company is alsoresponsible for environmental matters at some of its former off-site disposallocations owned by third parties. These sites are considered Superfund sites asdefined by the EPA or state regulatory authority. The Company is a potentiallyresponsible party or*de minimis*participant at the following Superfund locations: Casmalia, CA; Laurel, MD;Niagara Falls, NY; South Gate, CA; and Whittier, CA and has reserves for thesematters totaling $6.2 million at June 30, 2009. In addition, in late 2008,the German authorities have ordered the Company to investigate and, dependingon the results, potentially remediate a portion of a former site in Liebenau,Germany. The Company is currently in the process of gathering additionalinformation regarding the site and cannot predict the potential scope of anysuch remediation.

 

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

 

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

 

During the course of theCompany’s business, the Company may receive notices of violation, enforcementand other complaints from regulatory agencies alleging non-compliance withapplicable SHE laws. During 2008, the Company’s Timber Treatment Chemicalssubsidiary was cited by the U.S. EPA for failure to report hazardous materialproduction quantities under the Toxic Substances Control Act - 2005 InventoryUpdate Rule.  The business has subsequently provided the requiredinformation; however, the business received a fine for $0.1 million as a resultof this violation. The Company does not believe, based upon currently availableinformation, that this issue will have a material adverse impact on its resultsof operations, financial position or liquidity.

 

***Environmental Reserves***

 

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

 

The Company’s liabilityestimates are based upon available facts, existing technology, indemnities fromthird parties, past experience and, in some instances, insurance recoveries wherethe remediation costs are being paid by its insurers, and are generated byseveral means, including State-mandated schedules, environmental consultantsand internal experts, depending on the circumstances. On a consolidated basis,the Company has accrued $61.0 million and $55.1 million for known environmentalliabilities as of June 30, 2009 and December 31, 2008,respectively.  As of June 30, 2009and December 31, 2008, $54.7 million and $55.1 million, respectively, wereclassified as other non-current liabilities in the Condensed ConsolidatedBalance Sheets.  The increase in the reserve was primarily due tounanticipated cost increases at a State Superfund remediation project inLaurel, MD related to legacy obligations assumed in connection with the acquisitionof Laporte, plc in 2000.  For thisSuperfund project, the Company expects to be indemnified by Evonik Degussa, assuccessor to Laporte, for a portion of this reserve and has recorded areceivable of $5.0 million as June 30, 2009.  Included in the $61.0 million as of June 30,2009 is $21.7 million that is discounted using discount rates ranging from 5.0%to 7.5%, with the undiscounted amount of these reserves equaling $31.3 million.Included in the $55.1 million as of December 31, 2008 is $21.4 millionthat is discounted using discount rates ranging from 5.0% to 7.5%, with theundiscounted amount of these reserves equaling $30.9 million. In certain cases,the Company’s remediation liabilities are payable over periods of up to 30years. At a number of the sites described above, the extent of contaminationhas not yet been fully investigated or the final scope of remediation is notyet determinable and could potentially affect the range. The Company estimatesthat the potential range for such environmental matters as of June 30,2009 is from $61.0 million to $104.6 million. For the six months ended June 30,2009, the Company recorded charges of $1.5 million ($6.5 million increase tothe environmental reserve less the $5.0 million receivable recorded as notedabove) to increase its environmental liabilities and made payments of $1.2million for clean-up and remediation costs, which reduced its environmentalliabilities. For the six months ended June 30, 2009, the recurring cost ofmanaging hazardous substances for ongoing operations is $21.0 million.

 

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

 

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

 

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

 

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

 

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

 

*Unlessotherwise noted, all balance sheet related items which are denominated in eurosare converted at the June 30, 2009 exchange rate of €1.00 = $1.4033.*

 

**General**

 

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

 

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

 

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

 

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

 

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

 

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

 

29

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

 

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

 

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

 

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

 

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

 

**FactorsWhich Affect Our Results of Operations**

 

**OurMarkets**

 

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

 

***Specialty Chemicals***

 

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

 

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

 

***Performance Additives***

 

·                  Generally, a trend towards the increased use ofcolored concrete products in the construction market has historically had apositive effect on our Color Pigments and Services business line. However,a general slowdown in the construction market negatively impacted constructionsales.  North American and European volumes were lower in 2008 andcontinued to decline in the first six months of 2009.  A continuedslowdown in the construction industry could have a negative impact on ourresults for the remainder of 2009.

 

·                  Demand for our wood protection products, in particularalkaline copper quaternary, or ACQ, is generally driven by new construction, aswell as remodeling and renovations.  The market position of ACQ wasnegatively impacted in 2008 and the first half of 2009 by customer shifts tosubstitute products, a general slowdown in the construction market and the useof wood substitutes. These trends are expected to continue for the remainder of2009.  In 2008, we introduced our newest*Ecolife* system which utilizes*Ecovance*, ahigh-performance non-metallic preservative with enhanced environmentalbenefits. Commercialization began in 2008, but did not have a significantimpact in 2008 or the first half of 2009. We do not expect these products to have a significant impact for theremainder of the year.

 

30

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·                  In the Clay-based Additives business, net salesincreased in 2008 as increased selling prices and volumes for oilfieldapplications and increased selling prices of coatings and inks were partiallyoffset by lower volumes of coatings and carbonless applications.  Acontinued economic slowdown could have a negative impact on the results of thisbusiness for the remainder of 2009.

 

·                  Raw material costs have increased in the first sixmonths of 2009 in the Performance Additives segment. Our ability to pass onadditional selling price increases for raw material increases in 2009 isuncertain in these businesses.

 

***Titanium Dioxide Pigments***

 

·                  Demand for our titanium dioxide products in anatasegrade is driven mainly by demand in the synthetic fiber industry, while demandfor titanium dioxide products in rutile grade and our functional additives isdriven by demand in the coatings, construction, cosmetics, pharmaceutical,food, paper and plastics industries. Market conditions, including pricingpressure and current industry overcapacity, have continued to negatively impactthis segment. Volumes and selling prices in fiber anatase applicationsdecreased in 2008.  In the first six months of 2009, lower volumes offiber anatase applications were partially offset by increased sellingprices.  Sales of titanium dioxide products in rutile grade were down in2008 due to lower selling prices, partially offset by slightly highervolumes.  In the first six months of 2009, sales of rutile applicationswere up due to higher volumes as a result of the venture with Kemira that wascompleted on September 1, 2008, partially offset by lower sellingprices.  Our functional additives sales were down in 2008 and in the firstsix months of 2009 on lower volumes, partially offset by increased sellingprices in both years.  A continued economic downturn could have a negativeimpact on the results of these applications for the remainder of 2009.

 

***Advanced Ceramics***

 

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

 

·                  Despite the negative impact of pricing pressure fromAsian competitors, sales of ceramic products for use in cutting tool productswere up slightly in 2008 on higher volumes.  However, sales of theseapplications were lower in the first half of 2009.  Sales of mechanicalsystems and applications, electronic applications and multi-functionalapplications were down in 2008 and in the first half of 2009 from lowervolumes. Volumes for these applications, particularly cutting tools, electronicsand multi-functional, as well as other industrial driven applications, could benegatively impacted by a continued economic downturn, particularly in theautomotive industry.

 

***Specialty Compounds***

 

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

 

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

 

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

 

31

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**GlobalExposure**

 

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

 

We estimate that we soldto customers in more than 60 countries during this period. Currently, we serveour diverse and extensive customer base with 94 manufacturing facilities in 26countries. Consequently, we are exposed to global economic and politicalchanges, particularly currency fluctuations that could impact our profitabilityand demand for our products.

 

Our sales and productioncosts are mainly denominated in U.S. dollars or euros. Our results ofoperations and financial condition have been historically impacted by thefluctuation of the euro against our reporting currency, the U.S. dollar. Forthe three and six months ended June 30, 2009, the average exchange rate ofthe euro against the U.S. dollar was lower compared to the same period in 2008.As a result, our net sales, gross profit and operating income were negativelyimpacted. Historically, however, our operating margins have not beensignificantly impacted by currency fluctuations because, in general, sales andcosts of products sold are generated or incurred in the same currency, subjectto certain exceptions.

 

**RawMaterials**

 

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

 

**EnergyCosts**

 

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

 

**IncomeTaxes**

 

We recorded an income taxprovision of $10.6 million in the second quarter of 2009 on income from continuingoperations before taxes of $8.6 million. The income tax provision in the secondquarter of 2009 was positively impacted by $2.0 million of nonrecurring items primarilyrelated to foreign taxes and negatively impacted by $6.6 million of domestictax costs allocated from other comprehensive income and the domestic valuationallowance.

 

In the second quarter of2009, the worldwide valuation allowance increased by $26.0 million. This was primarilydue to an increase of $4.1 million related to net operating losses and a $22.4million increase due to domestic losses in other comprehensive income. Of the$26.0 million increase in the valuation allowance for the second quarter of2009, $4.1 million impacted the tax provision.

 

**Acquisitions**

 

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

 

**SpecialCharges and Credits**

 

During the periodspresented, we incurred certain special charges that includedsystems/organization establishment expenses, restructuring and other severancecosts, foreign exchange gains and losses and a loss on the early extinguishmentof debt, net. See “Items excluded from Adjusted EBITDA” section in Note 4, “SegmentInformation,” for a discussion of special charges and credits recorded in thethree and six months ended June 30, 2009 and 2008.

 

32

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**SpecialNote Regarding Non-GAAP Financial Measures**

 

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

 

**Definitionof Adjusted EBITDA**

 

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

 

·                  interest expense;

·                  depreciation expense;

·                  amortization expense, including amortization ofdeferred financing fees;

·                  extraordinary losses and non-recurring charges;

·                  non-cash charges;

·                  losses on asset sales;

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

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

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

·                  any fees and expenses related to permittedacquisitions;

·                  any deduction for noncontrolling interest expense; and

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

 

less:

 

·                  extraordinary gains and non-recurring gains;

·                  non-cash gains; and

·                  gains on asset sales,

 

in all cases, subject tocertain exclusions.

 

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

 

**Management’sUses**

 

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

 

33

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

 

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

 

**Limitations**

 

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

 

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

 

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

 

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

 

An investor or potentialinvestor may find any one or all of these items important in evaluating ourperformance, results of operations, financial position and liquidity.Management compensates for the limitations of using non-GAAP financial measuresby using them only to supplement our U.S. GAAP results to provide a morecomplete understanding of the factors and trends affecting our business.  Adjusted EBITDA is not an alternative to netincome (loss) or income (loss) from continuing operations before taxes oroperating income or cash flows from operating activities as calculated andpresented in accordance with U.S. GAAP. You should not rely on Adjusted EBITDAas a substitute for any such U.S. GAAP financial measures. We strongly urge youto review the reconciliations of Adjusted EBITDA to U.S. GAAP financialmeasures and other financial information, in each case included elsewhere inthis Annual Report. We also strongly urge you not to rely on any singlefinancial measure to evaluate our business. Our measure of Adjusted EBITDA maynot 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 Attributable to Rockwood Holdings, Inc. to Adjusted EBITDA for thethree and six months ended June 30, 2009 and 2008), including as apercentage 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 to Adjusted EBITDA on a segment basis.

 

34

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| ** **                                                     | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|----------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                     | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| **($ in millions)**                                       | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Statement of operations data:**                              |       |                   |       |                 |       |   |   |   |   |
| **Net sales:**                                                 |       |                   |       |                 |       |   |   |   |   |
| Specialty  Chemicals                                           |       | $                      | 236.2      |                 | $          | 335.5 |   | $ | 461.5 |   | $ | 647.2 |   |
| Performance  Additives                                         |       | 180.1                  |       | 242.3                |       | 335.4 |   | 453.6 |   |
| Titanium  Dioxide Pigments                                     |       | 164.3                  |       | 124.3                |       | 303.3 |   | 240.2 |   |
| Advanced  Ceramics                                             |       | 97.1                   |       | 145.3                |       | 185.0 |   | 278.5 |   |
| Specialty  Compounds                                           |       | 51.6                   |       | 73.2                 |       | 102.7 |   | 142.2 |   |
| Corporate  and other                                           |       | 1.1                    |       | 2.6                  |       | 2.5 |   | 5.3 |   |
| Total  net sales                                               |       | 730.4                  |       | 923.2                |       | 1,390.4 |   | 1,767.0 |   |
|                                                           |       |                   |       |                 |       |   |   |   |   |
| Gross  profit                                                  |       | 203.2                  |       | 283.3                |       | 385.3 |   | 555.8 |   |
|                                                           |       | 27.8                   | %          | 30.7                 | %          | 27.7 | % | 31.5 | % |
| Selling,  general and administrative expenses                  |       | 151.0                  |       | 175.8                |       | 296.1 |   | 342.4 |   |
|                                                           |       | 20.7                   | %          | 19.0                 | %          | 21.3 | % | 19.4 | % |
| Restructuring  and other severance costs                       |       | 4.0                    |       | 1.5                  |       | 11.8 |   | 2.3 |   |
| Loss  on sale of assets and other                              |       | —                 |       | 0.8                  |       | 0.1 |   | 0.9 |   |
| **Operating income (loss):**                                   |       |                   |       |                 |       |   |   |   |   |
| Specialty  Chemicals                                           |       | 37.0                   |       | 64.3                 |       | 66.2 |   | 127.9 |   |
|                                                           |       | 15.7                   | %          | 19.2                 | %          | 14.3 | % | 19.8 | % |
| Performance  Additives                                         |       | 4.4                    |       | 17.4                 |       | 6.2 |   | 32.9 |   |
|                                                           |       | 2.4                    | %          | 7.2                  | %          | 1.8 | % | 7.3 | % |
| Titanium  Dioxide Pigments                                     |       | 0.4                    |       | 0.5                  |       | 2.8 |   | 10.4 |   |
|                                                           |       | 0.2                    | %          | 0.4                  | %          | 0.9 | % | 4.3 | % |
| Advanced  Ceramics                                             |       | 11.6                   |       | 32.6                 |       | 14.2 |   | 58.9 |   |
|                                                           |       | 11.9                   | %          | 22.4                 | %          | 7.7 | % | 21.1 | % |
| Specialty  Compounds                                           |       | 6.2                    |       | 6.9                  |       | 11.3 |   | 12.6 |   |
|                                                           |       | 12.0                   | %          | 9.4                  | %          | 11.0 | % | 8.9 | % |
| Corporate  and other                                           |       | (11.4                  | )          | (16.5                | )          | (23.4 | ) | (32.5 | ) |
| Total  operating income                                        |       | 48.2                   |       | 105.2                |       | 77.3 |   | 210.2 |   |
| **Other expenses, net:**                                       |       |                   |       |                 |       |   |   |   |   |
| Interest  expense                                              |       | (28.9                  | )          | (9.7                 | )          | (78.6 | ) | (83.4 | ) |
| Interest  income                                               |       | 0.4                    |       | 1.4                  |       | 0.8 |   | 3.6 |   |
| Loss  on early extinguishment of debt, net                     |       | (27.9                  | )          | —               |       | (25.7 | ) | — |   |
| Foreign  exchange gain (loss), net                             |       | 16.5                   |       | (0.8                 | )          | 10.9 |   | 14.3 |   |
| Other,  net                                                    |       | 0.3                    |       | 0.1                  |       | 0.4 |   | 0.5 |   |
| Other  expenses, net                                           |       | (39.6                  | )          | (9.0                 | )          | (92.2 | ) | (65.0 | ) |
| **Income (loss) from continuing operations before taxes**      |       | 8.6                    |       | 96.2                 |       | (14.9 | ) | 145.2 |   |
| Income  tax provision (benefit)                                |       | 10.6                   |       | 20.6                 |       | (6.1 | ) | 40.3 |   |
| (Loss)  income from continuing operations                      |       | (2.0                   | )          | 75.6                 |       | (8.8 | ) | 104.9 |   |
| Income  from discontinued operations, net of tax               |       | 1.1                    |       | 2.4                  |       | 3.4 |   | 1.4 |   |
| Net  (loss) income                                             |       | (0.9                   | )          | 78.0                 |       | (5.4 | ) | 106.3 |   |
| Net  loss (income) attributable to the noncontrolling interest |       | 2.6                    |       | —               |       | 5.6 |   | (0.6 | ) |
| Net  income attributable to Rockwood Holdings, Inc.       |       | $                      | 1.7        |                 | $          | 78.0 |   | $ | 0.2 |   | $ | 105.7 |   |
|                                                           |       |                   |       |                 |       |   |   |   |   |
| **Adjusted EBITDA:**                                           |       |                   |       |                 |       |   |   |   |   |
| Specialty  Chemicals                                           |       | $                      | 57.5       |                 | $          | 82.1 |   | $ | 107.8 |   | $ | 162.6 |   |
|                                                           |       | 24.3                   | %          | 24.5                 | %          | 23.4 | % | 25.1 | % |
| Performance  Additives                                         |       | 22.3                   |       | 37.2                 |       | 42.9 |   | 70.9 |   |
|                                                           |       | 12.4                   | %          | 15.4                 | %          | 12.8 | % | 15.6 | % |
| Titanium  Dioxide Pigments                                     |       | 19.5                   |       | 14.1                 |       | 41.0 |   | 36.3 |   |
|                                                           |       | 11.9                   | %          | 11.3                 | %          | 13.5 | % | 15.1 | % |
| Advanced  Ceramics                                             |       | 26.1                   |       | 44.9                 |       | 43.9 |   | 83.4 |   |
|                                                           |       | 26.9                   | %          | 30.9                 | %          | 23.7 | % | 29.9 | % |
| Specialty  Compounds                                           |       | 8.9                    |       | 10.1                 |       | 16.7 |   | 18.8 |   |
|                                                           |       | 17.2                   | %          | 13.8                 | %          | 16.3 | % | 13.2 | % |
| Corporate  and other                                           |       | (9.0                   | )          | (13.3                | )          | (17.8 | ) | (27.7 | ) |
| Total  Adjusted EBITDA (a)                                     |       | $                      | 125.3      |                 | $          | 175.1 |   | $ | 234.5 |   | $ | 344.3 |   |

 

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(a)                This amount does not include $3.2 million and $2.4million of Adjusted EBITDA for the three and six months ended June 30,2008 from the pool and spa chemicals business sold in October 2008.

 

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

 
| ** **                                                     | ** ** | **Change: Three months ended June 30, 2009 versus 2008** | ** ** | **Change: Six months ended June 30, 2009 versus 2008** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|
| ** **                                                     | ** ** | ** **                                                                                       | ** ** | ** **                                                                                     | ** ** | **Constant** | ** ** | **Constant** | ** ** | ** ** | ** ** | ** ** | ** ** | **Constant** | ** ** | **Constant** | ** ** |
| ** **                                                     | ** ** | ** **                                                                                       | ** ** | **%**                                                                                          | ** ** | **Currency** | ** ** | **Currency** | ** ** | ** ** | ** ** | **%** | ** ** | **Currency** | ** ** | **Currency** | ** ** |
| **($ in millions)**                                  | ** ** | **Total**                                                                                        | ** ** | **Change**                                                                                     | ** ** | **Effect (a)** | ** ** | **Basis** | ** ** | **Total** | ** ** | **Change** | ** ** | **Effect (a)** | ** ** | **Basis** | ** ** |
| **Statement of operations data:**                              |       |                                                                                             |       |                                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Net sales:**                                                 |       |                                                                                             |       |                                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty  Chemicals                                           |       | $                                                                                                | (99.3      | )                                                                                              | (29.6      | )% | $ | (26.3 | ) | $ | (73.0 | ) | $ | (185.7 | ) | (28.7 | )% | $ | (54.4 | ) | $ | (131.3 | ) |
| Performance  Additives                                         |       | (62.2                                                                                            | )          | (25.7                                                                                          | )          | (15.1 | ) | (47.1 | ) | (118.2 | ) | (26.1 | ) | (30.0 | ) | (88.2 | ) |
| Titanium  Dioxide Pigments                                     |       | 40.0                                                                                             |       | 32.2                                                                                           |       | (13.4 | ) | 53.4 |   | 63.1 |   | 26.3 |   | (24.3 | ) | 87.4 |   |
| Advanced  Ceramics                                             |       | (48.2                                                                                            | )          | (33.2                                                                                          | )          | (12.1 | ) | (36.1 | ) | (93.5 | ) | (33.6 | ) | (23.4 | ) | (70.1 | ) |
| Specialty  Compounds                                           |       | (21.6                                                                                            | )          | (29.5                                                                                          | )          | (4.7 | ) | (16.9 | ) | (39.5 | ) | (27.8 | ) | (11.0 | ) | (28.5 | ) |
| Corporate  and other                                           |       | (1.5                                                                                             | )          | (57.7                                                                                          | )          | (0.2 | ) | (1.3 | ) | (2.8 | ) | (52.8 | ) | (0.4 | ) | (2.4 | ) |
| Total  net sales                                               |       | (192.8                                                                                           | )          | (20.9                                                                                          | )          | (71.8 | ) | (121.0 | ) | (376.6 | ) | (21.3 | ) | (143.5 | ) | (233.1 | ) |
|                                                           |       |                                                                                             |       |                                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross  profit                                                  |       | (80.1                                                                                            | )          | (28.3                                                                                          | )          | (20.2 | ) | (59.9 | ) | (170.5 | ) | (30.7 | ) | (39.8 | ) | (130.7 | ) |
| Selling,  general and administrative expenses                  |       | (24.8                                                                                            | )          | (14.1                                                                                          | )          | (15.7 | ) | (9.1 | ) | (46.3 | ) | (13.5 | ) | (31.7 | ) | (14.6 | ) |
| Restructuring  and other severance costs                       |       | 2.5                                                                                              |       |                                                                                           |       |   |   | 2.5 |   | 9.5 |   |   |   |   |   | 9.5 |   |
| Loss  on sale of assets and other                              |       | (0.8                                                                                             | )          |                                                                                           |       |   |   | (0.8 | ) | (0.8 | ) |   |   |   |   | (0.8 | ) |
| Total  operating expenses                                      |       | (23.1                                                                                            | )          | (13.0                                                                                          | )          | (15.7 | ) | (7.4 | ) | (37.6 | ) | (10.9 | ) | (31.7 | ) | (5.9 | ) |
| **Operating income (loss):**                                   |       |                                                                                             |       |                                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty  Chemicals                                           |       | (27.3                                                                                            | )          | (42.5                                                                                          | )          | (2.5 | ) | (24.8 | ) | (61.7 | ) | (48.2 | ) | (4.3 | ) | (57.4 | ) |
| Performance  Additives                                         |       | (13.0                                                                                            | )          | (74.7                                                                                          | )          | (0.8 | ) | (12.2 | ) | (26.7 | ) | (81.2 | ) | (1.2 | ) | (25.5 | ) |
| Titanium  Dioxide Pigments                                     |       | (0.1                                                                                             | )          | (20.0                                                                                          | )          | 0.4 |   | (0.5 | ) | (7.6 | ) | (73.1 | ) | (0.3 | ) | (7.3 | ) |
| Advanced  Ceramics                                             |       | (21.0                                                                                            | )          | (64.4                                                                                          | )          | (2.0 | ) | (19.0 | ) | (44.7 | ) | (75.9 | ) | (3.0 | ) | (41.7 | ) |
| Specialty  Compounds                                           |       | (0.7                                                                                             | )          | (10.1                                                                                          | )          | (0.1 | ) | (0.6 | ) | (1.3 | ) | (10.3 | ) | (0.3 | ) | (1.0 | ) |
| Corporate  and other                                           |       | 5.1                                                                                              |       | 30.9                                                                                           |       | 0.5 |   | 4.6 |   | 9.1 |   | 28.0 |   | 1.0 |   | 8.1 |   |
| Total                                                          |       | (57.0                                                                                            | )          | (54.2                                                                                          | )          | (4.5 | ) | (52.5 | ) | (132.9 | ) | (63.2 | ) | (8.1 | ) | (124.8 | ) |
| **Other expenses, net:**                                       |       |                                                                                             |       |                                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest  expense                                              |       | (19.2                                                                                            | )          | 197.9                                                                                          |       | 1.0 |   | (20.2 | ) | 4.8 |   | (5.8 | ) | 2.3 |   | 2.5 |   |
| Interest  income                                               |       | (1.0                                                                                             | )          | (71.4                                                                                          | )          | — |   | (1.0 | ) | (2.8 | ) | (77.8 | ) | (0.1 | ) | (2.7 | ) |
| Loss  on early extinguishment of debt, net                     |       | (27.9                                                                                            | )          |                                                                                           |       |   |   |   |   | (25.7 | ) |   |   |   |   |   |   |
| Foreign  exchange gain (loss), net                             |       | 17.3                                                                                             |       |                                                                                           |       |   |   |   |   | (3.4 | ) |   |   |   |   |   |   |
| Other,  net                                                    |       | 0.2                                                                                              |       |                                                                                           |       |   |   |   |   | (0.1 | ) |   |   |   |   |   |   |
| Other  expenses, net                                           |       | (30.6                                                                                            | )          |                                                                                           |       |   |   |   |   | (27.2 | ) |   |   |   |   |   |   |
| **Income (loss) from continuing operations before taxes**      |       |                                                                                             |       |                                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty  Chemicals                                           |       | (38.4                                                                                            | )          |                                                                                           |       |   |   |   |   | (77.9 | ) |   |   |   |   |   |   |
| Performance  Additives                                         |       | (15.2                                                                                            | )          |                                                                                           |       |   |   |   |   | (28.6 | ) |   |   |   |   |   |   |
| Titanium  Dioxide Pigments                                     |       | 4.1                                                                                              |       |                                                                                           |       |   |   |   |   | (4.3 | ) |   |   |   |   |   |   |
| Advanced  Ceramics                                             |       | (26.8                                                                                            | )          |                                                                                           |       |   |   |   |   | (51.7 | ) |   |   |   |   |   |   |
| Specialty  Compounds                                           |       | (1.5                                                                                             | )          |                                                                                           |       |   |   |   |   | (2.3 | ) |   |   |   |   |   |   |
| Corporate  and other                                           |       | (9.8                                                                                             | )          |                                                                                           |       |   |   |   |   | 4.7 |   |   |   |   |   |   |   |
| Total                                                          |       | (87.6                                                                                            | )          |                                                                                           |       |   |   |   |   | (160.1 | ) |   |   |   |   |   |   |
| Income  tax provision (benefit)                                |       | (10.0                                                                                            | )          |                                                                                           |       |   |   |   |   | (46.4 | ) |   |   |   |   |   |   |
| (Loss)  income from continuing operations                      |       | (77.6                                                                                            | )          |                                                                                           |       |   |   |   |   | (113.7 | ) |   |   |   |   |   |   |
| Income  from discontinued operations, net of tax               |       | (1.3                                                                                             | )          |                                                                                           |       |   |   |   |   | 2.0 |   |   |   |   |   |   |   |
| Net  (loss) income                                             |       | (78.9                                                                                            | )          |                                                                                           |       |   |   |   |   | (111.7 | ) |   |   |   |   |   |   |
| Net  loss (income) attributable to the noncontrolling interest |       | 2.6                                                                                              |       |                                                                                           |       |   |   |   |   | 6.2 |   |   |   |   |   |   |   |
| Net  income attributable to Rockwood Holdings, Inc.       |       | $                                                                                                | (76.3      | )                                                                                              |       |   |   |   |   |   | $ | (105.5 | ) |   |   |   |   |   |   |
| **Adjusted EBITDA:**                                           |       |                                                                                             |       |                                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty  Chemicals                                           |       | $                                                                                                | (24.6      | )                                                                                              | (30.0      | )% | $ | (4.3 | ) | $ | (20.3 | ) | $ | (54.8 | ) | (33.7 | )% | $ | (8.2 | ) | $ | (46.6 | ) |
| Performance  Additives                                         |       | (14.9                                                                                            | )          | (40.1                                                                                          | )          | (2.0 | ) | (12.9 | ) | (28.0 | ) | (39.5 | ) | (3.7 | ) | (24.3 | ) |
| Titanium  Dioxide Pigments                                     |       | 5.4                                                                                              |       | 38.3                                                                                           |       | (1.4 | ) | 6.8 |   | 4.7 |   | 12.9 |   | (3.7 | ) | 8.4 |   |
| Advanced  Ceramics                                             |       | (18.8                                                                                            | )          | (41.9                                                                                          | )          | (3.6 | ) | (15.2 | ) | (39.5 | ) | (47.4 | ) | (6.2 | ) | (33.3 | ) |
| Specialty  Compounds                                           |       | (1.2                                                                                             | )          | (11.9                                                                                          | )          | (0.5 | ) | (0.7 | ) | (2.1 | ) | (11.2 | ) | (1.2 | ) | (0.9 | ) |
| Corporate  and other                                           |       | 4.3                                                                                              |       | 32.3                                                                                           |       | 0.4 |   | 3.9 |   | 9.9 |   | 35.7 |   | 0.8 |   | 9.1 |   |
| Total  Adjusted EBITDA                                         |       | $                                                                                                | (49.8      | )                                                                                              | (28.4      | )% | $ | (11.4 | ) | $ | (38.4 | ) | $ | (109.8 | ) | (31.9 | )% | $ | (22.2 | ) | $ | (87.6 | ) |

 

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

 

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

 

**Overview**

 

Net sales decreased$192.8 million in the second quarter of 2009 compared with the same period inthe prior year primarily due to lower volumes and the negative impact ofcurrency changes of $71.8 million, partially offset by increased selling pricesof $24.0 million and bolt-on acquisitions, particularly the Titanium DioxidePigments venture with Kemira. See further discussion by segment below.

 

Operating income andAdjusted EBITDA decreased in the second quarter of 2009 compared with the sameperiod in the prior year primarily due to lower sales volumes and the negativeimpact of currency changes. This was partially offset by higher selling prices 

 

36

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and lower corporate costsdue to decreased incentive compensation-related costs and lower professionalfees, as well as other cost control measures throughout the Company.

 

Net income fromcontinuing operations decreased $77.6 million compared with the same period inthe prior year due to the reasons noted above, a loss on the earlyextinguishment of debt, net of $27.9 million primarily related to the amendmentof our senior secured credit facility in June 2009 and higher interestexpense due to a decrease in mark-to-market gains on our interest rate hedginginstruments.  This was partially offsetby increased foreign exchange gains on financing activities recorded in thesecond quarter of 2009.

 

Income from discontinuedoperations, net of tax decreased $1.3 million in the second quarter of 2009 andwas primarily due to the absence of income from the sale of the pool and spachemicals business in October 2008.

 

Net loss attributable tononcontrolling interest of $2.6 million was recorded in the second quarter of2009 and relates to losses recorded in our Viance LLC timber treatment andTitanium Dioxide Pigment’s ventures.

 

Net income attributableto Rockwood Holdings, Inc. decreased $76.3 million in the second quarterof 2009 compared with the same period in the prior year due to the reasonsnoted above.

 

**Netsales**

 

*SpecialtyChemicals*.  Net sales decreased $99.3 million over the prior year primarily due to lowervolumes and the negative impact of currency changes of $26.3 million.  Inthe Fine Chemicals business, lower volumes driven by lower demand across mostindustries were partially offset by higher selling prices. Net sales in theSurface Treatment business were lower on decreased volumes, particularly ingeneral industrial and automotive applications, partially offset by higherselling prices and the impact of a bolt-on acquisition in September 2008.

 

*PerformanceAdditives*.  Net sales decreased $62.2 million over the prior year primarily due to lowervolumes of construction-related products in our Color Pigments and Services andTimber Treatment Chemicals businesses, lower volumes in our Clay-basedAdditives business and the negative impact of currency changes of $15.1million. This decrease was partially offset by increased selling prices,particularly in Color Pigments and Services, cost control measures and theimpact of a bolt-on acquisition in August 2008.

 

*TitaniumDioxide Pigments*.  Net sales increased $40.0 million over the prior year due to the completion ofthe venture with Kemira on September 1, 2008, as well as increased sellingprices.  This was partially offset by lower volumes of titanium dioxideproducts and functional additives, and the negative impact of currency changesof $13.4 million.

 

*AdvancedCeramics*.  Net sales decreased $48.2 million over the prior year primarily due to lowervolumes in most applications and the negative impact of currency changes of$12.1 million, partially offset by the impact of a bolt-on acquisition in October 2008.

 

*SpecialtyCompounds*.  Net sales decreased $21.6 million over the prior year primarily due to lowervolumes in most applications, particularly in wire and cable, and the negativeimpact of currency changes of $4.7 million.

 

*Corporateand other*.  Net sales decreased $1.5 million over the prior year primarily due to lowervolumes in the European wafer reclaim business.

 

**Grossprofit**

 

Gross profit decreased$80.1 million over the prior year primarily due to the sales volume decreasesnoted above and the negative impact of currency changes of $20.2 million. In addition, depreciation and amortization costs were higher in most businessesprimarily from the impact of acquisitions. The decrease in gross profitwas partially offset by cost control measures undertaken throughout theCompany.  Gross profit as a percentage ofnet sales decreased to 27.8% in the second quarter of 2009 from 30.7% in thesecond quarter of 2008.

 

**Selling,general and administrative expenses**

 

Selling, general andadministrative expenses, or SG&A, decreased $24.8 million over the prioryear primarily due to the impact of currency changes of $15.7 million, lowercompensation-related costs and professional fees, as well as other cost controlmeasures undertaken throughout the Company.  Lower compensation-relatedcosts include the reversal of certain long-term incentive compensation programaccruals of $1.4 million for which related targets are no longer expected to beachieved.  SG&A expenses as a percentage of net sales were 20.7% and19.0% in the second quarter of 2009 and 2008, respectively.

 

37

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**Restructuringand other severance costs**

 

We recorded $4.0 millionof restructuring and other severance costs in the second quarter of 2009throughout the Company.  These charges primarily relate to headcount reductionsas part of our global cost control initiatives.  We recorded $1.5 millionof restructuring charges in the second quarter of 2008 for restructuringactions in the Performance Additives, Advanced Ceramics and Specialty Chemicalssegments for miscellaneous headcount reductions. See Note 15, “Restructuringand Other Severance Costs,” for further details.

 

**Operatingincome**

 

*SpecialtyChemicals*.  Operating income decreased $27.3 million over the prior year primarily due tothe lower volumes discussed above, the negative impact of currency changes of$2.5 million, increased reserves of $1.9 million covering a legacy obligationassumed in connection with the acquisition of Dynamit Nobel in 2004 andincreased depreciation and amortization costs of $0.7 million.  This decrease was partially offset by higherselling prices, cost control measures and the impact of a bolt-on acquisition.

 

*PerformanceAdditives*.  Operating income decreased $13.0 million over the prior year due to the lowervolumes discussed above and increased restructuring and other severance costsof $0.7 million.  This decrease waspartially offset by higher selling prices, cost control measures and the impactof a bolt-on acquisition.

 

*TitaniumDioxide Pigments*.  Operating income decreased $0.1 million over the prior year primarily due tothe lower volumes noted above and increased depreciation and amortization costsof $6.0 million primarily related to the Kemira venture completed in September 2008.This was partially offset by increased sales related to the Kemira venture,cost control measures, as well as lower raw material and energy costs of $6.9million.

 

*AdvancedCeramics*.  Operating income decreased $21.0 million over the prior year primarily due tothe lower volumes noted above and increased restructuring and other severancecosts of $1.4 million. This decrease was partially offset by cost controlmeasures and the impact of a bolt-on acquisition in October 2008.

 

*SpecialtyCompounds*.  Operating income decreased $0.7 million over the prior year primarily due tothe lower volumes noted above, partially offset by lower raw material costs of$3.0 million, particularly PVC resin and plasticizer costs, and cost controlmeasures.

 

*Corporateand other. *Operatingloss decreased $5.1 million primarily due to lower compensation-related costsand professional fees, as well as other cost control measures undertakenthroughout the Company, partially offset by the lower sales volumes notedabove.  Lower compensation-related costs include the reversal of certainlong-term incentive compensation accruals of $1.4 million related toperformance targets that are no longer expected to be achieved.

 

**Otherincome (expenses)**

 

*Interestexpense*.  Interestexpense increased $19.2 million in the second quarter of 2009 compared to thesame period in the prior year. The second quarter of 2009 and 2008 includednon-cash gains of $12.2 million and $34.0 million, respectively, representingthe movement in the mark-to-market valuation of our interest rate hedging instruments.Excluding the impact of these gains, interest expense decreased $2.6 millionprimarily due to lower interest rates and debt repayments, partially offset bydebt incurred during the third quarter of 2008 related to the Titanium DioxidePigments venture with Kemira.

 

*Interestincome*.  Interestincome decreased $1.0 million in the second quarter of 2009 compared to thesame period in the prior year due to lower average cash balances in the secondquarter of 2009 compared to the same period in the prior year and lowershort-term average interest rates.

 

*Loss onearly extinguishment of debt, net*.  In the second quarter of 2009, we recorded aloss on early extinguishment of debt, net of $27.9 million primarily related tothe amendment of our senior secured credit facility on June 15, 2009. Thisincluded the write-off of $19.5 million of deferred financing costs and $11.1million of lender fees that were expensed. This was partially offset by a discount of $2.7 million related to therepurchase of $137.7 million in aggregate principal amount of ourEuro-denominated 2014 Notes.

 

*Foreignexchange, net*.  In the second quarter of 2009, we had foreign exchange gains of $16.5 millionprimarily due to the impact of the stronger pound sterling as of June 30,2009 versus March 31, 2009 in connection with non-operatingEuro-denominated transactions.  In the second quarter of 2008, foreignexchange losses of $0.8 million were reported due to the impact of the weakereuro as of June 30, 2008 versus March 31, 2008 related tonon-operating Euro-denominated transactions.

 

38

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**Provisionfor income taxes**

 

We recorded an income taxprovision of $10.6 million in the second quarter of 2009 on income fromcontinuing operations before taxes of $8.6 million. The income tax provision inthe second quarter of 2009 was positively impacted by $2.0 million ofnonrecurring items primarily related to foreign taxes and negatively impactedby $6.6 million of domestic tax costs allocated from other comprehensive incomeand the domestic valuation allowance. The effective income tax rate was 21.4%for the second quarter of 2008 and was positively impacted by domestic incomewhich was not tax effected due to the Company’s valuation allowance position.

 

**(Loss)income from continuing operations**

 

Loss from continuingoperations for the second quarter of 2009 was $2.0 million as compared toincome from continuing operations of $75.6 million for the second quarter of2008 for the reasons described above.

 

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

 

Income from discontinuedoperations, net of tax was $1.1 million in the second quarter of 2009 and wasrelated to the reversal of certain reserves in connection with the sale of theElectronics business in December 2007. Income from discontinued operations, net of tax was $2.4 million in thesecond quarter of 2008 from operating the pool and spa chemicals business thatwas sold in October 2008.

 

**Net lossattributable to noncontrolling interest**

 

Net loss attributable tononcontrolling interest for the second quarter of 2009 was $2.6 million. Noncontrolling interest represents the noncontrolling interest portion of theViance, LLC joint venture and the noncontrolling interest portion of the TitaniumDioxide Pigments venture.  The loss attributable to noncontrollinginterest in the second quarter of 2009 is due to losses recorded in theseventures.

 

**Netincome attributable to Rockwood Holdings, Inc.**

 

Net income attributableto Rockwood Holdings, Inc. for the second quarter of 2009 was $1.7 million(income of $0.6 million from continuing operations and income from discontinuedoperations of $1.1 million) as compared to net income attributable to RockwoodHoldings, Inc. of $78.0 million (income of $75.6 million from continuingoperations and income from discontinued operations of $2.4 million) for thesame period in the prior year for the reasons described above.

 

**AdjustedEBITDA**

 

*SpecialtyChemicals*.  Adjusted EBITDA decreased $24.6 million over the prior year primarily due tothe lower volumes as discussed above, as well as the negative impact ofcurrency changes of $4.3 million.  Thisdecrease was partially offset by higher selling prices, cost control measuresand the impact of a bolt-on acquisition.

 

*PerformanceAdditives*.  Adjusted EBITDA decreased $14.9 million over the prior year due to the lowervolumes as discussed above, as well as the negative impact of currency changesof $2.0 million.  This decrease waspartially offset by higher selling prices, cost control measures and the impactof a bolt-on acquisition.

 

*TitaniumDioxide Pigments*.  Adjusted EBITDA increased $5.4 million over the prior year due to increasedsales related to the completion of the venture with Kemira, cost controlmeasures and lower raw material and energy costs of $6.9 million. This waspartially offset by the negative impact of currency changes of $1.4 million andlower sales volumes.

 

*AdvancedCeramics*.  Adjusted EBITDA decreased $18.8 million over the prior year primarily due tothe lower volumes noted above and the negative impact of currency changes of$3.6 million. This decrease was partially offset by cost control measures andthe impact of a bolt-on acquisition.

 

*SpecialtyCompounds*.  Adjusted EBITDA decreased $1.2 million over the prior year due to the lowervolumes noted above and the negative impact of currency changes of $0.5million, partially offset by lower raw material costs of $3.0 million and costcontrol measures.

 

*Corporateand other. *AdjustedEBITDA increased $4.3 million primarily due to the reasons described above.

 

39

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***Six months ended June 30, 2009 compared to six monthsended June 30, 2008***

 

**Overview**

 

Net sales decreased$376.6 million in the six months ended June 30, 2009 compared with thesame period in the prior year primarily due to lower volumes and the negativeimpact of currency changes of $143.5 million, partially offset by increasedselling prices of $61.9 million and bolt-on acquisitions, particularly the TitaniumDioxide Pigments venture with Kemira. See further discussion by segment below.

 

Operating income andAdjusted EBITDA decreased in the six months ended June 30, 2009 comparedwith the same period in the prior year primarily due to lower sales volumes,higher raw material costs and the negative impact of currency changes. This waspartially offset by higher selling prices and lower corporate costs due todecreased incentive compensation-related costs and lower professional fees, aswell as other cost control measures throughout the Company.

 

Net income fromcontinuing operations decreased $113.7 million in the six months ended June 30,2009 compared with the same period in the prior year due to the reasons notedabove, a loss on the early extinguishment of debt, net of $25.7 millionprimarily related to the amendment of our senior secured credit facility in June 2009and lower foreign exchange gains on financing activities recorded in the sixmonths ended June 30, 2009.

 

Income from discontinuedoperations, net of tax increased $2.0 million in the six months ended June 30,2009 and was primarily due to the favorable resolution of a claim against theCompany’s former Groupe Novasep business and the reversal of certain reservesin connection with the sale of the Electronics business in December 2007.

 

Net loss attributable tononcontrolling interest increased $6.2 million in the six months ended June 30,2009 and was due to losses recorded in our Viance LLC and Titanium DioxidePigment’s ventures in the first half of 2009.

 

Net income attributableto Rockwood Holdings, Inc. decreased $105.5 million in the six monthsended June 30, 2009 compared with the same period in the prior year due tothe reasons noted above.

 

**Netsales**

 

*SpecialtyChemicals*.  Net sales decreased $185.7 million over the prior year primarily due to lowervolumes and the negative impact of currency changes of $54.4 million.  Inthe Fine Chemicals business, lower volumes in most products, particularly inlithium and metal sulfide applications, were partially offset by higher sellingprices. Net sales in the Surface Treatment business were lower on decreasedvolumes, particularly in general industrial and automotive applications,partially offset by higher selling prices and the impact of a bolt-onacquisition in September 2008.

 

*PerformanceAdditives*.  Net sales decreased $118.2 million over the prior year primarily due to lowervolumes of construction-related products in our Color Pigments and Services andTimber Treatment Chemicals businesses, lower volumes in our Clay-basedAdditives business and the negative impact of currency changes of $30.0million. This decrease was partially offset by increased selling prices, costcontrol measures and the impact of a bolt-on acquisition in August 2008.

 

*TitaniumDioxide Pigments*.  Net sales increased $63.1 million over the prior year due to the completion ofthe venture with Kemira on September 1, 2008, as well as increased sellingprices.  This was partially offset by lower volumes of titanium dioxideproducts and functional additives, and the negative impact of currency changesof $24.3 million.

 

*AdvancedCeramics*.  Net sales decreased $93.5 million over the prior year primarily due to lowervolumes in most applications and the negative impact of currency changes of$23.4 million, partially offset by the impact of a bolt-on acquisition in October 2008and higher volumes of medical applications.

 

*SpecialtyCompounds*.  Net sales decreased $39.5 million over the prior year primarily due to lowervolumes in most applications, particularly in wire and cable, and the negativeimpact of currency changes of $11.0 million.

 

*Corporateand other*.  Net sales decreased $2.8 million over the prior year primarily due to lowervolumes in the European wafer reclaim business.

 

**Grossprofit**

 

Gross profit decreased$170.5 million over the prior year primarily due to the sales volume decreasesnoted above, raw material cost increases and the negative impact of currencychanges of $39.8 million.  Raw material costs increased, particularly fromthe impact of

 

40

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higherphosphoric acid costs in our Specialty Chemicals segment and higher iron-oxidecosts in our Color Pigments and Services business.  In addition, depreciation and amortizationcosts were higher in most businesses primarily from the impact of acquisitions. The decrease in gross profit was partially offset by cost control measuresundertaken throughout the Company.  Grossprofit as a percentage of net sales decreased to 27.7% in the six months ended June 30,2009 from 31.5% in the six months ended June 30, 2008.

 

**Selling, general and administrative expenses**

 

Selling,general and administrative expenses, or SG&A, decreased $46.3 million overthe prior year primarily due to the impact of currency changes of $31.7million, lower compensation-related costs and professional fees, as well asother cost control measures undertaken throughout the Company.  Lowercompensation-related costs include the reversal of discretionary profit-sharingaccruals of $2.6 million and the reversal of certain long-term incentivecompensation program accruals of $2.7 million for which related targets are nolonger expected to be achieved.  SG&A expenses as a percentage of netsales were 21.3% and 19.4% in the six months ended June 30, 2009 and 2008,respectively.

 

**Restructuring and other severance costs**

 

Werecorded $11.8 million of restructuring and other severance costs in the sixmonths ended June 30, 2009 throughout the Company.  These chargesprimarily relate to headcount reductions as part of our global cost controlinitiatives.  We recorded $2.3 million of restructuring charges in the sixmonths ended June 30, 2008 for restructuring actions in the PerformanceAdditives, Advanced Ceramics and Specialty Chemicals segments for miscellaneousheadcount reductions. See Note 15, “Restructuring and Other SeveranceCosts,” for further details.

 

**Operating income**

 

*Specialty Chemicals*.   Operatingincome decreased $61.7 million over the prior year primarily due to the lowervolumes discussed above, higher raw material costs of $9.1 million primarilyfor phosphoric acid, the negative impact of currency changes of $4.3 millionand increased depreciation and amortization costs of $3.4 million.  This decrease was partially offset by higherselling prices, cost control measures and the impact of a bolt-on acquisition.

 

*Performance Additives*.   Operatingincome decreased $26.7 million over the prior year due to the lower volumesdiscussed above, higher raw material costs of $3.9 million, particularlyiron-oxide costs in the Color Pigments and Services business, and increasedrestructuring and other severance costs of $3.0 million.  This decrease was partially offset by higherselling prices, cost control measures and the impact of a bolt-on acquisition.

 

*Titanium Dioxide Pigments*.   Operating incomedecreased $7.6 million over the prior year primarily due to the lower volumesnoted above and increased depreciation and amortization costs of $11.7 millionprimarily related to the Kemira venture completed in September 2008. Thiswas partially offset by increased sales related to the Kemira venture, costcontrol measures, as well as lower raw material and energy costs of $4.1million.

 

*Advanced Ceramics*.   Operatingincome decreased $44.7 million over the prior year primarily due to the lowervolumes noted above, increased restructuring and other severance costs of $4.3million and the negative impact of currency changes of $3.0 million. Thisdecrease was partially offset by cost control measures, the impact of a bolt-onacquisition in October 2008 and higher volumes of medical applications.

 

*Specialty Compounds*.   Operatingincome decreased $1.3 million over the prior year primarily due to the lowervolumes noted above, partially offset by lower raw material costs of $4.2million, particularly PVC resin and plasticizer costs, and cost controlmeasures.

 

*Corporate and other. *Operating loss decreased$9.1 million primarily due to lower compensation-related costs and professionalfees, as well as other cost control measures undertaken throughout the Company,partially offset by the lower sales volumes noted above.  Lowercompensation-related costs include the reversal of certain long-term incentivecompensation accruals of $2.7 million related to performance targets that areno longer expected to be achieved.

 

**Other income (expenses)**

 

*Interest expense*.  Interestexpense decreased $4.8 million in the six months ended June 30, 2009compared to the same period in the prior year. The six months ended June 30,2009 and 2008 included non-cash gains of $2.6 million and $3.2 million,respectively, representing the movement in the mark-to-market valuation of ourinterest rate hedging instruments. Excluding the impact of these gains,interest expense decreased $5.4 million primarily due to lower interest ratesand debt repayments, partially offset by debt incurred during the third quarterof 2008 related to the Titanium Dioxide Pigments venture with Kemira.

 

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*Interest income*.  Interest incomedecreased $2.8 million in the six months ended June 30, 2009 compared tothe same period in the prior year due to lower short-term average interestrates.

 

*Loss on early extinguishment of debt, net*.  For thesix months ended June 30, 2009, we recorded a loss on early extinguishmentof debt, net of $25.7 million primarily related to the write-off of deferredfinancing costs of $20.9 million and lender fees related to the earlyextinguishment of debt of $11.1 million, partially offset by a discount of $6.3million related to the repurchase of $153.2 million in aggregate principalamount of the 2014 Notes.

 

*Foreign exchange, net*.   For the sixmonths ended June 30, 2009, foreign exchange gains of $10.9 million werereported primarily due to the impact of the stronger pound sterling as of June 30,2009 versus December 31, 2008, in connection with non-operatingEuro-denominated transactions. For the six months ended June 30,2008, foreign exchange gains of $14.3 million were reported primarily due tothe impact of the stronger euro as of June 30, 2008 versus December 31,2007 related to intercompany financing arrangements.

 

**Provision for income taxes**

 

Theeffective income tax rate for the six months ended June 30, 2009 was 40.9%and an income tax benefit of $6.1 million was recorded for the six months endedJune 30, 2009. The difference between the effective rate and the U.S.statutory rate of 35.0% in the six months ended June 30, 2009 primarilyrelates to a nonrecurring tax benefit related to foreign currency changesoffset by a domestic valuation allowance. For the six months ended June 30,2008, the difference between the effective tax rate of 27.8% and the U.S.statutory rate of 35.0% is primarily a function of domestic income which is nottax effected as a result of a full valuation allowance and favorable Europeanrate changes and geographic earnings mix.

 

**(Loss) income from continuing operations**

 

Lossfrom continuing operations for the six months ended June 30, 2009 was$(8.8) million as compared to income from continuing operations of $104.9million for the six months ended June 30, 2008 for the reasons describedabove.

 

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

 

Incomefrom discontinued operations, net of tax was $3.4 million in the six monthsended June 30, 2009 and was due to the favorable resolution of a claimagainst the Company’s former Groupe Novasep business and the reversal ofcertain reserves in connection with the sale of the Electronics business in December 2007.  Income from discontinued operations, net oftax was $1.4 million in the six months ended June 30, 2008 from operatingthe pool and spa chemicals business that was sold in October 2008.

 

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

 

Netloss (income) attributable to noncontrolling interest of $5.6 million and$(0.6) million for the six months ended June 30, 2009 and 2008,respectively, was recorded.  Noncontrolling interest represents thenoncontrolling interest portion of the Viance, LLC joint venture that wascompleted in January 2007 and the noncontrolling interest portion of theTitanium Dioxide Pigments venture completed in September 2008. The changefrom the prior year primarily relates to losses recorded in these ventures.

 

**Net income attributable to Rockwood Holdings, Inc.**

 

Netincome attributable to Rockwood Holdings, Inc. for the six months ended June 30,2009 was $0.2 million (loss of $3.2 million from continuing operations andincome from discontinued operations of $3.4 million) as compared to net incomeattributable to Rockwood Holdings, Inc. of $105.7 million (income of$104.3 million from continuing operations and income from discontinuedoperations of $1.4 million) for the same period in the prior year for thereasons described above.

 

**Adjusted EBITDA**

 

*Specialty Chemicals*.   AdjustedEBITDA decreased $54.8 million over the prior year primarily due to the lowersales volumes and higher raw material costs of $9.1 million as discussed above,as well as the negative impact of currency changes of $8.2 million.  This decrease was partially offset by higherselling prices, cost control measures and the impact of a bolt-on acquisition.

 

*Performance Additives*.   AdjustedEBITDA decreased $28.0 million over the prior year due to the lower salesvolumes and higher raw material costs of $3.9 million as discussed above, aswell as the negative impact of currency changes of $3.7 million.  This decrease was partially offset by higherselling prices, cost control measures and the impact of a bolt-on acquisition.

 

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*Titanium Dioxide Pigments*.   AdjustedEBITDA increased $4.7 million over the prior year due to increased salesrelated to the completion of the venture with Kemira, cost control measures andlower raw material and energy costs of $4.1 million. This was partially offsetby the negative impact of currency changes of $3.7 million and lower salesvolumes.

 

*Advanced Ceramics*.   AdjustedEBITDA decreased $39.5 million over the prior year primarily due to the lowersales volumes noted above and the negative impact of currency changes of $6.2million. This decrease was partially offset by cost control measures, the impactof a bolt-on acquisition in October 2008 and higher volumes of medicalapplications.

 

*Specialty Compounds*.   AdjustedEBITDA decreased $2.1 million over the prior year due to the lower salesvolumes noted above and the negative impact of currency changes of $1.2million, partially offset by lower raw material costs of $4.2 million and costcontrol measures.

 

*Corporate and other. *Adjusted EBITDA increased$9.9 million primarily due to lower compensation-related costs and professionalfees, as well as other cost control measures undertaken throughout theCompany. Lower compensation-related costs include the reversal of certain long-termincentive compensation accruals of $2.7 million related to performance targetsthat are no longer expected to be achieved.

 

***Reconciliation of Net Income Attributableto Rockwood Holdings, Inc. to Adjusted EBITDA***

 

Becausewe view Adjusted EBITDA on both a consolidated basis and segment basis as anoperating performance measure, we use net income as the most comparable U.S.GAAP measure on a consolidated basis. The following table, which sets forth theapplicable components of Adjusted EBITDA, presents a reconciliation of netincome attributable to Rockwood Holdings, Inc. to Adjusted EBITDA on aconsolidated basis:

 
| ** **                                                 | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                 | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| **($ in millions)**                                   | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net income attributable to Rockwood Holdings, Inc.    |       | $                      | 1.7        |                 | $          | 78.0 |   | $ | 0.2 |   | $ | 105.7 |   |
| Net (loss) income attributable to noncontrolling  interest |       | (2.6                   | )          | —               |       | (5.6 | ) | 0.6 |   |
| Net (loss) income                                          |       | (0.9                   | )          | 78.0                 |       | (5.4 | ) | 106.3 |   |
| Income tax provision (benefit)                             |       | 10.6                   |       | 20.6                 |       | (6.1 | ) | 40.3 |   |
| Income from discontinued operations, net of tax            |       | (1.1                   | )          | (2.4                 | )          | (3.4 | ) | (1.4 | ) |
| Income (loss) from continuing operations before  taxes     |       | 8.6                    |       | 96.2                 |       | (14.9 | ) | 145.2 |   |
| Interest expense (a)                                       |       | 28.9                   |       | 9.7                  |       | 78.6 |   | 83.4 |   |
| Interest income                                            |       | (0.4                   | )          | (1.4                 | )          | (0.8 | ) | (3.6 | ) |
| Depreciation and amortization                              |       | 68.9                   |       | 63.5                 |       | 137.0 |   | 125.0 |   |
| Restructuring and other severance costs                    |       | 4.0                    |       | 1.5                  |       | 11.8 |   | 2.3 |   |
| Systems/organization establishment expenses                |       | 1.0                    |       | 2.2                  |       | 3.1 |   | 3.4 |   |
| Acquisition and disposal costs                             |       | —                 |       | 0.7                  |       | — |   | 0.7 |   |
| Inventory write-up charges                                 |       | —                 |       | 0.1                  |       | — |   | 0.5 |   |
| Loss on early extinguishment of debt, net                  |       | 27.9                   |       | —               |       | 25.7 |   | — |   |
| Loss on sale of assets and other                           |       | —                 |       | 0.8                  |       | 0.1 |   | 0.9 |   |
| Foreign exchange (gain) loss, net                          |       | (16.5                  | )          | 0.8                  |       | (10.9 | ) | (14.3 | ) |
| Other                                                      |       | 2.9                    |       | 1.0                  |       | 4.8 |   | 0.8 |   |
| Total Adjusted EBITDA (b)                                  |       | $                      | 125.3      |                 | $          | 175.1 |   | $ | 234.5 |   | $ | 344.3 |   |

 

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(a)                Includes gains of $12.2 million and $34.0million for the three months ended June 30, 2009 and 2008, respectively,and gains of $2.6 million and $3.2 million for the six months ended June 30,2009 and 2008, respectively, representing the movement in the mark-to-marketvaluation of the Company’s interest rate and cross-currency hedginginstruments.

 

(b)               This amount does not include $3.2 million and$2.4 million of Adjusted EBITDA for the three and six months ended June 30,2008, respectively, from the pool and spa chemicals business sold in October 2008.

 

**Liquidity and Capital Resources**

 

**Cash Flows**

 

*Operating Activities*.   Net cashprovided by operating activities was $135.9 million and $123.7 million for thesix months ended June 

 

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30,2009 and 2008, respectively. Net cash from operating activities increasedprimarily from an outflow of operating cash from working capital changes in thesix months ended June 30, 2008 and lower cash interest expense, partiallyoffset by lower net income and operating cash inflows in the prior year relatedto operating the pool and spa business that was sold in October 2008.

 

*Investing Activities*.  Net cash usedin investing activities was $75.1 million for the six months ended June 30,2009 and was primarily comprised of capital expenditures. Net cash used ininvesting activities was $88.5 million for the six months ended June 30,2008 and was primarily comprised of capital expenditures and funds used for bolt-onacquisitions, partially offset by funds received related to the claimsettlement between the Company and GEA Group and GEA North America in the firstquarter of 2008.

 

*Financing Activities*.   Net cash usedin financing activities was $312.6 million and $43.6 million for the six monthsended June 30, 2009 and 2008, respectively, and included scheduledpayments for long-term debt.  Net cash used in financing activitiesincreased due to certain debt prepayments. We used $146.8 million of cash to prepay, at a discount, $153.2 millionin aggregate principal amount of our Euro-denominated senior subordinated notesdue in 2014, $102.3 million to prepay our senior secured term loans in thefirst half of 2009, and $22.0 million related to the amendment of the seniorsecured credit facility in June 2009.

 

**Liquidity**

 

Ourprimary source of liquidity has been and will continue to be cash generatedfrom the operations of our subsidiaries. Events that occurred in 2009 that hador may have an impact on our liquidity include:

 

·                  In the firsthalf of 2009, we used $146.8 million of cash to repurchase, at a discount,$153.2 million in aggregate principal amount of our Euro-denominated 2014 Notesand $102.3 million to prepay our senior secured term loans.

 

·                  On June 15,2009, we amended our senior secured credit agreement, which amends and restatesin its entirety our senior secured credit agreement.  See further details in Note 11, “Long-TermDebt,” and below within this Liquidity and Capital Resources section.

 

Ourprimary liquidity requirements are working capital, debt service, capitalexpenditures and acquisitions. Our debt service requirements and othercontractual obligations and commitments over the next several years aresignificant and are substantially higher than historical amounts.  Webelieve that based on current conditions in our industry and markets, our cashreserves, cash flows from operations and borrowings available under ourrevolving credit facility will be adequate sources of liquidity for the remainderof 2009. However, a prolonged economic downturn or recession may have amaterial adverse impact on our results of operations, cash flows fromoperations and our liquidity. See Item 1, “Business,” and Item 1A, “RiskFactors” in our 2008 Form 10-K.

 

Inaddition, our liquidity may be negatively impacted due to funding obligationsrelated to certain pension plans. We have several pension plans located inGermany, Finland, the United Kingdom and the United States, which have beenadversely impacted by market conditions. Based upon recent investmentperformance of assets in pension plans covering our employees in thesecountries, we may have to increase funding and/or make a significant payment tothe plan via a one-time payment and/or long-term funding arrangement to one ormore of these plans. However, this could change significantly based on theinvestment performance of the pension plan and the future performance of thepension plan assets. Any further deterioration of the capital markets orreturns available in such markets may materially and adversely impact ourpension plan assets and increase our funding obligations for one or more ofthese plans and adversely impact our liquidity. We cannot predict the impact ofthis or any further market disruption on our pension funding obligations.

 

Asof June 30, 2009, we had actual total indebtedness of $2,509.7 million.The revolving credit facility under the senior secured credit facility providedfor additional borrowings of up to $224.3 million as of June 30, 2009.There were no outstanding borrowings under this revolving credit facility as ofJune 30, 2009 (as of June 30, 2009, we had outstanding letters of creditof $25.7 million that reduced our availability under the senior secured creditfacility). The revolving credit facility under the Titanium Dioxide Pigmentsventure facility provided for additional borrowings of up to €30.0 million($42.1 million). As of June 30, 2009, there were no outstanding borrowingsunder this revolving credit facility.  Asof August 3, 2009, the Titanium Dioxide Pigments venture had €10.0 million($14.4 million using the August 3, 2009 exchange rate of €1.00 = $1.4412)outstanding under this facility, as well as an outstanding bank guarantee of€10.0 million ($14.4 million using the August 3, 2009 exchange rate of€1.00 = $1.4412) that reduced its availability under this facility.

 

Asof June 30, 2009, we had cash and cash equivalents of $203.0 million fromseveral sources, including cash from operations and the net cash proceeds receivedfrom the sale of the pool and spa chemicals business in October 2008, lesscash used for certain selective acquisitions and debt repayments.

 

*Senior secured credit facilities.*  On June 15,2009, we amended and restated our senior secured credit agreement (“RestatedCredit Agreement”), which amends and restates in its entirety our seniorsecured credit agreement.  The RestatedCredit Agreement extends the maturity of certain term loans by providing for (i) approximately$942.0 million of new tranche H term loans with a maturity date 

 

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ofMay 15, 2014, the aggregate amount of which is deemed to convert a likeamount of outstanding principal of existing tranche E term loans (that had amaturity date of July 30, 2012) under the existing credit agreement and (ii) approximately€195.6 million ($274.5 million) of new tranche I term loans with a maturitydate of May 15, 2014, the aggregate amount of which is deemed to convert alike amount of outstanding principal of existing tranche G term loans (that hada maturity date of July 30, 2012) under the existing credit agreement. In thethird quarter of 2009, we extended the maturity of $180 million ofavailability under our revolving credit facility from 2010 to 2012 bearinginterest at our option of either (i) Libor (subject to Libor floor of2.00%) plus 4.50% or (ii) ABR plus 3.25%.

 

TheRestated Credit Agreement also provides for a Libor (Euribor forEuro-denominated tranches) floor of 2.00% applicable to all senior securedcredit facilities subject to pricing based on Libor or Euribor with thefollowing applicable margins above Libor or Euribor: applicable margins forTranches A-1 and A-2 of 3.00%; Tranche E of 2.75%; Tranche G of 3.00%; TrancheH of 4.25%; and 

TrancheI of 4.50%, in each case per annum, each with a 0.25% reduction for achieving adesignated credit rating, with the exception of Tranches A-1 and A-2. As aresult, interest expense related to these term loans will be higher in futureperiods.  As of June 30, 2009, theinterest rates for Tranches E, G, H and I were reduced by 0.25% as thedesignated credit ratings were achieved.

 

Inaddition, the Restated Credit Agreement replaces the consolidated total debt toconsolidated Adjusted EBITDA ratio covenant with a senior secured debt toconsolidated Adjusted EBITDA covenant ratio such that the Company may notpermit its senior secured debt ratio to exceed 4.40 to 1.00 on the last day ofany fiscal quarter through and including March 31, 2010, 4.25 to 1.00 onthe last day of any fiscal quarter thereafter through and including September 30,2010, and 4.00 to 1.00 on the last day of any fiscal quarter thereafter.  The Restated Credit Agreement also resets theasset sales basket and increases the available amount basket that applies tocertain investment, debt and capital expenditure negative covenants and certainother baskets.

 

Asof June 30, 2009, the senior secured credit facilities, as amended,consisted of:

 

·                  tranche A-1term loans in an aggregate principal amount of €4.6 million ($6.4 million) andtranche A-2 term loans in an aggregate principal amount of €39.8 million ($55.9million), each maturing on July 30, 2011 and bearing interest at a Euriborfloor of 2.00% plus 3.00%;

 

·                  tranche E termloans in an aggregate principal amount of $140.1 million, maturing on July 30,2012 and bearing interest at a Libor floor of 2.00% plus 2.50%;

 

·                  tranche G termloans in an aggregate principal amount of €65.4 million ($91.8 million)maturing on July 30, 2012 and bearing interest at a Euribor floor of 2.00%plus 2.75%;

 

·                  tranche H termloan in an aggregate principal amount of $942.0 million maturing on May 15,2014 and bearing interest at a Libor floor of 2.00% plus 4.00%;

 

·                  tranche I termloan in an aggregate principal amount of €195.6 million ($274.5 million)maturing on May 15, 2014 and bearing interest at a Euribor floor of 2.00%Euribor plus 4.25%; and

 

·                  a revolvingcredit facility in an aggregate principal amount of $250.0 millionmaturing on July 30, 2010  bearinginterest at the Company’s option of either (i) Libor (subject to Liborfloor of 2.00%) plus 3.00% or (ii) ABR plus 1.75%. As of June 30,2009, we had no borrowings outstanding under this facility and had outstandingletters of credit of $25.7 million that reduced our availability under thecredit facility.

 

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

 

Theborrowings of our indirect, wholly-owned subsidiaries, RSGI and RockwoodSpecialties Limited under the senior secured credit facilities are guaranteedand secured by assets and pledges of capital stock.

 

Inaddition to the financial covenants described below under “Covenant Compliance,”the Company’s senior secured credit facilities contain various affirmative andrestrictive covenants. The restrictive covenants limit our ability to, amongother things, incur indebtedness and other liabilities; create liens; merge orconsolidate; dispose of assets; make investments; pay dividends and makepayments to shareholders; make payments on certain indebtedness or to amenddocuments related to certain indebtedness and to enter into sale leasebacktransactions. In connection with the restated credit agreement in June 2009,some of the baskets relating to the above restrictions were reset.

 

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*Covenant compliance.*   In addition tothe affirmative and restrictive covenants, the senior secured credit agreementcontains the following financial covenants that are determined based on ourAdjusted EBITDA (including certain adjustments for acquisitions and relatedsynergies), which reflects management’s interpretations thereof:

 

·                  a leverageratio: for the twelve-month period ended June 30, 2009, net senior secureddebt (senior secured debt plus capital lease obligations, minus cash up to amaximum of $100.0 million) to Adjusted EBITDA must be less than 4.40 to 1; forsuch period, our ratio equaled 3.27 to 1; and

 

·                  an interestcoverage ratio: for the twelve-month period ended June 30, 2009, AdjustedEBITDA to cash interest expense (interest expense, net excluding deferred debtissuance cost amortization and the movements in the mark-to market value of ourinterest rate and cross-currency interest rate derivatives) must be at least2.00 to 1; for such period, our ratio equaled 3.47 to 1.

 

Thesecovenants are material terms of the senior secured credit agreement.Non-compliance with these covenants or other covenants could result in adefault under the senior secured credit agreement and the lenders could electto declare all amounts borrowed immediately due and payable. Any suchacceleration would also result in a default under the indenture governing the2014 Notes, which could lead to the note holders electing to declare theprincipal, premium, if any, and interest on the then outstanding notesimmediately due and payable.  The senior secured credit agreement containsa cross default provision for indebtedness in excess of $30.0 million;therefore, a default under the indenture governing the 2014 Notes, the TitaniumDioxide Pigments term loans or other indebtedness may cause the lenders todeclare the principal and interest on the then outstanding senior securedcredit facilities immediately due and payable.

 

SeeItem 7, Management’s Discussion and Analysis of Financial Condition and Resultsof Operations—“Definitions of Adjusted EBITDA,” for a discussion of thedefinition of Adjusted EBITDA used in calculating our financial covenants.

 

Wewere in compliance with the above covenants as of June 30, 2009.

 

*2014 Notes.*   As of June 30,2009, the 2014 Notes have an aggregate principal amount of €250.1 million($351.0 million) in the case of the Euro notes and $200.0 million in the caseof the U.S. Dollar notes, and mature on November 15, 2014. Interest on the2014 Notes is payable semi-annually on May 15 and November 15 andaccrues at the rate of 7.625% in the case of the Euro notes and 7.500% in thecase of the U.S. Dollar notes. Certain of our domestic subsidiaries guaranteethe 2014 Notes on a senior subordinated unsecured basis.  In the firsthalf of 2009, we repurchased at a discount €113.9 million ($153.2 million) inaggregate principal amount of our 2014 Notes. We may use available cash torepurchase additional 2014 Notes at any time.

 

The2014 Notes contain various affirmative and restrictive covenants. Therestrictive covenants limit our ability, and the ability of our restrictedsubsidiaries, to, among other things, incur or guarantee additional indebtedness(as described below), pay dividends or make other equity distributions orrepurchase capital stock, make investments or other restricted payments, createliens, transfer or sell assets, restrict dividends or other payments to us,engage in transactions with affiliates, and merge or consolidate with othercompanies or sell substantially all of our assets.

 

Theindenture governing the 2014 Notes prohibits 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 indenture prohibits 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 June 30, 2009, the fixed charge coverageratio equaled 3.47 to 1. This covenant is a material term of the indenturegoverning the 2014 Notes.

 

Becausethe indenture governing the 2014 Notes defines an event of default to include,among other things, a default under any other debt obligation in excess of$35.0 million that could cause the acceleration of such obligation, anyacceleration under the senior secured credit agreement or other debt agreementwould also result in a default under the indenture governing these notes, whichcould lead to the note holders electing to declare the principal, premium, ifany, and interest on the then outstanding notes immediately due and payable.

 

*Titanium Dioxide Pigments venture term loans, revolvingcredit facility and assumed debt.*   As of June 30,2009, the Titanium Dioxide Pigments venture had €245.0 million ($343.8 million)outstanding under the term loan facility of its facility agreement entered intoin June 2008, as amended in August 2008. The term loan facilitymatures on June 17, 2013. The facility also provides for a revolvingcredit facility in an aggregate amount of €30.0 million ($42.1 million),maturing on June 17, 2013. As of June 30, 2009, there were nooutstanding borrowings under the revolving credit facility. As of August 3,2009, the Titanium Dioxide Pigments 

 

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venturehad €10.0 million ($14.4 million using the August 3, 2009 exchange rate of€1.00 = $1.4412) outstanding under this facility, as well as an outstandingbank guarantee of €10.0 million ($14.4 million using the August 3, 2009exchange rate of €1.00 = $1.4412) that reduced its availability under thisfacility.

 

Inaddition, the Titanium Dioxide Pigments venture has assumed debt of €24.0million ($33.7 million) at June 30, 2009 from Kemira, primarily due to adefined benefit plan, at interest rates ranging from 3.70% to 5.00%.

 

Theloans are secured by the assets of the venture. In the event that either Kemira’sor Rockwood’s ownership interest changes, any lender may cancel its commitmentand demand repayment of its respective portion of the loans, including accruedand unpaid interest.  The facility agreement contains customary events ofdefault, subject to remedy periods, thresholds and exceptions. Upon theoccurrence of an event of default under the facility agreement, the lenders canterminate the commitments and declare all amounts, including accrued and unpaidinterest, to be due and payable.

 

Asof June 30, 2009, the interest rate on the term loan and revolving creditfacility is Euribor (or Libor if the currency is in USD) plus 3.00%, subject toa step down determined by reference to a leverage ratio test. The term loan ispayable in installments over a five-year period from the date of the facilityagreement, with payments commencing twelve months from such date and theremainder due at the final maturity date. The term loan and revolving creditfacility may be repaid in advance without penalty.

 

Thefacility agreement contains affirmative and restrictive covenants, subject tocertain thresholds and exceptions. The restrictive covenants limit the venture’sability to undertake certain actions, including but not limited to acquiring ordisposing of assets, creating liens on assets, entering into a merger orcorporate restructuring, and incurring additional indebtedness. These covenantsare calculated in accordance with International Financial Reporting Standardsand are based solely on the results of the venture. In addition, the facilityagreement requires the venture to meet certain financial covenants, including:

 

·                  A leveragecoverage ratio: for the twelve-month period ended June 30, 2009, net debtto EBITDA, subject to certain adjustments (which is substantially similar tothe definition of Adjusted EBITDA in our senior secured credit agreement) mustbe less than 4.00 to 1: for such period, our ratio equaled 3.38 to 1;

 

·                  An interestcoverage ratio: EBITDA, subject to certain adjustments, (which is substantiallysimilar to the definition of Adjusted EBITDA in our senior secured creditagreement) to cash interest expense (net of interest income), must be greaterthan 3.00 to 1: for such period, our ratio equaled 3.84 to 1; and

 

·                  Cash flowcoverage ratio: cash generated for financing activities (EBITDA, subject tocertain adjustments, less working capital changes, capital expenditures andinterest) to debt service (interest expense and amortization of debt) must begreater than 1.00: for such period, our ratio equaled 1.70 to 1.

 

Wewere in compliance with the above covenants as of June 30, 2009 and December 31,2008.

 

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Givenour use of Adjusted EBITDA (see “Special Note Regarding Non-GAAP FinancialMeasures” for the definition of Adjusted EBITDA and management’s uses ofAdjusted EBITDA) as a liquidity measure, the following table presents areconciliation of net cash provided by operating activities from continuingoperations to Adjusted EBITDA:

 
| ** **                                                                                                            | ** ** | **Six months ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                                            | ** ** | **June 30,**    | ** ** |
| **($ in millions)**                                                                                              | ** ** | **2009**             | ** ** | **2008** | ** ** |
| Net cash provided by operating activities from  continuing operations                                                 |       | $                    | 135.9      |   | $ | 120.4 |   |
| Changes in assets and liabilities, net of the  effect of foreign currency translation and acquisitions                |       | (6.9                 | )          | 114.4 |   |
| Current portion of income tax provision                                                                               |       | 10.3                 |       | 23.6 |   |
| Interest expense, net, excluding amortization of  deferred financing costs and unrealized losses/gains on derivatives |       | 75.8                 |       | 78.3 |   |
| Restructuring and other severance costs                                                                               |       | 11.8                 |       | 2.3 |   |
| Systems/organization establishment expenses                                                                           |       | 3.1                  |       | 3.4 |   |
| Acquisition and disposal costs                                                                                        |       | —               |       | 0.7 |   |
| Inventory write-up charges                                                                                            |       | —               |       | 0.5 |   |
| Bad debt provision                                                                                                    |       | (0.4                 | )          | (1.0 | ) |
| Loss on sale of assets and other                                                                                      |       | 0.1                  |       | 0.9 |   |
| Other                                                                                                                 |       | 4.8                  |       | 0.8 |   |
| Total Adjusted EBITDA                                                                                                 |       | $                    | 234.5      |   | $ | 344.3 |   |

 

***Contractual Obligations***

 

TheCompany is obligated to make future payments under various contracts such as debtagreements (including scheduled cash interest payments), operating leaseagreements, and unconditional purchase obligations.  In addition,liabilities for unrecognized tax benefits in the amount of $29.8 million as of December 31,2008 related to Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”)No. 48,*Accounting for Uncertainty inIncome Taxes — An Interpretation of FASB Statement No. 109*, were excluded from the ContractualObligations table as we were unable to make a reasonably reliable estimate ofthe period of cash settlement with the respective taxing authorities.Liabilities for these unrecognized tax benefits are classified as non-currentincome tax liabilities (other liabilities) unless expected to be paid in oneyear. A discussion of these contractual obligations is included in the Company’s2008 Form 10-K.  As noted above, we repurchased $153.2 million of ourEuro-denominated 2014 Notes and voluntarily prepaid $102.3 million of oursenior secured term loans in the first half of 2009. We also amended our seniorsecured credit agreement in June 2009.  Except for the debtrepayments made in the first six months of 2009, the extension of the maturityof $1.2 billion of our senior secured debt from 2012 to 2014, and the higherinterest costs associated with the amendment to our senior secured creditagreement, there have not been significant changes to these contractualobligations as of June 30, 2009.

 

***Capital Expenditures***

 

Rockwood’scapital expenditures for the six months ended June 30, 2009 consistedprimarily of replacements of worn, obsolete or damaged equipment as well asinvestments in new equipment.

 

Forthe six months ended June 30, 2009 and 2008, our capital expenditures,excluding capital leases, were $81.2 million and $104.2 million, respectively.Capital expenditures for each of our reporting segments are provided in thefollowing table:

 
| ** **                          | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Titanium  Dioxide** | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | **Corporate and** | ** ** | ** **       | ** ** |
|-------------------------------------|------------|---------------|------------|-----------------|------------|-----------------------|------------|--------------|------------|---------------|------------|-------------------|------------|------------------|------------|
| **($ in millions)**            | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments**          | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **other**         | ** ** | **Consolidated** | ** ** |
| Six months ended June 30, 2009 |       | $             | 26.3       |            | $          | 12.2                  |       | $            | 20.8       |          | $          | 17.4              |       | $                | 3.8        |   | $ | 0.7 |   | $ | 81.2 |   |
| Six months ended June 30, 2008 |       | 33.7          |       | 20.4            |       | 19.8                  |       | 20.6         |       | 6.4           |       | 3.3               |       | 104.2            |       |
|                                     |            |               |            |                 |            |                       |            |              |            |               |            |                   |            |                  |            |  |  |  |  |  |  |  |

 

Wemay incur future costs for capital improvements and general compliance underSafety, Health and Environmental (“SHE”) laws. For the year ended December 31,2008, our capital expenditures for SHE matters totaled $28.1 million, excludingcosts to maintain and repair pollution control equipment. For 2009, 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 

 

48

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assurancethat our recent expenditures will be indicative of future amounts required tocomply with these laws, including the EU’s Registration, Evaluation andAuthorization of Chemicals (“REACH”) legislation. See Note 16, “Commitments andContingencies,” 

“RegulatoryDevelopments” for a discussion of REACH.

 

***Foreign currency related transactions***

 

Asof June 30, 2009, $1,213.2 million of the debt outstanding is denominatedin euros.

 

**Recent Accounting Pronouncements**

 

SeeNote 1, “Description of Business and Summary of Significant AccountingPolicies,” for a discussion of recent accounting pronouncements.

 

**Off-Balance Sheet Arrangements**

 

Inthe normal course of business, the Company incurs obligations which includeguarantees related to contract completion, regulatory compliance and productperformance. Under certain circumstances, these obligations are supportedthrough the issuance of letters of credit and other bank guarantees. As of June 30,2009, the Company had approximately $29.7 million of letters of credit andother bank guarantees, of which $27.4 million will expire in 2009 through 2014.The remaining guarantees have no specified expiration date. This amountincludes outstanding letters of credit of $25.7 million that reduced ouravailability under the senior secured credit facility. In the opinion ofmanagement, such obligations will not significantly affect the Company’sfinancial position, results of operations or cash flows as the Companyanticipates fulfilling its performance obligations.

 

**Commitments and Contingencies**

 

SeeNote 16, “Commitments and Contingencies,” for a discussion of the Company’sCommitments and Contingencies.

 

**Critical Accounting Policies and Estimates**

 

Ourdiscussion and analysis of our financial condition and results of operationsare based upon our condensed consolidated financial statements, which have beenprepared in accordance with U.S. GAAP. The preparation of these financialstatements requires us to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses, and the relateddisclosure of contingent assets and liabilities. These estimates includeassessing, among other things:

 

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

 

·                  the use andrecoverability of inventory;

 

·                  the valuationof deferred tax assets;

 

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

 

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

 

·                  the usefullives of tangible and intangible assets.

 

Weevaluate our estimates on an ongoing basis, based on historical experience andvarious other assumptions that we believe to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results may differ from these estimates underdifferent assumptions or conditions.

 

Thesignificant accounting policies of the Company are described in Note 1,”Descriptionof Business and Summary of Significant Accounting Policies,” to the unauditedcondensed consolidated financial statements and the critical accountingpolicies and estimates are described in the “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” section in theCompany’s 2008 Form 10-K. There have been no significant changes to thesecritical accounting policies and estimates as of June 30, 2009.

 

**Forward-Looking Statements**

 

Thisdocument contains forward-looking statements. Forward-looking statements withinthe context of the Private Securities 

 

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LitigationReform Act of 1995 are not statements of historical fact and may involve anumber of risks and uncertainties. Forward-looking statements give our currentexpectations or forecasts of future events and estimates of amounts not yetdeterminable. We have used the words “anticipate,” “estimate,” “expect,” “project,”“intend,” “plan,” “believe,” “predict,” “could,” “may” and other words andterms of similar meaning, including references to assumptions, in this reportto identify forward-looking statements. These 

forward-lookingstatements are made based on expectations and beliefs concerning future eventsaffecting us and are subject to uncertainties and factors relating to ouroperations and business environment, all of which are difficult to predict andmany of which are beyond our control, that could cause our actual results todiffer materially from those expressed in or implied by these forward-lookingstatements. In particular, these factors include, among other things:

 

·                  our businessstrategy;

·                  changes in thegeneral economic conditions in North America and Europe and in other locationsin which we currently do business;

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

·                  fluctuations ininterest rates, exchange rates and currency values;

·                  availabilityand pricing of raw materials;

·                  fluctuations inenergy prices;

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

·                  our ability toaccess capital markets;

·                  technologicalchanges affecting production of our materials;

·                  governmentaland environmental regulations and changes in those regulations;

·                  hazardsassociated with chemicals manufacturing;

·                  our high levelof indebtedness;

·                  risks associatedwith negotiating, consummating and integrating acquisitions;

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

·                  risksassociated with international sales and operations.

 

Youshould keep in mind that any forward-looking statements made by us in thisdocument or elsewhere speak only as of the date on which we make them. Newrisks and uncertainties come up from time to time, and it is impossible for usto predict these events or how they may affect us. We disclaim any obligationto update or revise any forward-looking statements, whether as a result of newinformation, future events or otherwise.

 

**Item 3.  Quantitative and Qualitative DisclosuresAbout Market Risk.**

 

Weare exposed to market risk from changes in interest rates, foreign currencyexchange rates and commodity prices. We manage our exposure to these marketrisks through regular operating and financing activities and through the use ofderivatives. When used, derivatives are employed as risk management tools andnot for trading purposes. A discussion and analysis of the Company’smarket risk is included in the Company’s 2008 Form 10-K. There have beenno significant changes to these market risks as of June 30, 2009.

 

**Item 4.  Controls and Procedures**

 

Ourmanagement, with the participation of our Chief Executive Officer and ChiefFinancial Officer, evaluated the effectiveness of the design and operation ofour disclosure controls and procedures as of June 30, 2009 and concludedthat our disclosure controls and procedures are effective. In connection withthis evaluation, our management did not identify any change in our internalcontrol over financial reporting that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reportingduring the second quarter of 2009.

 

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**PART II— OTHER INFORMATION**

 

**Item1.  Legal Proceedings.**

 

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

 

The European Commission (“EC”)is investigating possible infringement of certain antitrust regulations in themarket for heat stabilizers from 1986 to 2000 by certain industry participants,which included a business sold by a subsidiary in our Specialty Chemicalssegment in 2000.  On March 23, 2009, the EC confirmed that itcommenced a proceeding against certain participants in the heat stabilizersmarket, including the business formerly owned by this subsidiary and theCompany’s subsidiary.  Neither the Company nor any of its subsidiaries areactive in this market for heat stabilizers; however, the business sold in 2000was active in this market.  In June 2009, the EC held a hearing onthis matter.  The Company expects adecision by the EC in late 2009.  TheCompany will vigorously defend this matter.  While the Company believesits subsidiary has meritorious defenses against these claims and does notbelieve that resolution of this matter will have a material adverse effect onits business or financial condition, the Company cannot predict the ultimateoutcome of this proceeding and resolution of this matter may have a materialadverse effect on its results of operations or cash flows in any quarterly orannual reporting period.

 

We do not believe thatthere is any other individual, governmental, legal proceeding or arbitrationthat is likely to have a material adverse effect on our business, results ofoperations, cash flows or financial condition. We cannot predict the outcome ofany legal proceeding or the potential for future legal proceedings. SeeNote 16, “Commitments and Contingencies,” and Item 3, Legal Proceedings in our2008 Form 10-K for descriptions of other legal matters.

 

**Item1A. Risk Factors.**

 

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

 

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

 

None.

 

**Item3.  Defaults upon Senior Securities.**

 

None.

 

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

 

(a)                The Company’s Annual Meeting of Shareholders was heldon Thursday, April 23, 2009.

 

(b)               The results of votes of security holders for theelection of Class I directors were as follows:

 
| **Election of Directors** | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|-------------------------------------|------------|------------|------------|--------------|------------|
| Nance  K. Dicciani                  |       | 66,328,178 |       | 3,837,473    |       |
| J.  Kent Masters                    |       | 48,448,740 |       | 21,716,911   |       |

 

Seifi Ghasemi, Brian F.Carroll, Sheldon R. Erikson, Todd A. Fisher, and Douglas L. Maine continued asDirectors after the annual meeting.

 

51

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(c)                The results of votes of security holders for theratification of the appointment of Deloitte & Touche, LLP as ourindependent registered public accounting firm were as follows:

 
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker Non-  Votes** | ** ** |
|------------|------------|-------------|------------|-------------|------------|-----------------------------|------------|
| 70,084,991 |       | 54,139      |       | 26,520      |       | —                      |       |

 

(d)               The results of votes of security holders for theapproval of the 2009 Rockwood Holdings, Inc. Stock Incentive Plan were asfollows:

 
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker Non-  Votes** | ** ** |
|------------|------------|-------------|------------|-------------|------------|-----------------------------|------------|
| 36,368,595 |       | 30,127,922  |       | 45,070      |       | 3,624,065                   |       |

 

(e)                The results of votes of security holders for theapproval of the 2009 Rockwood Holdings, Inc. Short-Term Incentive Planwere as follows:

 
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker Non-  Votes** | ** ** |
|------------|------------|-------------|------------|-------------|------------|-----------------------------|------------|
| 67,418,470 |       | 2,716,582   |       | 30,596      |       | —                      |       |

 

**Item5.  Other Information.**

 

None.

 

**Item6.  Exhibits**

 

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

 

52

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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, thereunto dulyauthorized.

 
|   | ROCKWOOD  HOLDINGS, INC. |
|--------|-------------------------------|
|   |                          |   |
|   |                          |   |
|   | By:                           | /s/ SEIFI GHASEMI |
|   |                          | Seifi Ghasemi |
|   |                          | Chairman and Chief  Executive Officer |
|   |                          | Date: August 7,  2009 |
|   |                          |   |
|   |                          |   |
|   | ROCKWOOD  HOLDINGS, INC. |
|   |                          |   |
|   |                          |   |
|   | By:                           | /s/ ROBERT J. ZATTA |
|   |                          | Robert J. Zatta |
|   |                          | Senior Vice President  and Chief Financial Officer |
|   |                          | Date: August 7,  2009 |

 

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**Exhibit Index**

 
| **Exhibit No.** | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                                                                                                           |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **           | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.1                 |       | Amended and restated  credit agreement dated as of June 15, 2009, among Rockwood Specialties  Group, Inc., Rockwood Specialties Limited, Rockwood Specialties  International, Inc., Credit Suisse and USB Securities LLC and Goldman  Sachs Credit Partners L.P. (incorporated by reference to the Company’s  Current Report on Form 8-K filed on June 17, 2009) |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                           |
| 31.1*                |       | Rule 13a-14(a)/15d-14(a) Certification  of Chief Executive Officer.                                                                                                                                                                                                                                                                                                                  |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                           |
| 31.2*                |       | Rule 13a-14(a)/15d-14(a) Certification  of Chief Financial Officer.                                                                                                                                                                                                                                                                                                                  |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                           |
| 32.1                 |       | Section 1350  Certification of Chief Executive Officer. This certification accompanies this  report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and  shall not be deemed filed by the Company for purposes of Section 18 or  any other provision of the Securities Exchange Act of 1934, as amended.                                                              |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                           |
| 32.2                 |       | Section 1350 Certification  of Chief Financial Officer. This certification accompanies this report  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not  be deemed filed by the Company for purposes of Section 18 or any other  provision of the Securities Exchange Act of 1934, as amended.                                                              |

 

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*       Filed herewith.

 

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