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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q


ý

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

For the quarterly period ended March 31, 2005

or

o

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

Commission file number 33-109686

Rockwood Specialties Group, Inc.
(Exact name of Registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)
  52-2277390
(I.R.S. Employer
Identification No.)

100 Overlook Center, Princeton, New Jersey
(Address of principal executive offices)

 

08540
(Zip Code)

(609) 514-0300
(Registrant's telephone number, including area code)

        Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ý  Yes    o  No

        Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    o  Yes    ý  No

        Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

        As of May 13, 2005, there were outstanding 382,000 shares of common stock, par value $0.01 per 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 months ended March 31, 2005 and 2004   1
    Condensed Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004   2
    Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004   3
    Notes to Condensed Consolidated Financial Statements   4
Item 2   Management's Discussion and Analysis of Financial Condition and Results of Operations   27
Item 3   Quantitative and Qualitative Disclosures about Market Risk   61
Item 4   Controls and Procedures   62

 

 

PART II — OTHER INFORMATION

 

64

Item 1

 

Legal Proceedings

 

64
Item 2   Unregistered Sales of Equity Securities and Use of Proceeds   64
Item 3   Defaults Upon Senior Securities   64
Item 4   Submission of Matters to a Vote of Security Holders   64
Item 5   Other Information   64
Item 6   Exhibits   64
    Signatures   65


PART I—FINANCIAL INFORMATION

ROCKWOOD SPECIALTIES GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions)
(Unaudited)

 
  Three Months Ended March 31,
 
 
  2005
  2004
 
NET SALES   $ 769.7   $ 227.4  
COST OF PRODUCTS SOLD     544.1     165.0  
   
 
 
GROSS PROFIT     225.6     62.4  
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES     150.2     35.2  
RESTRUCTURING CHARGE, net     2.9      
   
 
 
OPERATING INCOME     72.5     27.2  
   
 
 
OTHER INCOME (EXPENSES):              
Interest, net     (48.2 )   (16.6 )
Foreign exchange gain, net     41.9     12.2  
   
 
 
Net     (6.3 )   (4.4 )

INCOME BEFORE TAXES AND MINORITY INTEREST

 

 

66.2

 

 

22.8

 
INCOME TAX PROVISION     24.9     7.8  
   
 
 
NET INCOME BEFORE MINORITY INTEREST     41.3     15.0  

MINORITY INTEREST

 

 

0.8

 

 


 
   
 
 
NET INCOME   $ 42.1   $ 15.0  
   
 
 

See accompanying notes to condensed consolidated financial statements.

1



ROCKWOOD SPECIALTIES GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except per share amounts)
(Unaudited)

 
  March 31,
2005

  December 31,
2004

 
ASSETS              
CURRENT ASSETS:              
Cash and cash equivalents   $ 237.3   $ 111.4  
Accounts receivable, net     497.8     500.9  
Inventories     473.8     476.9  
Deferred income taxes     31.1     32.5  
Prepaid expenses and other current assets     66.9     112.0  
   
 
 
Total current assets     1,306.9     1,233.7  

PROPERTY, PLANT AND EQUIPMENT, net

 

 

1,534.1

 

 

1,580.9

 
GOODWILL     1,758.3     1,826.8  
OTHER INTANGIBLE ASSETS, net     616.3     655.3  
DEFERRED DEBT ISSUANCE COSTS, net     69.5     73.8  
OTHER ASSETS     48.1     46.3  
   
 
 
TOTAL ASSETS   $ 5,333.2   $ 5,416.8  
   
 
 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 
CURRENT LIABILITIES:              
Accounts payable   $ 264.5   $ 326.1  
Income taxes payable     18.5     19.4  
Accrued compensation     67.2     84.5  
Accrued expenses and other current liabilities     256.3     260.3  
Senior secured revolving credit facility     175.0      
Long-term debt, current portion     67.4     47.2  
   
 
 
Total current liabilities     848.9     737.5  
LONG-TERM DEBT     2,994.8     3,076.9  
PENSION AND RELATED LIABILITIES     360.0     375.0  
DEFERRED INCOME TAXES     54.6     44.9  
OTHER LIABILITIES     172.3     219.2  
   
 
 
Total liabilities     4,430.6     4,453.5  

MINORITY INTEREST

 

 

54.9

 

 

58.3

 

STOCKHOLDERS' EQUITY:

 

 

 

 

 

 

 
Common stock ($.01 par value, 1,000,000 shares authorized; 382,000 shares issued and outstanding)          
Paid-in capital     848.3     848.3  
Accumulated other comprehensive income     306.6     406.0  
Accumulated deficit     (307.2 )   (349.3 )
   
 
 
Total stockholders' equity     847.7     905.0  
   
 
 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY   $ 5,333.2   $ 5,416.8  
   
 
 

See accompanying notes to condensed consolidated financial statements.

2



ROCKWOOD SPECIALTIES GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)

 
  For the Three Months ended
March 31,

 
 
  2005
  2004
 
CASH FLOWS FROM OPERATING ACTIVITIES:              
Net income   $ 42.1   $ 15.0  
Adjustments to reconcile net income to net cash provided by operating activities:              
  Depreciation and amortization     53.2     13.8  
  Deferred financing costs amortization     2.5     0.5  
  Foreign exchange gain     (41.9 )   (12.3 )
  Fair value adjustment of derivatives     (7.6 )   (2.3 )
  Bad debt provision     0.2     0.6  
  Deferred income taxes     18.2     3.8  
  Minority interest     (0.8 )    
Changes in assets and liabilities, net of the effect of foreign currency translation and acquisitions:              
  Accounts receivable     (11.5 )   (23.7 )
  Inventories, including fair value write-up charge     (11.9 )   (4.7 )
  Prepaid expenses and other assets     (12.9 )   (3.1 )
  Accounts payable     (7.8 )   (0.9 )
  Income taxes payable     1.0     2.8  
  Accrued expenses and other liabilities     (30.1 )   11.8  
   
 
 
Net cash provided by operating activities     (7.3 )   1.3  
CASH FLOWS FROM INVESTING ACTIVITIES:              
Capital expenditures, excluding capital leases     (35.7 )   (6.7 )
Proceeds on sale of property, plant and equipment     0.2      
   
 
 
Net cash used in investing activities     (35.5 )   (6.7 )
CASH FLOWS FROM FINANCING ACTIVITIES:              
Proceeds from senior secured revolving credit facility     260.0      
Repayment of senior secured revolving credit facility     (85.0 )    
Payments on long-term debt     (5.9 )   (4.5 )
   
 
 
Net cash provided by (used in) financing activities     169.1     (4.5 )
   
 
 
EFFECT OF EXCHANGE RATE CHANGES ON CASH     (0.4 )   (0.4 )
   
 
 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS     125.9     (10.3 )
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD     111.4     42.7  
   
 
 
CASH AND CASH EQUIVALENTS, END OF PERIOD   $ 237.3   $ 32.4  
   
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:              
Interest paid, net   $ 23.7   $ 8.0  
Income taxes paid, net of refunds   $ 4.8   $ 1.2  

NON-CASH INVESTING ACTIVITIES

 

 

 

 

 

 

 
Acquisition of equipment under capital leases   $ 4.8   $  

See accompanying notes to condensed consolidated financial statements.

3



ROCKWOOD SPECIALTIES GROUP, INC. AND SUBSIDIARIES
Notes To Condensed Consolidated Financial Statements (Unaudited)

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

        Business Description, Background—Rockwood Specialties Group, Inc. and Subsidiaries ("Rockwood" or the "Company") is a global developer, manufacturer and marketer of high value-added specialty chemicals and advanced materials used for industrial and commercial purposes.

        The Company is an indirect wholly-owned subsidiary of Rockwood Holdings, Inc. ("Holdings"), an entity controlled by affiliates of Kohlberg Kravis Roberts & Co. L.P. ("KKR") and DLJ Merchant Banking Partners III, L.P.("DLJMB"), and was formed in connection with an acquisition of certain assets, stock and businesses from Laporte plc ("Laporte") on November 20, 2000.

        On July 31, 2004, the Company completed the acquisition of four businesses of Dynamit Nobel from mg technologies ag and Mg North America Holdings, Inc. The businesses acquired are focused on highly specialized markets and consist of: white pigments; surface treatment and lithium chemicals; ceramics; and pharmaceutical intermediates. See Note 2—Acquisitions for a more complete description of the Dynamit Nobel Acquisition.

        Basis of Presentation—The accompanying condensed consolidated balance sheets and the related condensed consolidated statements of operations and cash flows of Rockwood are presented on a consolidated basis. All significant intercompany accounts and transactions have been eliminated.

        The interim financial statements included herein are unaudited. The condensed consolidated financial statements are presented based upon accounting principles generally accepted in the United States of America ("US GAAP"), except that certain information and footnote disclosures, normally included in financial statements prepared in accordance with US GAAP, have been condensed or omitted. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2004. In the opinion of management, this information contains all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the results for the periods presented.

        The results of operations and cash flows since January 1, 2005 of the businesses acquired in the Dynamit Nobel Acquisition, the Groupe Novasep combination and the pigments and dispersions business of Johnson Matthey Plc. are included in the condensed consolidated financial statements for the three month period ended March 31, 2005 along with the financial position of such operations as of March 31, 2005.

        The results of operations for the interim periods are not necessarily indicative of the results of operations for the full year.

        Nature of Operations/ Segment Reporting—The Company is a global developer, manufacturer and marketer of high value-added specialty chemicals and advanced materials. The Company operates in various business lines within its seven reportable segments consisting of: (1) Performance Additives, which includes color pigments and services, timber treatment chemicals, clay-based additives, and water treatment chemicals, (2) Specialty Compounds, which consists of plastic compounds, (3) Electronics, which consists of electronic chemicals, wafer reclaim and photomasks, (4) Specialty Chemicals, which includes lithium compounds and chemicals, metal surface treatment chemicals, and synthetic metal sulfides, (5) Titanium Dioxide Pigments, which consists of titanium dioxide pigments, and zinc- and barium-based compounds, (6) Advanced Ceramics, which includes ceramic-on-ceramic ball head and liner components used in hip-joint prostheses systems, ceramics cutting tools and a range of other ceramic components, and (7) Groupe Novasep (formerly known as Custom Synthesis), which includes hazardous chemistry and chiral technologies for the synthesis of pharmaceutical compounds.

4



        The basis for determining an enterprise's operating segments is the manner in which financial information is used internally by the enterprise's chief operating decision maker (our chief executive officer). See Note 3—Segment Information for further segment reporting information.

        Use of Estimates—The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and revenue and expenses during the periods reported. These estimates include, among other things, assessing the collectibility of accounts receivable, the use and recoverability of inventory, the valuation of deferred tax assets, impairment of goodwill as well as property, plant and equipment and other intangible assets, and the useful lives of tangible and intangible assets, among others. Actual results could differ from those estimates.

        Such estimates also include the fair value of assets acquired and liabilities assumed allocated to the purchase price of business combinations consummated (See Note 2—Acquisitions).

        Risks Associated with International Operations and Currency Risk—The Company's international operations are subject to risks normally associated with foreign operations, including, but not limited to, the disruption of markets, changes in export or import laws, restrictions on currency exchanges and the modification or introduction of other governmental policies with potentially adverse effects. A majority of the Company's sales and expenses are denominated in currencies other than U.S. dollars. Changes in exchange rates may have a material effect on the Company's reported results of operations and financial position. In addition, a significant portion of the Company's indebtedness is denominated in Euros.

        Related party transactions—Rockwood has engaged in transactions with certain related parties including KKR, DLJMB and affiliates of each.

        Through the date of the Dynamit Nobel Acquisition, KKR provided consulting and management advisory services to Rockwood for an annual fee of $0.6 million. Since the date of the Dynamit Nobel Acquisition, KKR and DLJ Merchant Banking III, Inc. have provided the Company with consulting and management advisory services for an annual fee of $2.1 million, increasing 5% annually. In connection with the expected initial public offering of the common stock of Rockwood Holdings, the affiliates of KKR and DLJMB have agreed to terminate the management services agreement effective upon the closing of such offering for an aggregate consideration of $10.0 million.

        Revenue Recognition—The Company recognizes revenue when the earnings process is complete, except for approximately 1% of consolidated revenues derived from long-term contracts accounted for under the percentage of completion method within our Groupe Novasep segment. Product sales are recognized when products are shipped to the customer in accordance with the terms of the contract of sale, title and risk of loss have been transferred, collectibility is reasonably assured, and pricing is fixed or determinable. Accruals are made for sales returns and other allowances based on the Company's experience. Revenue under service agreements is realized when the service is performed.

        Foreign Currency Translation—The functional currency of each of the Company's foreign subsidiaries is primarily the respective local currency. Balance sheet accounts of the foreign operations are translated into U.S. dollars at period-end exchange rates and income and expense accounts are translated at average exchange rates during the period. Translation gains and losses related to net assets located outside the U.S. are shown as a component of accumulated other comprehensive income. Gains and losses resulting from foreign currency transactions (transactions denominated in a currency other

5



than the entity's functional currency), should be included in determining net income for the period in which exchange rates change. However, the related gains or losses on certain intercompany transactions that are of a long-term investment nature for which settlement is not planned or anticipated in the foreseeable future are reported and accumulated in the same manner as translation adjustments.

        Derivatives—The Company accounts for derivatives based on Statement of Financial Accounting Standard ("SFAS") 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted. SFAS 133 requires that all derivatives be recognized as either assets or liabilities at fair value. Changes in the fair value of derivatives not designated as hedging instruments are recognized currently in earnings. The Company uses derivative instruments to manage its exposure to market risks associated with fluctuations in interest rates and foreign currency exchange rates. See Note 1—Comprehensive Income—for the impact of the Company's net investment hedge. The Company does not enter into derivative contracts for trading purposes nor does it use leveraged or complex instruments.

        Pension, Postemployment and Postretirement Costs—Defined benefit costs and liabilities have been determined in accordance with SFAS 87, Employers' Accounting for Pensions. Other postretirement benefit costs and liabilities have been determined in accordance with SFAS 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. Postemployment benefit costs and liabilities have been determined in accordance with SFAS 112, Employers' Accounting for Postemployment Benefits.

        Income Taxes—Income taxes are determined in accordance with SFAS 109, Accounting for Income Taxes. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts and the corresponding tax carrying amounts of assets and liabilities. Deferred tax assets are also recognized for tax loss and tax credit carryforwards. A valuation allowance is recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized based on available evidence weighted toward evidence that is objectively verifiable. Deferred taxes are not provided on the undistributed earnings of subsidiaries as such amounts are considered to be permanently invested or could be distributed to the parent company in a tax free manner.

        Future realization of the tax benefit of an existing deductible temporary difference or carryforward ultimately depends on the existence of sufficient taxable income of the appropriate character (for example, ordinary income or capital gain) within the carry forward period available under the tax law. The Company's policy is to consider the following sources of taxable income which may be available under the tax law to realize a tax benefit for deductible temporary differences and carry forwards:

        Evidence available about each of those possible sources of taxable income will vary between tax jurisdictions and, possibly, from year to year. To the extent evidence about one or more sources of

6



taxable income is sufficient to support a conclusion that a valuation allowance is not necessary, the Company's policy is that other sources need not be considered. Consideration of each source is required, however, to determine the amount of the valuation allowance that may be required to be recognized for deferred tax assets.

        For any specific jurisdiction where a history of three years of cumulative losses has occurred or where there has been a substantial change in the business (e.g. a major acquisition or divestiture), the Company does not rely on projections of future taxable income as described above. Instead, the Company determines its need for a valuation allowance on deferred tax assets, if any, by determining an average steady-state normalized taxable income amount over the last three years, adjusted for acquisitions or divestitures if necessary.

        The Company will also consider the following positive evidence in the above scenarios, if present:

        Comprehensive Income—Comprehensive income includes net income and the other comprehensive income components which include unrealized gains and losses from foreign currency translation and from certain intracompany transactions that are of a long-term investment nature as well as minimum pension liability adjustments that are recorded directly into a separate section of stockholders' equity in the balance sheets. Also included is the net investment hedge discussed below. Foreign currency translation amounts are not adjusted for income taxes since they relate to indefinite length investments in non-U.S. subsidiaries and certain intercompany debt.

 
  Three months ended
March 31,

 
(millions)

 
  2005
  2004
 
Net income   $ 42.1   $ 15.0  
Foreign currency translation     (40.5 )   (4.1 )
Net investment hedge, net of tax     6.2      
Other comprehensive income     (65.1 )    
   
 
 
Total comprehensive (loss) income   $ (57.3 ) $ 10.9  
   
 
 

        The Company completed the sale of €375.0 million aggregate principal amount of 7.625% senior subordinated notes and $200.0 million aggregate principal amount of 7.500% senior subordinated notes, both due in 2014 ("2014 Notes"). In connection with the 2014 notes, the Company entered into cross currency interest rate swaps with a five year term and a notional amount of €155.6 million that effectively convert the U.S. dollar fixed rate debt in respect of the dollar notes sold into euro fixed rate debt. The Company has designated this contract as a hedge of the foreign currency exposure of its net investment in its euro denominated operations. There was no ineffective portion of the net investment hedge as of March 31, 2005. The Company does not expect any of the loss on the net investment hedge residing in other comprehensive income at March 31, 2005 to be reclassified into earnings during the subsequent 12 months.

        Accounting for Environmental Liabilities—In the ordinary course of business, Rockwood is subject to extensive and changing federal, state, local and foreign environmental laws and regulations, and has made provisions for the estimated financial impact of environmental cleanup related costs. Rockwood's

7



policy has been to accrue costs of a non-capital nature related to environmental clean-up when those costs are believed to be probable and can be reasonably estimated. If the aggregate amount of the obligation and the amount and timing of the cash payments for a site are fixed or reliably determinable, the liability is discounted. Expenditures that extend the life of the related property or mitigate or prevent future environmental contamination are capitalized and expenditures related to existing conditions resulting from past or present operations and from which no current or future benefit is discernible are immediately expensed. The quantification of environmental exposures requires an assessment of many factors, including changing laws and regulations, advancements in environmental technologies, the quality of information available related to specific sites, the assessment stage of each site investigation and the length of time involved in remediation or settlement. In some matters, Rockwood could share costs with other parties. Rockwood does not include anticipated recoveries from insurance carriers or other third parties in its accruals for environmental liabilities.

Recent Accounting Pronouncements

FIN 47   Accounting for Conditional Asset Retirement Obligations—An Interpretation of Statement of Financial Accounting Standard ("SFAS") 143
SFAS 123R   Accounting for Share-Based Payment

        FIN 47 clarifies that the term conditional asset retirement obligation as used in SFAS 143, Accounting for Asset Retirement Obligations, refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. FIN 47 is effective December 31, 2005 for the Company.

        SFAS 123R revises SFAS 123 Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS 123R requires entities to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which the employee is required to provide services in exchange for the award. This standard eliminates the alternative to use the intrinsic value method of accounting for share based payments as previously provided in APB 25. This standard is effective for the Company beginning in the first quarter of 2006. As we are not a publicly traded equity company, we will apply SFAS 123R on a prospective basis. New awards, modifications to existing awards, repurchases or cancellations subsequent to February 11, 2005 (the date on which the Company's parent filed its Form S-1) will be accounted for in accordance with SFAS 123R on the modified prospective basis.

        Stock-Based Compensation—At March 31, 2005, the Company had in place the Amended and Restated 2003 Stock Purchase and Option Plan of Rockwood Holdings, Inc., as amended, (formerly the 2000 Stock Purchase and Option Plan), (the "Plan"). The Company accounts for the Plan under the recognition and measurement principles of APB Opinion 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation is reflected in net income related to this Plan, as all options granted had an exercise price at least equal to the market value of the underlying common stock on the date of the grant. The following table illustrates the effect on net income if the Company had applied the fair value recognition provisions of SFAS 123, Accounting for Stock-Based Compensation, to stock-based employee compensation. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing model. Volatility is

8



assumed to be zero as there is no public market for the underlying stock. Dividend yield is also assumed to be zero.

 
  Three months ended
March 31,

 
(millions)

 
  2005
  2004
 
Net income, as reported   $ 42.1   $ 15.0  
Less: Stock-based employee compensation expense determined under fair value based method, net of tax     (0.2 )   (0.1 )
   
 
 
Pro forma net income   $ 41.9   $ 14.9  
   
 
 

2.     ACQUISITIONS:

Dynamit Nobel

        On July 31, 2004, the Company consummated the Dynamit Nobel Acquisition. The Company paid approximately €1,635.0 million (or $1,968.5 million) (excluding repayment of certain assumed debt) in cash to mg technologies ag for the businesses acquired, subject to possible post-closing adjustments. The four divisions of Dynamit Nobel acquired by Rockwood were (i) Chemetall, or Specialty Chemicals; (ii) Sachtleben Chemie, or Titanium Dioxide Pigments; (iii) CeramTec, or Advanced Ceramics and (iv) DNES Custom Synthesis (consisting of Dynamit Nobel Special Chemistry, Finorga, S.A. and Rohner A.G.), or Custom Synthesis, which is now known as Groupe Novasep. Through this acquisition, the Company believes it has created a portfolio of distinct specialty chemicals and advanced performance materials businesses, with diversified geographic and end-use markets, strong market positions and margins, and limited exposure to individual raw material fluctuations.

        The allocation of the purchase price to the identifiable assets acquired is complete except that the purchase price is subject to possible post-closing adjustments, including adjustments related to Closing Net Financial Debt and Closing Working Capital (as each term is defined in the Sale and Purchase Agreement dated April 19, 2004). mg technologies ag has notified the Company of several adjustments which would result in the Company paying an additional €31.5 million; however, the Company has notified mg technologies ag of counterclaims in the aggregate of €34.7 million. The Company believes the potential future consideration due to mg technologies ag ranges from $0 to approximately $30.0 million dollars. Given the complexities of the underlying claims, the Company's inability to predict the success of negotiating a resolution and the possibility of eventual arbitration of some or all of the claims the Company believes that no estimate within this range is better than another. The Company expects to finalize the post-closing adjustments within the next 12 months. The recorded amount of goodwill, net of tax, as applicable may change when the post-close adjustments are finalized.

Groupe Novasep Combination

        In December 2004, in connection with the combination of the three business lines of the Custom Synthesis segment (now known as our Groupe Novasep segment) with Groupe Novasep SAS, one of the subsidiaries acquired 69.4% of the stock of Groupe Novasep SAS for a total purchase price of approximately $148.2 million, including assumed debt of $48.6 million, cash acquired of $14.6 million and the exchange of the remaining 30.6% of the stock of Groupe Novasep SAS for stock in the acquiring subsidiary. As a result of this transaction, the Company owns approximately 79% of the new Groupe Novasep. Management of Groupe Novasep owns the remaining 21%. The Company used cash on hand to finance this transaction.

9



        This combination is accounted for using the purchase method of accounting. The Company has not finalized the estimated fair value of the assets acquired and liabilities assumed although values of inventory, identified intangible assets, and property, plant and equipment are completed. The Company expects to complete its research and fair value estimates on remaining purchase price components by the third quarter of 2005. However, significant changes to the preliminary purchase accounting are not expected.

Johnson Matthey Pigments and Dispersions Business

        On September 2, 2004 the Company completed the acquisition of the Pigments and Dispersions business of Johnson Matthey Plc for approximately $50.0 million (including fees and expenses), subject to post-closing adjustments. The acquisition expands the Company's global color pigments and services' business specifically within transparent iron oxide pigments and dispersions, color concentrates and complex inorganic color pigments for the surface and wood coatings, plastics, building materials and printing inks markets. The Company utilized the remaining undrawn funds from the term loan portion of its senior credit facilities to finance this transaction.

        This acquisition was accounted for using the purchase method of accounting. Except for the possible effect of the post-closing adjustments described above, the Company has finalized the estimated fair value of the assets acquired and liabilities assumed.

10


3.     SEGMENT INFORMATION:

        Items that cannot be readily attributed to individual segments have been classified as "corporate". Major Corporate components within the reconciliation of net income (loss) to Adjusted EBITDA (described more fully below) include systems/ organization establishment expenses such as outside consulting costs for Sarbanes-Oxley initial documentation, tax benefit resulting from corporate losses, interest expense on external debt, foreign exchange losses or gains, and refinancing expenses related to external debt. Corporate identifiable assets primarily represent cash balances or overdrafts maintained in accordance with centralized cash management techniques and deferred financing costs that have been capitalized in connection with certain corporate external debt financing. The corporate classification also includes the results of operations, assets (primarily real estate) and liabilities (including pension and environmental) of legacy businesses formerly belonging to Dynamit Nobel.

        Summarized financial information for each of the reportable segments is provided in the following table.

(millions)

  Performance
Additives

  Specialty
Compounds

  Electronics
  Specialty
Chemicals

  Titanium
Dioxide
Pigments

  Advanced
Ceramics

  Groupe
Novasep

  Corporate
  Consolidated
Three months ended March 31, 2005                                                      
Net sales   $ 159.5   $ 58.1   $ 42.8   $ 220.0   $ 104.5   $ 91.9   $ 92.9   $   $ 769.7
Adjusted EBITDA     34.2     7.3     5.8     43.0     20.9     21.4     10.2     (9.6 )   133.2

Three months ended March 31, 2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Net sales   $ 139.1   $ 47.9   $ 40.4   $   $   $   $   $   $ 227.4
Adjusted EBITDA     32.1     6.8     6.6                     (4.4 )   41.1
 
  Performance
Additives

  Specialty
Compounds

  Electronics
  Specialty
Chemicals

  Titanium
Dioxide
Pigments

  Advanced
Ceramics

  Groupe
Novasep

  Corporate
  Consolidated
Identifiable assets as of:                                                      
March 31, 2005   $ 1,155.4   $ 262.3   $ 305.0   $ 1,601.0   $ 678.6   $ 719.2   $ 554.9   $ 56.8   $ 5,333.2
December 31, 2004   $ 1,170.0   $ 256.7   $ 309.5   $ 1,653.9   $ 707.5   $ 750.6   $ 683.9   $ (115.3 ) $ 5,416.8

        The summary of segment information above includes "Adjusted EBITDA", a financial measure used by our chief decision maker, who is the Company's Chief Executive Officer, to evaluate the operating performance of each segment.

Components of Adjusted EBITDA

        The process of refocusing and restructuring the businesses acquired in the KKR Acquisition and establishing the post-acquisition corporate entity, along with the impact of the Dynamit Nobel Acquisition, resulted in a number of charges that have affected Rockwood's historical results. These charges, along with certain other items, are added to or subtracted from net loss to derive Adjusted EBITDA, as defined below. The more significant of these items include the following:

11


        On a segment basis, the Company defines Adjusted EBITDA as operating income excluding depreciation and amortization, certain non-cash gains and charges, certain non-recurring gains and charges and certain items deemed by senior management to have little or no bearing on the day-to-day operating performance of its business segments and reporting units. The adjustments made to operating income directly correlate with the adjustments to net income in calculating Adjusted EBITDA on a consolidated basis pursuant to the senior secured credit agreement. The indentures governing the 2011 Notes and the 2014 Notes exclude certain adjustments permitted under the senior credit agreement. Senior management uses Adjusted EBITDA on a segment basis as the primary measure to evaluate the ongoing performance of the Company's business segments and reporting units.

        The Company uses Adjusted EBITDA on a segment and consolidated basis to assess its operating performance. In addition, management uses Adjusted EBITDA on a consolidated basis as the most significant criterion in the calculation of performance-based cash bonuses and the determination of whether certain performance-based stock options vest.

        Rockwood believes this financial measure on a consolidated basis is helpful in highlighting trends in its overall business because Adjusted EBITDA excludes those items that have little or no bearing on day-to-day operating performance.

        Because the Company views Adjusted EBITDA on both a segment basis and consolidated basis as an operating performance measure, the Company uses net income (loss) as the most comparable

12



GAAP measure. The following table, which sets forth the applicable component of Adjusted EBITDA, presents a reconciliation of net income (loss) to Adjusted EBITDA on a GAAP basis:

(millions)

  Performance
Additives

  Specialty
Compounds

  Electronics
  Specialty
Chemicals

  Titanium
Dioxide
Pigments

  Advanced
Ceramics

  Groupe
Novasep

  Corporate
  Consolidated
 
Three months ended March 31, 2005                                                        
Net income (loss)   $ 10.8   $ 5.3   $ 0.6   $ 6.9   $ 1.9   $ 2.8   $ (3.1 ) $ 16.9   $ 42.1  
Income tax provision (benefit)     6.4     0.7     0.2     10.1     1.3     1.7     (1.9 )   6.4     24.9  
Interest, net     6.6     (0.1 )   1.3     12.1     8.5     9.4     4.5     5.9     48.2  
Depreciation and amortization     8.5     1.4     5.1     11.7     9.2     7.5     8.9     0.9     53.2  
Restructuring and related charges     2.4             0.5                     2.9  
CCA litigation     0.3                             0.1     0.4  
Systems/organization establishment expenses                                 1.2     1.2  
Cancelled acquisition and disposal costs                                 0.2     0.2  
Inventory write-up reversal                             2.8         2.8  
Foreign exchange (gain) loss     (0.9 )       (1.4 )   1.8                 (41.4 )   (41.9 )
Minority interest                             (0.8 )       (0.8 )
Other     0.1             (0.1 )           (0.2 )   0.2      
   
 
 
 
 
 
 
 
 
 
Total Adjusted EBITDA   $ 34.2   $ 7.3   $ 5.8   $ 43.0   $ 20.9   $ 21.4   $ 10.2   $ (9.6 ) $ 133.2  
   
 
 
 
 
 
 
 
 
 

Three months ended March 31, 2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Net income (loss)   $ 10.4   $ 3.7   $ 0.7   $   $   $   $   $ 0.2   $ 15.0  
Income tax provision (benefit)     8.4     1.7     1.2                     (3.5 )   7.8  
Interest, net     7.6         1.5                     7.6     16.7  
Depreciation and amortization     7.1     1.4     5.0                     0.3     13.8  
Foreign exchange gain     (1.4 )       (1.8 )                   (9.0 )   (12.2 )
   
 
 
 
 
 
 
 
 
 
Total Adjusted EBITDA   $ 32.1   $ 6.8   $ 6.6   $   $   $   $   $ (4.4 ) $ 41.1  
   
 
 
 
 
 
 
 
 
 

4.     INVENTORIES:

        Inventories are comprised of the following:

(millions)

  March 31,
2005

  December 31,
2004

Raw materials   $ 135.5   $ 140.4
Work-in-process     86.3     81.6
Finished goods     238.1     240.3
Packaging materials     13.9     14.6
   
 
    $ 473.8   $ 476.9
   
 

13


5.     GOODWILL:

        Below are goodwill balances and activity by segment:

(millions)

  Performance
Additives

  Specialty
Compounds

  Electronics
  Specialty
Chemicals

  Titanium
Dioxide
Pigments

  Advanced
Ceramics

  Groupe
Novasep

  Total
 
Balance, December 31, 2004   $ 463.8   $ 115.5   $ 124.2   $ 659.3   $ 172.4   $ 230.7   $ 60.9   $ 1,826.8  
Foreign exchange     (5.1 )   (1.5 )   (0.4 )   (32.1 )   (7.6 )   (10.6 )   (2.7 )   (60.0 )
Reversal of deferred tax valuation                                                  
allowances                 (2.3 )       (6.6 )       (8.9 )
Other adjustments     0.4                             0.4  
   
 
 
 
 
 
 
 
 
Balance, March 31, 2005   $ 459.1   $ 114.0   $ 123.8   $ 624.9   $ 164.8   $ 213.5   $ 58.2   $ 1,758.3  
   
 
 
 
 
 
 
 
 

        The Groupe Novasep portion of this balance represented by assets of the acquisitions and combination discussed in Note 2—Acquisitions is subject to change upon the finalization of purchase accounting. Additionally, the goodwill associated with the acquired businesses of Dynamit Nobel is subject to change based on the final determination of the purchase price as discussed in Note 2—Acquisitions.

6.     OTHER INTANGIBLE ASSETS:

        Other intangible assets, net consist of:

 
  As of March 31, 2005
  As of December 31, 2004
(millions)

  Gross
Carrying
Amount

  Accumulated
Amortization

  Net
  Gross
Carrying
Amount

  Accumulated
Amortization

  Net
Patents and other intellectual property   $ 365.4   $ (50.1 ) $ 315.3   $ 377.3   $ (39.4 ) $ 337.9
Trade Names and Trademarks     107.8     (2.5 )   105.3     115.0     (1.5 )   113.5
Customer Relationships     199.1     (10.3 )   188.8     205.7     (6.5 )   199.2
Other     10.3     (3.4 )   6.9     7.8     (3.1 )   4.7
   
 
 
 
 
 
Total   $ 682.6   $ (66.3 ) $ 616.3   $ 705.8   $ (50.5 ) $ 655.3
   
 
 
 
 
 

        Amortization of other intangible assets was $14.1 million and $1.6 million for the three months ended March 31, 2005 and 2004, respectively.

7.     TAXES ON INCOME:

        The income tax expense has been computed based on the projected effective rate for the year. The valuation allowance for U.S. net operating losses established at December 31, 2004 has been reduced by $14.0 million due to U.S. income generated in the first quarter of 2005. Of this reduction, $8.9 million has been recorded as a decrease to goodwill representing the expected utilization of certain net operating losses acquired in the Dynamit Nobel acquisition. The remaining $5.1 million has been reflected as a reduction in the income tax expense for the quarter ended March 31, 2005. The determination of the net operating losses to be utilized is based on a "first-in, first-out" methodology. In accordance with the Company's policy, the Company has not reversed the entire U.S. valuation allowance because the steady-state three year average of cumulative normalized earnings continues to be negative.

14



8.     EMPLOYEE BENEFIT PLANS:

        The following table represents the net periodic benefit costs and related components in accordance with SFAS 132:

 
  Three months ended
March 31,

 
(millions)

 
  2005
  2004
 
Three months ended March 31              
Service cost   $ 2.8   $ 0.3  
Interest cost     7.0     0.7  
Expected return on plan assets     (2.9 )   (0.5 )
Net amortization of prior experience losses     0.2     0.2  
   
 
 
Net periodic benefit cost   $ 7.1   $ 0.7  
   
 
 

9.     RESTRUCTURING LIABILITY:

        We record restructuring charges from time to time that represent expenses incurred in connection with consolidations and cessations of certain of our operations as well as headcount reduction programs. These charges consist primarily of write-offs of surplus assets and severance costs. Severance charges are based on various factors including the employee's length of service, contract provisions, salary levels and local governmental legislation. At the time a related charge is recorded, we calculate our best estimate based upon detailed analysis. Although significant changes are not expected, actual costs may differ from these estimates.

Dynamit Nobel Restructuring and Johnson Matthey Pigments and Dispersions Restructuring

        The Company began to assess and formulate specific plans to involuntarily terminate (relocate) certain employees and/or exit certain activities of Dynamit Nobel as of the Dynamit Nobel Acquisition date. This assessment has led to certain restructuring measures being taken by the Company as described below.

        The Company closed the former corporate office of Dynamit Nobel located in Troisdorf, Germany in the fourth quarter of 2004. The Company recorded restructuring charges related to this closure including severance costs for 44 general and administrative personnel of the former Dynamit Nobel company, the closure costs on this building and the relocation costs for the remaining 27 employees who were relocated to our new Frankfurt, Germany location. Also in 2004, as part of the acquisition of the Pigments and Dispersions business of Johnson Matthey, the Company enacted a restructuring program. To date, 40 positions have been eliminated. All of these employees are selling, general and administrative personnel.

Selected information for the Dynamit Nobel, Johnson Matthey and other 2004 restructuring actions follows:

        During the first quarter of 2005, the Company has identified and accrued $2.9 million to cover restructuring costs for miscellaneous restructuring actions, primarily in the Performance Additives

15



segment including the announced closure of the Baulking, United Kingdom facility in the Clay Based Additives business.

(millions)

  Severance
Costs

  Facility
Closure
Costs

  Relocation
Costs

  Total
 
Liability balance, January 1, 2005   $ 20.8   $ 11.3   $ 2.6   $ 34.7  
Purchase accounting     0.8             0.8  
Restructuring charge     2.9             2.9  
Utilized in 2005     (6.8 )   (0.9 )   (0.4 )   (8.1 )
Foreign Exchange and other     1.5     (3.0 )   0.6     (0.9 )
   
 
 
 
 
Liability balance, March 31, 2005   $ 19.2   $ 7.4   $ 2.8   $ 29.4  
   
 
 
 
 

10.   COMMITMENTS AND CONTINGENCIES:

        Legal Proceedings—The Company is involved in various legal proceedings, including commercial, intellectual property, product liability and environmental matters of a nature considered normal to its business. It is the Company's policy to accrue for amounts related to these matters, in accordance with SFAS 5, Accounting for Contingencies, if it is probable that a liability has been incurred and an amount can be reasonably estimated. It is the Company's policy to disclose such matters when there is at least a reasonable possibility that a material loss may have been incurred. Although the Company expects to continue to pay legal fees in connection with certain legal actions related to chromated copper arsenate, based on currently available facts, the Company does not believe that these actions will have a material effect on the financial condition, results of operations or liquidity of the Company. In addition, the Company does not believe that there is any other individual legal proceeding that is likely to have a material adverse affect on its business or financial condition.

        Indemnity Matters—Under the terms of the Business and Share Sale and Purchase Agreement, the Deed of Tax Covenant and the Environmental Deed entered into in connection with the KKR Acquisition, Degussa UK Holdings Ltd., as successor to the Laporte Plc, is obligated to indemnify the Company for certain legal, tax and environmental liabilities and obligations that relate to the period prior to the closing of the KKR Acquisition.

        Under the terms of the Sale and Purchase Agreement with mg technologies ag and its subsidiary MG NAH, mg technologies is obligated to indemnify the Company for certain legal, tax and environmental liabilities and obligations that relate to the period prior to the closing, subject to certain limits and exclusions. Pursuant to these agreements, we have various claims for indemnification with Degussa and mg technologies. In addition, the Company may be subject to indemnity claims relating to properties or businesses it divested. In the opinion of management, and based upon information currently available, the ultimate resolution of any indemnification obligations owed to us or by us will not have a material effect on the Company's financial condition or results of operations. See Item 1—Financial Statements and Supplementary Data—Note 2—Acquisitions.

Safety, Health and Environmental Matters

        The Company is subject to extensive environmental, health and safety laws in the United States, the European Union and elsewhere at both the national and local level. Many of these laws impose requirements relating to clean-up of contamination, and impose liability in the event of damage to human beings, natural resources or property, and provide for substantial fines, injunctions and potential criminal sanctions for violations. The products, including the raw materials handled, are also subject to rigorous industrial hygiene regulations and investigation. The nature of the Company's operations

16


exposes it to risks of liability for breaches of these laws and regulations as a result of the production, storage, transportation and sale of materials that can cause contamination or personal injury when released into the environment. Environmental laws are subject to change and have tended to become stricter over time. Such changes in environmental laws, or the enactment of new environmental laws, could result in materially increased capital, operating and compliance costs.

        The Company is committed to achieving and maintaining compliance with all applicable safety, health and environmental ("SHE") legal requirements, and the Company's subsidiaries have developed policies and management systems that are intended to identify the SHE legal requirements applicable to the operations, enhance compliance with such requirements, ensure the safety of the Company's employees, contractors, community neighbors and customers and minimize the production and emission of wastes and other pollutants. Although SHE legal requirements are constantly changing and are often difficult to comply with, these SHE management systems are designed to assist the Company in meeting its compliance goals and minimizing overall risk.

        In October 2003, the European Commission adopted a proposal for a new European Union framework for chemicals known as the Registration, Evaluation and Authorization of Chemicals, or REACH. While it is uncertain as to whether, when and in what form REACH will be finalized and become law, REACH may eventually significantly expand the European Union's regulation of chemicals. As currently proposed, REACH would include requirements that certain manufacturers and importers of chemicals register those chemicals, perform health and environmental risk analyses of those chemicals, and in certain instances, obtain authorizations for the use of the chemicals. As a specialty chemicals company, it is possible that the Company is the only manufacturer of one or more substances to be regulated under REACH and thus could potentially bear the full cost of compliance with REACH for some or all of the Company's products. The Company estimates it has over 400 products that might be subject to REACH.

        Under the European Union Integrated Pollution Prevention and Control Directive ("IPPC"), European Union member governments are to adopt rules and implement a cross-media (air, water and waste) environmental permitting program for individual facilities. While the EU countries are at varying stages in their respective implementation of the IPPC permit program, the Company has submitted all necessary IPPC permit applications required to date, and in some cases received completed permits from the applicable government agency. The Company expects to submit all other IPPC applications and related documents on a timely basis as the various countries implement the IPPC permit program. Although it is not known with certainty what each IPPC permit will require, the Company believes, based upon its experience with the permits received to date, that the costs of compliance with the IPPC permit program will not be material to its results of operations, financial position or liquidity.

        The Company may incur future costs for capital improvements and general compliance under SHE laws. For the year December 31, 2004, the capital expenditures for SHE matters totaled approximately $23.9 million, excluding costs to maintain and repair pollution control equipment. For 2005 and 2006, the Company estimates capital expenditures for compliance with SHE laws to be at similar levels; however, because capital expenditures for these matters are subject to changes in existing and new SHE laws, the Company cannot provide assurance that its recent expenditures will be indicative of future amounts required to comply with these laws.

17


        Environmental laws have a significant effect on the nature and scope of any clean-up of contamination at current and former operating facilities, the costs of transportation and storage of chemicals and finished products and the costs of the storage and disposal of wastes. In addition, "Superfund" statutes in the United States as well as statutes in other jurisdictions impose strict, joint and several liability for clean-up costs on the entities that generated waste and/or arranged for its disposal at contaminated third party sites, as well as the past and present owners and operators of contaminated sites. All responsible parties 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.

        Environmental contamination is known to exist at certain of our present and former facilities, including our facilities located in Turin, Italy, St. Fromond, St. Cheron and Sens, France; Hainhaussen, Troisdorf, Schlebusch, Stadeln, Duisburg, Plochingen, Marktredwitz, Ronnenberg-Empelde and Langelsheim, Germany; Oss, The Netherlands; Kidsgrove, and Barrow, U.K.; Boksburg East, South Africa; Pratteln, Switzerland and in the United States, in Valdosta, Georgia, Beltsville, Maryland, Harrisburg, North Carolina, Laurens, South Carolina, Silver Peak, Nevada and La Mirada, California. Soil contamination is also known to exist at our facilities at Freeport, Texas, Chasse-sur-Rhone, France and Sumperk in Czech Republic; however, no further regulatory remedial actions are currently required for these facilities and any liabilities arising from such contamination is covered by indemnity obligations or the previous owners of these facilities with the exception of Freeport. We are currently operating groundwater remediation systems at our Hainhaussen, Troisdorf, Valdosta, and Silver Peak facilities. We also operate ground water remediation systems at our Schlebusch, Plochingen, Marktredwitz, Stadeln and Laurens facilities, for which prior owners or insurers have assumed responsibility and a soil remediation project at our facility in St. Cheron, and we continue to monitor groundwater at the Beltsville facility, which was previously the subject of a soil removal action. Groundwater is also monitored at the St. Fromond and Barrow facilities due to prior spills and at the Harrisburg facility due to a landfill closure. We are also required to monitor groundwater quality at our facilities at Mourenx, France and New Johnsonville, Tennessee. We believe that additional environmental studies, and possibly environmental remediations, will be required at the Turin and Harrisburg facilities. We are also in the process of determining appropriate remedial actions with the regulatory authorities at the following locations: Duisburg, Pratteln, Langelsheim, Troisdorf and La Mirada. Furthermore, as a result of facility closings, divestitures and offsite disposal activities such as a former disposal site in Laurel, Maryland, we are responsible for the following other matters: contamination beneath divested portions of the manufacturing facility in Troisdorf; contamination at a closed Chemetall Oakite facility in Houston, Texas, contamination at a former Chemetall Foote facility in Sunbright, Virginia, contribution towards the clean-up of three industrial landfills in the Basel, Switzerland area, groundwater remediation at Stadeln and former sites operated by DNSC's Dynamit Nobel's previously divested explosives business. The Company is also a de minimis participant in several Superfund matters.

        Although the Company cannot provide assurances in this regard, the Company does not believe that these issues will have a material adverse effect on its long-term business or financial condition. Nonetheless, the discovery of contamination arising from present or historical industrial operations at some of the Company's and the Company's predecessor's former and present properties and/or contamination at sites it and its predecessor disposed wastes could expose the Company to cleanup obligations and other damages in the future.

Government Enforcement Proceedings and Civil Litigation

        During the course of the Company's business, the Company may receive notices of violation, enforcement and other complaints from regulatory agencies alleging non-compliance with applicable SHE laws. Currently, the Company is party to a consent order with the Metropolitan Sewer District

18



("MSD") in Saint Louis, Missouri to reduce ammonia concentrations in wastewater discharge to a city treatment plant. The entry into the consent order resulted from violations of its wastewater discharge permit. The order is presently stayed pending MSD's negotiation of its own National Pollution Discharge Elimination System permit with the State of Missouri. Although the Company may be required to make capital expenditures in connection with this matter, it does not believe that this issue will have a material adverse effect on its long-term business or financial condition.

Environmental Indemnities

        Pursuant to the environmental deed entered into in connection with the KKR acquisition, Degussa, as successor to Laporte, is required to indemnify the Company and its subsidiaries for certain environmental matters that relate to the business as conducted prior to the closing of the KKR acquisition. The environmental deed provides that Degussa will indemnify the Company and its subsidiaries for claims for which notice is given within a period of two years for breaches of representations and warranties, which expired in 2002, and five years, which expires in September 2005, for claims related to the contamination of the Company's properties or its subsidiaries' properties (inclusive of contamination which leaks or escapes from the Company's properties or its subsidiaries' properties). These indemnity obligations are subject to a minimum per matter loss of $0.2 million and are further subject to a $5.0 million deductible for the indemnity to be available. In addition, the environmental deed provides that Degussa will indemnify Rockwood and its subsidiaries for claims relating to properties that were formerly owned, occupied or used as of November 20, 2000, as well as properties owned by third parties (inclusive of disposal of waste and certain other identified issues prior to November 20, 2000). The environmental deed provides that in this instance, Degussa will be responsible for reasonable costs and expenses incurred.

        In addition, pursuant to the sale and purchase agreement entered into in connection with the Dynamit Nobel Acquisition, mg technologies ag and its subsidiary, MG North America Holdings Inc., are required to indemnify Rockwood and its subsidiaries for 50% of the excess amount of losses over the amount of the related reserves (in the case of known claims) and 50% of claims (in the case of unknown claims) related to the contamination of the Company or its subsidiaries' properties, if notified within ten years. If mg technologies and MG North America Holdings' responsibility for contamination matters cannot be proven, a sliding scale reduces the percentage further for each year during the five-year period from year six to ten. mg technologies and MG North America Holdings are also obligated to indemnify the Company for 85% of claims related to legacy site matters, such as environmental matters relating to properties or businesses owned or operated by Dynamit Nobel prior to, but not on, the closing of Dynamit Nobel Acquisition, if notified within ten years. In addition, mg technologies and MG North America Holdings are obligated to indemnify us for 50% of the excess amount of losses over the amount of the related reserves for operational compliance matters, if notified by December 31, 2006, and 50% of the excess amount of losses over the amount of the related reserves (in the case of known claims) and 50% of claims (in the case of unknown claims) related to certain environmental damage claims unknown at the time of the closing of the Dynamit Nobel Acquisition, if notified within ten years. All of these indemnity obligations are subject to different minimum per-claim thresholds depending on whether the matter was disclosed or not, and on the subject matter, ranging between €100,000 and €750,000 ($0.1 million and $0.9 million) depending on the type of claim. The indemnity obligations are further subject to certain deductibles, exclusions and limitations. Furthermore, mg technologies and MG North America Holdings are obligated to indemnify us for certain environmental risks arising from certain "shared site" structures for a duration of ten years. This indemnity obligation is not subject to the percentages, de minimis exclusions, deductibles and thresholds described above, and it is not subject to most of the general limitations.

        In the event the Company seeks indemnity under any of these agreements or through other means, there can be no assurance that mg technologies, MG North America Holdings, Degussa or any other

19



party who may have obligations to indemnify the Company will adhere to their obligations and the Company may have to resort to legal action to enforce its rights under the indemnities. In addition, the Company maybe required to make indemnity payments in connection with certain environmental matters. However, the Company does not believe that resolution of the known environmental matters subject to indemnification obligations owed to it or by it will have a material adverse effect on our long-term business or financial condition as such amounts are not significant.

Environmental Reserves

        The Company has established financial reserves relating to anticipated environmental cleanup obligations, site reclamation and remediation and closure costs. Liabilities are recorded when potential liabilities are either known or believed to be probable and can be reasonably estimated. The Company's liability estimates are based upon available facts, existing technology, past experience and, in some instances where the remediation costs are being paid directly by the Company's insurers, insurance recoveries, and are generated by several means, including State-mandated schedules, environmental consultants and internal experts, depending on the circumstances. On a consolidated basis, the Company accrued approximately $51.2 million and $51.9 million for known environmental liabilities as of March 31, 2005 and December 31, 2004, respectively, all of which are classified as other non-current liabilities on our consolidated balance sheets for such periods. Included in the $51.2 million and $51.9 million as of March 31, 2005 and December 31, 2004 is €6.5 million ($8.4 million using the exchange rate on March 31, 2005 of €1.00 = $1.2996) that is discounted using 5.0% discount rate (undiscounted amount equals $13.0 million), and €2.4 million ($3.2 million) that is discounted using 5.5% discount rate (undiscounted amount equals $4.9 million). In certain cases, our remediation liabilities are payable over periods of up to 30 years.

        The Company believes these accruals are adequate based on currently available information. The Company may incur losses in excess of the amounts accrued, however, based on currently available information the Company does not believe the additional amount of potential losses would have a material effect on the Company's long-term results of operations, financial condition, or liquidity. The Company is unable to estimate the amount or range of any potential incremental charges should facts and circumstances change and may in the future revise our estimates based on new information becoming available.

        The Company is obligated to undertake soil remediation at two facilities in Europe in the event manufacturing operations are discontinued there at some future date. The Company does not contemplate any such action occurring in the foreseeable future, as these facilities' remaining lives are indefinite. Given the indeterminate useful life of these facilities and the corresponding indeterminate settlement date of any soil remediation obligations the Company does not have sufficient information to estimate a range of potential settlement dates for the obligations. Consequently, we cannot employ a present value technique to estimate fair value and, accordingly, we have not accrued for any related costs.

        The Company believes these environmental matters will not have a material adverse effect on our long-term results of operations and/or financial condition. However, these matters may have a material adverse effect on our results of operations or cash flows in any given accounting period.

11.   CONSOLIDATING FINANCIAL INFORMATION:

        The Company issued $375.0 million principal amount of 10.625% senior subordinated notes due May 15, 2011 ("2011 Notes") in July 2003. In November 2004 the Company issued €375.0 million aggregate principal amount of 7.625% senior subordinated notes and $200.0 million aggregate principal amount of 7.500% senior subordinated notes, both due November 15, 2014 ("2014 Notes").

20



        The following unaudited consolidating financial statements present the results of operations, financial condition and cash flows, in separate columns, of the parent company (Rockwood Specialties Group, Inc.), which is the issuer of the 2011 Notes and the 2014 Notes, guarantor subsidiaries, non-guarantor subsidiaries, elimination adjustments, and consolidated totals.


ROCKWOOD SPECIALTIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2005
(Dollars in millions)

 
  Parent
Company

  Guarantor
Subsidiaries

  Non-Guarantor
Subsidiaries

  Consolidated
 
NET SALES   $   $ 211.9   $ 557.8   $ 769.7  
COST OF PRODUCTS SOLD         152.2     391.9     544.1  
   
 
 
 
 
GROSS PROFIT         59.7     165.9     225.6  
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES         39.4     110.8     150.2  
RESTRUCTURING CHARGE, net             2.9     2.9  
   
 
 
 
 
OPERATING INCOME         20.3     52.2     72.5  
   
 
 
 
 
OTHER INCOME (EXPENSES):                          
  Intergroup interest, net     36.8     (10.6 )   (26.2 )    
  Interest, net     (40.3 )   (0.2 )   (7.7 )   (48.2 )
  Intergroup other, net         (0.8 )   0.8      
  Foreign exchange gain, net     37.3         4.6     41.9  
   
 
 
 
 
    Net     33.8     (11.6 )   (28.5 )   (6.3 )
   
 
 
 
 
INCOME BEFORE TAXES AND MINORITY INTEREST     33.8     8.7     23.7     66.2  
INCOME TAX PROVISION     6.7     7.9     10.3     24.9  
   
 
 
 
 
NET INCOME BEFORE MINORITY INTEREST     27.1     0.8     13.4     41.3  
MINORITY INTEREST             0.8     0.8  
   
 
 
 
 
NET INCOME   $ 27.1   $ 0.8   $ 14.2   $ 42.1  
   
 
 
 
 

21



ROCKWOOD SPECIALTIES GROUP INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004
(Dollars in millions)

 
  Parent
Company

  Guarantor
Subsidiaries

  Non-Guarantor
Subsidiaries

  Consolidated
 
NET SALES   $   $ 148.3   $ 79.1   $ 227.4  
COST OF PRODUCTS SOLD         103.1     61.9     165.0  
   
 
 
 
 
GROSS PROFIT         45.2     17.2     62.4  
SELLING, GENERAL AND                          
ADMINISTRATIVE EXPENSES         23.5     11.7     35.2  
   
 
 
 
 
OPERATING INCOME         21.7     5.5     27.2  
   
 
 
 
 
OTHER INCOME (EXPENSES):                          
  Intergroup interest, net     14.3     (13.5 )   (0.8 )    
  Interest, net     (13.5 )   (0.2 )   (2.9 )   (16.6 )
  Intergroup other, net         (0.2 )   0.2      
  Foreign exchange (loss) gain, net     (0.1 )       12.3     12.2  
   
 
 
 
 
    Net     0.7     (13.9 )   8.8     (4.4 )
   
 
 
 
 
INCOME BEFORE TAXES AND                          
MINORITY INTEREST     0.7     7.8     14.3     22.8  
INCOME TAX PROVISION     0.3     3.5     4.0     7.8  
NET INCOME BEFORE MINORITY                          
INTEREST     0.4     4.3     10.3     15.0  
MINORITY INTEREST                  
   
 
 
 
 
NET INCOME   $ 0.4   $ 4.3   $ 10.3   $ 15.0  
   
 
 
 
 

22



ROCKWOOD SPECIALTIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEET
March 31, 2005
(Dollars in millions)

 
  Parent
Company

  Guarantor
Subsidiaries

  Non-Guarantor
Subsidiaries

  Eliminations
  Consolidated
 
ASSETS                                
CURRENT ASSETS:                                
  Cash and cash equivalents   $ 276.2   $ 9.7   $ (48.6 ) $   $ 237.3  
  Accounts receivable, net         128.3     369.5         497.8  
  Inventories         93.0     380.8         473.8  
  Deferred income taxes     (4.9 )   16.8     19.2         31.1  
  Prepaid expenses and other current assets     0.1     1.8     65.0         66.9  
   
 
 
 
 
 
    Total current assets     271.4     249.6     785.9         1,306.9  
PROPERTY, PLANT AND EQUIPMENT, net         232.3     1,301.8         1,534.1  
INVESTMENT IN SUBSIDIARIES     1,756.6     83.0         (1,839.6 )    
GOODWILL         329.4     1,428.9         1,758.3  
INTERGROUP RECEIVABLE     1,815.6     872.8     4,869.1     (7,557.5 )    
OTHER INTANGIBLE ASSETS, net         26.6     589.7         616.3  
DEFERRED DEBT ISSUANCE COSTS, net     3.6     14.2     51.7         69.5  
OTHER ASSETS     1.0     3.5     43.6         48.1  
   
 
 
 
 
 
TOTAL ASSETS   $ 3,848.2   $ 1,811.4   $ 9,070.7   $ (9,397.1 ) $ 5,333.2  
   
 
 
 
 
 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
CURRENT LIABILITIES:                                
  Accounts payable   $   $ 78.8   $ 185.7   $   $ 264.5  
  Income taxes payable     (1.4 )   1.6     18.3         18.5  
  Accrued compensation         9.4     57.8         67.2  
  Accrued expenses and other current liabilities     53.5     21.7     181.1         256.3  
  Senior secured revolving credit facility     175.0                 175.0  
  Long-term debt, current portion     17.5         49.9         67.4  
   
 
 
 
 
 
    Total current liabilities     244.6     111.5     492.8         848.9  
LONG-TERM DEBT     2,597.8         397.0         2,994.8  
PENSION AND RELATED LIABILITIES         12.0     348.0         360.0  
INTERGROUP PAYABLE     80.1     1,252.8     6,224.6     (7,557.5 )    
DEFERRED INCOME TAXES     (27.6 )   44.4     37.8         54.6  
OTHER LIABILITIES     18.1     17.6     136.6         172.3  
   
 
 
 
 
 
    Total liabilities     2,913.0     1,438.3     7,636.8     (7,557.5 )   4,430.6  
MINORITY INTEREST             54.9         54.9  
STOCKHOLDERS' EQUITY                                
  Common stock         285.3     70.0     (355.3 )    
  Paid-in capital     889.3     244.5     1,198.8     (1,484.3 )   848.3  
  Accumulated other comprehensive ncome     102.7     7.0     196.9         306.6  
  Accumulated deficit     (56.8 )   (163.7 )   (86.7 )       (307.2 )
   
 
 
 
 
 
    Total stockholders' equity     935.2     373.1     1,379.0     (1,839.6 )   847.7  
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY   $ 3,848.2   $ 1,811.4   $ 9,070.7   $ (9,397.1 ) $ 5,333.2  
   
 
 
 
 
 

23



ROCKWOOD SPECIALTIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2004
(Dollars in millions)

 
  Parent
Company

  Guarantor
Subsidiaries

  Non-Guarantor
Subsidiaries

  Eliminations
  Consolidated
 
ASSETS                                
CURRENT ASSETS:                                
  Cash and cash equivalents   $ 79.1   $ 48.2   $ (15.9 ) $   $ 111.4  
  Accounts receivable, net         112.4     388.5         500.9  
  Inventories         84.2     392.7         476.9  
  Deferred income taxes     (4.9 )   16.9     20.5         32.5  
  Prepaid expenses and other current assets     0.1     7.6     104.3         112.0  
   
 
 
 
 
 
    Total current assets     74.3     269.3     890.1         1,233.7  
PROPERTY, PLANT AND EQUIPMENT, net         192.7     1,388.2         1,580.9  
INVESTMENT IN SUBSIDIARIES     1,756.1     83.0         (1,839.1 )    
GOODWILL         353.7     1,473.1         1,826.8  
INTERGROUP RECEIVABLE     1,880.6     782.0     5,334.5     (7,997.1 )    
OTHER INTANGIBLE ASSETS, net         49.0     606.3         655.3  
DEFERRED DEBT ISSUANCE COSTS, net     3.7     7.8     62.3         73.8  
OTHER ASSETS     1.0     2.3     43.0         46.3  
   
 
 
 
 
 
TOTAL ASSETS   $ 3,715.7   $ 1,739.8   $ 9,797.5   $ (9,836.2 ) $ 5,416.8  
   
 
 
 
 
 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
CURRENT LIABILITIES:                                
  Accounts payable   $   $ 66.7   $ 259.4   $   $ 326.1  
  Income taxes payable     (1.4 )   1.6     19.2         19.4  
  Accrued compensation         20.3     64.2         84.5  
  Accrued expenses and other current liabilities     22.3     41.2     196.8         260.3  
  Long-term debt, current portion     7.6         39.6         47.2  
   
 
 
 
 
 
    Total current liabilities     28.5     129.8     579.2         737.5  
LONG-TERM DEBT     2,648.9         428.0         3,076.9  
PENSION AND RELATED LIABILITIES         12.3     362.7         375.0  
INTERGROUP PAYABLE     78.5     1,252.3     6,666.3     (7,997.1 )    
DEFERRED INCOME TAXES     (34.3 )   46.4     32.8         44.9  
OTHER LIABILITIES     33.4     18.2     167.6         219.2  
   
 
 
 
 
 
    Total liabilities     2,755.0     1,459.0     8,236.6     (7,997.1 )   4,453.5  
MINORITY INTEREST     30.6         27.7         58.3  
STOCKHOLDERS' EQUITY                                
  Common stock         285.3     70.0     (355.3 )    
  Paid-in capital     858.7     146.3     1,327.1     (1,483.8 )   848.3  
  Accumulated other comprehensive income     155.3     13.1     237.6         406.0  
  Accumulated deficit     (83.9 )   (163.9 )   (101.5 )       (349.3 )
   
 
 
 
 
 
    Total stockholders' equity     930.1     280.8     1,533.2     (1,839.1 )   905.0  
TOTAL LIABILITIES AND                                
STOCKHOLDERS' EQUITY   $ 3,715.7   $ 1,739.8   $ 9,797.5   $ (9,836.2 ) $ 5,416.8  
   
 
 
 
 
 

24



ROCKWOOD SPECIALTIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED March 31, 2005
(Dollars in millions)

 
  Parent
Company

  Guarantor
Subsidiaries

  Non-Guarantor
Subsidiaries

  Consolidated
 
CASH FLOWS FROM OPERATING ACTIVITIES:                          
  Net loss   $ 27.1   $ 0.8   $ 14.2   $ 42.1  
  Adjustments to reconcile net loss to net cash provided by (used in) operating activities:                          
  Depreciation and amortization         7.5     45.7     53.2  
  Amortization of deferred financing costs     0.1     0.6     1.8     2.5  
  Write-off of deferred debt issuance costs                  
  Minority Interest             (0.8 )   (0.8 )
  Foreign exchange loss (gain)     (37.3 )       (4.6 )   (41.9 )
  Deferred income taxes     6.7     6.3     5.2     18.2  
  Fair value adjustments of derivatives     (6.5 )       (1.1 )   (7.6 )
  Bad debt provision         0.2         0.2  
  Changes in assets and liabilities, net of the effect of foreign currency translation and acquisitions:                          
    Accounts receivable         (11.5 )       (11.5 )
    Inventories         (8.8 )   (3.1 )   (11.9 )
    Prepaid expenses and other assets         0.9     (13.8 )   (12.9 )
    Accounts payable         12.1     (19.9 )   (7.8 )
    Income taxes payable         1.3     (0.3 )   1.0  
    Accrued expenses and other liabilities     35.4     (43.7 )   (21.8 )   (30.1 )
   
 
 
 
 
      Net cash provided by (used in) operating activities     25.5     (34.3 )   1.5     (7.3 )
   
 
 
 
 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 
  Acquisitions, net of cash acquired                  
  Capital expenditures, excluding capital leases         (4.2 )   (31.5 )   (35.7 )
  Proceeds on sale of property, plant and equipment             0.2     0.2  
  Net insurance proceeds from fire damage                  
   
 
 
 
 
    Net cash used in investing activities         (4.2 )   (31.3 )   (35.5 )
   
 
 
 
 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 
  Capital contribution     (0.5 )       0.5      
  Proceeds from senior secured revolving credit facility     260.0             260.0  
  Repayment of senior secured revolving credit facility     (85.0 )           (85.0 )
  Payments on long-term debt             (5.9 )   (5.9 )
   
 
 
 
 
    Net cash used in financing activities     174.5         (5.4 )   169.1  
   
 
 
 
 
EFFECT OF EXCHANGE RATE CHANGES ON CASH     (2.8 )       2.4     (0.4 )
   
 
 
 
 
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS     197.2     (38.5 )   (32.8 )   125.9  
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD     79.0     48.2     (15.8 )   111.4  
   
 
 
 
 
CASH AND CASH EQUIVALENTS, END OF PERIOD   $ 276.2   $ 9.7   $ (48.6 ) $ 237.3  
   
 
 
 
 

25



ROCKWOOD SPECIALTIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2004
(Dollars in millions)

 
  Parent
Company

  Guarantor
Subsidiaries

  Non-Guarantor
Subsidiaries

  Consolidated
 
CASH FLOWS FROM OPERATING ACTIVITIES:                          
  Net loss   $ 0.4   $ 4.3   $ 10.3   $ 15.0  
  Adjustments to reconcile net loss to net cash provided by (used in) operating activities:                          
    Depreciation and amortization         5.6     8.2     13.8  
    Amortization of deferred financing costs     0.1     0.3     0.1     0.5  
    Write-off of deferred debt issuance costs                  
    Foreign exchange loss (gain)     0.1         (12.4 )   (12.3 )
    Deferred income taxes     0.3     3.5         3.8  
    Fair value adjustments of derivatives     (1.6 )       (0.7 )   (2.3 )
    Bad debt provision         0.6         0.6  
    Changes in assets and liabilities, net of the effect of foreign currency translation and acquisitions:                          
      Accounts receivable         (19.1 )   (4.6 )   (23.7 )
      Inventories         (3.0 )   (1.7 )   (4.7 )
      Prepaid expenses and other assets         (2.4 )   (0.7 )   (3.1 )
      Accounts payable         (1.5 )   0.6     (0.9 )
      Income taxes payable         (0.3 )   3.1     2.8  
      Accrued expenses and other liabilities     42.8     (33.0 )   2.0     11.8  
   
 
 
 
 
        Net cash provided by (used in) operating activities     42.1     (45.0 )   4.2     1.3  
   
 
 
 
 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 
  Acquisitions, net of cash acquired                  
  Capital expenditures         (3.9 )   (2.8 )   (6.7 )
  Proceeds on sale of property, plant and equipment                  
  Net insurance proceeds from fire damage                  
   
 
 
 
 
        Net cash used in investing activities         (3.9 )   (2.8 )   (6.7 )
   
 
 
 
 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 
  Capital contribution                  
  Proceeds from long-term debt, net of issuance costs                  
  Payments on long-term debt     (1.3 )       (3.2 )   (4.5 )
   
 
 
 
 
        Net cash used in financing activities     (1.3 )       (3.2 )   (4.5 )
   
 
 
 
 
EFFECT OF EXCHANGE RATE CHANGES ON CASH     (0.2 )       (0.2 )   (0.4 )
   
 
 
 
 
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS     40.6     (48.9 )   (2.0 )   (10.3 )
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD     (43.1 )   79.2     6.6     42.7  
   
 
 
 
 
CASH AND CASH EQUIVALENTS, END OF PERIOD   $ (2.5 ) $ 30.3   $ 4.6   $ 32.4  
   
 
 
 
 

26


Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations.

        The following discussion and analysis of our financial condition and results of operations covers periods prior and subsequent to the Dynamit Nobel Acquisition consummated on July 31, 2004. In connection with the Dynamit Nobel Acquisition, we entered into new financing arrangements and significantly altered our capital structure. The historical financial information of Rockwood during the periods prior to the Dynamit Nobel Acquisition included in this Quarterly Report does not reflect the significant impact the Dynamit Nobel Acquisition has had and will have on us. The results of operations of Dynamit Nobel for the three-months ended March 31, 2005 are included in our consolidated financial statements for the three months ended March 31, 2005.

        The following discussion contains forward-looking statements that involve numerous risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements as a result of these risks and uncertainties, including those set forth under "Business—Risk Factors" and "Information Concerning Forward-Looking Statements." You should read the following discussion and analysis together with "Selected Financial Data," and our consolidated financial statements and the notes to those statements that appear elsewhere in this Quarterly Report. Amounts may not recalculate due to rounding differences.

        Given the significance of the Dynamit Nobel Acquisition we have included a limited discussion of the results of our operations on a pro forma basis as if the Dynamit Nobel Acquisition had taken place at January 1, 2004. See "—Results of Operations—Pro Forma Net Sales, Net Income (Loss) and Adjusted EBITDA" below. The results of operations on a pro forma basis also assumes the pigments and dispersions acquisition and the Groupe Novasep combination had also taken place at January 1, 2004.

General

        We are a global developer, manufacturer and marketer of technologically advanced, high value-added specialty chemicals and advanced materials. We serve more than 60,000 customers across a wide variety of industries and geographic areas. Since the completion of the Dynamit Nobel acquisition, we operate through seven business segments: (1) Performance Additives; (2) Specialty Compounds; (3) Electronics; (4) Specialty Chemicals; (5) Titanium Dioxide Pigments; (6) Advanced Ceramics; and (7) Groupe Novasep. Of these seven segments, we acquired Specialty Chemicals, Titanium Dioxide Pigments, Advanced Ceramics and Groupe Novasep (then known as our Custom Synthesis segment) in the Dynamit Nobel acquisition.

        Our net sales consist of sales of our products, net of sales discounts, product returns and allowances. Sales are primarily made on a purchase order basis.

        Our cost of products sold consists of variable and fixed components. Our variable costs are proportional to volume and consist principally of raw materials, packaging and related supplies, certain energy costs, and certain distribution costs including inbound, outbound, and internal shipping and transfer costs. Our fixed costs are not significantly impacted by production volume and consist principally of certain fixed manufacturing costs and other distribution network costs, including warehousing. Fixed manufacturing costs comprise headcount-related costs and overhead, including depreciation, periodic maintenance costs, purchasing and receiving costs, inspection costs and certain energy costs.

        Our selling, general and administrative expenses include research and development costs, sales and marketing, divisional management expenses and corporate services including cash management, legal, benefit plan administration and other administrative and professional services.

        We financed the Dynamit Nobel Acquisition primarily through the proceeds of net equity investments in Holdings of $404.0 million from KKR and DLJMB, term loans of approximately $1,454.2 million and a senior subordinated loan facility of approximately $854.5 million, as described in

27



detail under "—Liquidity and Capital Resources" below. Also, we refinanced significant portions of this indebtedness with indebtedness bearing lower interest rates. Nonetheless, as a result of the Dynamit Nobel Acquisition, our interest expense currently is, and will continue to be, higher than it was prior to the Dynamit Nobel Acquisition.

        We are focused on increasing sales, improving productivity, reducing costs, expanding margins and reducing debt. In connection with this focus, since the KKR acquisition, among other things:

Factors Which Affect Our Results of Operations

Our Markets

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

28


29


30


Global Exposure

        We operate a geographically diverse business. Of our 2004 pro forma net sales, 50% were by shipments to Europe, 34% to North America (predominately the United States) and 16% to the rest of the world.

        We estimate that we sold to customers in more than 25 countries during this period. Currently, we serve our diverse and extensive customer base with over 99 manufacturing facilities in 25 countries. Consequently, we are exposed to global economic and political changes, particularly currency fluctuations that could impact our profitability.

        Our sales and production costs are mainly denominated in U.S. dollars or euros. Therefore, our results of operations and financial condition have been historically impacted primarily by the fluctuation of the euro against our reporting currency, the U.S. dollar. The recent increase in the value of the euro has had a positive impact on our net sales, gross profit and operating income reported in our consolidated statements of operations for the quarters ended March 31, 2005 and March 31, 2004, as a result of our euro-denominated operations being translated into U.S. dollars, and has had a positive impact on the "foreign exchange gain, net" component of "other income(expenses) "as a result of our euro-denominated debt being translated into U.S. dollars. Historically, however, our pro forma operating margins have not been significantly impacted by currency fluctuations because, in general, sales and costs of products sold are generated or incurred in the same currency, subject to certain exceptions, particularly in our Groupe Novasep segment.

Raw Materials

        Raw materials constituted approximately 48% of our 2004 pro forma cost of products sold. We have a broad raw material base, with the cost of no single raw material representing more than 5% of our pro forma cost of products sold in 2004. Nonetheless, the significant price fluctuations our raw materials have experienced in the past during periods of high demand have had an adverse impact on our results of operations. We cannot accurately predict the impact of any future price increases for raw materials or any raw material shortages on our business as a whole or in specific geographic regions. In addition, we may not be able to continue to pass on some or all of the raw material price increases to our customers.

Energy Costs

        In 2004, energy purchases represented approximately 4% of Rockwood's historical cost of products sold and 5% of Dynamit Nobel's historical cost of products sold. However, within certain business lines, such as our Titanium Dioxide Pigments segment and the Color Pigments and Services and Clay-based Additives businesses of our Performance Additives segment, energy costs are more significant. The cost

31



of products sold for certain of our businesses, including Color Pigments and Services and Clay-based Additives, increases when the price of natural gas in North America rises. In 2004, natural gas prices were volatile in North America and have been increasing in the first quarter of 2005. Energy cost increases have been mainly due to global political conditions and extreme weather conditions. In contrast, natural gas prices in Europe, where our Titanium Dioxide Pigments segment is located, have historically been relatively stable.

Income Taxes

        As of March 31, 2005, we have global tax loss carryforwards (excluding state and local amounts) of approximately $404.4 million, of which $195.3 million expire in years 2007 through 2024 and $209.1 million have no current expiration date. For financial reporting purposes, a valuation allowance has been recognized to reduce the deferred tax assets related to certain tax loss carryforwards for which it is more likely than not that the related tax benefits will not be realized. Our net deferred tax assets include certain amounts of tax loss carryforwards as well as certain tax deductible temporary differences which we believe are realizable through a combination of forecasted future taxable income, reversal of deferred tax liabilities and anticipated tax planning strategies. Failure to achieve forecasted future taxable income might affect the ultimate realization of any remaining recorded net deferred tax assets.

        Based on the U.S. income generated in the first quarter of 2005, $14.0 million of the valuation allowance has been reversed. $8.9 million of the reversal related to the anticipated utilization of acquired net operating losses has been recorded as a reduction to goodwill. The remaining reduction in the valuation allowance of $5.1 million has been reflected as a reduction in income tax expense.

Acquisitions

        Since February 2002, pursuant to our business strategy of achieving profitable growth through selective acquisitions, we have acquired seven businesses at purchase prices ranging from approximately $3.0 million (a Canadian color pigments asset acquisition by our Performance Additives segment) to $2,274.0 million (the four businesses of Dynamit Nobel); and combined the three business lines of our Custom Synthesis segment (now known as Groupe Novasep segment) with the acquired businesses of Groupe Novasep SAS.

        We accounted for the Dynamit Nobel Acquisition using the purchase method of accounting. We have allocated the estimated total purchase price to the assets acquired and liabilities assumed of Dynamit Nobel based on management's estimates of their fair values. We retained independent valuation specialists to assist in the determination of fair value of a significant portion of these assets, including property, plant and equipment and identified intangible assets. The consolidated statements of operations for the three months ended March 31, 2005 reflect the results of Dynamit Nobel. See Item 1—Financial Statements and Supplementary Data—Note 2—Acquisitions, Note 5—Goodwill and Note 6—Other Intangible Assets.

        The allocation of the purchase price to the identifiable assets acquired is complete, except the purchase price is subject to possible post-closing adjustments, including adjustments related to Closing Net Financial Debt and Closing Working Capital (as each term is defined in the Sale and Purchase Agreement dated April 19, 2004). mg technologies ag has notified the Company of several adjustments which would result in the Company paying an additional €31.5 million ($40.9 million); however, the Company has notified mg technologies of counterclaims in the aggregate of €34.7 million ($45.1 million). We believe the potential future consideration due to mg technologies ag ranges from $0 to approximately $30.0 million dollars. Given the complexities of the underlying claims, our inability to predict the success of negotiating a resolution and the possibility of eventual arbitration of some or all of the claims, we believe that no estimate within this range is better than another. We expect to finalize the post-closing adjustments within the next twelve months. Finalization of this amount may change the recorded amount of goodwill, net of tax, as applicable.

32



        The excess of the total purchase price over the fair value of the net assets acquired at closing has been allocated to goodwill and this indefinite-lived asset is subject to annual impairment review. Based on the allocation of the total estimated purchase price, goodwill in the transaction totaled $931.6 million as of the acquisition date.

        In December 2004, we completed a combination (total purchase price of approximately $148.2 million including assumed debt of $48.6 million; cash purchase price including fees and acquisition costs of $74.5 million; and the shares contributed to the management of the new combined company valued at $39.7 million less cash acquired of $14.6 million) of the three business lines of our Custom Synthesis segment (now known as our Groupe Novasep segment) with Groupe Novasep SAS, or Groupe Novasep. As a result of the combination, we own approximately 79% of the combined new Groupe Novasep. We believe this combination strengthens this segment by joining together Groupe Novasep's proprietary separation technologies with our capabilities of developing and manufacturing advanced intermediates and active ingredients for the pharmaceutical and performance chemical industries, which we expect will position us better in this highly competitive market.

        We accounted for the Groupe Novasep combination using the purchase method of accounting. We have allocated the total estimated purchase price to the assets acquired and liabilities assumed of Groupe Novasep SAS. We have not finalized the estimated fair value of the assets acquired and liabilities assumed although values of inventory, identified intangible assets, and property, plant and equipment are completed. We expect to complete our research and fair value estimates on remaining purchase price components by the third quarter of 2005.The excess of the total purchase price over the estimated fair value of the net assets acquired at closing has been allocated to goodwill and this indefinite lived asset is subject to annual impairment review. Based on the preliminary allocation of the total estimated purchase price, goodwill in the transaction totaled $60.9 million as of the combination date. We expect this amount will change at a subsequent date when we finalize the purchase accounting for the Groupe Novasep combination. The consolidated statements of operations for the three months ended March 31, 2005 reflect the results of Groupe Novasep. See Item 1—Financial Statements and Supplementary Data—Note 2—Acquisitions, Note 5—Goodwill and Note 6—Other Intangible Assets.

Special Charges

        During the periods presented, we have incurred certain special charges, substantially in connection with the process of refocusing and restructuring the historic Rockwood businesses after the completion of the KKR acquisition and the establishment of the post-acquisition corporate entity that incorporates the four business segments acquired in the Dynamit Nobel Acquisition. These items include the following:

33


Special Note Regarding Non-GAAP Financial Measures

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

        All presentations of consolidated Adjusted EBITDA contained in this report are calculated using the definition set forth in the senior secured credit agreement. Adjusted EBITDA, which is referred 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 secured credit agreement), excluding extraordinary items) plus:

34


        less:

in all cases, subject to certain exclusions.

        With respect to entities acquired, we include Adjusted EBITDA for such entities in calculating our pro forma Adjusted EBITDA. The adjustments made to the income from continuing operations before income taxes and extraordinary items of such entities directly correlate to the adjustments to net income in calculating Adjusted EBITDA on a consolidated basis pursuant to the senior secured credit agreement.

        We use Adjusted EBITDA on a consolidated basis to assess our operating performance. We believe this financial measure on a consolidated basis is helpful in highlighting trends in our overall business because the items excluded in calculating Adjusted EBITDA have little or no bearing on our day-to-day operating performance. It is also the most significant criterion in our calculation of performance-based cash bonuses and our determination of whether certain performance-based stock options vest, both of which are tied to Adjusted EBITDA targets.

        We also use Adjusted EBITDA on a consolidated basis as a liquidity measure. We believe this financial measure on a consolidated basis is important in analyzing our liquidity because our senior secured credit agreement and indentures governing the 2011 notes and 2014 notes contain financial covenants that are determined based on Adjusted EBITDA. These covenants are material terms of these agreements, which are material because they govern substantially all of our long-term debt, which in turn represents a substantial portion of our capitalization. Non-compliance with these financial covenants under our senior secured credit facilities—our maximum total leverage ratio and our minimum interest coverage ratio, in particular—could result in the lenders requiring us to immediately repay all amounts borrowed. Any such acceleration could also lead to the noteholders accelerating the maturity of the 2011 notes and the 2014 notes. In addition, if we cannot satisfy these financial covenants in the indentures governing the 2011 notes and 2014 notes, we cannot engage in certain activities, such as incurring additional indebtedness or making certain payments. Consequently, Adjusted EBITDA is critical to our assessment of our liquidity.

        We also use Adjusted EBITDA on a segment basis as the primary measure used by our chief decision maker to evaluate the ongoing performance of our business segments and reporting units. On a segment basis, we define Adjusted EBITDA as operating income excluding depreciation and amortization, certain non-cash gains and charges, certain other special gains and charges determined by our senior management to be non-recurring gains and charges and certain items deemed by our senior management to have little or no bearing on the day-to-day operating performance of our business segments and reporting units. The adjustments made to operating income directly correlate with the adjustments to net income in calculating Adjusted EBITDA on a consolidated basis pursuant to the senior secured credit agreement.

        For presentation purposes within this report we consistently use the computation prescribed under our senior secured credit agreement as described above. Specifically, calculation of Adjusted EBITDA according to the indentures underlying our 2011 and 2014 senior subordinated notes excludes certain adjustments prescribed within the senior secured credit agreement. Given that borrowings under the

35



senior secured credit agreement are secured by most of our assets and given that the calculation does not materially differ from the calculation of Adjusted EBITDA for performance measurement purposes, we believe this is the most appropriate computation of Adjusted EBITDA to present.

Limitations

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

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

        Adjusted EBITDA is not an alternative to net (loss) income or operating income or cash flows from operating activities as calculated and presented in accordance with U.S. GAAP. You should not rely on Adjusted EBITDA as a substitute for any such U.S. GAAP financial measures. We strongly urge you to review the reconciliations of Adjusted EBITDA to GAAP financial measures and other financial information, in each case included elsewhere in this report. We also strongly urge you not to rely on any single financial measure to evaluate our business.

Results of Operations

Actual Results of Operations

        The following table presents the major components of our operations on an actual basis and Adjusted EBITDA (the reconciliation to net income is set forth below), including as a percentage of net sales, for the periods presented. See Note 3 to Rockwood's unaudited condensed financial statements included in Item 1, Financial Statements, for segment information and reconciliation to consolidated net income.

36


 
  Three Months Ended March 31,
 
(dollars in millions)

 
  2005
  2004
 
Statement of operations data:              
Net sales:              
Performance Additives   $ 159.5   $ 139.1  
Specialty Compounds     58.1     47.9  
Electronics     42.8     40.4  
Specialty Chemicals     220.0      
Titanium Dioxide Pigments     104.5      
Advanced Ceramics     91.9      
Groupe Novasep     92.9      
   
 
 
Total net sales     769.7     227.4  
Gross profit     225.6     62.4  
      29.3 %   27.4 %
Selling, general and administrative expenses     150.2     35.2  
      19.5 %   15.5 %
Restructuring charges     2.9      

Operating income (loss):

 

 

 

 

 

 

 
Performance Additives     23.0     24.9  
      14.4 %   17.9 %
Specialty Compounds     5.9     5.4  
      10.2 %   11.3 %
Electronics     0.7     1.6  
      1.6 %   4.0 %
Specialty Chemicals     30.8      
      14.0 %      
Titanium Dioxide Pigments     11.7      
      11.2 %      
Advanced Ceramics     13.9      
      15.1 %      
Groupe Novasep     (1.5 )    
      (1.6 %)      
Corporate costs     (12.0 )   (4.7 )
   
 
 
Total operating income     72.5     27.2  
      9.4 %   12.0 %
Other (expense) income:              
Interest expense, net     (48.2 )   (16.6 )
Foreign exchange gain, net     41.9     12.2  
   
 
 
Income before taxes and minority interest     66.2     22.8  
Income tax provision     24.9     7.8  
   
 
 
Net income before minority interest     41.3     15.0  
Minority interest     0.8      
   
 
 
Net income   $ 42.1   $ 15.0  
   
 
 
Adjusted EBITDA:              
Performance Additives     34.2     32.1  
      21.4 %   23.1 %
Specialty Compounds     7.3     6.8  
      12.6 %   14.2 %
Electronics     5.8     6.6  
      13.6 %   16.3 %
Specialty Chemicals     43.0      
      19.5 %      
Titanium Dioxide Pigments     20.9      
      20.0 %      
Advanced Ceramics     21.4      
      23.3 %      
Groupe Novasep     10.2      
      11.0 %      
Corporate costs     (9.6 )   (4.4 )
   
 
 
Total Adjusted EBITDA   $ 133.2   $ 41.1  
   
 
 

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        The following table presents the changes in the major components of our operations on a historical basis in dollars and percentages:

 
  Change: Three Months ended March 31, 2005 versus 2004
 
(dollars in millions)

  Total
  %
Change

  FX
Effect(1)

  Acquisitions
Divestitures
net(2)

  Other
 
Statement of operations data:                              
Net sales:                              
Performance Additives   $ 20.4   14.7 % $ 2.0   $ 16.3   $ 2.1  
Specialty Compounds     10.2   21.3 %   0.7         9.5  
Electronics     2.4   5.9 %   1.3         1.1  
Specialty Chemicals     220.0             220.0      
Titanium Dioxide Pigments     104.5             104.5      
Advanced Ceramics     91.9             91.9      
Groupe Novasep     92.9             92.9      
   
 
 
 
 
 
Total net sales     542.3   238.5 %   4.0     525.6     12.7  

Gross profit

 

 

163.2

 

261.5

%

 

0.9

 

 

160.7

 

 

1.6

 
Selling, general and administrative expenses     115.0   326.7 %   0.8     108.7     5.5  
Restructuring charges     2.9             0.5     2.4  
   
 
 
 
 
 
Total operating expenses     117.9   334.9 %   0.8     109.2     7.9  

Operating income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Performance Additives     (1.9 ) -7.6 %   0.3     1.3     (3.5 )
Specialty Compounds     0.5   9.3 %   0.1         0.4  
Electronics     (0.9 ) -56.3 %   (0.2 )       (0.7 )
Specialty Chemicals     30.8             30.8      
Titanium Dioxide Pigments     11.7             11.7      
Advanced Ceramics     13.9             13.9      
Groupe Novasep     (1.5 )           (1.5 )    
Corporate costs     (7.3 ) 155.3 %             (7.3 )
   
 
 
 
 
 
Total     45.3   166.5 %   0.2     56.2     (11.1 )

Other income (expenses):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Interest expense,net     (31.6 ) 190.4 %   0.4     (6.0 )   (26.0 )
Foreign exchange gain, net     29.7                 29.7  
   
 
 
 
 
 
Income before taxes and minority interest     43.4                        
Income tax provision     17.1                        
Net income before minority interest     26.3                        
Minority interest     0.8                        
Net income (loss):                              
Performance Additives     0.4                        
Specialty Compounds     1.6                        
Electronics     (0.1 )                      
Specialty Chemicals     6.9                        
Titanium Dioxide Pigments     1.9                        
Advanced Ceramics     2.8                        
Groupe Novasep     (3.1 )                      
Corporate costs     16.7                        
   
 
 
 
 
 
Total     27.1                        

Adjusted EBITDA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Performance Additives     2.1   6.5 %   0.5     2.2     (0.6 )
Specialty Compounds     0.5   7.4 %   0.1         0.4  
Electronics     (0.8 ) -12.1 %   (0.1 )       (0.7 )
Specialty Chemicals     43.0             43.0      
Titanium Dioxide Pigments     20.9             20.9      
Advanced Ceramics     21.4             21.4      
Groupe Novasep     10.2             10.2      
Corporate costs     (5.2 ) 118.2 %           (5.2 )
   
 
 
 
 
 
Total   $ 92.1   224.1 % $ 0.5   $ 97.7   $ (6.1 )

(1)
The foreign exchange effect was calculated based on the change in the euro to U.S. dollar exchange rate for the applicable period.

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(2)
The acquisition effect represents the current year inclusion of three months of operations for the segments acquired as part of the Dynamit Nobel Acquisition as well as other acquisitions consummated in 2004.

Three months ended March 31, 2005 compared with three months ended March 31, 2004

        Overview

        Net sales increased $542.3 million primarily as a result of the Dynamit Nobel Acquisition ($479.2 million) as well as other 2004 acquisitions consummated after the first quarter of 2004 ($46.4 million). Net sales also increased by $4.0 million due to currency changes. The remaining sales improvement of $12.7 million or 5.6% was primarily in the Performance Additives and the Specialty Compounds segments (aggregating $11.6 million) due to the impact of higher selling prices ($6.7 million) to offset higher raw material costs, and volume increases in the Specialty Compounds segment.

        Gross profit increased $163.2 million primarily as a result of the Dynamit Nobel Acquisition as well as other 2004 acquisitions ($160.7 million). Gross profit increased by $0.9 million due to currency changes. The remaining improvement was due to sales increases offset by raw material cost increases.

        Operating income increased $45.3 million with $56.2 million due to acquisitions and $0.2 million due to currency changes. The remaining decrease of $11.1 million was due to special charges aggregating $4.7 million and higher central costs to operate the significantly larger business due to the acquisitions and higher amortization expense from purchase accounting.

        Adjusted EBITDA increased $92.1 million due to the effect of acquisitions ($97.7 million) offset by higher corporate costs ($5.2 million).

Net sales

        Performance Additives.    Net sales for our Performance Additives segment increased $20.4 million over the prior period primarily due to acquisitions ($16.3 million). Net sales also increased by $2.0 million due to currency changes. The remaining increase of $2.1 million or 1.7% was due to the impact of higher selling prices to offset higher raw material costs.

        Specialty Compounds.    Net sales for our Specialty Compounds segment increased $10.2 million or 21.3% over the prior period including the impact of higher selling prices ($4.3 million) to offset higher raw material costs. The remaining increase was primarily due to stronger sales volume in our wire and cable compounds business.

        Electronics.    Net sales for our Electronics segment increased $2.4 million over the prior year period with $1.3 million due to currency changes. Despite $0.8 million of price declines from continued pricing pressures in the wafer reclaim business, a remaining increase of $1.1 million or 2.5% occurred due to increases in sales volumes.

Gross profit

        Gross profit increased $163.2 million primarily due to acquisitions ($160.7 million). Gross profit increased by $0.9 million due to currency changes. The remaining increase in gross profit of $1.6 million occurred as the remaining sales improvement above was offset primarily by higher raw material costs of $8.3 million ($4.7 million in the Specialty Compounds segment due to PVC resin and ammonium octamolybdate cost increases, $3.5 million in the Performance Additives segment due to higher copper costs in the Timber Treatment Chemicals business and higher costs in the Color Pigments and Services business and $0.1 million in the Electronics business) as well as by higher manufacturing costs.

        Gross profit as a percentage of net sales was 29.3% in the first quarter of 2005 versus 27.4% in the first quarter of 2004 due to the inclusion of the Dynamit Nobel businesses which have a higher average gross margin percentage than the historical Rockwood businesses (offset by higher selling, general and administrative expenses as a percentage of net sales in the Dynamit Nobel businesses versus the historical Rockwood businesses), and offset in part by the impact of the higher raw material costs.

        Selling, general and administrative expenses

        Selling, general and administrative expenses, or SG&A, increased $115.0 million primarily due to the acquisitions ($108.7 million), as well as $0.8 million due to currency changes. The remaining increase of $5.5 million was due primarily to special charges, aggregating $1.8 million, primarily related to the integration of the Dynamit Nobel Acquisition and costs for initial compliance with Sarbanes-

39



Oxley as well as $7.3 million of higher central costs to operate the significantly larger business resulting from the acquisitions.

        SG&A expenses as a percentage of net sales were 19.5% in the first quarter of 2005 as compared to 15.5% for the first quarter of 2004, primarily due to the inclusion of the Dynamit Nobel businesses which have higher weighted average SG&A expenses as a percentage of net sales than the historical Rockwood businesses.

        Restructuring charges

        We recorded $2.9 million of restructuring charges in the first quarter of 2005 for miscellaneous restructuring actions, primarily in the Performance Additives segment including the announced closure of our Baulking facility in the Clay Based Additives business.

        Operating income

        Performance Additives.    Operating income decreased $1.9 million despite the $1.3 million favorable impact of acquisitions due to $2.4 million of restructuring charges with the balance primarily due to the higher raw material costs described above.

        Specialty Compounds.    Operating income increased $0.5 million primarily due to the increase in net sales partially offset by the higher PVC and AOM raw material costs discussed above.

        Electronics.    Operating income decreased $0.9 million primarily due to the pricing pressures in the wafer reclaim business.

        Corporate.    Operating loss at Corporate increased $7.3 million primarily due to the special charges and higher central costs discussed in "SG&A" above.

        Other income (expenses)

        Interest expense, net.    For the first quarter of 2005 and 2004, interest expense, net, increased $31.6 million. The first quarter of 2005 and 2004 included a gain of $7.6 million and $2.3 million, respectively, representing the movement in the mark-to-market valuation of our interest rate and cross currency hedging instruments as well as $2.5 million and $0.5 million, respectively, of amortization expense related to deferred financing costs. The remaining increase of $34.9 million was primarily due to higher debt levels from the Acquisitions.

        Foreign exchange gain.    In the first quarter of 2005, the foreign exchange gains increased by $29.7 million reflecting the non-cash currency impact on our euro-denominated debt due to the weaker euro as of March 31, 2005 versus December 31, 2004.

        Provision for income taxes

        The effective income tax rate for the first quarter of 2005 and 2004 was 37.6% and 34.2%, respectively. The effective tax rate in the first quarter of 2005 was favorably impacted by the reversal of $5.1 million of valuation allowances related to US federal income generated. The effective tax rate in both periods was impacted by the recording of valuation allowances in certain other jurisdictions as well as the impact of foreign tax rate differentials.

        Minority interest

        Minority interest income represents the minority interest portion of the Groupe Novasep segment net loss in the first quarter of 2005.

        Net income

        Net income for the first quarter of 2005 was $42.1 million as compared to net income of $15.0 million for the first quarter of 2004 for the reasons described above.

        Adjusted EBITDA

        Performance Additives.    Adjusted EBITDA for our Performance Additives segment increased from $32.1 million to $34.2 million, or 6.5%, primarily due to a $0.7 million impact from acquisitions and $0.5 million from currency changes.

        Specialty Compounds.    Adjusted EBITDA for our Specialty Compounds segment increased from $6.8 million to $7.3 million or 7.4% primarily due to stronger wire and cable volume. Higher raw material prices, partially offset by higher selling prices described above, negatively impacted Adjusted EBITDA.

40


        Electronics.    Adjusted EBITDA for our Electronics segment decreased from $6.6 million to $5.8 million or (12.1%) primarily due to $0.8 million in selling price decreases.

        Corporate.    Adjusted EBITDA loss at Corporate increased from $4.4 million to $9.6 million due to higher central costs to operate the significantly larger business due to the Dynamit Nobel Acquisition.

Reconciliation of Net Income to Adjusted EBITDA

        Because we view Adjusted EBITDA on both a consolidated basis and segment basis as an operating performance measure, we use net income as the most comparable U.S. GAAP measure. The following table, which sets forth the applicable components of Adjusted EBITDA, presents a reconciliation of net income to Adjusted EBITDA:

 
  Three months ended March 31,
 
(millions)

 
  2005
  2004
 
Net income   $ 42.1   $ 15.0  
Income tax provision     24.9     7.8  
Interest, net     48.2     16.7  
Depreciation and amortization     53.2     13.8  
Restructuring and related charges     2.9      
Inventory write-up reversal     2.8      
CCA litigation     0.4      
Systems/organization establishment expenses     1.2      
Cancelled acquisition and disposal costs     0.2      
Foreign exchange gain     (41.9 )   (12.2 )
Minority interest     (0.8 )    
   
 
 
Total Adjusted EBITDA   $ 133.2   $ 41.1  
   
 
 

41


Pro Forma Net Sales, Net Income (Loss) and Adjusted EBITDA

Actual three months ended March 31, 2005 compared with pro forma three months ended March 31, 2004

 
  Three Months Ended
March 31,

 
(millions)

 
  2005
  2004
 
 
  (Actual)

  (Pro Forma)

 
Net sales:              
Performance Additives   $ 159.5   $ 155.0  
Specialty Compounds     58.1     47.9  
Electronics     42.8     40.4  
Specialty Chemicals     220.0     187.9  
Titanium Dioxide Pigments     104.5     109.2  
Advanced Ceramics     91.9     86.6  
Groupe Novasep     92.9     72.3  
   
 
 
Total   $ 769.7   $ 699.3  
   
 
 
Net Income (Loss):              
Performance Additives   $ 10.8   $ 11.1  
Specialty Compounds     5.3     3.4  
Electronics     0.6     0.6  
Specialty Chemicals     6.9     4.8  
Titanium Dioxide Pigments     1.9     2.6  
Advanced Ceramics     2.8      
Groupe Novasep     (3.1 )   (0.2 )
Corporate     16.9     (13.6 )
   
 
 
Total   $ 42.1   $ 8.7  
   
 
 
Adjusted EBITDA:              
Performance Additives   $ 34.2   $ 34.6  
Specialty Compounds     7.3     6.8  
Electronics     5.8     6.6  
Specialty Chemicals     43.0     37.0  
Titanium Dioxide Pigments     20.9     20.4  
Advanced Ceramics     21.4     19.4  
Groupe Novasep     10.2     13.3  
Corporate     (9.6 )   (9.7 )
   
 
 
Total   $ 133.2   $ 128.4  
   
 
 
 
  Change: Pro Forma Three Months Ended March 31, 2005 vs. March 31, 2004
 
(millions)

  Total
Change In $

  Total Change in %
  Foreign
Exchange
Effect in $

  Other
Change in $

  Other
Change in %

 
Pro forma net sales:                            
Performance Additives   $ 4.5   2.9 % $ 2.0   $ 2.5   1.6 %
Specialty Compounds     10.2   21.3 %   0.7     9.5   19.8 %
Electronics     2.4   5.9 %   1.3     1.1   2.7 %
Specialty Chemicals     32.1   17.1 %   8.9     23.2   12.3 %
Titanium Dioxide Pigments     (4.7 ) -4.3 %   5.2     (9.9 ) -9.1 %
Advanced Ceramics     5.3   6.1 %   4.3     1.0   1.2 %
Groupe Novasep     20.6   28.5 %   4.8     15.8   21.9 %
   
 
 
 
 
 
Total   $ 70.4   10.1 % $ 27.2   $ 43.2   6.2 %
   
 
 
 
 
 
Pro forma Net Income:                            
Performance Additives   $ (0.3 ) -2.7 %                
Specialty Compounds     1.9   55.9 %                
Electronics       0.0 %                
Specialty Chemicals     2.1   43.8 %                
Titanium Dioxide Pigments     (0.7 ) -26.9 %                
Advanced Ceramics     2.8                    
Groupe Novasep     (2.9 ) 1450.0 %                
Corporate     30.5   -224.3 %                
   
 
                 
Total   $ 33.4   383.9 %                
   
 
                 

42


Pro forma Adjusted EBITDA:                            
Performance Additives   $ (0.4 ) -1.2 % $ 0.5   $ (0.9 ) -2.6 %
Specialty Compounds     0.5   7.4 %   0.1     0.4   5.9 %
Electronics     (0.8 ) -12.1 %   (0.1 )   (0.7 ) -10.6 %
Specialty Chemicals     6.0   16.2 %   2.3     3.7   10.0 %
Titanium Dioxide Pigments     0.5   2.5 %   1.1     (0.6 ) -2.9 %
Advanced Ceramics     2.0   10.3 %   1.2     0.8   4.1 %
Groupe Novasep     (3.1 ) -23.3 %   0.4     (3.5 ) -26.3 %
Corporate     0.1   -1.0 %   (0.2 )   0.3   -3.1 %
   
 
 
 
 
 
Total   $ 4.8   3.7 % $ 5.3   $ (0.5 ) -0.4 %
   
 
 
 
 
 

Overview

        Net sales increased $70.4 million on a pro forma basis with $27.2 million due to currency changes. The remaining sales improvement of $43.2 million or 6.2% was primarily in the Specialty Chemicals segment, the Performance Additives segment and the Specialty Compounds segment due to the impact of higher selling prices in each of the segments to offset higher raw material costs, and volume increases in the Specialty Compounds segment. Net sales for our Groupe Novasep segment were favorably impacted by $12.5 million due to acquisitions made by Groupe Novasep after the first quarter of 2004. Titanium Dioxide Pigments sales were down due to weaker demand for synthetic fiber caused by lower prices for cotton, which are a competing fiber.

        Adjusted EBITDA increased $4.8 million on a pro forma basis with $5.3 million due to currency changes. The remaining decrease was $0.5 million. Gross profit was down slightly as higher selling prices were offset by higher raw material offset by slightly lower selling, general and administrative expenses were incurred at the operating segments.

        Net income on a pro forma basis increased by $33.4 million or 383.9% in the first quarter of 2005.

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Pro Forma Net Sales

        Net sales on a pro forma basis increased $70.4 million with $27.2 million due to currency changes. The remaining sales improvement of $43.2 million or 6.2% is described in the segment discussions below.

        Performance Additives.    Net sales on a pro forma basis for our Performance Additives segment increased $4.5 million with $2.0 million due to currency changes. The remaining increase of $2.5 million or 1.6% was due to the impact of higher selling prices ($2.4 million), to offset higher raw material costs.

        Specialty Compounds.    Net sales for our Specialty Compounds segment increased $10.2 million or 21.3% over the prior period including the impact of higher selling prices ($4.3 million) to offset higher raw material costs. The remaining increase was primarily due to stronger sales volume in our wire and cable compounds business.

        Electronics.    Net sales for our Electronics segment increased $2.4 million over the prior year period with $1.3 million due to currency changes. The remaining increase of $1.1 million or 2.7% occurred despite $0.8 million of continued pricing pressures in the wafer reclaim business due to increases in sales volumes.

        Specialty Chemicals.    Net sales for our Specialty Chemicals segment increased $32.1 million on a pro forma basis over the prior period, including $8.9 million related to currency changes. The remaining increase of $23.2 million or 12.3% was primarily due to higher sales prices ($7.6 million) primarily in metal sulfide products realized due to the pass through of raw material cost increases and volume growth in the Surface Treatment businesses.

        Titanium Dioxide Pigments.    Net sales for our Titanium Dioxide Pigments segment decreased $4.7 million on a pro forma basis versus the prior year period, despite $5.2 million of favorable currency changes. The remaining decrease of $9.9 million or 9.1% was due to weaker demand for synthetic fiber caused by lower prices for cotton, a competing fiber.

        Advanced Ceramics.    Net sales for our Advanced Ceramics segment increased $5.3 million on a pro forma basis over the prior year period, including $4.3 million related to currency changes. The remaining increase of $1.0 million is primarily due to a better mix of medical products and Piezo applications.

        Groupe Novasep.    Net sales for our Groupe Novasep segment increased $20.6 million on a pro forma basis as compared to the prior year period. However, $12.5 million related to Novasep acquisitions made after the first quarter of 2004 and $4.8 million related to currency changes. The remaining net sales increase of $3.3 million was primarily due to solid performance from the new Groupe Novasep businesses offset by continued capacity utilization issues at the Rohner plant.

Pro Forma Net Income (Loss)

        Net income on a pro forma basis was $8.7 million in the first quarter of 2004. This amount included $11.1 million pro forma net income in the Performance Additives segment, $3.4 million pro forma net income in the Specialty Compounds segment, $0.6 million pro forma net income in the Electronics segment, $4.8 million pro forma net income in the Specialty Chemicals segment, $2.6 million pro forma net income in the Titanium Dioxide Pigments segment, $0.0 million in the Advanced Ceramics segment and $(0.2) million pro forma net loss in the Groupe Novasep segment. Also included in net income on a pro forma basis in 2004 were losses at Corporate of $13.6 million.

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Pro Forma Adjusted EBITDA

        Adjusted EBITDA increased $4.8 million on a pro forma basis with $5.3 million due to currency changes. The remaining Adjusted EBITDA decrease of $0.5 million is described in the segment discussion below.

        Performance Additives.    Adjusted EBITDA on a pro forma basis for our Performance Additives segment decreased from $34.6 million to $34.2 million despite $0.5 million of favorable currency changes. The remaining decrease of $0.9 million was primarily due to the higher raw material prices partially offset by higher selling prices described above.

        Specialty Compounds.    Adjusted EBITDA for our Specialty Compounds segment increased from $6.8 million to $7.3 million or 7.4% primarily due to stronger wire and cable volume. Higher raw material prices, partially offset by higher selling prices described above, negatively impacted Adjusted EBITDA.

        Electronics.    Adjusted EBITDA for our Electronics segment decreased from $6.6 million to $5.8 million or 12.1% primarily due to $0.8 million in selling price decreases.

        Specialty Chemicals.    Adjusted EBITDA for our Specialty Chemicals segment increased $6.0 million on a pro forma basis over the prior period, including $2.3 million related to currency changes. The remaining increase of $3.7 million was primarily due to volume growth in the Surface Treatment businesses. Also, higher sales prices ($7.6 million) primarily in metal sulfide products were realized due to the pass through of raw material cost increases ($6.5 million).

        Titanium Dioxide Pigments.    Adjusted EBITDA for our Titanium Dioxide Pigments segment increased $0.5 million on a pro forma basis over the prior year period, with $1.1 million of favorable currency changes. The remaining decrease of $0.6 million was due to soft demand for synthetic fiber used in clothing caused by lower prices for cotton, a competing fiber, offset partially by cost reduction measures.

        Advanced Ceramics.    Adjusted EBITDA for our Advanced Ceramics segment increased $2.0 million on a pro forma basis over the prior year period, including $1.2 million related to currency changes. The remaining increase of $0.8 million is primarily due to a better mix of medical products and Piezo applications.

        Groupe Novasep.    Adjusted EBITDA for our Groupe Novasep segment decreased $3.1 million on a pro forma basis as compared to the prior year period despite $0.5 million of increases related to Novasep acquisitions made after the first quarter of 2004 and $0.4 million related to currency changes. The remaining decrease of $3.0 million was primarily due to continued capacity utilization issues at the Rohner plant partially offset by solid performance from the new Novasep businesses.

        Corporate.    Adjusted EBITDA loss at Corporate was relatively flat as higher central costs to operate the significantly larger business due to the Dynamit Nobel Acquisition were offset in part by savings from headcount reductions at the former Dynamit Nobel corporate headquarters.

Reconciliation of Pro Forma Net Income (Loss) to Pro Forma Adjusted EBITDA for the three months ended March 31, 2004

        Because we view Adjusted EBITDA on both a consolidated and segment basis as an operating performance measure, we use net income (loss) as the most comparable U.S. GAAP measure. The following table, which sets forth the applicable components of Adjusted EBITDA, presents a

45



reconciliation of pro forma net income (loss) to pro forma Adjusted EBITDA on a consolidated and segment basis for the three months ended March 31, 2004:

(in millions)

  Performance
Additives

  Specialty
Compounds

  Electronics
  Specialty
Chemicals

  Titanium
Dioxide

  Advanced
Ceramics

  Groupe
Novasep

  Corporate
  Consolidated
 
Three months ended March 31, 2004                                                        
Net income (loss)   $ 11.1   $ 3.4   $ 0.6   $ 4.8   $ 2.6   $   $ (0.2 ) $ (13.6 ) $ 8.7  

Income tax provision (benefit)

 

 

8.8

 

 

1.6

 

 

0.9

 

 

10.9

 

 

3.0

 

 

4.5

 

 

4.5

 

 

(3.0

)

 

31.2

 
Interest expense, net     7.5     (0.1 )   1.7     12.0     7.7     8.2     2.7     15.1     54.8  
Depreciation and amortization     8.6     1.9     5.2     9.5     7.1     6.4     6.0     0.3     45.0  
Restructuring and related charges                         0.1     0.1         0.2  
Foreign exchange gain     (1.4 )       (1.8 )   (0.2 )               (9.0 )   (12.4 )
Other                         0.2     0.2     0.5     0.9  
   
 
 
 
 
 
 
 
 
 
Total Adjusted EBITDA   $ 34.6   $ 6.8   $ 6.6   $ 37.0   $ 20.4   $ 19.4   $ 13.3   $ (9.7 ) $ 128.4  
   
 
 
 
 
 
 
 
 
 

Liquidity and Capital Resources

Cash Flows

        Unless otherwise noted, all amounts below which are denominated in currencies other than the U.S. dollar are converted at March 31, 2005 exchange rates.

        Operating Activities.    Net cash (used in) provided by operating activities was ($7.3) million and $1.3 million for the three months ended March 31, 2005 and 2004, respectively. Net cash from operating activities was unfavorable in 2005 from higher adjusted EBITDA due to the inclusion of the businesses acquired in the 2004 acquisitions, offset by an increase in working capital as our working capital requirements have historically increased during the first quarter of each year since our inception. That trend is magnified due to the acquisitions.

        Investing Activities.    Net cash used in investing activities was $35.5 million, excluding capital leases, and $6.7 million for the three months ended March 31, 2005 and 2004, respectively. Investing activities primarily represented capital expenditures, which increased due mostly to the Dynamit Nobel Acquisition.

        Financing Activities.    Net cash provided by (used for) financing activities was $169.1 million and $(4.5) million for the three months ended March 31, 2005 and 2004, respectively. Activity in the first quarter of 2005 substantially represented $175.0 million, net borrowed against our senior secured revolving credit facility for short-term liquidity needs. This balance has been reduced to $85.0 million as of May 16, 2005.

Liquidity

        Our primary source of liquidity has been and will continue to be cash generated from operations. Our primary liquidity requirements are working capital, debt service, capital expenditures and acquisitions. Our debt service requirements, and other contractual obligations and commitments over the next several years are significant and are substantially higher than historical amounts. We believe that our currently available sources of liquidity will be sufficient for these needs. Furthermore, any future major acquisitions, business combinations or similar transactions will likely require additional capital resources. If our present operating performance and current market conditions continue, we believe that such resources will be available to us for small transactions. We would need access to alternative sources of liquidity for larger acquisitions such as through additional borrowings, equity issuances or other sources. We may not have access to these sources of cash for a variety of reasons.

        We believe that based on current and anticipated levels of operations and conditions in our industry and markets, cash flows from operations and borrowings available under our revolving credit facility will be adequate for 2005 and the foreseeable future to make required payments of principal

46



and interest on our debt and fund our working capital and capital expenditure requirements. We are taking actions to reduce overhead and excess or unprofitable manufacturing capacity, in part to improve our long-term liquidity. As noted in the "General" section above, we are also applying the same initiatives used after the KKR Acquisition—reducing net working capital as a percentage of net sales through improved systems and manager incentives as well as implementation of stringent controls to help ensure that maintenance capital expenditures are appropriate and that expansion capital expenditures are in line with both capacity and market demands. We expect this to further improve our short and long-term liquidity. If our cash flow from operations and borrowings under our revolving credit facility were to be insufficient to fund our currently existing liquidity requirements, we may be forced to use other means available to us, such as reduce or delay capital expenditures and seek additional capital. We may not have adequate capital for working capital, future acquisitions, business combinations or similar transactions.

        As of March 31, 2005, we had actual total indebtedness of $3,237.2 million. This included borrowings of $175.0 million under the revolving credit facility to meet short-term liquidity needs, reduced to $85.0 million at May 16, 2005.

        Senior secured credit facilities.    The senior secured credit facilities, as amended, consist of:

        The U.S. dollar equivalents of term loans denominated in euros are shown based on the exchange rate on March 31, 2005 of €1.00=$1.2996. In each case, the interest rates per year (other than under the tranche C term loan facility) are subject to step-downs determined by reference to a performance test. Adjusted LIBOR is the London inter-bank offered rate adjusted for statutory reserves. ABR is the alternate base rate, which is the highest of Credit Suisse First Boston's prime rate and the federal funds effective rate plus 1/2 of 1%. Tranche A-1 and A-2 term loans are payable in January and July of each year at escalating percentages of the original principal amount. Tranche C and tranche D term loans are payable in January and July of each year at amounts equal to 0.5% of the original principal balance, with the remainder due at the final maturity date.

        The Company's borrowings and the borrowings of Rockwood Specialties Limited under the senior secured credit facilities are guaranteed and secured by assets and pledges of capital stock.

        In addition to the financial covenants described below under "—Covenant Compliance," the Company's senior secured credit facilities contain various affirmative and restrictive covenants. The restrictive covenants limit the Company and its subsidiaries' ability to, among other things, incur indebtedness and other liabilities; create liens; merge or consolidate; dispose of assets; make investments; pay dividends and make payments to shareholders; make payments on certain indebtedness or to amend documents related to certain indebtedness and to enter into sale leaseback transactions.

47



        2011 notes and 2014 notes.    The Company's 2011 notes have an aggregate principal amount of $375.0 million, and mature on May 15, 2011 and the 2014 notes have an aggregate principal amount of €375.0 million ($487.4 million) in the case of the euro notes and $200.0 million in the case of the dollar notes, and mature on November 15, 2014. Interest on both the 2011 notes and 2014 notes are payable semi-annually on May 15 and November 15. Interest on the 2011 notes accrues at the rate of 10.625% per year, and interest on the 2014 notes accrues at the rate of 7.625% in the case of euro notes and 7.500% in the case of dollar notes. Certain of our domestic subsidiaries guarantee the 2011 notes and 2014 notes on a senior subordinated unsecured basis.

        The Company's 2011 notes and 2014 notes contain various affirmative and restrictive covenants. The restrictive covenants limit our ability, and the ability of our restricted subsidiaries, to, among other things, incur or guarantee additional indebtedness (as described below under "—Covenant Compliance"); pay dividends or make other equity distributions or repurchase capital stock (as described below under "—Covenant Compliance"); make investments or other restricted payments (as described below under "—Covenant Compliance"); create liens; transfer or sell assets; restrict dividends or other payments to us; engage in transactions with affiliates; and merge or consolidate with other companies or sell substantially all of our assets.

        Covenant compliance.    In addition to the affirmative and restrictive covenants, the Company's senior secured credit agreement contains the following financial covenants that are determined based on our Adjusted EBITDA:

        These covenants are material terms of the senior secured credit agreement. Non-compliance with these covenants could result in a default under the senior secured credit agreement and the lenders could elect to declare all amounts borrowed immediately due and payable. Any such acceleration would also result in a default under the indentures governing the 2011 notes and the 2014 notes, which could lead to the noteholders electing to declare the principal, premium, if any, and interest on the then outstanding notes immediately due and payable.

        The indentures governing the 2011 notes and 2014 notes prohibit us from incurring additional debt, subject to certain permitted incurrences, unless the fixed charge coverage ratio, which is the ratio of Adjusted EBITDA (as defined therein excluding certain adjustments permitted under the senior secured credit agreement) to fixed charges (as defined therein), for the most recently ended four fiscal quarters is at least 2.00 to 1. In addition, the indentures prohibit us from making restricted payments (such as dividends or other equity distributions, repurchases of capital stock or restricted investments), subject to certain permitted payments, unless, among other things, the fixed charge coverage ratio for the most recently ended four fiscal quarters is at least 2.00 to 1. These covenants are material terms of the indentures governing the 2011 notes and 2014 notes.

        We were in compliance with all of the above covenants as of March 31, 2005 and December 31, 2004.

        Given our use of Adjusted EBITDA (see—Special Note Regarding Non-GAAP Financial Measures for the definition of Adjusted EBITDA and management's uses of adjusted EBITDA) as a

48



liquidity measure, the following table presents a reconciliation of net cash provided by (used in) operating activities to Adjusted EBITDA:

 
  Three Months Ended March 31,
 
(millions)

 
  2005
  2004
 
Net cash provided by (used in) operating activities   $ (7.3 ) $ 1.3  
Changes in assets and liabilities, net of the effect of foreign currency translation and acquisitions     76.0     17.8  
Current portion of income tax (benefit) provision     6.7     4.0  
Interest expense, net, excluding amortization of deferred financing costs and unrealized losses/gains on derivatives     53.3     18.4  
Restructuring and related charges     2.9      
CCA Litigation     0.4      
Systems/organization establishment expenses     1.2      
Cancelled acquisition and disposal costs     0.2     0.2  
Bad debt provision     (0.2 )   (0.6 )
   
 
 
Total Adjusted EBITDA   $ 133.2   $ 41.1  
   
 
 

        Assumed debt.    Certain of our subsidiaries acquired in the Dynamit Nobel Acquisition are borrowers under eight euro-denominated term loan facilities that provide aggregate outstanding borrowings of approximately €15.6 million ($20.3 million) as of March 31, 2005. These term loans mature between 2006 and 2010 and bear annual interest rates ranging between 1.00% and 4.25% or EURIBOR plus 1.45% or LIBOR plus 0.39%. In addition, certain of our subsidiaries acquired in the Dynamit Nobel Acquisition are borrowers under nine term loan facilities denominated in other foreign currencies, including Swiss Francs, Taiwanese Dollars, Chinese Renminbi and Japanese Yen, providing for borrowings of an aggregate U.S. dollar equivalent amount of approximately $47.4 million as of March 31, 2005. These term loans mature between 2005 and 2011 and bear annual interest rates ranging between 1.38% and 4.02%. The term loan facilities described above contain customary events of default and some of them are secured by mortgages or accounts receivables.

        Additionally, Groupe Novasep (including subsidiaries) has three tranches of bank debt at the Novasep parent level totaling €13.0 million ($16.9 million) and $10.8 million ($27.7 million in total), each with a maturity date of 2010 and interest rates of EURIBOR plus 1.75% in the case of two of the tranches, and LIBOR plus 1.75% for the remaining tranche. In addition, there is bank debt at the Novasep subsidiary level totaling €6.1 million ($7.9 million) with maturity dates ranging from 2006 to 2010 and interest rates ranging from EURIBOR plus 0.7% to EURIBOR plus 1.25%. The remaining amount of assumed debt of €11.4 million ($14.8 million) consists primarily of capital leases with maturity dates ranging from 2006 to 2013.

        "Assumed debt" includes certain capitalized lease obligations, a full recourse receivables factoring arrangement and subsidiary preferred stock in addition to the long-term debt described in the preceding two paragraphs.

Capital Expenditures

        For the three months ended March 31, 2005 and 2004, our capital expenditures excluding capital leases, amounted to $35.7 million and $6.7 million, respectively. The capital expenditures of Rockwood and Dynamit Nobel have averaged $61.0 million and $108.7 million, respectively per year over the last three years. Rockwood's capital expenditures consisted primarily of replacements of worn, obsolete or damaged equipment as well as investments in new equipment, mostly for our Color Pigments and Services and Timber Treatment Chemicals business lines of our Performance Additives segment. In

49



addition, Rockwood also made significant investments in new facilities to expand capacity across our business lines including expenditures made in connection with the expansion of our ACQ production capabilities in our Timber Treatment Chemicals business line, and expansion and refurbishment of our wafer reclaim facility and production equipmentin Greasque, France. In addition to maintenance capital expenditures, Dynamit Nobel's growth capital expenditures consisted of expansion of current Good Manufacturing Practice production lines and new equipment relating to multi-column chromatography in our Groupe Novasep segment, expansion of our titanium dioxide capacity for our Titanium Dioxide Pigments segment and capacity expansion for our Advanced Ceramics segment.

        We intend to apply our capital discipline and stringent controls to reduce our future capital expenditures as compared to historical levels for the acquired businesses of Dynamit Nobel. Our annual capital expenditures will increase in amount, but we do not believe they will change significantly from current levels in proportion to the size of the combined entity or as a percentage of net sales.

Foreign currency related transactions

        As of March 31, 2005, $1,261.2 million of the debt outstanding are denominated in euros.

Management and transaction fees

        KKR and DLJ Merchant Banking III, Inc. provide us with consulting and management advisory services for an aggregate annual fee of $2.1 million, increasing 5% annually.

Commitments and Contingencies

Legal Matters

        We are involved in various legal proceedings, including product liability, intellectual property and environmental matters, of a nature considered normal to our business. It is our policy to accrue for amounts related to these matters in accordance with SFAS No.5, Accounting for Contingencies, if it is probable that a liability has been incurred and an amount can be reasonably estimated. It is our policy to disclose such matters when there is at least a reasonable possibility that a material loss may have been incurred. In addition, we may be required to make indemnity payments in connection with certain product liability claims. Although we expect to continue to pay legal fees in connection with certain legal actions related to chromated copper arsenate, based on currently available facts, we do not believe that these actions will have a material effect on our financial condition, results of operations or liquidity. In addition, we do not believe that there is any individual legal proceeding that is likely to have a material adverse effect on our business or financial condition.

Indemnities

        Under the business and share sale and purchase agreement, the deed of tax covenant and the environmental deed entered into in connection with the KKR acquisition, Degussa UK Holdings Ltd., or Degussa, as successor to Laporte, plc, or Laporte, is required to indemnify us for certain legal, tax and environmental liabilities and obligations that relate to the period prior to the closing of the KKR acquisition. In addition, under the sale and purchase agreement entered into in connection with the Dynamit Nobel Acquisition, mg technologies ag and MG North America Holdings Inc. are required to indemnify us for certain legal, tax and environmental liabilities and obligations that related to the period prior to the closing of the Dynamit Nobel Acquisition. Pursuant to these agreements, we have made various claims for indemnification with Degussa, mg technologies ag and MG North America Holdings, Inc. In the opinion of management, and based upon information currently available, we do not expect the ultimate resolution of any of these claims to have a material effect on our financial condition or results of operations.

50



Safety, Health and Environmental Matters

        The Company is subject to extensive environmental, health and safety laws in the United States, the European Union and elsewhere at both the national and local level. Many of these laws impose requirements relating to clean-up of contamination, and impose liability in the event of damage to human beings, natural resources or property, and provide for substantial fines, injunctions and potential criminal sanctions for violations. The products, including the raw materials handled, are also subject to rigorous industrial hygiene regulations and investigation. The nature of the Company's operations exposes it to risks of liability for breaches of these laws and regulations as a result of the production, storage, transportation and sale of materials that can cause contamination or personal injury when released into the environment. Environmental laws are subject to change and have tended to become stricter over time. Such changes in environmental laws, or the enactment of new environmental laws, could result in materially increased capital, operating and compliance costs.

        The Company is committed to achieving and maintaining compliance with all applicable safety, health and environmental ("SHE") legal requirements, and the Company's subsidiaries have developed policies and management systems that are intended to identify the SHE legal requirements applicable to the operations, enhance compliance with such requirements, ensure the safety of the Company's employees, contractors, community neighbors and customers and minimize the production and emission of wastes and other pollutants. Although SHE legal requirements are constantly changing and are often difficult to comply with, these SHE management systems are designed to assist the Company in meeting its compliance goals and minimizing overall risk.

        In October 2003, the European Commission adopted a proposal for a new European Union framework for chemicals known as the Registration, Evaluation and Authorization of Chemicals, or REACH. While it is uncertain as to whether, when and in what form REACH will be finalized and become law, REACH may eventually significantly expand the European Union's regulation of chemicals. As currently proposed, REACH would include requirements that certain manufacturers and importers of chemicals register those chemicals, perform health and environmental risk analyses of those chemicals, and in certain instances, obtain authorizations for the use of the chemicals. As a specialty chemicals company, it is possible that the Company is the only manufacturer of one or more substances to be regulated under REACH and thus could potentially bear the full cost of compliance with REACH for some or all of the Company's products. The Company estimates it has over 400 products that might be subject to REACH.

        Under the European Union Integrated Pollution Prevention and Control Directive ("IPPC"), European Union member governments are to adopt rules and implement a cross-media (air, water and waste) environmental permitting program for individual facilities. While the EU countries are at varying stages in their respective implementation of the IPPC permit program, the Company has submitted all necessary IPPC permit applications required to date, and in some cases received completed permits from the applicable government agency. The Company expects to submit all other IPPC applications and related documents on a timely basis as the various countries implement the IPPC permit program. Although it is not known with certainty what each IPPC permit will require, the Company believes, based upon its experience with the permits received to date, that the costs of compliance with the IPPC permit program will not be material to its results of operations, financial position or liquidity.

51



SHE Capital Expenditures

        The Company may incur future costs for capital improvements and general compliance under SHE laws. For the year December 31, 2004, the capital expenditures for SHE matters totaled approximately $23.9 million, excluding costs to maintain and repair pollution control equipment. For 2005 and 2006, the Company estimates capital expenditures for compliance with SHE laws to be at similar levels; however, because capital expenditures for these matters are subject to changes in existing and new SHE laws, the Company cannot provide assurance that its recent expenditures will be indicative of future amounts required to comply with these laws.

        Environmental laws have a significant effect on the nature and scope of any clean-up of contamination at current and former operating facilities, the costs of transportation and storage of chemicals and finished products and the costs of the storage and disposal of wastes. In addition, "Superfund" statutes in the United States as well as statutes in other jurisdictions impose strict, joint and several liability for clean-up costs on the entities that generated waste and/or arranged for its disposal at contaminated third party sites, as well as the past and present owners and operators of contaminated sites. All responsible parties 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.

        Environmental contamination is known to exist at certain of our present and former facilities, including our facilities located in Turin, Italy, St. Fromond, St. Cheron and Sens, France; Hainhaussen, Troisdorf, Schlebusch, Stadeln, Duisburg, Plochingen, Marktredwitz, Ronnenberg-Empelde and Langelsheim, Germany; Oss, The Netherlands; Kidsgrove, and Barrow, U.K.; Boksburg East, South Africa; Pratteln, Switzerland and in the United States, in Valdosta, Georgia, Beltsville, Maryland, Harrisburg, North Carolina, Laurens, South Carolina, Silver Peak, Nevada and La Mirada, California. Soil contamination is also known to exist at our facilities at Freeport, Texas, Chasse-sur-Rhone, France and Sumperk in Czech Republic; however, no further regulatory remedial actions are currently required for these facilities and any liabilities arising from such contamination is covered by indemnity obligations or the previous owners of these facilities with the exception of Freeport. We are currently operating groundwater remediation systems at our Hainhaussen, Troisdorf, Valdosta, and Silver Peak facilities. We also operate ground water remediation systems at our Schlebusch, Plochingen, Marktredwitz, Stadeln and Laurens facilities, for which prior owners or insurers have assumed responsibility and a soil remediation project at our facility in St. Cheron, and we continue to monitor groundwater at the Beltsville facility, which was previously the subject of a soil removal action. Groundwater is also monitored at the St. Fromond and Barrow facilities due to prior spills and at the Harrisburg facility due to a landfill closure. We are also required to monitor groundwater quality at our facilities at Mourenx, France and New Johnsonville, Tennessee. We believe that additional environmental studies, and possibly environmental remediations, will be required at the Turin and Harrisburg facilities. We are also in the process of determining appropriate remedial actions with the regulatory authorities at the following locations: Duisburg, Pratteln, Langelsheim, Troisdorf and La Mirada. Furthermore, as a result of facility closings, divestitures and offsite disposal activities such as a former disposal site in Laurel, Maryland, we are responsible for the following other matters: contamination beneath divested portions of the manufacturing facility in Troisdorf; contamination at a closed Chemetall Oakite facility in Houston, Texas, contamination at a former Chemetall Foote facility in Sunbright, Virginia, contribution towards the clean-up of three industrial landfills in the Basel, Switzerland area, groundwater remediation at Stadeln and former sites operated by DNSC's Dynamit Nobel's previously divested explosives business. The Company is also a de minimis participant in several Superfund matters.

        Although the Company cannot provide assurances in this regard, the Company does not believe that these issues will have a material adverse effect on its long-term business or financial condition.

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Nonetheless, the discovery of contamination arising from present or historical industrial operations at some of the Company's and the Company's predecessor's former and present properties and/or contamination at sites it and its predecessor disposed wastes could expose the Company to cleanup obligations and other damages in the future.

Government Enforcement Proceedings and Civil Litigation

        During the course of the Company's business, the Company may receive notices of violation, enforcement and other complaints from regulatory agencies alleging non-compliance with applicable SHE laws. Currently, the Company is party to a consent order with the Metropolitan Sewer District ("MSD") in Saint Louis, Missouri to reduce ammonia concentrations in wastewater discharge to a city treatment plant. The entry into the consent order resulted from violations of its wastewater discharge permit. The order is presently stayed pending MSD's negotiation of its own National Pollution Discharge Elimination System permit with the State of Missouri. Although the Company may be required to make capital expenditures in connection with this matter, it does not believe that this issue will have a material adverse effect on its long-term business or financial condition.

Environmental Indemnities

        Pursuant to the environmental deed entered into in connection with the KKR acquisition, Degussa, as successor to Laporte, is required to indemnify the Company and its subsidiaries for certain environmental matters that relate to the business as conducted prior to the closing of the KKR acquisition. The environmental deed provides that Degussa will indemnify the Company and its subsidiaries for claims for which notice is given within a period of two years for breaches of representations and warranties, which expired in 2002, and five years for claims related to the contamination of the Company's properties or its subsidiaries' properties (inclusive of contamination which leaks or escapes from the Company's properties or its subsidiaries' properties), which expires in September 2005. These indemnity obligations are subject to a minimum per matter loss of $0.2 million and are further subject to a $5.0 million deductible for the indemnity to be available. In addition, the environmental deed provides that Degussa will indemnify Rockwood and its subsidiaries for claims relating to properties that were formerly owned, occupied or used as of November 20, 2000, as well as properties owned by third parties (inclusive of disposal of waste and certain other identified issues prior to November 20, 2000). The environmental deed provides that in this instance, Degussa will be responsible for reasonable costs and expenses incurred.

        In addition, pursuant to the sale and purchase agreement entered into in connection with the Dynamit Nobel Acquisition, mg technologies ag and its subsidiary, MG North America Holdings Inc., are required to indemnify Rockwood and its subsidiaries for 50% of the excess amount of losses over the amount of the related reserves (in the case of known claims) and 50% of claims (in the case of unknown claims) related to the contamination of the Company or its subsidiaries' properties, if notified within ten years. If mg technologies and MG North America Holdings' responsibility for contamination matters cannot be proven, a sliding scale reduces the percentage further for each year during the five-year period from year six to ten. mg technologies and MG North America Holdings are also obligated to indemnify the Company for 85% of claims related to legacy site matters, such as environmental matters relating to properties or businesses owned or operated by Dynamit Nobel prior to, but not on, the closing of Dynamit Nobel Acquisition, if notified within ten years. In addition, mg technologies and MG North America Holdings are obligated to indemnify us for 50% of the excess amount of losses over the amount of the related reserves for operational compliance matters, if notified by December 31, 2006, and 50% of the excess amount of losses over the amount of the related reserves (in the case of known claims) and 50% of claims (in the case of unknown claims) related to certain environmental damage claims unknown at the time of the closing of the Dynamit Nobel Acquisition, if notified within ten years. All of these indemnity obligations are subject to different minimum per-claim

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thresholds depending on whether the matter was disclosed or not, and on the subject matter, ranging between €100,000 and €750,000 ($0.1 million and $0.9 million) depending on the type of claim. The indemnity obligations are further subject to certain deductibles, exclusions and limitations. Furthermore, mg technologies and MG North America Holdings are obligated to indemnify us for certain environmental risks arising from certain "shared site" structures for a duration of ten years. This indemnity obligation is not subject to the percentages, de minimis exclusions, deductibles and thresholds described above, and it is not subject to most of the general limitations.

        In the event the Company seeks indemnity under any of these agreements or through other means, there can be no assurance that mg technologies, MG North America Holdings, Degussa or any other party who may have obligations to indemnify the Company will adhere to their obligations and the Company may have to resort to legal action to enforce its rights under the indemnities. In addition, the Company maybe required to make indemnity payments in connection with certain environmental matters. However, the Company does not believe that resolution of the known environmental matters subject to indemnification obligations owed to it or by it will have a material adverse effect on our long-term business or financial condition as such amounts are not significant.

Environmental Reserves

        The Company has established financial reserves relating to anticipated environmental cleanup obligations, site reclamation and remediation and closure costs. Liabilities are recorded when potential liabilities are either known or believed to be probable and can be reasonably estimated. The Company's liability estimates are based upon available facts, existing technology, past experience and, in some instances where the remediation costs are being paid directly by the Company's insurers, insurance recoveries, and are generated by several means, including State-mandated schedules, environmental consultants and internal experts, depending on the circumstances. On a consolidated basis, the Company accrued approximately $51.2 and $51.9 million for known environmental liabilities as of March 31, 2005 and December 31, 2004, respectively, all of which are classified as other non-current liabilities on our consolidated balance sheets for such periods. Included in the $51.2 and $51.9 million as of March 31, 2005 and December 31, 2004 is €6.5 million ($8.4 million using the exchange rate on March 31, 2005 of €1.00 = $1.2996) that is discounted using 5.0% discount rate (undiscounted amount equals $13.0 million), and €2.4 million ($3.2 million) that is discounted using 5.5% discount rate (undiscounted amount equals $4.9 million). In certain cases, our remediation liabilities are payable over periods of up to 30 years.

        The Company believes these accruals are adequate based on currently available information. The Company may incur losses in excess of the amounts accrued, however, based on currently available information the Company does not believe the additional amount of potential losses would have a material effect on the Company's long-term results of operations, financial condition, or liquidity. The Company is unable to estimate the amount or range of any potential incremental charges should facts and circumstances change and may in the future revise our estimates based on new information becoming available.

        The Company is obligated to undertake soil remediation at two facilities in Europe in the event manufacturing operations are discontinued there at some future date. The Company does not contemplate any such action occurring in the foreseeable future, as these facilities' remaining lives are indefinite. Given the indeterminate useful life of these facilities and the corresponding indeterminate settlement date of any soil remediation obligations the Company does not have sufficient information to estimate a range of potential settlement dates for the obligations. Consequently, we cannot employ a present value technique to estimate fair value and, accordingly, we have not accrued for any related costs.

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        The Company believes these environmental matters will not have a material adverse effect on our long-term results of operations and/or financial condition. However, these matters may have a material adverse effect on our results of operations or cash flows in any given accounting period.

Off-Balance Sheet Arrangements

        None.

Critical Accounting Policies and Estimates

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

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

        See Note 1—Description of Business and Summary of Significant Accounting Policies to Rockwood's unaudited condensed consolidated financial statements included in Item 1—Financial Statements for a summary of our significant accounting policies. We believe the following to be the most critical accounting policies and estimates affecting preparation of our consolidated financial statements:

        Revenue Recognition.    We recognize revenue when the earnings process is complete. Product sales are recognized when products are shipped to the customer in accordance with the terms of the contract of sale, title and risk of loss have been transferred and collectibility is reasonably assured. We believe that we have adequate credit granting procedures in place and operating effectively so that collectibility is reasonably assured. We have a low incidence of uncollectible accounts. Additionally, credit insurance is purchased at times by certain of our businesses, particularly in Europe, to protect against collection risk. Accruals are made for sales returns based on our experience and for other allowances based on the terms of allowance programs put in place. Although we believe that sufficient experience and history exists to make reasonable estimates as to such accruals and allowances, actual results can differ depending on market conditions.

        Impairment Accounting.    The recoverability of goodwill is reviewed on an annual basis during the fourth quarter. Additionally, the recoverability of goodwill, long-lived tangible, and certain intangible assets is reviewed when events or changes in circumstances occur indicating that the carrying value of the assets may not be recoverable.

        Initial goodwill impairment review begins with the estimate of fair value of each reporting unit generally based on an industry metric such as the ratio of enterprise value (commonly defined as market capitalization, plus long-term debt, less cash) to Adjusted EBITDA for the current year and the

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following year budget. If potential impairment is identified, we may expand the review to take into account expected future cash flows in subsequent years. Similarly, when we test for impairment of long-lived assets other than goodwill we initially review the estimated future undiscounted cash flows to be derived from the asset or asset group (collectively "asset"). If it appears that the asset is impaired based on undiscounted cash flows, the estimated fair value of the asset is calculated on a present value basis by multiplying the estimated future annual cash flows of the asset by the then current enterprise value ratio (a discounted measure) or by a discount factor appropriate to the related reporting unit, in accordance with paragraph 23 of SFAS 144. An impairment loss is recognized when the carrying value of the asset or goodwill exceeds the discounted cash flow (or other measure of) fair value.

        These calculations are based on inherent assumptions and estimates about future cash flows and appropriate benchmark peer companies or groups. Subsequent changes in these assumptions could result in future impairment. Although we consistently use the same methods in developing the assumptions and estimates underlying the fair value calculations, such estimates are uncertain by nature and can vary from actual results. For example, if the peer group multiples used in 2004 had been 10% lower, no additional goodwill impairment would have been recorded. However, if the peer group multiples used in 2003 had been 10% lower, we might have had an additional goodwill impairment of approximately $8.0 million in one of our reporting units. As noted above, if we had discovered such a potential impairment we might have expanded the review to prepare more detailed estimates of future cash flows in subsequent years which might have resulted in a different impairment assessment.

        We have not to date had circumstances occur that caused us to review the values of individual long-lived assets for impairment. However, in 2004 and 2003 we did review for impairment the assets of an entire reporting unit within our Electronics segment. Had the calculation multiple in 2003 or the future cash flow estimates in 2004 been 10% lower, we would have recorded an additional impairment in this reporting unit of approximately $3.5 million in 2003 and $1.1 million in 2004.

        Business Combinations—We account for business combinations using the purchase method of accounting as required by SFAS 141 Business Combinations. Under the purchase method of accounting we are required to allocate the purchase price to the estimated fair value of assets acquired and liabilities assumed. Examples of material estimates from our previous acquisitions are:

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        Goodwill is an intangible asset that represents the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed. While goodwill itself does not represent an estimate, under SFAS 141 we must assign goodwill to one or more reporting units. Allocation of goodwill to reporting units requires judgments about the relative fair values of reporting units including the fair value of their identifiable assets and estimates as to the present value of future cash flows expected from the reporting units as adjusted by a weighted average and or risk-adjusted costs of capital. Goodwill is assessed for impairment at least annually.

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        Some of our business combinations have complex terms that may result in conflicting claims between buyer and seller concerning the purchase price itself. Management is required to assess the probability and amount (or range of amounts) of such claims, and, where possible, determine the most likely amount due. For example, in the Dynamit Nobel Acquisition, management is currently aware of several claims which could result in an increased purchase price and has estimated a range from $0 to approximately $30.0 million possibly due for such claims which we expect to finalize during the next twelve months.

        Legal Matters.    We are involved in various legal proceedings, including commercial, product liability, intellectual property and environmental matters, of a nature that can be expected in our business. It is our policy to accrue for amounts related to these matters in accordance with SFAS No. 5, Accounting for Contingencies, if it is probable that a liability has been incurred and an amount can be reasonably estimated. The probability that a contingent liability has been incurred is regularly assessed by our legal staff, based on periodic reviews of available facts and circumstances for our legal matters, with senior operating and finance management both at the business accountable for the potential liability and at our corporate offices. This is supplemented where applicable by consultation with outside counsel. We do not believe it is informative to quantify past experience at assessing probability or estimating exposure since material matters of this nature at Rockwood often represent unique situations with little applicability to the assessment of probability or estimation of potential liability regarding other legal matters. It is our policy to disclose such matters when there is at least a reasonable possibility that a loss may have been incurred.

        Environmental Matters.    We accrue costs of a non-capital nature related to environmental clean-up when those costs are believed to be probable and can be reasonably estimated. Expenditures that extend the life of the related property or mitigate or prevent future environmental contamination are capitalized, and expenditures related to existing conditions resulting from past or present operations and from which no current or future benefit is discernible are immediately expensed. The quantification of environmental exposures requires an assessment of many factors, including changing laws and regulations, advancements in environmental technologies, the quality of information available related to specific sites, the assessment stage of each site investigation and the length of time involved in remediation or settlement. As such, it can be extremely difficult to accurately estimate such costs. We do not include anticipated recoveries from insurance carriers or other third parties in our accruals for environmental liabilities.

        We have estimated and established financial reserves relating to anticipated environmental cleanup obligations, site reclamation and remediation and closure costs. On a consolidated basis, we have accrued approximately $51.2 million for known environmental liabilities as of March 31, 2005. Some of these liabilities were assumed as part of business combinations, others resulted from charges to operations when the underlying costs were probable and could be reasonably estimated. Given that these obligations may be paid/relieved over extended time periods (30 years in some cases), charges or credits to operations may be required as information is gathered and estimates improved.

        We have evaluated our total environmental exposure based on currently available data and believe that such environmental matters will not have a material adverse impact on our financial position or results of operations. If matters previously identified by management are resolved in a manner different from original estimates, there is the potential for a material adverse effect on operating results or cash flows in any one accounting period. See Commitments and Contingencies.

        Restructuring.    We record restructuring charges from time to time that represent expenses incurred in connection with consolidations and cessations of certain of our operations as well as headcount reduction programs. These charges consist primarily of write-offs of surplus assets and severance costs. These charges are based on various factors including the employee's length of service, contract provisions, salary levels and local governmental legislation. At the time a related charge is recorded, we

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calculate our best estimate based upon detailed analysis. Although significant changes are not expected, actual costs may differ from these estimates.

        For example, we have accrued liabilities of $27.7 million to cover restructuring liabilities for employee severance and facility closure costs in connection with the Dynamit Nobel Acquisition. Although under the rules of purchase accounting, this is not charged to operations, in the event that our estimates of such costs are too low, an additional charge to operations would be required.

        Deferred Taxes.    We record valuation allowances to reduce our deferred tax assets to the amount that is more likely than not to be realized based on available evidence weighted toward evidence that is objectively verifiable. While we consider future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for valuation allowances, if we were to determine that we would be able to realize deferred tax assets in the future in excess of our net recorded amount, an adjustment to the net deferred tax asset would increase income (or decrease goodwill for any net deferred tax assets acquired in the Dynamit Nobel Acquisition) in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of our recorded net deferred tax assets in the future, an adjustment to the deferred tax asset would decrease income (or increase goodwill for any net deferred tax assets acquired in the Dynamit Nobel Acquisition) in the period such determination was made.

        We have cumulative net operating loss carry forwards in the U.S., Germany, Switzerland, Italy and UK. We have fully reserved for net operating loss carry forwards in the U.S., Switzerland, Italy and the UK and certain states in the U.S. as we have concluded realizability of these net operating loss carry forwards is not more likely than not. The full valuation allowance on the U.S. federal deferred tax assets was recorded during the fourth quarter of 2004, in accordance with our policy. We have not recorded valuation allowances on our German net operating loss carry forwards as we have considered positive evidence such as forecasted future taxable income based on historical taxable income adjusted for charges which are not indicative of future operations and as the carry forward period is indefinite.

        SFAS 109, Accounting for Income Taxes, ("SFAS 109") paragraph 105, "requires consideration of future taxable income and other available evidence when assessing the need for a valuation allowance." Various assumptions and strategies (including elections for tax purposes) are implicit in estimates of forecasted future taxable income.

        We believe that, in situations in which future realization of deferred tax assets is dependent on taxable income from future operations, SFAS 109 requires the relative significance of cumulative losses be addressed within the guidance provided in paragraphs 24 and 103. Accordingly, in assessing the realization of U.S. jurisdiction net operating loss carry forwards for the years ended December 31, 2002, 2003 and 2004 (see detail of the expiration of U.S. federal tax loss carry forwards in Item 8—Financial Statements and Supplementary Data—Note 9—Taxes on Income) and, considering future taxable income, we have identified the key elements of both positive and negative evidence and evaluated such evidence by applying the guidance provided by paragraphs 24 and 103 of SFAS 109.

        For 2004, based on our policy and the steady-state analysis, we determined during the fourth quarter that a full valuation allowance was required on the deferred tax assets related to the U.S. federal net operating loss carry forwards of $143.7 million as the analysis resulted in a steady-state taxable loss. During the fourth quarter, the further weakening of the U.S. dollar resulted in significant foreign exchange losses on our euro-denominated debt resulting in a three-year steady-state taxable loss.

        The valuation allowance for US net operating losses established at December 31, 2004 has been reduced by $14.0 million in the first quarter of 2005. Of this reduction, $8.9 million has been recorded as a decrease to goodwill representing the expected utilization of certain net operating losses acquired in the Dynamit Nobel acquisition. The remaining $5.1 million has been reflected as a reduction in

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income tax expense for the quarter ended March 31, 2005. The determination of the net operating losses to be utilized is based on a "first-in, first-out" methodology.

        Tax Planning Strategy—We also identified a tax planning strategy as part of our evaluation of evidence needed to rebut the presumption that a full valuation allowance was required for U.S. NOL carry forwards at December 31, 2002 and 2003. Specifically, we identified the sale of an appreciated non-core business. While the existence of a qualifying strategy often provides more objectively determinable evidence of realization and may be given more weight than a forecast of future taxable income, in our analysis we did not rely entirely on the potential sale because we had other sources of taxable income which were sufficient for us to conclude that no valuation allowance was required at December 31, 2002 and 2003.

        We are committed to buying and selling businesses within our portfolio of businesses as opportunities arise to enhance our overall results. We are committed to selling assets which are non-core and which would generate a taxable gain in the event of expiring U.S. Federal NOL's.

        Pensions, Postemployment and Postretirement Costs.    In connection with the KKR, Dynamit Nobel, and pigments and dispersion acquisitions as well as the Novasep combination, Rockwood assumed responsibility for the pension and postretirement benefits for substantially all of the employees of the businesses acquired that were active as of the date of the acquisition. For the KKR and pigments and dispersion acquisitions, obligations related to retired and terminated vested employees as of such date remained the responsibility of the seller, and accordingly, these obligations are not reflected in our financial statements. Defined benefit costs and liabilities have been determined in accordance with SFAS 87, Employers' Accounting for Pensions. Postretirement benefit costs and liabilities have been determined in accordance with SFAS 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. Postemployment benefit costs and liabilities have been determined in accordance with SFAS 112, Employers' Accounting for Postemployment Benefits.

        The measurement of our pension obligations, costs and liabilities is dependent on a variety of assumptions used by our actuaries. These assumptions include estimates of the present value of projected future pension payments to all plan participants, with consideration to the likelihood of potential future events such as salary increases (due to marketplace conditions and/or inflation) and demographic experience (such as retirement and mortality rates). These assumptions may have an effect on the amount and timing of future contributions or benefit payments. For funded plans, the plan trustee obtains an independent valuation of the fair value of pension plan assets and prepares estimates of expected returns based on target asset allocations multiplied by current marketplace rates of return for comparable assets. We base the discount rate assumption on investment yields available at year-end on AA-rated corporate long-term bonds. The effects of actual results differing from our assumptions are accumulated and amortized over future periods and therefore are likely to affect our recognized expense in those periods. We can not predict these bond yields or investment returns and therefore can not reasonably estimate whether adjustments to our stockholders' equity for minimum pension liability in subsequent years will be significant.

Effects of Recently Issued Accounting Standards

        We plan to implement the financial accounting standards listed below in 2005 and 2006. FIN 47 will be effective at December 31,2005. SFAS 123R will be effective January 1, 2006. We do not expect any significant impact on our financial position, results of operation, or cash flows from the

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implementation of FIN 47, although we are still in the process of evaluating SFAS 123R as to its potential impact, if any.


FIN 47

 

Accounting for Conditional Asset Retirement Obligations — An Interpretation of SFAS 143

SFAS 123R

 

Share Based Payment

        FIN 47 clarifies that the term conditional asset retirement obligation as used in SFAS 143, Accounting for Asset Retirement Obligations, refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. FIN 47 is effective December 31, 2005 for us.

        SFAS 123R revises SFAS 123, Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS 123R requires entities to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which the employee is required to provide services in exchange for the award. This standard eliminates the alternative to use the intrinsic value method of accounting for share based payments as previously provided in APB 25. This standard is effective for the Company beginning in the first quarter of 2006. As we are not a publicly traded equity company, we will apply SFAS 123R on a prospective basis. As such, new awards, modifications to existing awards, repurchases or cancellations subsequent to February 11, 2005 (the date on which the Company filed its Form S-1) will be accounted for in accordance with SFAS 123R on the modified prospective basis.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk.

        We are exposed to market risk from changes in interest rates, foreign currency exchange rates and commodity prices. We manage our exposure to these market risks through regular operating and financing activities and through the use of derivatives. When used, derivatives are employed as risk management tools and not for trading purposes.

Interest Rate Risk

        We had $549.1 million of variable rate debt (after hedging) outstanding as of March 31, 2005 at the then applicable exchange rate. Any borrowings under our revolving credit facility will also be at a variable rate. We are not required under the terms of any of our long-term debt facilities to hedge, or otherwise protect against interest rate fluctuation in our variable rate debt. In August 2004, we entered into two derivative contracts to hedge interest rate risk, which currently cover notional amounts of $652.6 million and €486.0 million. These derivative contracts partially convert U.S. dollar senior secured credit facilities to fixed rate obligations and fully convert euro senior secured credit facilities to fixed rate obligations, currently at weighted average interest rates of 5.67% and 6.37%, respectively. The maturity date of the U.S. dollars hedge is July 2007, and the maturity date of the euro hedge is July 2008. We may in the future consider adjusting the amounts covered by these derivative contracts to better suit our new capital structure. Each 0.125% increase or decrease in the assumed weighted average interest rate would change the annual pro forma interest expense by $0.7 million.

Foreign Currency Risk

        We conduct operations in many countries around the world. Our results of operations are subject to both currency transaction risk and currency translation risk. We operate a geographically diverse business, with 50% of our pro forma net sales in 2004 generated from customers in Europe, 34% in North America (predominately in the United States) and 16% from the rest of the world based upon

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customer ship to locations. Our diverse and extensive customer base is served by over 99 manufacturing facilities in 25 countries. Although we sell and manufacture our products in many countries, our sales and production costs are mainly denominated in U.S. dollars and euros. Our results of operations and financial condition are therefore impacted by the fluctuation of the euro against our reporting currency, the U.S. dollar. As a result of the Dynamit Nobel Acquisition, a significantly larger portion of our sales and production costs is now denominated in euros. This increases the impact of the fluctuation of the euro against the U.S. dollar.

        We incur currency transaction risk whenever we enter into either a purchase or sale transaction using a currency other than the local currency of the transacting entity. Gains and losses on currency transactions are included in operating income and do impact our operating margins. With respect to currency translation risk, our financial condition and results of operations are measured and recorded in the relevant domestic currency and then translated into U.S. dollars for inclusion in our consolidated financial statements. Gains and losses on currency translations are recorded in our financial statements as a component of "other comprehensive income (loss)" and do not impact our operating margins. Exchange rates between these currencies and U.S. dollars in recent years have fluctuated significantly and may do so in the future.

        Our financial results are subject to the effect of currency fluctuations on the translation of our euro-denominated debt. Our senior secured credit facilities currently include €484.3 million (or $629.4 million) of euro-denominated debt, based on the exchange rate on March 31, 2005. Gains and losses on the translation of debt denominated in a currency other than the functional currency of the borrower are included as a separate component of "other income (expenses)" in our statement of operations and "accumulated other comprehensive income" in our balance sheet

        Also, in connection with the offering of the 2014 notes, we entered into cross currency interest rate swaps with a five year term and a notional amount of €155.6 million that effectively convert the U.S. dollar fixed rate debt in respect of the 2014 dollar-denominated notes sold into euro fixed rate debt. We designated this contract as a hedge of the foreign currency exposure of our net investment in its euro-denominated operations

Commodity Price Risk

        We are subject to commodity price risk for certain of our raw materials. We have not materially hedged this commodity price exposure to date.

Item 4.    Controls and Procedures

        We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including its chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

        There was no change in our internal control over financial reporting that occurred during the quarter ended March 31, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

        Our management, with the participation of our chief executive officer and chief financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2005. Based upon our inability to timely file our year-end financial statements mainly in conjunction with our determination to incorporate into the Annual Report information obtained as a

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result of the registration process relating to the Form S-1 filed with the SEC by our ultimate parent company, Rockwood Holdings, Inc., our chief executive officer and chief financial officer concluded that the design and operation of our disclosure controls and procedures need to be enhanced to ensure their objectives are accomplished. Specifically, we have identified weaknesses in internal controls within the financial reporting process mainly due to our dependence on external resources for data accumulation and analyses related to income taxes and pensions. In addition, we have identified other areas of internal controls that may need improvement, such as internal controls related to the segregation of duties at certain smaller locations, systems access and user security profiles, operating policies and procedures and in each case particularly with respect to newly acquired businesses. As we are still in the evaluation process, we may identify additional conditions that may be categorized as significant deficiencies or material weaknesses in the future.            

        Section 404 of the Sarbanes-Oxley Act will require us to provide an assessment of the effectiveness of our internal control over financial reporting, and our independent registered public accountants—to audit our assessment, as part of our Form 10-K for the year ended December 31, 2006. We are in the process of performing the system and process documentation, evaluation and testing required for us to make this assessment and for our independent registered public accountants to provide their attestation report. We have not completed this process or its assessment, and this process will require significant amounts of management time and resources.

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PART II—OTHER INFORMATION

Item 1.    Legal Proceedings

        We are involved in various legal proceedings, including commercial product liability, intellectual property and environmental matters of a nature considered normal to our business. However, we do not believe that there is any individual litigation that is likely to have a material adverse effect on our business or financial condition.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds.

        None.

Item 3.    Defaults upon Senior Securities.

        None.

Item 4.    Submission of Matters to a Vote of Security Holders.

        None.

Item 5.    Other Information.

        None.

Item 6.    Exhibits.

Exhibit No.

  Description of Exhibit

31.1

 

Certification of Chief Executive Officer Pursuant to Rule 15d-14(a).

31.2

 

Certification of Chief Financial Officer Pursuant to Rule 15d-14(a).

32.1

 

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

 

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

    ROCKWOOD SPECIALTIES GROUP, INC.

 

 

By:

/s/  
SEIFI GHASEMI      
     
Seifi Ghasemi
Chairman of the Board and Chief Executive Officer
Date: May 16, 2005

 

 

ROCKWOOD SPECIALTIES GROUP, INC.

 

 

By:

/s/  
ROBERT J. ZATTA      
     
Robert J. Zatta
Senior Vice President and Chief Financial Officer
Date: May 16, 2005

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QuickLinks

TABLE OF CONTENTS FORM 10-Q
PART I—FINANCIAL INFORMATION ROCKWOOD SPECIALTIES GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in millions) (Unaudited)
ROCKWOOD SPECIALTIES GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in millions, except per share amounts) (Unaudited)
ROCKWOOD SPECIALTIES GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in millions) (Unaudited)
ROCKWOOD SPECIALTIES GROUP, INC. AND SUBSIDIARIES Notes To Condensed Consolidated Financial Statements (Unaudited)
ROCKWOOD SPECIALTIES GROUP, INC. AND SUBSIDIARIES CONSOLIDATING STATEMENT OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2005 (Dollars in millions)
ROCKWOOD SPECIALTIES GROUP INC. AND SUBSIDIARIES CONSOLIDATING STATEMENT OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2004 (Dollars in millions)
ROCKWOOD SPECIALTIES GROUP, INC. AND SUBSIDIARIES CONSOLIDATING BALANCE SHEET March 31, 2005 (Dollars in millions)
ROCKWOOD SPECIALTIES GROUP, INC. AND SUBSIDIARIES CONSOLIDATING BALANCE SHEET DECEMBER 31, 2004 (Dollars in millions)
ROCKWOOD SPECIALTIES GROUP, INC. AND SUBSIDIARIES CONSOLIDATING STATEMENT OF CASH FLOWS THREE MONTHS ENDED March 31, 2005 (Dollars in millions)
ROCKWOOD SPECIALTIES GROUP, INC. AND SUBSIDIARIES CONSOLIDATING STATEMENT OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 2004 (Dollars in millions)
PART II—OTHER INFORMATION
SIGNATURES