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EX-31.1 - EX-31.1 - Rockwood Holdings, Inc.a09-30984_1ex31d1.htm
EX-31.2 - EX-31.2 - Rockwood Holdings, Inc.a09-30984_1ex31d2.htm
EX-32.2 - EX-32.2 - Rockwood Holdings, Inc.a09-30984_1ex32d2.htm
EX-32.1 - EX-32.1 - Rockwood Holdings, Inc.a09-30984_1ex32d1.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

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

 

For the quarterly period ended September 30, 2009

 

Or

 

o

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

 

Commission file number 001-32609

 

Rockwood Holdings, Inc.

(Exact name of Registrant as specified in its charter)

 

Delaware

 

52-2277366

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

100 Overlook Center, Princeton, New Jersey 08540

(Address of principal executive offices) (Zip Code)

 

(609) 514-0300

(Registrant’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.   x Yes o No

 

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

 

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

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   o Yes x 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 November 2, 2009, there were 74,118,205 outstanding 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 and nine months ended September 30, 2009 and 2008

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008

 

 

 

Condensed Consolidated Statements of Equity for the nine months ended September 30, 2009 and 2008

 

 

 

Notes to Condensed Consolidated Financial Statements

 

Item 2

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Item 3

 

Quantitative and Qualitative Disclosures about Market Risk

 

Item 4

 

Controls and Procedures

 

 

 

 

 

 

 

PART II- OTHER INFORMATION

 

Item 1

 

Legal Proceedings

 

Item 1A

 

Risk Factors

 

Item 2

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

Item 3

 

Defaults Upon Senior Securities

 

Item 4

 

Submission of Matters to a Vote of Security Holders

 

Item 5

 

Other Information

 

Item 6

 

Exhibits

 

 

 

 

 

 

 

Signatures

 

 

2



 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited).

 

ROCKWOOD HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in millions, except per share amounts;

shares in thousands)

(Unaudited)

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Net sales

 

$

786.2

 

$

880.8

 

$

2,176.6

 

$

2,647.8

 

Cost of products sold

 

555.0

 

623.3

 

1,560.1

 

1,834.5

 

Gross profit

 

231.2

 

257.5

 

616.5

 

813.3

 

Selling, general and administrative expenses

 

154.8

 

170.3

 

450.9

 

512.7

 

Restructuring and other severance costs

 

4.2

 

3.4

 

16.0

 

5.7

 

Gain on sale of assets and other

 

(0.4

)

(2.7

)

(0.3

)

(1.8

)

Operating income

 

72.6

 

86.5

 

149.9

 

296.7

 

Other expenses, net:

 

 

 

 

 

 

 

 

 

Interest expense (a)

 

(54.0

)

(56.3

)

(132.6

)

(139.7

)

Interest income

 

0.4

 

0.6

 

1.2

 

4.2

 

Loss on early extinguishment of debt, net

 

(0.9

)

 

(26.6

)

 

Foreign exchange gain (loss), net

 

4.5

 

(26.5

)

15.4

 

(12.2

)

Other, net

 

 

0.2

 

0.4

 

0.7

 

Other expenses, net

 

(50.0

)

(82.0

)

(142.2

)

(147.0

)

Income from continuing operations before taxes

 

22.6

 

4.5

 

7.7

 

149.7

 

Income tax provision

 

13.0

 

10.3

 

6.9

 

50.6

 

Income (loss) from continuing operations

 

9.6

 

(5.8

)

0.8

 

99.1

 

(Loss) income from discontinued operations, net of tax

 

(0.1

)

1.5

 

3.3

 

2.9

 

Net income (loss)

 

9.5

 

(4.3

)

4.1

 

102.0

 

Net loss attributable to noncontrolling interest

 

0.6

 

1.0

 

6.2

 

0.4

 

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

 

$

10.1

 

$

(3.3

)

$

10.3

 

$

102.4

 

 

 

 

 

 

 

 

 

 

 

Amounts attributable to Rockwood Holdings, Inc.:

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

10.2

 

$

(4.8

)

$

7.0

 

$

99.5

 

(Loss) income from discontinued operations

 

(0.1

)

1.5

 

3.3

 

2.9

 

Net income (loss)

 

$

10.1

 

$

(3.3

)

$

10.3

 

$

102.4

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share attributable to Rockwood Holdings, Inc.:

 

 

 

 

 

 

 

 

 

Earnings (loss) from continuing operations

 

$

0.14

 

$

(0.06

)

$

0.09

 

$

1.35

 

Earnings from discontinued operations

 

 

0.02

 

0.05

 

0.03

 

Basic earnings (loss) per share

 

$

0.14

 

$

(0.04

)

$

0.14

 

$

1.38

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per share attributable to Rockwood Holdings, Inc.:

 

 

 

 

 

 

 

 

 

Earnings (loss) from continuing operations

 

$

0.14

 

$

(0.06

)

$

0.09

 

$

1.30

 

(Loss) earnings from discontinued operations

 

(0.01

)

0.02

 

0.05

 

0.03

 

Diluted earnings (loss) per share

 

$

0.13

 

$

(0.04

)

$

0.14

 

$

1.33

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of basic shares outstanding

 

74,104

 

74,039

 

74,084

 

73,957

 

Weighted average number of diluted shares outstanding

 

75,520

 

74,039

 

74,372

 

76,795

 

 


(a)

Interest expense includes:

 

 

 

 

 

 

 

 

 

 

Interest expense on debt

 

$

(51.1

)

$

(43.9

)

$

(127.7

)

$

(125.8

)

 

Mark-to-market (losses) gains on interest rate swaps

 

(1.3

)

(10.0

)

1.3

 

(6.8

)

 

Deferred financing costs

 

(1.6

)

(2.4

)

(6.2

)

(7.1

)

Total

 

$

(54.0

)

$

(56.3

)

$

(132.6

)

$

(139.7

)

 

See accompanying notes to condensed consolidated financial statements.

 

3



 

ROCKWOOD HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in millions, except per share amounts;

shares in thousands)

(Unaudited)

 

 

 

September 30,

 

December 31,

 

 

 

2009

 

2008

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

287.8

 

$

468.7

 

Accounts receivable, net

 

486.3

 

464.6

 

Inventories

 

535.9

 

641.0

 

Deferred income taxes

 

26.9

 

22.1

 

Prepaid expenses and other current assets

 

68.1

 

65.9

 

Total current assets

 

1,405.0

 

1,662.3

 

Property, plant and equipment, net

 

1,742.5

 

1,752.2

 

Goodwill

 

959.9

 

917.8

 

Other intangible assets, net

 

730.4

 

754.8

 

Deferred debt issuance costs, net of accumulated amortization of $9.4 and $39.2, respectively

 

28.2

 

39.1

 

Deferred income taxes

 

26.1

 

11.6

 

Other assets

 

38.5

 

39.5

 

Total assets

 

$

4,930.6

 

$

5,177.3

 

LIABILITIES

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

220.0

 

$

260.8

 

Income taxes payable

 

4.5

 

4.1

 

Accrued compensation

 

61.5

 

92.6

 

Restructuring liability

 

9.3

 

18.9

 

Accrued expenses and other current liabilities

 

218.8

 

198.5

 

Deferred income taxes

 

8.4

 

9.0

 

Long-term debt, current portion

 

88.1

 

90.9

 

Total current liabilities

 

610.6

 

674.8

 

Long-term debt

 

2,474.6

 

2,720.3

 

Pension and related liabilities

 

373.2

 

352.0

 

Deferred income taxes

 

95.9

 

97.6

 

Other liabilities

 

184.0

 

191.6

 

Total liabilities

 

3,738.3

 

4,036.3

 

Restricted stock units

 

1.3

 

2.1

 

EQUITY

 

 

 

 

 

Rockwood Holdings, Inc. stockholders’ equity:

 

 

 

 

 

Common stock ($0.01 par value, 400,000 shares authorized, 74,212 shares issued and 74,118 shares outstanding at September 30, 2009; 400,000 shares authorized, 74,155 shares issued and 74,061 shares outstanding at December 31, 2008)

 

0.7

 

0.7

 

Paid-in capital

 

1,167.2

 

1,163.5

 

Accumulated other comprehensive income

 

264.3

 

204.0

 

Accumulated deficit

 

(533.0

)

(543.3

)

Treasury stock, at cost

 

(1.4

)

(1.4

)

Total Rockwood Holdings, Inc. stockholders’ equity

 

897.8

 

823.5

 

Noncontrolling interest

 

293.2

 

315.4

 

Total equity

 

1,191.0

 

1,138.9

 

Total liabilities and equity

 

$

4,930.6

 

$

5,177.3

 

 

See accompanying notes to condensed consolidated financial statements.

 

4



 

ROCKWOOD HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in millions)

(Unaudited)

 

 

 

Nine months ended

 

 

 

September 30,

 

 

 

2009

 

2008

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

4.1

 

$

102.0

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Income from discontinued operations, net of tax

 

(3.3

)

(2.9

)

Depreciation and amortization

 

208.5

 

190.6

 

Deferred financing costs amortization

 

6.2

 

7.1

 

Loss on early extinguishment of debt, net (a)

 

26.6

 

 

Foreign exchange (gain) loss, net

 

(15.4

)

12.2

 

Fair value adjustment of derivatives

 

(1.3

)

6.8

 

Bad debt provision

 

0.7

 

0.9

 

Acquired in-process research and development

 

 

2.8

 

Stock-based compensation

 

3.1

 

6.3

 

Deferred income taxes

 

(11.5

)

14.2

 

Gain (loss) on sale of assets and other

 

0.1

 

(1.8

)

Changes in assets and liabilities, net of the effect of foreign currency translation and acquisitions:

 

 

 

 

 

Accounts receivable

 

(4.6

)

(60.5

)

Inventories

 

121.4

 

(45.0

)

Prepaid expenses and other assets

 

(0.3

)

6.4

 

Accounts payable

 

(32.2

)

(29.1

)

Income taxes payable

 

(0.8

)

3.4

 

Accrued expenses and other liabilities

 

(26.8

)

26.1

 

Net cash provided by operating activities of continuing operations

 

274.5

 

239.5

 

Net cash provided by operating activities of discontinued operations

 

 

11.9

 

Net cash provided by operating activities

 

274.5

 

251.4

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Acquisitions, including transaction fees and payments for prior acquisitions, net of cash acquired

 

(6.4

)

(181.7

)

Post closing purchase price consideration

 

 

29.1

 

Capital expenditures, excluding capital leases

 

(116.5

)

(157.1

)

Contractual advance to Titanium Dioxide Pigments noncontrolling shareholder

 

(16.0

)

 

Proceeds on sale of assets

 

7.9

 

4.3

 

Net cash used in investing activities of continuing operations

 

(131.0

)

(305.4

)

Net cash used in investing activities of discontinued operations

 

(0.5

)

(5.1

)

Net cash used in investing activities

 

(131.5

)

(310.5

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Issuance of common stock, net of fees

 

0.4

 

2.4

 

Prepayment of 2014 Notes

 

(146.8

)

 

Proceeds from Titanium Dioxide Pigments revolving credit facility

 

14.1

 

 

Prepayment of senior secured debt

 

(102.3

)

 

Repayment of senior secured debt

 

(49.2

)

(68.7

)

Payments on other long-term debt

 

(6.2

)

(30.7

)

Deferred financing costs

 

(13.8

)

(5.0

)

Fees related to early extinguishment of debt

 

(12.0

)

 

Loan from Viance noncontrolling shareholder

 

2.0

 

 

Titanium Dioxide Pigments venture financing

 

 

362.5

 

Payment of assumed debt to Titanium Dioxide Pigments noncontrolling shareholder

 

 

(141.4

)

Distribution to noncontrolling shareholder

 

 

(3.9

)

Net cash (used in) provided by financing activities of continuing operations

 

(313.8

)

115.2

 

Net cash used in financing activities of discontinued operations

 

 

 

Net cash (used in) provided by financing activities

 

(313.8

)

115.2

 

Effect of exchange rate changes on cash and cash equivalents

 

(10.1

)

4.1

 

Net (decrease) increase in cash and cash equivalents

 

(180.9

)

60.2

 

Cash and cash equivalents of continuing operations, beginning of period

 

468.7

 

350.1

 

Cash and cash equivalents of continuing operations, end of period

 

$

287.8

 

$

410.3

 

 


(a)          Includes the write-off of deferred financing costs of $20.9 and lender fees related to the early extinguishment of debt of $12.0, partially offset by a discount on the prepayment of the 2014 Notes of $6.3.

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Interest paid

 

$

118.1

 

$

104.0

 

Income taxes paid, net of refunds

 

18.9

 

32.9

 

Non-cash investing activities:

 

 

 

 

 

Titanium Dioxide Pigments venture formation, net

 

 

214.7

 

Acquisition of capital equipment

 

8.1

 

8.0

 

Fees related to early extinguishment of debt

 

1.6

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

5



 

ROCKWOOD HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Dollars in millions)

(Unaudited)

 

 

 

2009

 

2008

 

 

 

Rockwood

 

 

 

 

 

Rockwood

 

 

 

 

 

 

 

Holdings, Inc.

 

 

 

 

 

Holdings, Inc.

 

 

 

 

 

 

 

Stockholders’

 

Noncontrolling

 

Total

 

Stockholders’

 

Noncontrolling

 

Total

 

 

 

Equity

 

Interest

 

Equity

 

Equity

 

Interest

 

Equity

 

Balance at January 1

 

$

823.5

 

$

315.4

 

$

1,138.9

 

$

1,571.6

 

$

175.3

 

$

1,746.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

10.3

 

(6.2

)

4.1

 

102.4

 

(0.4

)

102.0

 

Other comprehensive income (loss), net of tax

 

60.3

 

(4.4

)

55.9

 

(65.4

)

 

(65.4

)

Comprehensive income (loss)

 

70.6

 

(10.6

)

60.0

 

37.0

 

(0.4

)

36.6

 

Acquisition of noncontrolling interest in subsidiaries

 

 

 

 

 

210.2

 

210.2

 

Change in estimate of fair value of assets contributed to the Titanium Dioxide Pigments venture

 

 

(16.5

)

(16.5

)

 

 

 

Distribution to noncontrolling shareholder

 

 

 

 

 

(3.9

)

(3.9

)

Foreign currency translation

 

 

4.9

 

4.9

 

 

(4.0

)

(4.0

)

Issuance of common stock

 

0.4

 

 

0.4

 

2.4

 

 

2.4

 

Deferred compensation, net of tax

 

3.3

 

 

3.3

 

2.9

 

 

2.9

 

Balance at September 30

 

$

897.8

 

$

293.2

 

$

1,191.0

 

$

1,613.9

 

$

377.2

 

$

1,991.1

 

 

See accompanying notes to condensed consolidated financial statements.

 

6



 

ROCKWOOD HOLDINGS, INC. AND SUBSIDIARIES

Notes To Condensed Consolidated Financial Statements (Unaudited)

 

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

 

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

 

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

 

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

 

Basis of Presentation—The accompanying condensed financial statements of Rockwood are presented on a consolidated basis. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain prior-period amounts related to reporting the sale of the pool and spa chemicals business in October 2008 as discontinued operations and the adoption of a recent standard relating to the presentation of noncontrolling interests in the consolidated financial statements, have been reclassified to conform to the current-year classification.

 

The interim financial statements included herein are unaudited. The results of operations for the interim periods are not necessarily indicative of the results of operations for the full year. The condensed consolidated financial statements are presented based upon accounting principles generally accepted in the United States of America (“U.S. GAAP”), except that certain information and footnote disclosures, normally included in financial statements prepared in accordance with U.S. 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 2008 Form 10-K, with certain sections retrospectively adjusted by a Current Report on Form 8-K filed on August 24, 2009, to reflect the adoption of a recent standard related to the presentation of noncontrolling interests in consolidated financial statements. In the opinion of management, this information contains all adjustments necessary, consisting of normal and recurring accruals, for a fair presentation of the results for the periods presented.

 

The Company’s noncontrolling interest represents the total of the noncontrolling party’s interest in certain investments (principally the Viance, LLC timber treatment joint venture and the Titanium Dioxide Pigments venture) that are consolidated but less than 100% owned.

 

Unless otherwise noted, all balance sheet related items which are denominated in euros are converted at the September 30, 2009 exchange rate of €1.00 = $1.4640.

 

Stock-Based Compensation— The Company has previously granted awards under the 2008 Amended and Restated Stock Purchase and Option Plan of Rockwood Holdings, Inc. and Subsidiaries (the “Plan”). Under the Plan, the Company granted stock options, restricted stock and other stock-based awards to the Company’s employees and directors and allowed employees and directors to purchase shares of its common stock. There were 10,000,000 authorized shares available for grant under the Plan. However, the Company will no longer issue equity awards under this Plan. In April 2009, the Company adopted the 2009 Stock Incentive Plan (the “New Plan”), which has 11,000,000 authorized shares.

 

The aggregate compensation cost for stock options, restricted stock units and Board of Director stock grants recorded under the Plan caused income from continuing operations before taxes to decrease by $1.6 million and $2.2 million for the three months ended September 30, 2009 and 2008, respectively and $3.1 million and $6.3 million for the nine months ended September 30, 2009 and 2008, respectively. The total tax benefit recognized related to stock options was $0.2 million and $0.3 million for the three months ended September 30, 2009 and 2008, respectively and $0.3 million and $0.7 million for the nine months ended September 30, 2009 and 2008, respectively.

 

In December 2008, the Company approved an award of 606,256 performance restricted stock units to management and key employees which will vest on December 31, 2011 as long as the employee continues to be employed by the Company on this date and upon the achievement of certain performance targets approved by the Compensation Committee. The number of shares of the Company’s common stock ultimately awarded upon vesting is determined based on the achievement of specified performance criteria over the period January 1, 2009 through December 31, 2009. However, in accordance with Financial Accounting Standards Board (“FASB”)

 

7



 

Accounting Standards Codification (“ASC”) 718, Compensation — Stock Compensation (formerly Statement of Financial Accounting Standards (“SFAS”) No. 123R, Share-Based Payment), the Company did not recognize any compensation cost in 2008 for this issuance because the performance targets that form the basis for vesting of these restricted stock units were not known as of December 31, 2008. These performance targets were established on February 20, 2009, when such performance targets were approved by the Compensation Committee, and as a result, the Company began recording compensation cost on a ratable basis over the vesting period. The grant date fair value of these restricted stock units was $7.59 per stock unit.

 

The Company granted additional stock options and restricted stock units to certain employees of Rockwood Corporate Headquarters and its business units. The restricted stock units contain a provision in which the units shall immediately vest and become converted into the right to receive a cash payment on the vesting date upon a change in control as defined in the equity agreement. As the provisions for redemption are outside the control of the Company, the fair value of these units as of September 30, 2009 and December 31, 2008 have been recorded as mezzanine equity (outside of permanent equity) in the Condensed Consolidated Balance Sheets.

 

Recent Accounting Standards—The following represents the impact of recently issued accounting standards:

 

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations, as codified in ASC 805, Business Combinations. This statement establishes principles and requirements for how the acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. This statement also establishes disclosure requirements to enable users of financial statements to evaluate the nature and financial effects of the business combination. This statement was adopted as of January 1, 2009 and is effective for acquisitions completed on or after January 1, 2009.

 

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51, as codified in ASC 810, Consolidation. This statement pertains to the accounting and reporting for minority interests. Minority Interests were recharacterized as noncontrolling interests and classified as a component of equity (but separate from parent’s equity). This statement also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This statement was adopted as of January 1, 2009 and primarily relates to the Company’s Viance, LLC joint venture and Titanium Dioxide Pigments venture.

 

In February 2008, the FASB issued FASB Staff Position (“FSP”) Financial Accounting Standard (“FAS”) FSP FAS 157-2, Effective Date of FASB Statement No. 157, as codified in ASC 820, Fair Value Measurements and Disclosures. FSP FAS 157-2 delays the effective date of a previous standard on fair value measurements for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company applied the provisions of this FSP on January 1, 2009, and this FSP did not have a material impact on its financial statements.

 

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities - an Amendment of FASB Statement 133, as codified in ASC 815, Derivatives and Hedging. This statement changes the disclosure requirements for derivative instruments and hedging activities, including enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. The Company adopted this statement on January 1, 2009. See Note 5, “Derivatives,” for the disclosure requirements of this new statement.

 

In April 2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of Intangible Assets, as codified in ASC 350, Intangibles — Goodwill and Other, and ASC 275, Risks and Uncertainties. This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets. The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset. This FSP is effective for recognized intangible assets acquired after January 1, 2009 and did not have a material impact on the Company’s financial statements.

 

In December 2008, the FASB issued FSP No. 132 (R) — 1, Employers’ Disclosures about Postretirement Benefit Plan Assets, as codified by ASC 715, Compensation — Retirement Benefits. This FSP amends FASB Statement No. 132 (revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits, to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. This includes disclosing objectives about how investment allocation decisions are made, the major categories of plan assets, the inputs and valuation techniques used to measure the fair value of plan assets, the effect of fair value measurements using significant unobservable inputs (Level 3) on changes in plan assets, and significant concentrations of risk within plan assets. The disclosures about plan assets required by this FSP are effective beginning with the Company’s 2009 Form 10-K.

 

In April 2009, the FASB issued FSP No. 141 (R) — 1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies, as codified by ASC 805, Business Combinations. This FSP amends and clarifies SFAS No. 141R to address application issues raised by preparers, auditors, and members of the legal profession on initial recognition and

 

8



 

measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. This FSP was adopted as of January 1, 2009 and is effective for acquisitions completed on or after January 1, 2009.

 

In April 2009, the FASB issued FSP No. 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Statements, as codified by ASC 825, Financial Instruments. This FSP amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require disclosures in summarized financial information at interim reporting periods. This FSP was effective for the Company beginning with its Form 10-Q for the period ended June 30, 2009 and relates to disclosures made about the fair value of its debt instruments and cash and cash equivalents.

 

In April 2009, the FASB issued FSP No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, as codified in ASC 820, Fair Value Measurements and Disclosures. This FSP provides additional guidance for estimating fair value in accordance with FASB Statement No. 157, Fair Value Measurements, when the volume and level of activity for the asset or liability have significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. This FSP was effective for the Company beginning with its Form 10-Q for the period ended June 30, 2009 and did not have a material impact on its financial statements.

 

In May 2009, the FASB issued SFAS No. 165, Subsequent Events, as codified by ASC 855, Subsequent Events. This statement establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. This statement applies to both interim and annual financial statements and was effective for the Company beginning with its Form 10-Q for the period ended June 30, 2009. The Company has performed an evaluation of subsequent events through November 5, 2009, which is the date these financial statements were filed with the Securities and Exchange Commission (“SEC”).

 

In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers and Servicing of Financial Assets. This statement amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and will require more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. It also eliminates the concept of a “qualifying special purpose entity,” changes the requirements for derecognizing financial assets and will require additional disclosures. This Statement is effective for financial asset transfers occurring after January 1, 2010 for the Company. The Company does not expect this statement to have a material impact on its financial statements.

 

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46 (R). This Statement amends FASB Interpretation 46 (R), Consolidation of Variable Interest Entities, and requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest entity or interests give it a controlling financial interest in a variable interest entity. It also will require additional disclosures about involvement with variable interest entities and any significant changes in risk exposure due to that involvement. This Statement is effective for the Company as of January 1, 2010. The Company is currently evaluating the impact this statement will have on its financial statements primarily relating to its Viance LLC joint venture and its Titanium Dioxide Pigments venture.

 

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162, as codified by ASC 105, Generally Accepted Accounting Principles. This Statement establishes the FASB Accounting Standards Codification (“Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied to nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretative releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP. The Codification does not change current GAAP. Instead, it introduces a new structure that reorganizes the thousands of U.S. GAAP pronouncements into roughly 90 accounting Topics. The Codification supersedes all accounting standards in existing FASB, Emerging Issues Task Force (“EITF”), American Institute of Certified Public Accountants (“AICPA”), and related standards. This Codification is effective for the Company’s financial statements beginning with its Form 10-Q for the period ended September 30, 2009.

 

In August 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-05, Measuring Liabilities at Fair Value. This update provides amendments to ASC 820, Fair Value Measurements and Disclosure, for the fair value measurement of liabilities and provides clarification in circumstances in which a quoted price in an active market for the identical liability is not available. This Update is effective for the Company in its fourth quarter beginning October 1, 2009. The adoption of this Update did not have a material impact on the consolidated financial statements.

 

In September 2009, the FASB issued ASU No. 2009-06, Implementation Guidance on Accounting for Uncertainty in Income Taxes and Disclosure Amendments for Nonpublic Entities. This update provides amendments to ASC 740, Income Taxes, and addressed the need for additional implementation guidance on accounting for uncertainty in income taxes. This Update is effective for the

 

9



 

Company’s financial statements beginning with its Form 10-Q for the period ended September 30, 2009. The adoption of this Update did not have a material impact on the consolidated financial statements.

 

In October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force. This Update provides amendments to ASC 605-25, Revenue Recognition - Multiple Element Arrangements, and addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services separately rather as a combined unit. In addition, the amendments in this Update significantly expand the disclosures related to a vendor’s multiple-deliverable arrangements. This Update is effective for the Company in its first quarter beginning January 1, 2011. The Company does not expect this Update to have a material impact on its financial statements.

 

2.  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 intercompany transactions that are of a long-term investment nature, pension-related adjustments that are recorded directly into a separate section of equity in the balance sheets and net investment and foreign exchange cash flow hedges. 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.

 

Comprehensive income (loss) is summarized as follows:

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

($ in millions)

 

2009

 

2008

 

2009

 

2008

 

Net income (loss)

 

$

9.5

 

$

(4.3

)

$

4.1

 

$

102.0

 

Pension related adjustments, net of tax

 

 

(1.3

)

(0.1

)

(0.9

)

Foreign currency translation

 

49.6

 

(190.9

)

57.0

 

(71.4

)

Intercompany foreign currency loans

 

31.6

 

(86.6

)

35.0

 

(25.1

)

Net investment hedges, net of tax

 

(36.3

)

125.8

 

(35.7

)

32.0

 

Foreign exchange contracts, net of tax

 

(0.2

)

 

(0.3

)

 

Comprehensive income (loss)

 

54.2

 

(157.3

)

60.0

 

36.6

 

Comprehensive loss attributable to noncontrolling interest

 

0.8

 

1.0

 

10.6

 

0.4

 

Comprehensive income (loss) attributable to Rockwood Holdings, Inc.

 

$

55.0

 

$

(156.3

)

$

70.6

 

$

37.0

 

 

3.  DISCONTINUED OPERATIONS:

 

On October 10, 2008, the Company completed the sale of its pool and spa chemicals business and received net proceeds of $122.0 million in cash. The net gain on the pool and spa chemicals business sale recorded in the fourth quarter of 2008 was $40.5 million (net of $25.7 million of taxes). In connection with ASC 360 — Property, Plant and Equipment (formerly SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets), the Company’s financial statements have been reclassified to reflect this business as a discontinued operation for all periods presented.

 

For the three months ended September 30, 2009, loss from discontinued operations, net of tax, was $0.1 million. For the nine months ended September 30, 2009, income from discontinued operations, net of tax, was $3.3 million and was primarily comprised of income of $2.3 million due to the favorable resolution of a claim against the Company’s former Group Novasep business and the Electronics business reserve reversal of $1.1 million. For the three and nine months ended September 30, 2008, income from discontinued operations, net of tax, of $1.5 million and $2.9 million, respectively, related to operating the pool and spa chemicals business.

 

4.  SEGMENT INFORMATION:

 

Rockwood operates in five reportable segments according to the nature and economic characteristics of its products and services as well as the manner in which the information is used internally by the Company’s key decision maker, who is the Company’s Chief Executive Officer. The five segments are: (1) Specialty Chemicals, which consists of the surface treatment and fine chemicals business lines; (2) Performance Additives, which consists of color pigments and services, timber treatment chemicals and clay-based additives; (3) Titanium Dioxide Pigments; (4) Advanced Ceramics; and (5) Specialty Compounds.

 

Items that cannot be readily attributed to individual segments have been classified as “Corporate and other.” Corporate and other operating loss primarily represents payroll, professional fees and other operating expenses of centralized functions such as treasury, tax, legal, internal audit and consolidation accounting as well as the cost of operating the Company’s central offices (including some costs maintained based on legal or tax considerations). The primary components of Corporate and other loss, in addition to operating loss, are interest expense on external debt (including the amortization of deferred financing costs), foreign exchange losses or gains, and mark-to-market gains or losses on derivatives. Major components within the reconciliation of income before taxes (described more fully below) include systems/organization establishment expenses, interest expense on external debt, foreign exchange losses or

 

10



 

gains, and refinancing expenses related to external debt. Corporate and other identifiable assets primarily represent deferred financing costs that have been capitalized in connection with corporate external debt financing, deferred income tax assets and cash balances maintained in accordance with centralized cash management techniques. The Corporate and other 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 and the wafer reclaim business. The wafer reclaim business works with semiconductor manufacturers to refurbish used test wafers and return them to the manufacturer for reuse in test and process monitor applications.

 

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

 

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

 

 

 

 

 

 

 

Titanium

 

 

 

 

 

 

 

 

 

 

 

Specialty

 

Performance

 

Dioxide

 

Advanced

 

Specialty

 

Corporate

 

 

 

($ in millions)

 

Chemicals

 

Additives

 

Pigments

 

Ceramics

 

Compounds

 

and other

 

Consolidated (a)

 

Three months ended September 30, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

261.5

 

$

182.2

 

$

177.5

 

$

108.6

 

$

54.8

 

$

1.6

 

$

786.2

 

Total Adjusted EBITDA

 

68.1

 

28.3

 

24.6

 

31.4

 

8.8

 

(10.1

)

151.1

 

Three months ended September 30, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

319.5

 

$

223.2

 

$

140.6

 

$

126.4

 

$

68.6

 

$

2.5

 

$

880.8

 

Total Adjusted EBITDA

 

78.8

 

28.6

 

23.9

 

38.1

 

7.9

 

(14.1

)

163.2

 

Nine months ended September 30, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

723.0

 

$

517.6

 

$

480.8

 

$

293.6

 

$

157.5

 

$

4.1

 

$

2,176.6

 

Total Adjusted EBITDA

 

175.9

 

71.2

 

65.6

 

75.3

 

25.5

 

(27.9

)

385.6

 

Nine months ended September 30, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

966.7

 

$

676.8

 

$

380.8

 

$

404.9

 

$

210.8

 

$

7.8

 

$

2,647.8

 

Total Adjusted EBITDA

 

241.4

 

99.5

 

60.2

 

121.5

 

26.7

 

(41.8

)

507.5

 

 

 

 

 

 

 

 

Titanium

 

 

 

 

 

 

 

 

 

 

 

 

 

Specialty

 

Performance

 

Dioxide

 

Advanced

 

Specialty

 

Corporate

 

 

 

 

 

 

 

Chemicals

 

Additives

 

Pigments

 

Ceramics

 

Compounds

 

and other (b)

 

Eliminations (c)

 

Consolidated

 

Identifiable assets as of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2009

 

$

2,087.4

 

$

785.8

 

$

1,007.3

 

$

859.5

 

$

139.2

 

$

351.2

 

$

(299.8

)

$

4,930.6

 

December 31, 2008

 

2,030.9

 

829.8

 

990.0

 

879.9

 

130.2

 

541.4

 

(224.9

)

5,177.3

 

 


(a)                This amount does not include $2.7 million and $5.1 million of Adjusted EBITDA for the three and nine months ended September 30, 2008, respectively, from the pool and spa chemicals business sold in October 2008.

 

(b)               The decrease is primarily related to lower cash balances as a result of debt payments in 2009.

 

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

 

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

 

On a segment basis, the Company defines Adjusted EBITDA as operating income excluding depreciation and amortization, certain non-cash gains and charges, certain other special gains and charges deemed by senior management to be 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, which reflects management’s interpretations thereof. The indenture governing the senior subordinated notes, due in 2014 (“2014 Notes”) and the facility agreement related to the Titanium Dioxide Pigments venture excludes 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. Because the Company views Adjusted EBITDA on a segment basis as an operating performance measure, the Company uses income (loss) from continuing operations before taxes as the most comparable GAAP measure.

 

11



 

The following table presents a reconciliation of income (loss) from continuing operations before taxes to Adjusted EBITDA on a segment GAAP basis:

 

 

 

 

 

 

 

Titanium

 

 

 

 

 

 

 

 

 

 

 

Specialty

 

Performance

 

Dioxide

 

Advanced

 

Specialty

 

Corporate

 

 

 

($ in millions)

 

Chemicals

 

Additives

 

Pigments

 

Ceramics

 

Compounds

 

and other

 

Consolidated

 

Three months ended September 30, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before taxes

 

$

33.4

 

$

2.0

 

$

(2.5

)

$

8.0

 

$

2.7

 

$

(21.0

)

$

22.6

 

Interest expense (a)

 

18.9

 

8.4

 

6.5

 

10.0

 

2.8

 

7.4

 

54.0

 

Interest income

 

(0.2

)

0.1

 

(0.1

)

(0.3

)

 

0.1

 

(0.4

)

Depreciation and amortization

 

18.3

 

15.9

 

19.5

 

13.4

 

3.0

 

1.4

 

71.5

 

Restructuring and other severance costs

 

2.3

 

1.0

 

0.1

 

0.7

 

0.1

 

 

4.2

 

Systems/organization establishment expenses

 

0.2

 

0.6

 

1.1

 

0.1

 

 

0.4

 

2.4

 

Loss on early extinguishment of debt, net

 

1.1

 

0.2

 

 

0.3

 

0.1

 

(0.8

)

0.9

 

Gain on sale of assets and other

 

(0.4

)

 

 

 

 

 

(0.4

)

Foreign exchange (gain) loss, net

 

(5.4

)

(0.1

)

 

(0.8

)

 

1.8

 

(4.5

)

Other

 

(0.1

)

0.2

 

 

 

0.1

 

0.6

 

0.8

 

Total Adjusted EBITDA

 

$

68.1

 

$

28.3

 

$

24.6

 

$

31.4

 

$

8.8

 

$

(10.1

)

$

151.1

 

Three months ended September 30, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before taxes

 

$

44.5

 

$

(5.2

)

$

(1.5

)

$

17.0

 

$

2.5

 

$

(52.8

)

$

4.5

 

Interest expense (a)

 

14.6

 

7.8

 

8.6

 

8.5

 

2.3

 

14.5

 

56.3

 

Interest income

 

1.0

 

1.0

 

(0.1

)

0.1

 

(0.1

)

(2.5

)

(0.6

)

Depreciation and amortization

 

17.8

 

17.2

 

14.3

 

11.8

 

2.6

 

1.9

 

65.6

 

Restructuring and other severance costs

 

0.6

 

1.6

 

 

0.4

 

0.4

 

0.4

 

3.4

 

Systems/organization establishment expenses

 

0.6

 

1.4

 

0.7

 

0.1

 

0.1

 

0.8

 

3.7

 

Inventory write-up charges

 

0.1

 

1.5

 

2.1

 

 

 

 

3.7

 

(Gain) loss on sale of assets and other

 

(0.5

)

 

 

0.1

 

 

(2.3

)

(2.7

)

Acquired in-process research and development

 

 

2.8

 

 

 

 

 

2.8

 

Foreign exchange loss (gain), net

 

0.3

 

0.3

 

(0.1

)

0.2

 

 

25.8

 

26.5

 

Other

 

(0.2

)

0.2

 

(0.1

)

(0.1

)

0.1

 

0.1

 

 

Total Adjusted EBITDA (b)

 

$

78.8

 

$

28.6

 

$

23.9

 

$

38.1

 

$

7.9

 

$

(14.1

)

$

163.2

 

Nine months ended September 30, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before taxes

 

$

59.7

 

$

(8.6

)

$

(14.2

)

$

(1.5

)

$

8.7

 

$

(36.4

)

$

7.7

 

Interest expense (a)

 

49.5

 

22.7

 

21.4

 

26.3

 

7.4

 

5.3

 

132.6

 

Interest income

 

(0.9

)

0.3

 

(0.4

)

(0.4

)

 

0.2

 

(1.2

)

Depreciation and amortization

 

54.9

 

46.4

 

56.2

 

38.1

 

8.3

 

4.6

 

208.5

 

Restructuring and other severance costs

 

4.4

 

5.6

 

0.1

 

5.5

 

0.2

 

0.2

 

16.0

 

Systems/organization establishment expenses

 

0.6

 

1.7

 

2.5

 

0.3

 

 

0.4

 

5.5

 

Loss on early extinguishment of debt, net

 

11.6

 

2.4

 

 

7.2

 

0.8

 

4.6

 

26.6

 

Gain on sale of assets and other

 

(0.3

)

 

 

 

 

 

(0.3

)

Foreign exchange gain, net

 

(6.0

)

 

 

(0.2

)

 

(9.2

)

(15.4

)

Other

 

2.4

 

0.7

 

 

 

0.1

 

2.4

 

5.6

 

Total Adjusted EBITDA

 

$

175.9

 

$

71.2

 

$

65.6

 

$

75.3

 

$

25.5

 

$

(27.9

)

$

385.6

 

Nine months ended September 30, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before taxes

 

$

148.7

 

$

13.1

 

$

(9.0

)

$

59.2

 

$

10.8

 

$

(73.1

)

$

149.7

 

Interest expense (a)

 

41.0

 

22.6

 

26.6

 

26.4

 

6.9

 

16.2

 

139.7

 

Interest income

 

(0.9

)

1.1

 

(0.1

)

(0.1

)

(0.4

)

(3.8

)

(4.2

)

Depreciation and amortization

 

51.0

 

50.9

 

39.3

 

35.6

 

8.3

 

5.5

 

190.6

 

Restructuring and other severance costs

 

0.8

 

3.2

 

 

0.9

 

0.4

 

0.4

 

5.7

 

Systems/organization establishment expenses

 

1.4

 

3.6

 

0.7

 

0.3

 

0.3

 

0.8

 

7.1

 

Inventory write-up charges

 

0.6

 

1.5

 

2.1

 

 

 

 

4.2

 

(Gain) loss on sale of assets and other

 

(0.5

)

 

0.8

 

0.2

 

 

(2.3

)

(1.8

)

Acquired in-process research and development

 

 

2.8

 

 

 

 

 

2.8

 

Foreign exchange loss (gain), net

 

 

0.1

 

(0.1

)

(0.9

)

 

13.1

 

12.2

 

Other

 

(0.7

)

0.6

 

(0.1

)

(0.1

)

0.4

 

1.4

 

1.5

 

Total Adjusted EBITDA (b)

 

$

241.4

 

$

99.5

 

$

60.2

 

$

121.5

 

$

26.7

 

$

(41.8

)

$

507.5

 

 


(a)                Includes losses of $1.3 million and $10.0 million for the three months ended September 30, 2009 and 2008, respectively, and gains of $1.3 million and losses of $6.8 million for the nine months ended September 30, 2009 and 2008, respectively, representing the movement in the mark-to-market valuation of the Company’s interest rate and cross-currency hedging instruments.

 

(b)               This amount does not include $2.7 million and $5.1 million of Adjusted EBITDA for the three and nine months ended September 30, 2008 from the pool and spa chemicals business sold in October 2008.

 

12



 

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

 

Items excluded from Adjusted EBITDA

 

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

 

·                  Restructuring and other severance costs: Restructuring and other severance costs of $4.2 million and $3.4 million were recorded in the three months ended September 30, 2009 and 2008, respectively, and $16.0 million and $5.7 million were recorded in the nine months ended September 30, 2009 and 2008, respectively, for miscellaneous restructuring activities, including headcount reductions and facility closures (see Note 15, “Restructuring and Other Severance Costs,” for further details).

 

·                  Systems/organization establishment expenses: For the three and nine months ended September 30, 2009, expenses of $2.4 million and $5.5 million, respectively, were recorded related to the integration of businesses acquired, primarily related to the completion of the Titanium Dioxide Pigments venture in September 2008 and the acquisition of the Elementis plc business in the Performance Additives segment in August 2007. For the three and nine months ended September 30, 2008, expenses of $3.7 million and $7.1 million, respectively, were recorded related to the integration of businesses acquired, primarily related to the acquisition of the Elementis plc business in the Performance Additives segment and the completion of the Titanium Dioxide Pigments venture.

 

·                  Inventory write-up charges: Under ASC 805, Business Combinations (formerly SFAS No. 141, Business Combinations), all inventories acquired in an acquisition must be revalued to “fair value.” In connection with acquisitions, the Company allocates a portion of the total purchase price to inventory to reflect manufacturing profit in inventory at the date of the acquisitions. This resulted in a reduction of gross profit of $3.7 million and $4.2 million for the three and nine months ended September 30, 2008, respectively, primarily related to the acquisition of Holliday Pigments in August 2008 in the Performance Additives segment and the completion of the Titanium Dioxide Pigments venture in September 2008.

 

·                  Loss on early extinguishment of debt, net: For the three months ended September 30, 2009, the Company recorded a loss on early extinguishment of debt, net of $0.9 million primarily related to lender fees to extend the maturity of its revolving credit facility. For the nine months ended September 30, 2009, the Company recorded a loss on early extinguishment of debt, net of $26.6 million related to the write-off of deferred financing costs of $20.9 million and lender fees related to the early extinguishment of debt of $12.0 million, partially offset by a discount of $6.3 million related to the repurchase of $153.2 million in aggregate principal amount of the 2014 Notes.

 

·                  (Gain) loss on sale of assets and other: For the three and nine months ended September 30, 2009, the Company recorded gains on the sale of assets of $0.4 million and $0.3 million, respectively. The Company recorded a gain on the sale of assets and other of $2.7 million for the three months ended September 30, 2008 primarily related to the sale of land that was acquired as part of the acquisition of Dynamit Nobel in 2004. For the nine months ended September 30, 2008, a gain of $1.8 million was recorded related to the sale of land discussed above, partially offset by the liquidation of a joint venture in the Titanium Dioxide Pigments segment.

 

·                  Acquired in-process research and development:  For the three and nine months ended September 30, 2008, the Company expensed $2.8 million of in-process research and development related to the acquisition of Holliday Pigments in August 2008 in the Performance Additives segment.

 

·                  Foreign exchange (gain) loss, net: For the three months ended September 30, 2009, the Company recorded foreign exchange gains of $4.5 million primarily due to the impact of the stronger euro as of September 30, 2009 versus June 30, 2009 in connection with non-operating Euro-denominated transactions. For the nine months ended September 30, 2009, the Company recorded foreign exchange gains of $15.4 million primarily due to the impact of the stronger pound sterling as of September 30, 2009 versus December 31, 2008 in connection with non-operating Euro-denominated transactions. For the three and nine months ended September 30, 2008, losses of $26.5 million and $12.2 million, respectively, were recorded due to the impact of the weaker euro related to non-operating Euro-denominated transactions and intercompany financing arrangements.

 

·                  Other: For the nine months ended September 30, 2009, the Company recorded expenses of $5.6 million primarily related to an increase in reserves covering legacy obligations assumed in connection with the KKR acquisition in 2000 and the acquisition of the Dynamit Nobel businesses in 2004.

 

13



 

5.  DERIVATIVES:

 

The Company is exposed to market risk from changes in interest rates and foreign currency exchange rates. The Company manages its 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

 

The Company had $1,902.2 million ($1,516.5 million of which is subject to a Libor or Euribor floor of 2.00%) and $2,007.9 million of variable rate debt outstanding as of September 30, 2009 and December 31, 2008, respectively. Any borrowings under the senior secured revolving credit facility and the Titanium Dioxide Pigments venture revolving credit facility are at a variable rate (with the senior secured revolving credit facility subject to a Libor or Euribor floor of 2.00%). As of September 30, 2009, the Company had €10.0 million ($14.6 million) outstanding under the Titanium Dioxide Pigments venture revolving credit facility. There were no outstanding borrowings under the senior secured revolving credit facility as of September 30, 2009. Historically, the Company has entered into interest rate swaps to manage its exposure to changes in interest rates related to variable rate debt. As of September 30, 2009, these contracts cover notional amounts of $610.0 million (at interest rates ranging from 4.864% to 5.038%) and €486.4 million (at interest rates ranging from 2.995% to 4.416%). These derivative contracts effectively convert a majority of the senior secured credit obligations and the obligations under the Titanium Dioxide Pigments term loan facility to fixed rate obligations. These swaps will mature between November 2009 and July 2012. The Company may allow all or a portion of these swaps to lapse, enter into replacement swaps or settle these swaps prior to expiration. The Company has elected not to apply hedge accounting for these interest rate swaps and has recorded the mark-to-market of these derivatives as a component of interest expense in the Condensed Consolidated Statements of Operations.

 

During 2003, the Company entered into a cross-currency interest rate swap with a notional amount of $20.3 million that effectively converted $20.3 million U.S. dollar borrowings into euro-based obligations at an effective interest rate of Euribor plus 4.00%. As of September 30, 2009, the notional amounts of this cross-currency interest rate hedge were $19.2 million and €16.9 million. This contract has a final maturity date of July 2010. The Company has elected not to apply hedge accounting for this cross-currency interest rate swap and has recorded the mark-to-market of this derivative as a component of interest expense in the Condensed Consolidated Statements of Operations.

 

Foreign Currency Risk

 

In December 2008, the Company entered into foreign currency forward contracts to manage its exposure to fluctuations in currency rates on certain forecasted sales denominated in a currency other than the functional currency of the legal entity. The instruments were designated as foreign exchange cash flow hedges and are effective at generating offsetting changes in the fair value or cash flows of the hedged item or transaction. As of September 30, 2009, the Company had notional amounts outstanding for these foreign currency forward contracts of $3.0 million. It is expected that cumulative losses of $0.2 million as of September 30, 2009 will be reclassified into earnings within the next three months. There was no gain or loss reclassified from accumulated other comprehensive income into earnings as a result of the discontinuance of cash flow hedges due to the probability of the original forecasted transaction not occurring. As of September 30, 2009, the maximum length of time over which the Company has hedged its exposure to movements in foreign exchange rates for forecasted transactions is three months.

 

In March 2009, the Company entered into foreign currency forward contracts to manage its exposure to fluctuations in currency rates on forecasted sales denominated in a currency other than the functional currency of the legal entity. As of September 30, 2009, the Company had notional amounts outstanding for these foreign currency forward contracts of $1.3 million. The Company has elected not to apply hedge accounting for these foreign currency forward contracts.

 

In connection with the offering of the 2014 Notes, the Company entered into a cross-currency interest rate swap with a five-year term expiring in November 2009 and a notional amount of €155.6 million that effectively converts the U.S. dollar fixed rate debt in respect of the 2014 dollar-denominated notes sold into euro fixed rate debt. The Company may either renew or settle this swap upon or prior to expiration. The Company 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 September 30, 2009. In addition, the Company has designated a portion of its Euro-denominated debt that is recorded on its U.S. books as a net investment hedge of its Euro-denominated investments (Euro debt of €437.1 million at September 30, 2009; $639.9 million). In the third quarter of 2009, the Company dedesignated a portion of its euro-denominated debt (€77.0 million). Any foreign currency gains and losses resulting from the designated portion of Euro-denominated debt discussed above is accounted for as a component of accumulated other comprehensive income for as long as the hedge remains effective. There was no ineffective portion of the net investment hedge as of September 30, 2009.

 

14



 

The following table provides the fair value and balance sheet location of the Company’s derivative instruments as of September 30, 2009 and December 31, 2008:

 

 

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

 

 

 

Fair Value as of

 

Fair Value as of

 

(in millions)

 

Balance Sheet Location

 

September 30, 2009

 

December 31, 2008

 

September 30, 2009

 

December 31, 2008

 

Derivatives designated as hedging instruments under ASC 815:

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

Prepaid expenses and other current assets

 

$

0.4

 

$

1.1

 

$

 

$

 

Cross-currency interest rate swaps - net investment hedge

 

Accrued expenses and other current liabilities

 

 

 

28.4

 

16.4

 

Total derivatives designated as hedging instruments under ASC 815

 

 

 

$

0.4

 

$

1.1

 

$

28.4

 

$

16.4

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments under ASC 815:

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

Accrued expenses and other current liabilities

 

$

 

$

 

$

8.3

 

$

6.5

 

 

 

Other liabilities

 

 

 

62.0

 

58.9

 

Cross-currency interest rate swaps

 

Accrued expenses and other current liabilities

 

 

 

5.7

 

0.1

 

 

 

Other liabilities

 

 

 

 

4.7

 

Total derivatives not designated as hedging instruments under ASC 815

 

 

 

$

 

$

 

$

76.0

 

$

70.2

 

Total derivatives

 

 

 

$

0.4

 

$

1.1

 

$

104.4

 

$

86.6

 

 

The following table provides the gains and losses reported in “Other Comprehensive Income” (“OCI”) within Equity for the three and nine months ended September 30, 2009 and 2008:

 

 

 

Amount of Gain or (Loss) Recognized in OCI on Derivatives
and Other Financial Instruments (Effective Portion)

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

(in millions)

 

2009

 

2008

 

2009

 

2008

 

Derivatives in ASC 815 Cash Flow Hedging Relationships:

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

 

$

 

$

(0.2

)

$

 

 

 

 

 

 

 

 

 

 

 

Derivatives and Other Financial Instruments in ASC 815 Net Investment Hedging Relationships:

 

 

 

 

 

 

 

 

 

Cross-currency interest rate swaps - net investment hedge

 

$

(9.5

)

$

22.7

 

$

(11.6

)

$

6.8

 

Euro-denominated debt

 

(28.2

)

110.5

 

(24.1

)

32.6

 

 

 

$

(37.7

)

$

133.2

 

$

(35.7

)

$

39.4

 

 

In the nine months ended September 30, 2009 and 2008, no gains or losses were reclassified from accumulated other comprehensive income into income.

 

The following table provides the gains and losses reported in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2009 and 2008:

 

 

 

Amount of Gain or (Loss) Recognized in Income on Derivatives

 

 

 

 

 

Three months ended

 

Nine months ended

 

Location of Gain or (Loss)

 

 

 

September 30,

 

September 30,

 

Recognized in Income on

 

(in millions)

 

2009

 

2008

 

2009

 

2008

 

Derivatives

 

Derivatives Not Designated as Hedging Instruments under ASC 815

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

$

(0.1

)

$

(12.3

)

$

1.9

 

$

(7.3

)

Interest expense

 

Cross-currency interest rate swaps

 

(1.2

)

2.3

 

(0.6

)

0.5

 

Interest expense

 

 

 

$

(1.3

)

$

(10.0

)

$

1.3

 

$

(6.8

)