Rockwood Holdings 10-Q 2007
Washington, D.C. 20549
Commission file number 001-32609
Rockwood Holdings, Inc.
(Exact name of Registrant as specified in its charter)
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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
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 issuers classes of common stock, as of the latest practicable date.
As of November 2, 2007, there were 73,857,168 outstanding shares of common stock, par value $0.01 per share, of the Registrant.
TABLE OF CONTENTS
ROCKWOOD HOLDINGS, INC. AND SUBSIDIARIES
(Dollars in millions, except per share amounts;
shares in thousands)
See accompanying notes to condensed consolidated financial statements.
ROCKWOOD HOLDINGS, INC. AND SUBSIDIARIES
(Dollars in millions, except per share amounts;
shares in thousands)
See accompanying notes to condensed consolidated financial statements.
ROCKWOOD HOLDINGS, INC. AND SUBSIDIARIES
(Dollars in millions)
See accompanying notes to condensed consolidated financial statements.
ROCKWOOD HOLDINGS, INC. AND SUBSIDIARIES
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Business Description, Background Rockwood Holdings, 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.
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 focused on specialty compounds, iron-oxide pigments, timber-treatment chemicals, clay-based additives, pool and spa chemicals, and electronic chemicals in semiconductors and printed circuit boards. As discussed in Note 16, Subsequent Event, Rockwood Specialties Group, Inc., our indirect, wholly-owned subsidiary, entered into a definitive agreement on October 7, 2007 to sell its electronics business, excluding its French electronics business and its wafer reclaim business. The French electronics business is subject to a put option exercisable by the Company.
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. The businesses acquired are focused on highly specialized markets and consist of: titanium dioxide pigments; surface treatment and lithium chemicals; and advanced ceramics.
On January 9, 2007, the Company completed the sale of its Groupe Novasep subsidiary which represented one of its reportable segments. As a result, the condensed consolidated financial statements have been reclassified to reflect the former Groupe Novasep segment as a discontinued operation for all periods presented. See Note 3, Discontinued Operations, for further details.
Basis of PresentationThe 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 have been reclassified to conform to current-year classification.
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 (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 Companys 2006 Form 10-K. 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 results of operations for the interim periods are not necessarily indicative of the results of operations for the full year.
The Companys minority interest in continuing operations represents the total of the minority partys interest in certain investments (principally Viance, LLC) that are consolidated but less than 100% owned. See Note 4, Viance, LLC Joint Venture, for further details. In the condensed consolidated balance sheet, the minority interest balance as of December 31, 2006 relates to the former Groupe Novasep segment that was sold in January 2007.
Nature of Operations/Segment ReportingThe Company is a global developer, manufacturer and marketer of high value-added specialty chemicals and advanced materials. The Company currently operates in various business lines within its six reportable segments consisting of: (1) Specialty Chemicals, which includes lithium compounds and chemicals, metal surface treatment chemicals, and synthetic metal sulfides, (2) Performance Additives, which includes color pigments and services, timber treatment chemicals, clay-based additives, and water treatment chemicals, (3) Titanium Dioxide Pigments, which consists of titanium dioxide pigments, and zinc- and barium-based compounds, (4) Advanced Ceramics, which includes ceramic-on-ceramic ball head and liner components used in hip-joint prostheses systems, ceramic cutting tools and a range of other ceramic components, (5) Specialty Compounds, which consists of plastic compounds and (6) Electronics, which consists of electronic chemicals and photomasks, although the Company will no longer operate its Electronics segment upon the closing of the sale of this segment, which is expected to occur in the fourth quarter of 2007, subject to regulatory approval (see Note 16, Subsequent Event, for more details).
The basis for determining an enterprises operating segments is the manner in which financial information is used internally by the enterprises chief operating decision maker, the Companys Chief Executive Officer. See Note 5, Segment Information, for further segment reporting information.
Use of EstimatesThe 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, the measurement of the accrual for uncertain tax benefits, impairment of goodwill as well as property, plant and equipment and other intangible assets, the accrual of environmental and legal reserves 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.
Risks Associated with International Operations and Currency RiskThe Companys 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 Companys sales and expenses are denominated in currencies other than U.S. dollars. Changes in exchange rates may have a material effect on the Companys reported results of operations and financial position. In addition, a significant portion of the Companys indebtedness is denominated in euros.
Related Party TransactionsRockwood has engaged in transactions with certain related parties including KKR and DLJ Merchant Banking Partners III, L.P. (DLJMB) and affiliates of each. Information concerning certain transactions is included in the Companys 2006 Form 10-K in Item 13, Certain Relationships and Related Transactions, and Director Independence. There have been no significant changes to our related party transactions for the period ended September 30, 2007.
Revenue RecognitionThe Company recognizes 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, collectibility is reasonably assured, and pricing is fixed or determinable. Accruals are made for sales returns and other allowances based on the Companys experience. Revenue under service agreements, which was less than 1% of consolidated revenues in 2006, is realized when the service is performed.
Foreign Currency TranslationThe functional currency of each of the Companys 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 than the entitys functional currency) are included in determining net income for the period in which exchange rates change, except for gains or losses on euro-denominated debt that is designated as a net investment hedge of the Companys euro-denominated investments and gains or losses on certain intercompany loans that are of a long-term nature for which settlement is not planned or anticipated in the foreseeable future which are reported and accumulated in the same manner as translation adjustments. These loans are all related to intercompany debt arrangements. As of September 30, 2007, intercompany debt arrangements deemed to be of a long-term investment nature for which settlement is not planned or anticipated in the foreseeable future is predominantly related to 519.4 million ($741.0 million using the Friday, September 28, 2007 exchange rate of 1.00 = $1.4267) of intercompany loans.
DerivativesThe Company accounts for derivatives based on Statement of Financial Accounting Standards (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 while changes in the fair value of derivatives that are designated as hedging instruments are recognized as a component of comprehensive income. The Company uses derivative instruments to manage its exposure to market risks associated with fluctuations in interest rates and foreign currency exchange rates. See Comprehensive Income section of Note 1 for the impact of the Companys net investment hedges. The Company does not enter into derivative contracts for trading purposes nor does it use leveraged or complex instruments.
Pension, Postemployment and Postretirement CostsDefined benefit costs and liabilities have been determined in accordance with SFAS 87, Employers Accounting for Pensions and SFAS 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132 (R). Other postretirement benefit costs and liabilities have been determined in accordance with SFAS 106, Employers Accounting for Postretirement Benefits Other Than Pensions and SFAS 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132 (R). Postemployment benefit costs and liabilities have been determined in accordance with SFAS 112, Employers Accounting for Postemployment Benefits.
Income TaxesIncome taxes are determined in accordance with SFAS 109, Accounting for Income Taxes and Financial Accounting Standards Board (FASB) Interpretation (FIN) No. 48, Accounting for Uncertainty in Income TaxesAn Interpretation of FASB Statement No. 109. 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.
Comprehensive IncomeComprehensive income includes net income and the other comprehensive income components which include unrealized gains and losses from foreign currency translation and from certain intercompany foreign currency loan 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 are the net investment hedges 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.
Comprehensive income is summarized as follows:
In November 2004, 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 a cross-currency swap with a five-year term and a notional amount of 155.6 million that effectively converted 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 September 30, 2007. The Company does not expect any of the loss on the net investment hedge residing in comprehensive income at September 30, 2007 to be reclassified into earnings during the subsequent twelve months.
In addition, we designated the remaining portion of our euro-denominated debt that is recorded on our U.S. books as a net investment hedge of our euro-denominated investments as of October 1, 2005 (euro-denominated debt of 680.9 million or $971.4 million based on the Friday, September 28, 2007 exchange rate of 1.00 = $1.4267). As a result, effective October 1, 2005, any foreign currency gains and losses resulting from the euro-denominated debt discussed above are accounted for as a component of accumulated other comprehensive income. There was no ineffective portion of the net investment hedge as of September 30, 2007. The Company does not expect any of the loss on the net investment hedge residing in comprehensive income at September 30, 2007 to be reclassified into earnings during the subsequent twelve months.
Accounting for Environmental LiabilitiesIn 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. Rockwoods 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 may share costs with other parties. Rockwood does not include anticipated recoveries from insurance carriers or other third parties in its accruals for environmental liabilities.
Cash and Cash EquivalentsAll highly liquid instruments and money market funds with an original maturity of three months or less are considered to be cash equivalents. The carrying amount approximates fair value because of the short maturities of these instruments.
Stock-Based CompensationThe Company has in place the 2005 Amended and Restated Stock Purchase and Option Plan of Rockwood Holdings, Inc. and Subsidiaries (the Plan). Under the Plan, the Company may grant stock options, restricted stock and other stock-based awards to the Companys employees and directors and allow employees and directors to purchase shares of its common stock. There are 10,000,000 authorized shares available for grant under the Plan. Effective January 1, 2006, the Company adopted SFAS No. 123R, Share-Based Payment, and related interpretations and began expensing the grant-date fair value of stock options.
The Company adopted SFAS No. 123R using the modified prospective approach and therefore has not restated prior periods. In accordance with SFAS No. 123R, beginning in the first quarter of 2006, the Company recorded compensation cost for the unvested portion of awards issued after February 2005, which is the date it first filed its registration statement with the Securities and Exchange Commission (SEC). The compensation cost for stock options and restricted stock units recorded under the Plan caused income from continuing operations before taxes and minority interest to decrease by $1.5 million and less than $0.1 million for the three months ended September 30, 2007 and 2006, respectively, and to decrease by $2.2 million and $0.1 million for the nine months ended September 30, 2007 and 2006, respectively.
As discussed in Note 11, Stock-Based Compensation, the Company granted additional stock options and performance restricted stock units in the second quarter of 2007 to certain employees of Rockwood Corporate Headquarters and its business units. The performance restricted stock units contain a provision in which the units shall immediately vest and become converted into the right to receive a cash payment 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, 2007 have been recorded as mezzanine equity (outside of permanent equity) in the Condensed Consolidated Balance Sheets.
Recent Accounting PronouncementsThe Company adopted the following in the first quarter of 2007:
In June 2006, a final consensus was reached on Emerging Issues Task Force (EITF) Issue No. 06-3, How Taxes Collected From Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross Versus Net Presentation). The scope of this Issue includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is not limited to, sales, use, value added, and some excise taxes. This Issue affirms that the presentation of taxes in the income statement should be on either a gross (included in revenues and costs) or a net (excluded from revenues) basis and that this is an accounting policy decision that should be disclosed pursuant to APB Opinion No. 22. In addition, if such taxes are significant and reported on a gross basis, the amounts of those taxes should be disclosed in interim and annual financial statements. The Company adopted this EITF in the first quarter of 2007 and has adopted an accounting policy that requires taxes collected from customers and remitted to governmental authorities to be reported on a net basis (excluded from revenues). The adoption of this EITF did not have a material impact on the Companys financial statements.
In July 2006, FIN 48, Accounting for Uncertainty in Income TaxesAn Interpretation of FASB Statement No. 109, was issued. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with FASB Statement No. 109. FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. In May 2007, the FASB issued Staff Position (FSP) FIN 48-1, Definition of Settlement in FASB Interpretation No. 48. This FSP amends FIN 48 to provide guidance on how an enterprise should determine whether a tax provision is effectively settled for the purpose of recognizing previously unrecognized tax benefits. See Note 10, Income Taxes, for further details on the impact of adopting FIN 48.
In September 2006, the FASB issued FSP No. AUG AIR-1, Accounting for Planned Major Maintenance Activities. This FSP prohibits the use of the accrue-in-advance method of accounting for planned major maintenance activities in annual and interim financial reporting periods. It continues to permit the application of three alternative methods of accounting for planned maintenance activities: direct expense, built-in-overhaul and deferral methods. In addition, this FSP requires disclosure of the method of accounting for planned maintenance activities selected. The Company adopted this FSP in the first quarter of 2007 and has adopted an accounting policy that requires planned major maintenance activities to be accounted for under the direct-expense method. The adoption of this FSP did not have a material impact on the Companys financial statements.
The Company will adopt the following standards on January 1, 2008:
In September 2006, SFAS No. 157, Fair Value Measurements, was issued. This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This statement does not require any new fair value measurements. This statement is effective for the Company as of January 1, 2008. The Company is currently evaluating the impact this statement will have on its financial statements.
In February 2007, SFAS No. 159, The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an Amendment of FASB Statement No. 115 was issued. This standard permits an entity to choose to measure many financial instruments and certain other items at fair value and permits all entities to choose to measure eligible items at fair value at specified election dates. This statement is effective for the Company as of January 1, 2008. The Company is currently evaluating the impact this statement will have on its financial statements.
On August 31, 2007, the Company completed the acquisition of the global color pigments business of Elementis plc for a purchase price of approximately $140 million. This acquisition includes facilities in North America, Europe and China and will be integrated into the Color Pigments and Services business, which is part of the Performance Additives segment. The financial position of the business acquired is included in the condensed consolidated balance sheet as of September 30, 2007. The results of operations and cash flows of the business acquired for the periods after August 31, 2007 are included for the three and nine months ended September 30, 2007. The excess of the total purchase price over the estimated fair value of the net assets acquired at closing has been allocated to goodwill, estimated to be $8.7 million as of September 30, 2007. The allocation of the purchase price to the identifiable assets acquired is preliminary and is expected to be completed no later than the third quarter of 2008. The acquisitions completed in 2007, individually and in the aggregate, are not material to the Company's operations, financial position and cash flows.
3. DISCONTINUED OPERATIONS:
On January 9, 2007, the Company completed the sale of its Groupe Novasep subsidiary. The transaction was valued at approximately 425 million, which included the repayment of third party and intercompany indebtedness. As of December 31, 2006, the Company met the criteria for reporting the pending sale of its Groupe Novasep subsidiary as an asset held for sale and discontinued operations pursuant to SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Companys financial statements reflect the Groupe Novasep subsidiary as a discontinued operation for all periods presented.
Operating results of the discontinued operations are as follows:
The Company received net cash proceeds of $421.1 million in 2007 from the sale of Groupe Novasep. These proceeds were reported as net cash provided by investing activities of discontinued operations for the nine months ended September 30, 2007 in the Companys Condensed Consolidated Statements of Cash Flows. The net gain on the sale recorded in the first quarter of 2007 was $115.7 million (net of $2.0 million of German taxes).
In connection with the sale of Rohner AG, a subsidiary in the Companys former Groupe Novasep segment, the Company recorded a pre-tax loss of $12.1 million in the first quarter of 2006, representing consideration given less the remaining net liabilities of Rohner, which were transferred to the purchaser.
In connection with the downsizing of Rohner AG, the Company had recorded a minority interest charge of $13.9 million for the year ended December 31, 2005 related to a guarantee of up to 55.0 million made by one of the Companys wholly-owned subsidiaries that was the 78.6% owner of Groupe Novasep SAS of loans made by a Groupe Novasep SAS subsidiary to Rohner. At the time of the guarantee in May 2005, the Company concluded the likelihood of having to fulfill this guarantee obligation was remote based on the limited term of the guarantee, the fact that the Company indirectly controlled the subsidiary receiving the guarantee and the expectation of continuing operations at Rohner. However, in connection with the preparation of the Companys 2005 financial statements, the Company concluded that it was probable that it would have to fulfill this guarantee obligation. Accordingly, the Company recorded the minority interest charge, based on the 21.4% minority interest in Groupe Novasep SAS not held by the Company. In October 2006, this guarantee obligation was settled for 35.0 million. As a result, minority interest income of approximately $3.3 million ($5.5 million before taxes) was recorded in the third quarter of 2006 as the final negotiated guarantee settlement was less than the amount that was originally contractually agreed upon.
4. VIANCE, LLC JOINT VENTURE:
On January 2, 2007, Chemical Specialties, Inc. (CSI), a wholly-owned subsidiary of the Company within the Timber Treatment Chemicals business of the Performance Additives segment, and Rohm and Haas Company completed the formation of Viance, LLC, a joint venture company that provides an extensive range of advanced wood treatment technologies and services to the global wood treatment industry. Viance is jointly-owned by CSI and Rohm and Haas and was formed through the contribution by CSI and its related subsidiaries of their wood protection chemicals business and the contribution by Rohm and Haas of its wood biocides business and net cash of $73.0 million. The assets contributed by Rohm and Haas were recorded at fair values whereas the assets contributed by CSI were recorded at book value. In accordance with the consolidation principles of FIN 46 (R), Consolidation of Variable Interest EntitiesAn Interpretation of ARB No. 51, the Company has concluded that Rockwood is the primary beneficiary of the joint venture and as such has consolidated the joint venture.
At September 30, 2007, the joint venture had no third party debt outstanding, no consolidated assets of the Company were pledged as collateral for any joint venture obligations and the general creditors of the joint venture had no recourse to the general credit of the
Company. The minority interest in the consolidated subsidiary reflected in the Company's condensed consolidated balance sheets reflects Rohm and Haas' share of the net assets of the joint venture. All intercompany accounts, balances and transactions have been eliminated.
5. SEGMENT INFORMATION:
Rockwood currently operates in six 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 Companys key decision maker, the Companys Chief Executive Officer. The six 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 (including Viance, LLC), clay-based additives and water treatment chemicals business lines; (3) Titanium Dioxide Pigments; (4) Advanced Ceramics; (5) Specialty Compounds; and (6) Electronics, which consists of electronic chemicals and photomasks business lines, although the Company will no longer operate its Electronics segment upon the closing of the sale of this segment, which is expected to occur in the fourth quarter of 2007, subject to regulatory approval.
Items that cannot be readily attributed to individual segments have been classified as Corporate. The corporate operating loss primarily represents payroll, professional fees and other operating expenses of centralized functions such as treasury, legal, internal audit and consolidation accounting as well as the cost of operating our central offices (including some costs maintained based on legal or tax considerations). The primary components of corporate 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 corporate components within the reconciliation of income (loss) from continuing operations before taxes and minority interest (described more fully below) include systems/organization establishment expenses such as outside consulting costs for Sarbanes-Oxley initial documentation and fees relating to the implementation of a new consolidation software system, interest expense on external debt, interest income, foreign exchange losses or gains and refinancing expenses related to external debt. Corporate 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 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. These operations are substantially unrelated by nature to businesses currently within the Companys operating segments.
Summarized financial information for each of the reportable segments is provided in the following table:
(a) This amount does not include $13.9 million for the three months ended September 30, 2006 and $1.8 million and $49.6 million for the nine months ended September 30, 2007 and 2006, respectively, of Adjusted EBITDA from the former Groupe Novasep segment which was sold on January 9, 2007.
(b) This amount includes $44.6 million and $41.0 million of assets from the legacy businesses formerly belonging to Dynamit Nobel at September 30, 2007 and December 31, 2006, respectively.
(c) Amounts contained in the Eliminations column represent the individual subsidiaries retained interest in their cumulative net cash balance (deposits less withdrawals) included in the corporate centralized cash system and within the identifiable assets of the respective segment. These amounts are eliminated as the corporate centralized cash system is included in the Corporate segments identifiable assets.
(d) This amount does not include $490.6 million of identifiable assets at December 31, 2006 from the former Groupe Novasep
segment which was sold on January 9, 2007. Total identifiable assets including this amount were $5,219.8 million at December 31, 2006.
Geographic information regarding net sales based on sellers location and long-lived assets are described in Note 4, Segment Information, in the Companys 2006 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 our 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 managements interpretations thereof. The indentures governing the 2011 Notes (which was terminated when the 2011 Notes were redeemed in May 2007) 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 Companys business segments and reporting units. See Note 9, Long-term Debt, for information regarding the redemption of the 2011 Notes.
The Company uses Adjusted EBITDA on a segment basis to assess its operating performance. 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 and minority interest as the most comparable GAAP measure.
The following table presents a reconciliation of income (loss) from continuing operations before taxes and minority interest to Adjusted EBITDA on a segment GAAP basis:
(a) Includes losses of $13.4 million and $9.1 million for the three months ended September 30, 2007 and 2006, respectively, and losses of $15.4 million and gains of $6.2 million for the nine months ended September 30, 2007 and 2006, respectively, representing the movement in the mark-to-market valuation of the Companys interest rate and cross-currency hedging instruments.
(b) This amount does not include $13.9 million for the three months ended September 30, 2006 and $1.8 million and $49.6 million for the nine months ended September 30, 2007 and 2006, respectively, of Adjusted EBITDA from the former Groupe Novasep segment which was sold on January 9, 2007.
The summary of segment information above includes Adjusted EBITDA, a financial measure used by the Companys chief decision
maker and senior management to evaluate the operating performance of each segment.
Items excluded from 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 and the Companys initial public offering, resulted in a number of charges that have affected Rockwoods historical results. These charges, along with certain other items, are added to or subtracted from income (loss) from continuing operations before taxes and minority interest to derive Adjusted EBITDA, as defined below. These items include the following:
Restructuring and related charges: Restructuring charges of $2.9 million and $1.7 million were recorded in the three months ended September 30, 2007 and 2006, respectively, while $8.9 million and $3.9 million were recorded in the nine months ended September 30, 2007 and 2006, respectively, for miscellaneous restructuring activities, including headcount reductions and facility closures (see Note 14, Restructuring Liability, for further details).
Chromated copper arsenate (CCA) litigation defense costs: Costs of $0.1 million and $0.3 million were recorded in the three months ended September 30, 2007 and 2006, respectively, while $0.4 million and $0.8 million were recorded in the nine months ended September 30, 2007 and 2006, respectively, primarily for attorney fees related to the Companys Timber Treatment Chemicals business line of the Performance Additives segment.
Systems/organization establishment expenses: For the three and nine months ended September 30, 2007, expenses of $0.6 million and $1.8 million, respectively, were recorded. In the Performance Additives and Advanced Ceramics segments, expenses were incurred related to the integration of businesses acquired in 2007. In the Performance Additives segment, expenses were incurred primarily related to the integration of the global color pigments business of Elementis plc acquired in the third quarter of 2007. For the three and nine months ended September 30, 2006, expenses of $3.2 million and $7.3 million, respectively, were recorded related to professional fees incurred regarding systems and internal control documentation required in connection with the Companys compliance with the Sarbanes-Oxley Act of 2002 and fees relating to the implementation of a new consolidation software system.
Cancelled acquisition and disposal costs: Costs of $2.3 million and $0.4 million were recorded for the three months ended September 30, 2007 and 2006, respectively, and $3.1 million and $1.3 million were recorded for the nine months ended September 30, 2007 and 2006, respectively, in connection with non-consummated acquisitions and dispositions. Approximately $1.6 million of costs were incurred in 2007 related to the expected sale of the electronics businesses.
Loss on early extinguishment of debt: In the second quarter of 2007, the Company paid a redemption premium of $14.5 million and wrote off $4.9 million of deferred financing costs associated with the redemption of the 2011 Notes on May 15, 2007 (see Note 9, Long-Term Debt, for further details).
Refinancing expenses: In March 2007, the Company expensed $0.9 million related to the fourth amendment of the senior secured credit agreement to refinance all outstanding borrowings under the tranche F term loans with new tranche G term loans (see Note 9, Long-Term Debt, for further details).
Inventory write-up reversal: Under SFAS 141, Business Combinations, all inventories acquired in an acquisition must be revalued to fair value. In connection with acquisitions, the Company allocated 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 consequential reduction in gross profit, including currency effects, of $2.7 million and $2.8 million, respectively, primarily related to the acquisition of the Elementis plc businesses in the third quarter of 2007 for the three and nine months ended September 30, 2007; and $0.9 million primarily related to the acquisition of the Süd-Chemie businesses in 2005 in the nine months ended September 30, 2006 as the inventory was sold in the normal course of business.
Gain on sale of assets: The Company recorded gains related to the sale of assets of $0.1 million for the three months ended September 30, 2007 and $5.3 million and $0.4 million for the nine months ended September 30, 2007 and 2006, respectively. The gain recorded in the nine months ended September 30, 2007 primarily relates to the sale of the U.S. Wafer Reclaim business in the Electronics segment.
Foreign exchange gain (loss), net: During the periods presented, the Company recorded foreign exchange gains and (losses) related to our long-term debt and other non-operating transactions. These amounts primarily reflect the non-cash translation impact on our euro-denominated debt resulting from the strengthening or weakening of the euro against the U.S. dollar and/or the British pound. For the three months ended September 30, 2007 and 2006, gains of $7.6 million and $4.8 million, respectively, were recorded. For the nine months ended September 30, 2007 and 2006, gains of $11.3 million and $7.0 million, respectively, were recorded.
Other: In the three and nine months ended September 30, 2007, the Company recorded income of $1.0 million and $1.2 million, respectively, primarily related to the reversal of a pension reserve in the Specialty Chemicals segment due to the
expiration of the period for which certain claims could be made. In the nine months ended September 30, 2006, the Company recorded $1.6 million of income related to the correction of an immaterial error reported in the first quarter of 2006 related to a previously unrecorded asset in the Titanium Dioxide Pigments segment.
Inventories are comprised of the following:
The increase since December 31, 2006 is primarily related to inventory acquired from Elementis plc in August 2007 and the impact of currency changes.
Below are goodwill balances and activity by segment:
(a) See Note 10, Income Taxes, for details regarding the adoption of FIN 48.
(b) Consists primarily of foreign currency changes. In the Performance Additives segment, the amount includes goodwill of $1.4 million related to the Viance, LLC joint venture formed in January 2007.
8. OTHER INTANGIBLE ASSETS:
Other intangible assets, net consist of:
(a) The increase since December 31, 2006 is primarily related to other intangible assets acquired in the Viance joint venture completed in January 2007, other intangible assets acquired from Elementis plc in August 2007 and the impact of currency changes.
Amortization of other intangible assets was $16.6 million and $14.7 million for the three months ended September 30, 2007 and 2006, respectively and $48.0 million and $38.9 million for the nine months ended September 30, 2007 and 2006, respectively. Estimated aggregate amortization expense for each of the five succeeding years is as follows: