Description
Filed with the SEC from Sep 13 to Sep 19:
Rockwood Holdings (ROC)
Atlantic Investment Management disclosed that it owns 3,917,724 shares (5.1%) after it bought 494,441 shares from July 19 through Sept. 13 at prices from $44.13 to $49.48 apiece. Atlantic also disclosed selling 4,039 shares on Sept. 4 at $46.98 each.
Atlantic said it will "continue its active discussions" with management, regarding steps that might be taken to maximize shareholder value, adding that it "may hold discussions with other parties who might engage in shareholder-value-enhanci ng activities for the benefit of all of [Rockwood's] shareholders."
BUSINESS OVERVIEW
General
Rockwood is a global developer, manufacturer and marketer of high value-added specialty chemicals and advanced materials used for industrial and commercial purposes. Rockwood is focused on surface treatment and lithium chemicals, advanced ceramics, titanium dioxide pigments, iron-oxide pigments, timber-treatment chemicals and clay-based additives. Rockwood was incorporated in Delaware in September 2000 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”). Affiliates of KKR control significantly less than a majority (approximately 10.3% as of December 31, 2011) of the voting power of the Company’s outstanding common stock.
Our products consist primarily of inorganic chemicals and solutions and engineered materials. They are often customized to meet the complex needs of our customers and to enhance the value of their end products by improving performance, providing essential product attributes, lowering costs and/or making them more environmentally friendly. We generally compete in niche markets in a wide range of end-use markets, including chemicals and plastics, metal treatment and general industry, automotive, life sciences (including pharmaceutical and medical markets), construction, specialty coatings, and electronics and telecommunications. No single end-use market accounted for more than 17% of our 2011 net sales.
We have a number of growth product lines, such as lithium in our Fine Chemicals business, aerospace products in our Surface Treatment business and ceramic medical device components in our Advanced Ceramics business, which are complemented by a diverse portfolio of businesses that historically have generated stable revenues. Our high margins, diverse customer and end-use market base, capital discipline and ongoing productivity improvements provide us with a platform to capitalize on market growth opportunities.
We operate globally, manufacturing our products in 81 facilities in 23 countries and selling our products and providing our services to more than 60,000 customers, including some of the world’s preeminent companies. We believe our products are generally critical to our customers’ products’ performance, but account for a small percentage of the total cost of their products. No single customer accounted for more than 2% of our 2011 net sales. For a geographic description of the origin of our net sales and location of our long-lived assets, see Item 8. Financial Statements and Supplementary Data - Note 3, “Segment Information,” in the accompanying consolidated financial statements.
On January 7, 2011, we completed the sale of our plastic compounding business, which manufactured specialty plastic compounds for the wire and cable business, as well as medical applications and other uses. This business comprised substantially all of our former Specialty Compounds segment. In the financial statements contained herein, the results of the plastic compounding business sold have been presented as discontinued operations for all periods presented. The rubber/thermoplastic compounding business was retained and is included in the “Corporate and other” category for segment reporting purposes. See Item 8. Financial Statements and Supplementary Data - Note 2, “Discontinued Operations,” for further details.
We operate our business through the following four business segments: (1) Specialty Chemicals; (2) Performance Additives; (3) Titanium Dioxide Pigments and (4) Advanced Ceramics. The following table sets forth net sales of each segment, and the percentage of our net sales for the year ended December 31, 2011, as well as our principal products and our principal end-use markets. For financial information about each segment, see Item 8. Financial Statements and Supplementary Data - Note 3, “Segment Information.”
Operating Segments
The following describes each of our operating segments, as well as the principal products or principal divisions within each segment.
Specialty Chemicals (37 % of 2011 net sales )
Our Specialty Chemicals segment operates under the Chemetall brand name and develops and manufactures metal surface treatment products and services, lithium chemicals and fine chemicals for a wide range of industries and end markets. This segment is comprised of two business lines: (1) Surface Treatment, which supplies surface treatment products and solutions for metal processing industries; and (2) Fine Chemicals, which supplies lithium products across the entire value chain from raw materials to specialty lithium compounds and advanced metal-based specialty chemicals to niche markets. Our Specialty Chemicals segment generated net sales of $1,338.3 million, $1,163.2 million and $996.6 million for the years ended December 31, 2011, 2010 and 2009, respectively. See Item 8. Financial Statements and Supplementary Data - Note 3, “Segment Information,” for additional financial information regarding our Specialty Chemicals segment.
Surface Treatment
We believe that our Surface Treatment business line is a leading global supplier of surface treatment products and solutions. Surface Treatment’s products are used for a variety of applications and serve the automotive, aerospace and general industrial markets, including steel and metal-working industries. This business line supplies more than 5,000 different products, many of which are based on proprietary formulations and extensive application know-how, to over 50,000 customers and operates in different locations in over 20 countries for production, warehousing or research and development. Surface Treatment operates in the following core end-markets: Automotive Technologies and Components, Cold Forming and Coil, General Industry and Aerospace Technologies.
We develop and supply products and solutions for the chemical pre-treatment of metals and other substrates, some of which are customized for individual customers and applications. Our products and solutions are critical to many areas of the metal processing industry because they protect metals from corrosion, facilitate forming and machining, allow parts to be optimally prepared for the painting process where paint adhesion is critical and ensure good coating adhesion. Other products are used in the cleaning and maintenance of aircraft. As an integrated part of the business, we also offer a full range of customer services, including process control and analysis of chemical baths at clients’ facilities.
Surface Treatment competes in markets characterized by significant barriers to entry, proprietary manufacturing technologies and know-how, demanding product-handling requirements, rigorous product quality and performance standards and specifications and longstanding service-intensive customer relationships. In order to remain competitive, we are focused on developing new products, improving process technologies, expanding our customer base, and broadening our technology capabilities in existing and new markets through internal research and development and bolt-on acquisitions. We have recently expanded our production in India and are building a new plant in Michigan in the United States which is expected to be completed in late 2012. These investments will help us meet the increasing demand for our product portfolio and consolidate our plants in the United States. We also are involved with a number of research and development projects with industrial partners and scientific institutes on a regular basis that help us fulfill our needs for more cost efficient and environmentally compatible technologies. As a result, new products and improved technologies were launched in recent years and more are expected in the future.
The core end-markets that Surface Treatment operates in are as follows:
Automotive Technologies and Components. We provide surface treatment products and solutions for automotive OEMs, including an entire range of products and services for use in the “paint shop” step of car-body and automotive component manufacture. The products and services we provide typically represent a low percentage of total car body production costs, but have high value in terms of corrosion protection and surface quality. Major applications include car-body treatment (zinc-phosphating), paint coagulation and cleaning and pre-treatment of automotive components such as aluminum wheels. Our services typically include intensive process control and chemical management in the customer’s production processes. We are in the process of implementing zinc-phosphate replacements globally, and believe that this represents an attractive growth area in this market. We participate with our joint ventures in China and India for the growth of this segment in the emerging markets.
Cold Forming and Coil. We provide products and services used to facilitate the cold forming of tubes, wire drawing and cold extrusion of metal. We provide products and services used in forming, cleaning and the pre-treating of metal sheets used in the production of steel and aluminum coil.
General Industry. General industry includes the largest number of customers among the Surface Treatment businesses. We offer a range of products and services to a broad range of industrial end-markets that have metal surface treatment applications, including cleaning, activation, conversion coating and final rinsing. Our products include cleaners, iron phosphates, coolants, paint strippers and flocculants. We have also expanded our product range in North America and China, with products in the field of metalworking fluids. Over the last few years, we have introduced a new generation of iron-phosphating products in the U.S. market, which we expect will provide growth in the next few years, and began offering silane or oxsilan-based systems. The markets for General Industry include household appliances manufacturing, can producers, heating, ventilation, aluminum finishing and other diverse end-markets. In addition, we produce specialty products, which are similar to metal surface treatment products, but are used on glass substrates for glass manufacturers, including specialty cleaners, polishing products, cutting oils and cooling lubricants.
Aerospace Technologies. We provide products and services for Aerospace OEMs, airlines and maintenance companies. Aerospace Technologies focuses on four major application areas: cleaning; corrosion protection; maintenance chemicals; and sealants. Cleaning products are used for the interior and exterior cleaning of airplanes and range from daily cleaning to complete aircraft overhaul. Corrosion protection products include waxes used to protect airframes. Maintenance chemicals for aircraft engines and turbines include high performance cleaners and products for non-destructive testing of engines, and aircraft sealants provide high technology sealing solutions for airplanes and are expected to contribute to growth in the next few years. In the last few years, we introduced further variances of low-density sealants in the market place.
Competition
We believe we are a leader in the global metal surface treatment market. Our competitors include Henkel AG & Co. KGaA, Nihon Parkerizing Co., Ltd., PPG Industries, Inc. and Nippon Paint Co., Ltd. Competition in this market is based primarily on customer service, product quality and technological capabilities.
Customers
Surface Treatment serves a large customer base that is dependent on the industry served and its specific customer needs. Surface Treatment’s largest customers include Daimler AG, ArcelorMittal, Volkswagen AG, European Aeronautic Defence and Space Company (EADS) N.V and Ford. The composition of the customer base varies widely among product groups and industries served. The Automotive Technologies and Components business division serves approximately 20 customers, primarily global OEMs, and approximately 500 small to large customers in the components markets; the Cold Forming and Coil business division serves approximately 800 mid-size to large customers; the General Industry business division serves approximately 45,000 small to large customers in a broad range of industries worldwide; and the Aerospace Technologies business division serves approximately 4,000 small to large customers worldwide.
Fine Chemicals
Our Fine Chemicals business line consists of our lithium, metal sulfides and special metals product lines. We believe that our Fine Chemicals business line is the leading global producer of lithium products, specialty lithium compounds and chemicals and advanced metal-based specialty chemicals.
Fine Chemicals develops and manufactures a broad range of basic lithium compounds, including lithium carbonate, lithium hydroxide, lithium chloride, and value added lithium specialties and reagents, including butyllithium and lithium aluminum hydride. Lithium is a key component in products and processes used in a variety of applications and industries, which range from lithium batteries, high performance greases, thermoplastic elastomers for car tires, rubber soles and plastic bottles to intermediates in the pharmaceutical industry. In our Fine Chemicals business, we operate our lithium business along the following five business divisions reflecting its core end-markets: (1) Lithium Salts; (2) Special Salts; (3) Butyllithium/Lithium Metal; (4) Battery Products and (5) Lithium Specialties.
In addition to developing and supplying lithium compounds, we provide technical service, including the handling and use of reactive lithium products. We also offer our customers recycling services for lithium containing by-products resulting from synthesis with organolithium products, lithium metal and other reagents. We plan to continue to focus on the development of new products and applications. Currently, we are in the process of developing lithium compounds for several near- to medium-term, new and potentially high growth products for various applications, such as pharmaceuticals and batteries for electric vehicles.
In August 2009, the U.S. Department of Energy awarded $28.4 million in Recovery and Reinvestment Act funds, subject to certain terms and conditions, to our Fine Chemicals business. We are using the funds to expand and upgrade the production of lithium compounds used in lithium-ion batteries for hybrid and electric vehicles at our Silver Peak, Nevada and Kings Mountain, North Carolina facilities. In addition to the funds from this grant, we expect to invest $39.6 million in the project by April 2013. In addition, in September 2009, the German Federal Ministry for the Environment, Nature Conservation and Nuclear Safety awarded €5.7 million to our Fine Chemicals business to set up a pilot plant for the recycling of lithium-ion batteries. Including the funds from this grant, the total investment was €15.5 million.
In February 2012, we announced that we plan to invest $140 million in a new lithium carbonate production plant in Chile. This new investment, along with the expansion in the United States in North Carolina, is expected to increase total annual production capacity to 50,000 metric tons of lithium carbonate by the end of 2013.
Fine Chemicals also develops and manufactures advanced metal-based specialty chemicals along two business divisions based on its principal product groups: (1) Metal Sulfides, which develops and manufactures natural and synthetic metal sulfides used in brake pads, clutch facings and cutting and grinding wheels and (2) Special Metals, which develops and manufactures cesium products for the chemical and pharmaceutical industries and zirconium, barium and titanium products for various pyrotechnical applications, including airbag igniters. In order to further strengthen our competitive position in the metal-based specialty chemicals market, we are focused on the production of new variations of synthetic metal sulfides and new cesium products in the chemicals industry, the pharmaceuticals industry, the defense industry and for use in catalytic applications. We also continuously monitor our customers’ industries for potential new applications for our products. In addition, we expect to expand our business by penetrating growth areas such as India and China.
We expect that demand for synthetic metal sulfides will increase, particularly in Europe, as a result of the continuing substitution for asbestos-based friction linings, the transition from natural sulfides to synthetic sulfides spurred in part by environmental concerns and the transition from drum to disk brakes in Asia and the Americas. We believe further opportunities for growth exist from the use of the newly developed metal sulfides as solid lubricants or as additives for plastics.
Principal Business Divisions
Lithium
Lithium Salts. We develop and manufacture basic lithium compounds, which serve a wide range of industries and applications, and potash. Our products include: (1) lithium carbonate, which is used as a fluxing agent for enamels, glass and ceramic production to lower process temperature in aluminum electrolysis, and as a cement additive for construction applications; (2) lithium hydroxide, which is principally used in high performance greases for automotive and industrial applications; (3) lithium nitrate, which is principally used in the rubber industry; (4) lithium chloride, which is principally used in gas and air treatment; and (5) potash, which we produce as a by-product at our salar in Chile.
Special Salts. To focus more on the specialties within the salts business, we develop and manufacture products including: (1) lithium phosphate which is used as a catalyst for chemical reactions; (2) lithium bromide, which is traditionally used for air conditioning applications and (3) lithium carbonate pharmaceutical grade, which is used in pharmaceutical applications in the United States and Europe.
Butyllithium/Lithium Metal. Butyllithium is used as a polymerization initiator for synthetic rubber and thermoplastic elastomers and as a reagent for the synthesis of active pharmaceutical ingredients and agrochemicals. Lithium metal is used in organic synthesis processes, primarily in the area of steroid chemistry and vitamins. Generally, these products require a high degree of handling, transport and application know-how and customer service due to their high reactivity. We benefit from being a major supplier with butyllithium manufacturing and handling facilities in the United States, Germany, India and Taiwan.
Battery Products. We develop and manufacture lithium products for electronic applications, mainly for the primary (disposable) and secondary (rechargeable) battery industries. Our major product is battery grade lithium carbonate, which is the main component used in the production of thin, lightweight lithium-ion batteries. Lithium-ion-based batteries are used extensively in consumer electronics, such as mobile phones, camcorders, laptops and power tools. Our other products are battery grade lithium hydroxide, which has become more important for the development of high-performance lithium-ion batteries, and battery grade lithium metal, which is used as anode material for primary batteries. We are currently introducing a new generation of conductive lithium salts to the battery market, which we believe has the potential to drive significant growth in the future. We also expect increased demand for lithium products as a result of increased demand for longer-life lithium-based batteries in electric and hybrid electric automobiles.
Lithium Specialties. We develop and manufacture lithium compounds and other products for life science applications, such as special reagents for the synthesis of drug intermediates as well as for the flavor and fragrances industry. The principal products in this business division are lithium aluminum hydride and lithium amides, for which we believe we hold leading market positions. We also produce various other compounds which include lithium metal, grignard reagents and alkoxides. Our research and development team often works closely with research and development departments of pharmaceutical companies, especially in the European market, in order to develop products and solutions tailored for their needs. In addition, broad variations of our lithium specialties are designed to produce liquid crystals for flat screens.
Metal-based Specialty Chemicals
Metal Sulfides. This business division has two major product lines: friction stabilizers and abrasive additives. Friction stabilizers enhance the power and performance of brake pads and clutch facings and primarily serve the automotive supplier industry while abrasive additives are additive compounds. The demand for metal sulfides is driven primarily by the demand in the automotive supplier industry.
Special Metals . We develop and manufacture a unique range of products based on special metal compounds derived from cesium, zirconium, titanium, barium and rubidium. These products are used in highly specialized, technology-driven end-applications such as X-ray diagnostic systems and airbags, and serve various end-markets, such as chemical, pharmaceutical, metallurgical, automotive, electronics and pyrotechnical industries.
Competition
Lithium . We believe the global lithium market consists of three major producers and a number of other small producers mainly from China. We believe that we are the global market leader in the lithium compounds market. While we offer a diverse range of products from raw materials to specialty lithium compounds, FMC Corporation offers mainly specialty lithium compounds, and Sociedad Quimica y Minera de Chile S.A. (“SQM”) offers a more limited product line focused on basic lithium compounds. Competition in this market is based on product quality, reliability of products and customer service.
Metal-based Specialty Chemicals . We believe that in the metal-based specialty chemicals business, Fine Chemicals holds a leading market position in its niche markets. We have a leading position in friction materials and are the only supplier offering a full product range of friction stabilizers and abrasive additives based on metal sulfides. Key competitors include: Dow Corning Corporation, Catalise Industria e Comercio de Metals Ltda and Prince Minerals, Inc. in the Metal Sulfides division and Cabot Corporation and Sigma Aldrich Corporation in the Special Metals division. Competition in the metal-based specialty chemicals markets in which Fine Chemicals competes is based on product quality and product diversity.
Customers
Fine Chemicals serves approximately 1,000 customers worldwide in its lithium business and 700 customers worldwide in its metal-based specialty chemicals products business. Fine Chemicals’ customers of lithium products include Bayer CropScience (a division of Bayer AG), Kraton Performance Polymers Inc., Energizer Holdings, Inc. and Royal DSM N.V.
Performance Additives (21% of 2011 net sales)
Our Performance Additives segment consists of business lines which develop and manufacture a range of specialty chemicals used in industrial and consumer products and processes to enhance performance or create unique characteristics. This segment manufactures and markets products that are based on a focused research and development effort and a strong technology base. Our Performance Additives segment generated net sales of $784.4 million, $726.7 million and $671.5 million for the years ended December 31, 2011, 2010 and 2009, respectively. See Item 8. Financial Statements and Supplementary Data - Note 3, “Segment Information,” for additional financial information regarding our Performance Additives segment.
Color Pigments and Services
Our Color Pigments and Services business line is a global producer of synthetic iron-oxide and other inorganic pigments in a wide range of yellow, red, orange, ultramarine blue, black, manganese violet or blended shades, and serves the construction, paints and coatings, plastics, and specialty application markets with powder, granular and liquid grades. Color Pigments and Services focuses on developing and manufacturing high value-added inorganic pigments. The business also offers a number of unique pigment dispensing systems. Our Color Pigments and Services business line has been driven by product innovation, our brand names and our customer and technical service, including customer-specific color blending.
In December 2011, we announced that we will build an advanced technology production facility in Augusta, Georgia for the synthesis of iron-oxide pigments. This investment will be approximately $115 million and is expected to supply the highest quality color pigments to North American customers, to strengthen customer service and to reduce lead time and improve product development potential. This plant is expected to commence operations in the first half of 2013. Following the completion of this plant, we expect to close our St. Louis, Missouri manufacturing facility and part of our Beltsville, Maryland facility.
Principal Products
Construction Color Pigments and Services. We develop and manufacture principally iron-oxide pigments for manufacturers of construction products for use in the coloring of concrete products, including paving stones, bricks, concrete blocks, roofing tiles, stucco and mortar. Color Pigments and Services’ major U.S. brand is Davis Colors and its other key brands include Granufin/Granumat, Hydrotint, Mix-Ready and Chameleon . Granufin is a unique, dry, microgranulated pigment that combines the flow characteristics of a liquid with the storage and handling advantages of a powder. The Granumat dispensing system offers a variety of configurations and features designed to accommodate the varying requirements and budgets of concrete product manufacturers. Granufin pigments and the Granumat system improve product handling and color consistency for our customers. Our Chameleon system, which works in combination with our liquid pigments, automatically weighs, blends and conveys colors into a ready-mix truck using a standard personal computer and custom-developed Windows-based software.
CEO BACKGROUND
Nance K. Dicciani has been a director of Rockwood since June 2008 and lead independent director since October 2009. From 2001 to her retirement in April 2008, Dr. Dicciani was the President and Chief Executive of Honeywell International Inc.'s $4.9 billion revenue specialty materials business. Prior to joining Honeywell in 2001, she was with Rohm and Haas Company, serving as Senior Vice President and Business Group Executive of chemical specialties and Director, European Region. In 2006, President George W. Bush appointed Dr. Dicciani to the President's Council of Advisors on Science and Technology. Dr. Dicciani also serves on the boards of directors of Praxair Inc. and Halliburton Co. and the board of Trustees of Villanova University. Dr. Dicciani is an Operating Partner of Advent International Corp. Dr. Dicciani earned degrees in chemical engineering, including a B.S. from Villanova University, an M.S. from the University of Virginia and a Ph.D. from the University of Pennsylvania. She also earned a M.B.A. from the Wharton School of the University of Pennsylvania.
J. Kent Masters has been a director of Rockwood since May 2007. Mr. Masters assumed the role of Chief Executive Officer of Foster Wheeler AG, a global engineering and construction contractor and power equipment supplier, on October 1, 2011. Mr. Masters was also elected to the board of directors of Foster Wheeler AG in November 2011. Prior to joining Foster Wheeler, Mr. Masters was a member of the executive board of Linde AG, a global leader in manufacturing and sales of industrial gases, with responsibility for the Americas, Africa and the South Pacific since 2006. Prior to joining Linde AG, Mr. Masters was a member of the board of directors of BOC Group, plc, a global industrial gas company, which was acquired by Linde AG in 2006. At BOC Group, plc, he served as President, Process Gas Solutions-Americas, from 2002-2005, and as Chief Executive, Industrial and Special Products, from 2005 until 2006. Mr. Masters was the non-executive Chairman of African Oxygen Limited from 2005 until 2011. Mr. Masters has a B.Sc. degree in chemical engineering from Georgia Institute of Technology and a M.B.A. from New York University.
MANAGEMENT DISCUSSION FROM LATEST 10K
Executive Summary
We are a global developer, manufacturer and marketer of technologically advanced, high value-added specialty chemicals and advanced materials. We serve more than 60,000 customers across a wide variety of industries and geographic areas. We operate through four business segments: (1) Specialty Chemicals; (2) Performance Additives; (3) Titanium Dioxide Pigments; and (4) Advanced Ceramics.
Our Markets
Because the businesses in our segments generally serve many unrelated end-use markets, we discuss the principal market conditions on a segment basis rather than a consolidated basis. The principal market conditions in our segments and regions in which we operate that impacted our results of operations during the periods presented include the following:
Specialty Chemicals
• Demand for Surface Treatment products in our Specialty Chemicals segment generally follows the activity levels of metal processing manufacturers, including the automotive supply, steel and aerospace industries. In 2010, net sales were up from higher volumes in all markets. In 2011, net sales were up from higher volumes in all markets, particularly automotive and general industrial, as well as increased selling prices. We expect net sales growth in 2012 primarily from higher selling prices, as well as higher volumes, across most markets.
• Demand for our lithium carbonate products in the Fine Chemicals business line of our Specialty Chemicals segment is generally driven by demand in industrial applications, the aluminum business, the battery industry, glass ceramics, cement and the general demand in China. Sales of lithium products specifically used in life science applications depend on the trends in drug development and growth in pharmaceuticals and agrochemicals markets, as well as generic competition. Results in 2010 were higher primarily from increased volumes of lithium products and metal sulfide applications, partially offset by lower selling prices of potash and lithium carbonate. In 2011, net sales were up primarily from increased selling prices and increased volumes of lithium products. We expect net sales growth in 2012 driven by higher selling prices, particularly potash, as well as increased volumes of lithium products for the battery industry.
Performance Additives
• Generally, a trend towards the increased use of colored concrete products in the construction market has historically had a positive effect on our Color Pigments and Services business line. However, a general slowdown in the construction market has negatively impacted construction sales. North American construction volumes were lower in 2010 and continued to be lower in 2011. European construction volumes in 2010 were comparable to the same periods in the prior year, but were up slightly in 2011. Construction sales are expected to be up slightly in 2012 across all regions on higher volumes. Volumes of coatings and specialties products were up in 2010, but were down in 2011. Coatings and specialties sales are expected to be up in 2012 on increased volumes.
• Demand for our wood protection products, in particular alkaline copper quaternary, or ACQ, is generally driven by both repair and remodeling, as well as new construction. The market position of ACQ was negatively impacted in 2010 by a general slowdown in the construction market. In 2011, net sales were up from higher selling prices, as well as higher volumes. We expect net sales growth in 2012 primarily from higher selling prices and the impact of Ecolife applications.
• In the Clay-based Additives business, higher volumes in most markets, particularly oilfield, had a favorable impact on results in 2010. In 2011, higher volumes, as well as higher selling prices, continued in most markets, particularly oilfield. We expect net sales growth to continue in 2012 primarily from higher selling prices across most markets, as well as continued higher volumes, particularly in oilfield applications.
Titanium Dioxide Pigments
• Demand for our titanium dioxide products in anatase grade is driven mainly by demand in the synthetic fiber industry, while demand for titanium dioxide products in rutile grade and our functional additives business are driven by demand in the coatings, printing inks, construction, cosmetics, pharmaceutical, food, paper and plastics industries. Market conditions, including pricing pressure and industry overcapacity, have negatively impacted this segment in the past. However, this trend has changed as prices are increasing as a result of current undercapacity in this industry. In 2010, higher volumes, as well as selling price increases, had a favorable impact on results. In 2011, higher selling prices, as well as a favorable product mix, were partially offset by lower volumes. We expect sales to continue to be higher in 2012 primarily from higher selling prices to offset raw material price increases, particularly for slag and ilmenite, as well as higher sales volumes primarily in the specialties markets.
• Our functional additives sales were up in 2010 and 2011 as higher selling prices had a favorable impact on results. We expect net sales of functional additives applications to be higher in 2012 from higher selling prices to offset raw material cost increases.
Advanced Ceramics
• Demand for our ceramic components for medical devices is mainly tied to the aging population in Europe and the United States. Sales of our medical device applications increased in 2010 and 2011 on higher volumes. We expect this growth to continue in 2012 primarily in ceramic hip applications.
• Sales of most product applications, including cutting tools, mechanical applications and electronic applications were up in 2010 and 2011 on higher volumes. We expect sales for cutting tools and mechanical applications to be higher in 2012 on higher volumes. We expect a slow down in demand for ceramics for electronic applications for 2012.
Global Exposure
We operate a geographically diverse business, with 55% of our net sales in 2011 generated from shipments to customers in Europe, 23% to North America (predominantly the United States), 14% to Asia and 8% to the rest of the world. For a geographic description of the origin of our net sales and location of our long-lived assets, see Item 8. Financial Statements and Supplementary Data - Note 3, “Segment Information.”
We have sold to customers in more than 60 countries during this period. Currently, we serve our diverse and extensive customer base with 81 manufacturing facilities in 23 countries. Consequently, we are exposed to global economic and political changes, particularly currency fluctuations that could impact our profitability and demand for our products.
Our sales and production costs are mainly denominated in U.S. dollars or Euros. Our results of operations and financial condition have been historically impacted by the fluctuation of the Euro against our reporting currency, the U.S. dollar. For the year ended December 31, 2011, the average exchange rate of the Euro against the U.S. dollar was higher compared to 2010. As a result, our net sales, gross profit and operating income were favorably impacted. Historically, however, our operating margins have not been significantly impacted by currency fluctuations because, in general, sales and costs of products sold are generated or incurred in the same currency, subject to certain exceptions.
The foreign currency effect is the translation impact of the change in the average rate of exchange of another currency to the U.S. dollar for the applicable period as compared to the preceding period. The impact relates primarily to the conversion of the Euro to the U.S. dollar. Unless otherwise noted, all balance sheet items as of December 31, 2011 which are denominated in Euros are converted at the December 31, 2011 exchange rate of €1.00 = $1.2961.
Raw Materials
Raw materials constituted approximately 48% of our 2011 cost of products sold. We have a broad raw material base, with the cost of no single raw material representing more than 3% of our cost of products sold in 2011. Nonetheless, the significant price fluctuations our raw materials have experienced in the past during periods of high demand have had an adverse impact on our results of operations. In 2011, higher raw material costs in a number of businesses of $106.7 million had an unfavorable impact on our results of operations. For example, in 2011, we experienced higher prices for tin used in the Metal Sulfides business of our Specialty Chemicals segment, slag and ilmenite used in our Titanium Dioxide Pigments segment and copper used in the Timber Treatment Chemicals business. We cannot accurately predict the impact of any future price increases for raw materials or any raw material shortages on our business as a whole or in specific geographic regions. In addition, we may not be able to pass on raw material price increases to our customers. See details of our ten most significant raw materials (in terms of dollars) in Item 1, “Business — Raw Materials.”
Energy Costs
In 2011, energy purchases represented approximately 8% of our cost of products sold. However, within certain business lines, such as our Titanium Dioxide Pigments segment and the Color Pigments and Services and Clay-based Additives businesses of our Performance Additives segment, energy costs are more significant. Energy costs were up in 2011. Natural gas prices in Europe, where our Titanium Dioxide Pigments segment is located, were up in 2011. The cost of products sold for certain of our businesses, including Color Pigments and Services and Clay-based Additives, increases when the price of natural gas in North America rises. Natural gas prices in North America were down in 2011.
Income Taxes
As of December 31, 2011, we had U.S. federal and foreign corporate tax loss carryforwards (excluding state and local amounts) of approximately $447.6 million, of which $14.3 million expire through 2016, $345.9 million expire through 2031 and $87.4 million which have no current expiration date. Additionally, the Company has $15.0 million of federal capital loss carryforwards which expire through 2016. With repect to state and local tax loss carryforwards, the Company has $7.2 million that expire through 2021, $64.7 million that expire through 2026 and $209.0 million expiring in years through 2032. The state capital loss carryforwards of $73.6 million expire through 2016.
As a result of a tax election made at the end of 2011 related to a non-U.S. subsidiary, we recognized a taxable capital loss of $251.9 million and an increase to our deferred tax assets of $17.8 million related to the difference between the tax and book basis of the entity’s assets. The effect of both the capital loss and the deferred tax asset recognition is offset by an increase in the valuation allowance.
The worldwide valuation allowance increased by $100.7 million to $181.8 million at December 31, 2011 to reserve for an increase in deferred tax assets which resulted from net operating losses and capital losses that more likely than not, will not be realized.
Other Charges and Credits
During the periods presented, we incurred certain other charges that included systems/organization establishment expenses, restructuring and other severance costs, foreign exchange gains and losses, asset write-downs and other and a loss on early extinguishment/modificati on of debt. See “Items excluded from Adjusted EBITDA” section in Note 3, “Segment Information,” for a discussion of other charges and credits recorded in the years ended December 31, 2011, 2010 and 2009.
Note Regarding Non-GAAP Financial Measures
A non-GAAP financial measure is generally defined by the SEC as one that purports to measure historical or future financial performance, financial position or cash flows but excludes or includes amounts that would not be so adjusted in the most comparable U.S. GAAP measure. From time to time in this management’s discussion and analysis, we disclose non-GAAP financial measures, primarily Adjusted EBITDA, as defined below.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Executive Summary
We are a global developer, manufacturer and marketer of technologically advanced, high value-added specialty chemicals and advanced materials. We serve more than 60,000 customers across a wide variety of industries and geographic areas. We operate through five reportable segments: (1) Lithium; (2) Surface Treatment; (3) Performance Additives; (4) Titanium Dioxide Pigments; and (5) Advanced Ceramics. We are focused on growth, productivity, cost reduction, margin expansion, divestment of non-core businesses, debt reduction, bolt-on acquisitions and increasing stockholder value.
On June 11, 2012, our Board of Directors adopted a policy to commence a quarterly cash dividend program and declared an initial quarterly cash dividend of $0.35 per share which was paid on July 11, 2012 to all common shareholders of record as of June 26, 2012.
In the first quarter of 2012, the Company reorganized its Specialty Chemicals segment into two reportable segments: Lithium and Surface Treatment. The metal sulfides business that was previously reported in the Specialty Chemicals segment is now included in the “Corporate and other” category. All prior-period amounts related to the segment change have been retrospectively reclassified throughout these condensed consolidated financial statements. See Note 3, “Segment Information,” for further details.
Factors Which Affect Our Results of Operations
Our Markets
Because the businesses in our segments generally serve many unrelated end-use markets, we discuss the principal market conditions on a segment basis rather than a consolidated basis. The principal market conditions in our segments and regions in which we operate that impacted our results of operations during the periods presented include the following:
Lithium
• Demand for our lithium carbonate products is generally driven by demand in industrial applications, the aluminum business, the battery industry, glass ceramics and cement. Sales of lithium products specifically used in life science applications depend on the trends in drug development and growth in pharmaceuticals and agrochemicals markets, as well as generic competition. In 2011, net sales were up primarily from increased selling prices and increased volumes of lithium products. In the first six months of 2012, net sales were up primarily from increased selling prices, as well as higher volumes of lithium products for the battery industry, partially offset by a decline in potash and butyllithium volumes. Compared to the second half of the prior year, we expect net sales growth for the remainder of the year driven by higher selling prices, as well as increased volumes of lithium products for the battery industry.
Surface Treatment
• Demand for Surface Treatment products generally follows the activity levels of metal processing manufacturers, including the automotive supply, steel and aerospace industries. In 2011, net sales were up from higher volumes in all markets, particularly automotive and general industrial, as well as increased selling prices. In the first six months of 2012, excluding the impact of currency changes, net sales were up primarily from higher selling prices in certain markets. Compared to the second half of the prior year, we expect slight net sales growth for the remainder of the year primarily from higher selling prices.
Performance Additives
• Generally, a trend towards the increased use of colored concrete products in the construction market has historically had a positive effect on our Color Pigments and Services business line. However, a general slowdown in the construction market has negatively impacted construction sales. North American construction volumes were lower in 2011 and the first six months of 2012. European construction volumes were up slightly in 2011, but were down in the first six months of 2012. Volumes of coatings and specialties products were down in 2011 and the first six months of 2012. We do not expect any significant increase in volumes for the remainder of the year due to our exposure to the construction markets.
• Demand for our wood protection products, in particular Ecolife and alkaline copper quaternary, or ACQ, is generally driven by both repair and remodeling, as well as new construction. In 2011, and the first six months of 2012, net sales were up primarily from higher selling prices, as well as slightly higher volumes. Results for the remainder of the year could be negatively impacted by our exposure to the construction market.
• In the Clay-based Additives business, higher North American volumes in most markets, particularly oilfield, and higher selling prices, had a favorable impact on results in 2011 and in the first six months of 2012. We expect volumes to reflect overall economic trends in our key markets in North America and Europe.
Titanium Dioxide Pigments
• Demand for our titanium dioxide products in anatase grade is driven mainly by demand in the synthetic fiber industry, while demand for titanium dioxide products in rutile grade and our functional additives business are driven by demand in the coatings, printing inks, construction, cosmetics, pharmaceutical, food, paper and plastics industries. Market conditions, including pricing pressure and industry overcapacity, have negatively impacted this segment in the past. However, this trend has changed as prices are increasing as a result of current undercapacity in this industry. In 2011, higher selling prices were partially offset by lower volumes. In the first six months of 2012, net sales were down as lower volumes were partially offset by higher selling prices. Compared to the second half of the prior year, we expect net sales to be higher for the remainder of the year despite slower demand primarily from higher selling prices to offset raw material price increases, particularly for slag and ilmenite.
• Our functional additives sales were up in 2011 as higher selling prices had a favorable impact on results. In the first six months of 2012, our functional additives sales were down as lower volumes were partially offset by increased selling prices. Compared to the second half of the prior year, we expect net sales of functional additives applications to be higher for the remainder of the year from higher selling prices to offset raw material cost increases.
• In July 2012, our titanium dioxide venture Sachtleben GmbH acquired certain business assets, including production assets and inventory, of crenox GmbH, a German titanium dioxide producer from the insolvency administrator. crenox GmbH has been under administration since 2009 as a result of the creditor protection proceedings affecting its former parent company Tronox Inc.
Advanced Ceramics
• Demand for our ceramic components for medical devices is mainly tied to the aging population in Europe and the United States. Sales of our medical device applications increased in 2011 and the first six months of 2012 on higher volumes. We expect growth of medical applications for the remainder of the year, primarily in ceramic hip applications.
• Sales of most product applications, including cutting tools, mechanical applications and electronic applications were up in 2011 on higher volumes. In the first six months of 2012, lower volumes of electronic applications, mechanical systems and cutting tools were partially offset by increased volumes of mechanical applications. Lower volumes of electronic applications were driven by a slowdown in the market for power electronic applications in the energy and semiconductor industries and lower volumes of mechanical systems were driven by lower demand for faucet disks. We expect sales for cutting tools to be below prior year amounts due to a slowdown of worldwide automotive production. We expect demand for ceramics for electronic applications and mechanical systems to be at lower levels for the remainder of the year.
Global Exposure
We operate a geographically diverse business, with 55% of our net sales in 2011 generated from shipments to customers in Europe, 23% to North America (predominantly the United States), 14% to Asia and 8% to the rest of the world. For a geographic description of the origin of our net sales and location of our long-lived assets, see Item 8. Financial Statements and Supplementary Data - Note 3, “Segment Information” in our 2011 Form 10-K.
We have sold to customers in more than 60 countries during this period. Currently, we serve our diverse and extensive customer base with 81 manufacturing facilities in more than 20 countries. Consequently, we are exposed to global economic and political changes, particularly currency fluctuations that could impact our profitability and demand for our products.
Our sales and production costs are mainly denominated in U.S. dollars or Euros. Our results of operations and financial condition have been historically impacted by the fluctuation of the Euro against our reporting currency, the U.S. dollar. For the three and six months ended June 30, 2012, the average exchange rate of the Euro against the U.S. dollar was lower compared to the same period in 2011. As a result, our net sales, gross profit and operating income were negatively impacted. Historically, however, our operating margins have not been significantly impacted by currency fluctuations because, in general, sales and costs of products sold are generated or incurred in the same currency, subject to certain exceptions.
The foreign currency effect is the translation impact of the change in the average rate of exchange of another currency to the U.S. dollar for the applicable period as compared to the preceding period. The impact relates primarily to the conversion of the Euro to the U.S. dollar. Unless otherwise noted, all balance sheet items as of June 30, 2012 which are denominated in Euros are converted at the June 30, 2012 exchange rate of €1.00 = $1.2667. For the three months ended June 30, 2012 and 2011 and the six months ended June 30, 2012 and 2011, the average rate of exchange of the Euro to the U.S. dollar is $1.28 and $1.44, respectively, and $1.30 and $1.40, respectively.
Raw Materials
Raw materials constituted approximately 48% of our 2011 cost of products sold. We have a broad raw material base, with the cost of no single raw material representing more than 3% of our cost of products sold in 2011. Nonetheless, the significant price fluctuations our raw materials have experienced in the past during periods of high demand have had an adverse impact on our results of operations. In 2011 and the first six months of 2012, higher raw material costs in a number of businesses had an unfavorable impact on our results of operations. For example, in 2011 and the first six months of 2012, we experienced higher prices for slag and ilmenite used in our Titanium Dioxide Pigments segment and copper used in our Timber Treatment Chemicals business. We cannot accurately predict the impact of any future price increases for raw materials or any raw material shortages on our business as a whole or in specific geographic regions. In addition, we may not be able to pass on raw material price increases to our customers. See details of our ten most significant raw materials (in terms of dollars) in Item 1, “Business — Raw Materials” in our 2011 Annual Report on Form 10-K.
Energy Costs
In 2011, energy purchases represented approximately 8% of our cost of products sold. However, within certain business lines, such as our Titanium Dioxide Pigments segment and the Color Pigments and Services and Clay-based Additives businesses of our Performance Additives segment, energy costs are more significant. Energy costs were up in 2011 and were up in the first six months of 2012. Natural gas prices in Europe, where our Titanium Dioxide Pigments segment is located, were up in 2011 and in the first six months of 2012. Natural gas prices in North America were down in 2011 and in the first six months of 2012.
Income Taxes
We recorded an income tax benefit of $108.8 million on income from continuing operations before taxes of $124.9 million in the three months ended June 30, 2012. The income tax benefit in the second quarter of 2012 was favorably impacted by a $139.0 million reversal of our federal valuation allowance against our net federal deferred tax assets. In addition, the income tax benefit was favorably impacted by certain domestic income that was not tax effected due to a valuation allowance reversal and a beneficial foreign earnings mix.
Other Charges and Credits
During the periods presented, we incurred certain other charges that included systems/organization establishment expenses, restructuring and other severance costs, foreign exchange gains and losses, asset write-downs and other and a loss on early extinguishment/modificati on of debt. See “Items excluded from Adjusted EBITDA” section in Note 3, “Segment Information,” for a discussion of other charges and credits recorded in the three and six months ended June 30, 2012 and 2011.
Note Regarding Non-GAAP Financial Measures
A non-GAAP financial measure is generally defined by the SEC as one that purports to measure historical or future financial performance, financial position or cash flows but excludes or includes amounts that would not be so adjusted in the most comparable U.S. GAAP measure. From time to time in this management’s discussion and analysis, we disclose non-GAAP financial measures, primarily Adjusted EBITDA. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our 2011 Annual Report on Form 10-K for a definition of Adjusted EBITDA, management’s uses of Adjusted EBITDA and its limitations.
Results of Operations
Actual Results of Operations
The following table presents the major components of our operations on an actual basis and Adjusted EBITDA (the reconciliation to net income is set forth in—Reconciliation of Net Income Attributable to Rockwood Holdings, Inc. to Adjusted EBITDA for the three and six months ended June 30, 2012 and 2011 within this MD&A section), including as a percentage of net sales, for the periods presented. See Note 3, “Segment Information,” for segment information and a reconciliation from income (loss) from continuing operations before taxes to Adjusted EBITDA on a segment basis.
CONF CALL
Timothy McKenna - Investor Relations
Thank you, Kathy. Good morning and welcome to Rockwood’s second quarter earnings Conference Call. Seifi Ghasemi, our Chairman and Chief Executive; and Bob Zatta, our Chief Financial Officer will give the formal presentation. After that, we’ll have the Q&A session. You can follow our slides on our website at www.rocksp.com.
Before the call begins, I’ll read a short statement. The conference call may contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, concerning the business operations and financial conditions of Rockwood Holdings and its subsidiaries. Although Rockwood believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, there can be no assurance that its expectations will be realized.
Forward-looking statements consist of all non-historical information, including statements referring to the prospects and future performance of Rockwood. Actual results could differ materially from those projected in our statement due to numerous known and unknown risks and uncertainties, including among other things the risk factors described in our Form 10-K on file with the Securities And Exchange Commission.
We do not undertake any obligation to publicly update any forward-looking statements to reflect events or circumstances after the date on which any such statement is made or to reflect the occurrence of unanticipated events.
With that, I’ll turn it over to Seifi.
Seifi Ghasemi - Chairman, Chief Executive Officer
Thank you, Tim, and good day to all of you. Thanks for taking the time from your busiest schedules to participate in our conference call. We do appreciate your interest in Rockwood. During the call today, we will refer to the presentation material posted on our website. So please turn to page seven of that presentation.
I am pleased to report that Rockwood had a good second quarter. Our adjusted earnings per share was $1.24, which is 6% higher than last year. So for the first half of 2012, our earnings per share is 20% higher than the first half of 2011. We achieved these results despite significant headwinds as a result of translation of our earnings from Euros to dollars. As you know, Rockwood does not have much exposure to currency fluctuations from a transaction point of view.
The rest of the numbers on page seven are self-explanatory. And on page eight and nine, we have delineated the details of the performance of each one of our business units. I will skip these pages and then start on page 10 by commenting on the specifics of each one of our businesses.
I am on page 10 now. Our Lithium business continues to perform very well. The improved margins since both volumes and prices are higher than last year. We have started up our new state of the art lithium hydroxide facility in the United States and are moving ahead with the expansion program we have previously announced in Nevada and Chile that would see us double our production capacity to 50,000 tons per year by 2014. We expect our lithium business to continue to have a strong performance for the balance of the year.
Page 11, our Surface Treatment business again continues to do very well under the guidance of our excellent management team there. Margins improved to 21.2% as a result of higher prices and higher volumes in the United States and Asia. We fully expect this business to continue as a strong performance for the balance of the year. Our new state-of-the-art plant for this business being built in Michigan will come on stream by the end of this year and it will strengthen our position in the important U.S. markets.
Page 12, our Performance Additives sector where we have significant exposure to the construction market, volumes are slightly down, but prices are up. We have said previously in our calls for the last two years that we do not expect material improvement in this sector until 2014. Considering the outlook for the business, we have also moved the start off of our new Color Pigment business from 2014 to early 2015. This is the plant that we are building in Georgia.
Now please go to page 13. Our TiO2 business, we maintained our EBITDA margin at around 25% for the quarter, since higher prices offset the negative impact of lower volumes and some higher raw material costs. To give you more details, prices for the quarter, they’re 27% higher than the comparable quarter last year, while volumes are 28% lower. On a sequential basis, prices were about the same as the first quarter of 2012.
We also completed the acquisition of the new TiO2 plants in early July. This plant in Erlangen in Germany has a capacity of 107,000 metric tons per year and we consider this to be a significant strategic addition to our business, and will enhance our position for the long-term. The specific benefits of this business are, number one, as you recall last year when demand for TiO2 was strong, we were totally sold out at our two existing facilities. They did not have the opportunity for further growth. The addition of this new plant, which was not operating at full capacity, will give us excellent opportunity for growth when demand for TiO2 gets back to 2011 levels or even higher.
The second benefit is that the cash production cost of this plant is very favorable and very competitive since the plant can use both ilmenite and slag as a future start. Therefore this could help us improve our margins as they go forward.
The third benefit is that now that we have this plant, we can optimize our production of different grades of TiO2 at three facilities, and as a result realize savings by eliminating the need for multiple change of orders from grade-to-grade at each one of that plants, which costs [inaudible].
The fourth benefit of owning this plant is that we now have access to specific production facilities that comes along with this plant to be able to make DeNOx TiO2 catalyst material, a high growth material which is very high grade and it will help us increase our production of specialty grade TiO2 products which has higher margins and very good growth prospects. So these are the benefits and that’s why we acquired this facility.
Now, please turn to page 14. Our Advanced Ceramic business continues to perform very well with both volumes and – volumes are higher than before especially for our medical products mainly the ceramic to ceramic hip joints. The recent announcements by the different government organizations about the issues related to metal to metal hip joints has obviously helped us with the sale and market share of ceramic to ceramic hip joints. We expect this benefit to continue. The margins for the business now are at an all time high of 33.4%. We have an excellent management team in this business and we continue to expect the business to perform strongly for the balance of the year.
Now, please turn to page 15, where we have broken down details of the components of our sales. Prices were up 6% for the quarter. All of our business units except advanced ceramics saw an increase in prices. Currency translation as I mentioned before reduced our sales by 7.5%. And the decrease in volumes are mainly due to our TiO2 and performance additive businesses since all of the other businesses had an increase in volumes.
Now, I return the presentation to Mr. Bob Zatta, our Chief Financial Officer, to go through the details of the numbers and I will come back with some additional comments before we open the session for questions. Bob?
Robert J. Zatta
Thank you Seifi, and good morning to everyone. I am on page 17 of the presentation. This is our reported income statement for the second quarter of 2012 and the first half of the year. We reported sales of $905.6 million for the quarter as compared with $1 billion in the same period last year, a decrease of 9.4%. On a constant currency basis sales were down 1.9%. Net sales were down primarily from lower volumes and contained by eye sight pigments and color pigments partially offset by higher selling prices across those businesses.
First half of the year sales were $1.8151 billion, decrease of 5.2% from last year. On a constant currency basis sales were up 0.2%. We reported gross profit for the second quarter of $320.3 million or 35.4% of sales had with $345.6 million or 34.6% of sales last year. For the first half of the year gross profit as percent of sales was 36.5% compared to 34.8%. The improvement in gross margin year-on-year in the quarter and first half was primarily due to the higher pricing which more than offset lower volumes and raw material cost increases.
For the second quarter SG&A as a percent of sales was 18.5% up from 18.1% last year. And for the first half of the year SG&A as a percent of sales was 19% compared to 18.9% last year. The year-on-year percent decrease was 7.7% in the quarter and 4.8% for the first half of the year driven primarily by FX. We also has some restructuring and severance accruals in the quarter and first half of the year related to the continued streamlining of operations a write-off of the trade name which was related to the separation of lithium and surface treatment businesses earlier this year. We talked about that previously.
The next major item is net interest expense. The composition of interest expense is shown at the bottom of the page. Net interest expense decreased in the second quarter and first half of the year compared to the same periods for the prior year primarily due to the prepayment of debt. Also in June 2012 we entered a new facility agreement for our TiO2 pigment venture in the amount of €430 million. The proceeds were used to repay the outstanding balance under the previous facility to pay a dividend for venture partners and for general corporate purposes. In connection with this refinancing and repayment of our outstanding TiO2 term loans we recorded charge of $2.7 million in the second quarter which was comprised of fees of $2.4 million and the write-off of deferred finance costs of $0.3 million.
This brings us the income from continuing operations before taxes, which is $124.9 million for the second quarter and a $137.3 million in first half. Against this the income tax benefit is $108.8 million for second quarter and $78.2 million for the first half of the year and this is due to the reversal of the $139 million of our domestic federal valuation allowance on net deferred tax assets. Now we’ve talked about this before and in the second quarter we determined with our auditors that it was more likely than not that we will be able to utilize the federal deferred tax assets in 20 years and so as a result we made this reversal. On an adjusted basis, the effective tax rate for the second quarter is 23%. I will talk a little bit more about that in a few minutes.
We then show our net income attributable to the non-controlling interest in the TiO2 in timber joint ventures. This resulted in net income of $224.9 million for the second quarter and $300.7 million for the first half.
Page 18 presents the reconciliation of net income to adjusted EBITDA. For the second quarter beginning with net income of $224.9 million, we’ve added back guidance which get us to the pre-tax income from continuing operations of $124.9. Then adding back the interest expense and D&A brings us to a subtotal of $204.9. We then have several one-time adjusting items which brings us to an adjusted EBITDA in the quarter of $221.1 million.
Page 19 provides a detailed reconciliation of net income and EPS with continuing operations on a reported basis, the net income and EPS from continuing operations as adjusted. As you can see, the adjustments are shown on an after-tax basis include the same items already identified in the previous charts. This gives us an adjusted EPS of $1.24 per share for the second quarter and $2.47 for the first half of the year.
Page 20 provides a detailed reconciliation firstly between the income from continuing operations before tax of $124.9 million, the normalized as adjusted profit before tax which is $142.3 million. Secondly, from the reported income tax benefit of $108.8 million was a normalized tax charge of $33 million. This is where we get the effective tax rate of 23% in the second quarter, as I previously mentioned. And this lower effective tax rate is due to a beneficial foreign earnings mix in our second quarter results.
Page 21 provides a summary of our cash and debt position at June 30th, 2012. As we discussed above, we entered into a new TiO2 facility agreement and used the portion of the proceeds to repay the outstanding balance of the term loans under the previous facility.
Page 22 shows the long-term trend in Rockwood’s leverage ratio. We have continued to deleverage the company in accordance with our plan.
And finally, page 23, presents our free cash flow for the quarter and first half. As you can see, we generated free cash flow of $39 million in the second quarter and $20.3 million in the first half of the year. I would point out that in the second quarter, it was impacted by the payment of 2011 bonuses, which was in the range of about $50 million, still without that we would have generated a lot more free cash in the second quarter, and this puts us I think in good shape in terms of going forward to hit our numbers for the full year.
And with that, Seifi, I’ll turn to back to you.
Seifi Ghasemi - Chairman, Chief Executive Officer
Thank you, Bob. As all of you and most of you know, we did announce that the Rockwood will start paying a dividend of $0.35 per share. We did pay our first dividend in July and we are obviously committed to continue the program. The outlook for our core businesses that is Lithium, Surface Treatment and Advanced Ceramics is positive. I indicated earlier that we do not expect any material improvement in our performance out of this sector.
Our mid to long-term outlook for our TiO2 business remains positive since we do not see any change in the fundamental drivers of the business, since little if any additional capacity will be coming on a stream in the western board in the near future.
With that, I would like – we would like now to open it for questions and we would be delighted to answer any questions that you have. Cathy?
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Fund Letters
