Derivatives and Hedging Activities

9 Months Ended

Sep. 30, 2011

Derivatives and Hedging Activities [Abstract]

Derivatives and Hedging Activities

(10) Derivatives and Hedging Activities

     We report all derivative instruments on our balance sheet at fair value and establish criteria for designation and effectiveness of transactions entered into for hedging purposes.

     As a large global organization, we face exposure to market risks, such as fluctuations in foreign currency exchange rates and interest rates. To manage the volatility relating to these exposures, we enter into various derivative instruments from time to time under our risk management policies. We designate certain derivative instruments as hedges on a transaction basis to support hedge accounting. The changes in fair value of these hedging instruments offset in part or in whole corresponding changes in the fair value or cash flows of the underlying exposures being hedged. We assess the initial and ongoing effectiveness of our hedging relationships in accordance with our policy. We do not purchase, hold or sell derivative financial instruments for trading purposes. Our practice is to terminate derivative transactions if the underlying asset or liability matures or is sold or terminated, or if we determine the underlying forecasted transaction is no longer probable of occurring.

Foreign Currency Forward Contracts Not Designated as Hedges

     Our subsidiaries have foreign currency exchange exposure from buying and selling in currencies other than their functional currencies. The primary purposes of our foreign currency hedging activities are to manage the potential changes in value associated with the amounts receivable or payable on transactions denominated in foreign currencies and to minimize the impact of the changes in foreign currencies related to foreign currency denominated interest-bearing intercompany loans and receivables and payables. The changes in fair value of these derivative contracts are recognized in other income (expense), net, on our condensed consolidated statements of operations and are largely offset by the remeasurement of the underlying foreign currency denominated items indicated above. These contracts have original maturities of less than 12 months.

     The estimated fair value of these derivative contracts, which represents the estimated net balance that would be paid or that would be received by us in the event of their termination, based on the then current foreign currency exchange rates, was a net current asset of $1 million at September 30, 2011 and a net current liability of $0.3 million at December 31, 2010.

     In contemplation of the closing of the acquisition of Diversey on October 3, 2011, we entered into several foreign currency forward contracts during the month of September 2011. These contracts were entered into to minimize the foreign currency exposure related to various tax planning and intercompany loan transactions that occurred in connection with the closing of the acquisition. The change in fair value of these contracts as of September 30, 2011 resulted in pre-tax unrealized gains of $6.3 million ($3.9 million net of taxes), which were recorded in other income (expense), net, on our condensed consolidated statements of operations in the three and nine months ended September 30, 2011, and a corresponding asset was recorded on our condensed consolidated balance sheet.

Foreign Currency Forward Contracts Designated as Cash Flow Hedges

     The primary purposes of our cash flow hedging activities are to manage the potential changes in value associated with the amounts receivable or payable on equipment and raw material transactions that are denominated in foreign currencies in order to minimize the impact of the changes in foreign currencies. We record gains and losses on foreign currency forward contracts qualifying as cash flow hedges in other comprehensive income, included in stockholders’ equity on our condensed consolidated balance sheets, to the extent that these hedges are effective and until we recognize the underlying transactions in net earnings, at which time we recognize these gains or losses in other income (expense), net, on our condensed consolidated statements of operations.

     Net unrealized after tax gains (losses) related to these contracts were included in other comprehensive income for the three and nine months ended September 30, 2011 and 2010 and were immaterial. The unrealized amounts in other comprehensive income will fluctuate based on changes in the fair value of open contracts during each reporting period.

Interest Rate Swaps

     From time to time, we may use interest rate swaps to manage our mix of fixed and floating interest rates on our outstanding indebtedness.

     At September 30, 2011, we had outstanding interest rate swaps related to our 12% Senior Notes and our 5.625% Senior Notes that qualified and were designated as fair value hedges. We entered into these interest rate swaps to effectively convert these senior notes into floating rate debt.

     We recorded a mark-to-market adjustment to record an increase of $10 million at September 30, 2011 in the carrying amount of these senior notes due to changes in interest rates and an offsetting increase to other assets at September 30, 2011 to record the fair value of the related interest rate swaps. There was no ineffective portion of the hedges recognized in earnings during the period.

     At December 31, 2010, we recorded a mark-to-market adjustment to record an increase of $6 million in the carrying amount of our 12% Senior Notes and our 5.625% Senior Notes due to changes in interest rates and an offsetting increase to other assets at December 31, 2010 to record the fair value of the related interest rate swaps. There was no ineffective portion of the hedges recognized in earnings during the period.

     Under the terms of most of our outstanding interest rate swap agreements in 2011, we received interest at a fixed rate and paid interest at variable rates that were based on the one-month LIBOR. The remaining portion of our outstanding interest rate swap agreements in 2011 were based on the six-month LIBOR. As a result of our interest rate swap agreements, interest expense was reduced by $2 million in the three months ended September 30, 2011, $1 million in the three months ended September 30, 2010, $4 million in the nine months ended September 30, 2011 and $3 million in the nine months ended September 30, 2010.

Other Derivative Instruments

     We may use other derivative instruments from time to time, such as foreign exchange options to manage exposure to foreign exchange rates and interest rate and currency swaps related to access to international financing transactions. These instruments can potentially limit foreign exchange exposure by swapping borrowings denominated in one currency for borrowings denominated in another currency. At September 30, 2011 and December 31, 2010, we had no foreign exchange options or interest rate and currency swap agreements outstanding.

     See Note 11, “Fair Value Measurements and Other Financial Instruments,” for a discussion of the inputs and valuation techniques used to determine the fair value of our outstanding derivative instruments.

Fair Value of Derivative Instruments

     The following table details the fair value of our derivative instruments included on our condensed consolidated balance sheets.

	Fair Value of Asset				Fair Value of (Liability)
	Derivatives(1)				Derivatives(1)
	September 30,		December 31,		September 30,			December 31,
	2011		2010		2011			2010
Derivatives designated as hedging instruments:
Foreign currency forward contracts (cash flow hedges)	$	0.3	$	0.1	$	—		$	—
Interest rate swaps		9.5		6.0		—			(0.2	)
Derivatives not designated as hedging instruments:
Foreign currency forward contracts		7.6		0.5		(0.2	)		(0.8	)
Total	$	17.4	$	6.6	$	(0.2	)	$	(1.0	)

(1) Asset derivatives were included in other assets for the foreign currency forward contracts and for the interest rate swaps. Liability derivatives were included in other liabilities for the foreign currency forward contracts and for the interest rate swaps.

The following table details the effect of our derivative instruments on our condensed consolidated statements of operations.

	Amount of Gain (Loss)
	Recognized in
	Net Earnings on Derivatives(1)
	Three Months					Nine Months
	Ended					Ended
	September 30,					September 30,
	2011			2010		2011		2010
Derivatives designated as hedging instruments:
Interest rate swaps	$	1.3		$	1.2	$	3.6	$	3.3
Foreign currency forward contracts(2)		(0.1	)		0.5		—		0.2
Derivatives not designated as hedging instruments:
Foreign currency forward contracts(2)		7.2			23.4		7.8		12.9
Total	$	8.4		$	25.1	$	11.4	$	16.4

(1)

Amounts recognized on the foreign currency forward contracts were included in other income (expense), net. Amounts recognized on the interest rate swaps were included in interest expense.

(2)

The net gains and (losses) included above were substantially offset by the net (losses) and gains resulting from the remeasurement of the underlying foreign currency denominated items, which are included in other income (expense), net, on the condensed consolidated statement of operations. The underlying foreign currency denominated items include receivables and payables and interest-bearing intercompany loans and receivables and payables excluding the underlying foreign currency denominated items relating to the foreign currency forward contracts we entered into in contemplation of the closing of the acquisition of Diversey in the month of September 2011. See “Foreign Currency Forward Contracts Not Designated as Hedges” above for further information.