Derivative Financial Instruments

6 Months Ended

Jun. 30, 2011

Derivative Financial Instruments

Derivative Financial Instruments

NOTE 16. DERIVATIVE FINANCIAL INSTRUMENTS

We are exposed to market risk from changes in foreign exchange rates, interest rates and commodity prices that could impact our results of operations and financial condition. We use forward swaps and option contracts to hedge these exposures. Exposure to individual counterparties is controlled and derivative financial instruments are entered into with a diversified group of major financial institutions. Forward swaps and option contracts are entered into for periods consistent with underlying exposure and do not constitute positions independent of those exposures. At inception, hedges that we designate as hedging instruments are formally documented as either (1) a hedge of a forecasted transaction or "cash flow" hedge, or (2) a hedge of the fair value of a recognized liability or asset or "fair value" hedge. We also formally assess both at inception and at least quarterly thereafter, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in either the fair value or cash flows of the hedged item. If it is determined that a derivative ceases to be a highly effective hedge, or if the anticipated transaction is no longer probable of occurring, we discontinue hedge accounting, and any future mark-to-market adjustments are recognized in earnings. We use derivative financial instruments as risk management tools and not for speculative trading purposes.

Counter Party Risk

We only enter into derivative transactions with established counterparties having a credit rating of A or better. We monitor counterparty credit default swap levels and credit ratings on a regular basis. All of our derivative transactions with counterparties are governed by master International Swap Dealer Agreements ("ISDA's") with netting arrangements. These agreements can limit our exposure in situations where we have gain and loss positions outstanding with a single counterparty. We generally do not post nor receive cash collateral with any counterparty for our derivative transactions. As of June 30, 2011, we had no cash collateral posted or received for any of our derivative transactions. These ISDA agreements do not have any credit contingent features; however, a default under our bank credit facility would trigger a default under these agreements. Exposure to individual counterparties is controlled, and thus we consider the risk of counterparty default to be negligible.

Commodity Price Risk — We purchase natural gas for use in the manufacture of ceiling tiles and other products, and to heat many of our facilities. As a result, we are exposed to movements in the price of natural gas. We have a policy to reduce cost volatility for North American natural gas purchases by purchasing natural gas forward contracts and swaps, purchased call options, and zero-cost collars up to 24 months forward to reduce our overall exposure to natural gas price movements. There is a high correlation between the hedged item and the hedged instrument. The gains and losses on these transactions offset gains and losses on the transactions being hedged. These instruments are designated as cash flow hedges. At June 30, 2011 and December 31, 2010 the notional amount of these hedges was $47.5 million and $37.0 million, respectively. The mark-to-market gain or loss on qualifying hedges is included in other comprehensive income to the extent effective, and reclassified into cost of goods sold in the period during which the underlying gas is consumed. The mark-to-market gains or losses on ineffective portions of hedges are recognized in cost of goods sold immediately. The earnings impact of the ineffective portion of these hedges was not material during the second quarter or first six months of 2011 and 2010. The contracts are based on forecasted usage of natural gas measured in MMBtu's.

Currency Rate Risk —

Sales and Purchases — We manufacture and sell our products in a number of countries throughout the world and, as a result we are exposed to movements in foreign currency exchange rates. To a large extent, our global manufacturing and sales provide a natural hedge of foreign currency exchange rate movement, as foreign currency expenses generally offset foreign currency revenues. We manage our cash flow exposures on a net basis and use derivatives to hedge the majority of our unmatched foreign currency cash inflows and outflows. As of June 30, 2011, our major foreign currency exposures are to the Canadian dollar, the Euro, and the Australian dollar.

We use foreign currency forward exchange contracts to reduce our exposure to the risk that the eventual net cash inflows and outflows resulting from the sale of products to foreign customers and purchases from foreign suppliers will be adversely affected by changes in exchange rates. These derivative instruments are used for forecasted transactions and are classified as cash flow hedges. Cash flow hedges are executed quarterly generally up to 15 months forward and allow us to further reduce our overall exposure to exchange rate movements, since gains and losses on these contracts offset gains and losses on the transactions being hedged. The notional amount of these hedges was $49.6 million and $89.9 million at June 30, 2011 and December 31, 2010, respectively. Gains and losses on these instruments are recorded in other comprehensive income, to the extent effective, until the underlying transaction is recognized in earnings. The earnings impact of the ineffective portion of these hedges was not material during the second quarter or first six months of 2011 and 2010.

Intercompany Loan and Dividends — We also use foreign currency forward exchange contracts to hedge exposures created by cross-currency intercompany loans and dividends. The underlying intercompany loans are classified as short-term, and translation adjustments related to these loans are recorded in other non-operating income or expense. The offsetting gains or losses on the related derivative contracts are also recorded in other non-operating income or expense. These contracts are decreased or increased as repayments are made or additional intercompany loans are extended or adjusted for

intercompany dividend activity as necessary. The notional amount of these hedges was $11.1 million and $143.2 million at June 30, 2011 and December 31, 2010, respectively.

Interest Rate Risk — We utilize interest rate swaps to minimize the fluctuations in earnings caused by interest rate volatility. Interest expense on variable-rate liabilities increases or decreases as a result of interest rate fluctuations. On March 31, 2011 we entered into two interest rate swaps, on our Term Loan A and Term Loan B, with notional amounts of $100 million and $200 million, respectively, which mature in November 2015. Under the terms of the Term Loan A swap, we receive 3-month LIBOR and pay a fixed rate over the hedged period. Under the terms of the Term Loan B swap, we receive the greater of 3-month LIBOR or the 1% LIBOR Floor and pay a fixed rate over the hedged period. These swaps are designated as cash flow hedges to hedge against changes in LIBOR for a portion of our variable rate debt. The mark-to-market loss was $6.7 million at June 30, 2011.

Financial Statement Impacts

Our derivative assets, whether or not designated as hedging instruments, were not material as of June 30, 2011 and December 31, 2010.

The following tables detail amounts related to our derivatives as of June 30, 2011 and December 31, 2010 and for the six months ended June 30, 2011 and June 30, 2010.

	Liability Derivatives
		Fair Value		Fair Value
	Balance Sheet	June 30,		December
	Location	2011		31, 2010
Derivatives designated as hedging instruments
Natural gas commodity contracts	Accounts payable and accrued expenses	$	3.0	$	5.5
Foreign exchange contracts	Accounts payable and accrued expenses		2.7		2.4
Interest Rate Swaps	Other long-term liabilities		6.7		—
Total derivatives designated as hedging instruments		$	12.4	$	7.9
Derivatives not designated as hedging instruments
Foreign exchange contracts	Accounts payable and accrued expenses	$	0.4	$	4.6
Total derivative liabilities not designated as hedging instruments		$	0.4	$	4.6

	Amount of (Loss) Recognized in Other
	Comprehensive Income ("OCI") (Effective
	Portion) (a)
	For the Six Months			For the Six Months
	Ended June 30,			Ended June 30,
Derivatives in Cash Flow Hedging Relationships	2011			2010
Natural gas commodity contracts	$	(2.9	)	$	(4.4	)
Foreign exchange contracts — purchases and sales		(1.9	)		(0.2	)
Interest rate swap contracts		(6.7	)		—
Total	$	(11.5	)	$	(4.6	)

(a) As of June 30, 2011 the amount of existing gains/ (losses) in Accumulated OCI expected to be recognized in earnings over the next twelve months is $(4.5) million.

		(Loss) Reclassified from Accumulated OCI into Income
		(Effective Portion)
		For the Three Months						For the Six Months Ended
Derivatives in Cash		Ended June 30,						June 30,
Flow Hedging Relationships	Location	2011			2010			2011			2010
Natural gas commodity contracts	Cost of goods sold	$	(1.3	)	$	(2.0	)	$	(3.8	)	$	(5.6	)
Foreign exchange contracts — purchases and sales	Cost of goods sold		(1.3	)		(1.8	)		(2.1	)		(3.0	)
Total		$	(2.6	)	$	(3.8	)	$	(5.9	)	$	(8.6	)

	Location of Gain (Loss)
	Recognized in Income on
	Derivative (Ineffective
Derivatives in Cash Flow Hedging Relationships	Portion) (a)
Natural gas commodity contracts	Cost of goods sold
Foreign exchange contracts — purchases and sales	SG&A expense
Interest rate swap contracts	Interest expense

(a) The amount of gain (loss) recognized in income related to the ineffective portion of the hedging relationships was immaterial for the three months and six months ended June 30, 2011 and June 30, 2010. No gains or losses are excluded from the assessment of the hedge effectiveness.

The amount of gain (loss) recognized in income for derivative instruments not designated as hedging instruments was $(0.2) million and $4.3 million for the second quarter and first six months of 2011, respectively, and insignificant for the second quarter and first six months of 2010.