Derivative Financial Instruments

6 Months Ended

Jun. 30, 2012

Derivative Financial Instruments [Abstract]

Derivative Financial Instruments

NOTE 14.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 certain of 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.

Counterparty Risk

We only enter into derivative transactions with established counterparties having a credit rating of BBB 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 and Derivatives Association agreements (“ISDAs”) 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 do we receive cash collateral with any counterparty for our derivative transactions.As of June 30, 2012, we had no cash collateral posted or received for any of our derivative transactions.These ISDAs 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 fluctuations 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, 2012 and December 31, 2011, the notional amount of these hedges was $36.6 million and $47.2 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 for the second quarter or first six months of 2012 or 2011.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, 2012, our major foreign currency exposures are to the Canadian dollar, the Australian dollar, and the Euro.

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 $137.0 million and $128.3 million at June 30, 2012 and December 31, 2011, 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 for the second quarter or first six months of 2012 or 2011.

Currency Rate Risk - Intercompany Loans and Dividends

We also use foreign currency forward exchange contracts to hedge exposures created by cross-currency intercompany loans and dividends.The 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 $21.8 million at December 31, 2011.We did not have any open hedges related to intercompany loans and dividends as of June 30, 2012.

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. On March 27, 2012 we entered into an additional interest rate swap agreement with a notional amount of $250 million, maturing in March 2018, under the terms of which we pay a fixed rate of 1.9275% over the hedged period. We also entered into a forward starting interest rate swap of $200 million from November 2015 to March 2018, under the terms of which we pay a fixed rate of 2.810% over the hedged period. These swaps are designated as cash flow hedges against changes in LIBOR for a portion of our variable rate debt.

Financial Statement Impacts

The following tables detail amounts related to our derivatives as of June 30, 2012 and December 31, 2011. Our derivative assets and liabilities not designated as hedging instruments were not material as of June 30, 2012 and December 31, 2011.

	Asset Derivatives			Derivative Liabilities
		Fair Value			Fair Value
	Balance SheetLocation	June 30, 2012	December 31, 2011	Balance SheetLocation	June 30, 2012	December 31, 2011
Derivatives designated as hedging instruments
Natural gas commodity contracts	Other current assets	-	-	Accounts payable and accrued expenses	$7.1	$7.2
Natural gas commodity contracts	Other non-current assets	-	-	Other long-term liabilities	-	2.1
Foreign exchange contracts	Other current assets	$3.2	$2.4	Accounts payable and accrued expenses	1.4	1.3
Interest rate swap contracts	Other current assets	-	-	Other long-term liabilities	24.2	14.0
Total derivatives designated as hedging instruments		$3.2	$2.4		$32.7	$24.6

	Amount of Gain (Loss) Recognized in Accumulated Other Comprehensive Income (“AOCI”) (Effective Portion)(a)		Location of (Loss) Reclassified from AOCI into Income (Effective Portion)	(Loss) Reclassified from AOCI into Income (Effective Portion)
	Six Months Ended			Three Months Ended		Six Months Ended
	June 30,			June 30,		June 30,
	2012	2011		2012	2011	2012	2011
Derivatives in Cash Flow Hedging Relationships
Natural gas commodity contracts	($7.0)	($2.9)	Cost of goods sold	($2.4)	($1.3)	($5.1)	($3.8)
Foreign exchange contracts – purchases and sales	1.8	(1.9)	Cost of goods sold	(0.3)	(1.3)	(0.8)	(2.1)
Interest rate swap contracts	(24.2)	(6.7)	Interest Expense	-	-	-	-
Total	($29.4)	($11.5)		($2.7)	($2.6)	($5.9)	($5.9)

(a)As of June 30, 2012 the amount of existing (loss) in Accumulated OCI expected to be recognized in earnings over the next twelve months is $(5.3) million.

(b)

	Location of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion) (a)
Derivatives in Cash Flow Hedging Relationships
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, 2012 and June 30, 2011.No gains or losses are excluded from the assessment of the hedge effectiveness.

The gain (loss) recognized in income for derivative instruments not designated as hedging instruments was $0.6 million for the second quarter and zero for the first six months of 2012 and $(0.2) million and $4.3 million for the second quarter and first six months of 2011, respectively.