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Fair Value Measurements
 6 Months Ended
Jun. 30, 2011
Fair Value Measurements  
Fair Value Measurements

NOTE 11—FAIR VALUE MEASUREMENTS

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes a mid-market pricing convention for valuing the majority of its assets and liabilities measured and reported at fair value. The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. The Company primarily applies the market approach for recurring fair value measurements and endeavors to utilize the best available information. Accordingly, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The Company is able to classify fair value balances based on the observability of those inputs. The Company gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company's assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. In the first half year ended June 30, 2011, the Company evaluated the fair value hierarchy levels assigned to its assets and liabilities, and concluded that there should be no transfers into or out of Levels 1, 2 and 3.

The following table presents the carrying amount and fair values of the Company's assets and liabilities measured on a recurring basis at June 30, 2011 and December 31, 2010:

 

     June 30,
2011		      December 31,
2010		  

(in millions)

    Carrying
Amount		      Fair
Value		      Carrying
Amount		      Fair
Value		  

Assets

            

Non-derivatives:

            

Cash and cash equivalents

    $ 99.0       $ 99.0       $ 107.1       $ 107.1   

Short-term investments

      4.4         4.4         4.2         4.2   

Non-financial assets (Level 3 measurement):

            

Goodwill—Octane Additives

      3.5         3.5         4.6         4.6   

Derivatives (Level 1 measurement):

            

Commodity swaps

      1.5         1.5         1.7         1.7   

Foreign currency forward exchange contracts

      1.4         1.4         0.7         0.7   

Liabilities

            

Non-derivatives:

            

Long-term debt (including current portion)

      33.0         33.0         47.0         47.0   

Derivatives (Level 1 measurement):

            

Interest rate swaps

    $ 0.3       $ 0.3       $ 0.5       $ 0.5   

For assets and liabilities measured at fair value on a recurring basis using Level 3 inputs, the following reconciles the opening and closing positions:

 

(in millions)

    Goodwill—Octane
Additives		  

Assets

   

Balance at January 1, 2011

    $ 4.6   

Total gains or losses (realized/unrealized):

   

Included in earnings

      (1.1 ) 

Included in other comprehensive income

      0.0   
  

 

 

  

Balance at June 30, 2011

    $ 3.5   
  

 

 

  

 

The cumulative gains and losses on the interest rate swaps and commodity swaps are summarized as follows:

 

(in millions)

        2011              2010      

Balance at January 1

    $ 1.2       $ 1.2   

Change in fair value

      0.0         (1.7 ) 
  

 

 

     

 

 

  

Balance at June 30

    $ 1.2       $ (0.5 ) 
  

 

 

     

 

 

  

On June 12, 2009, the Company entered into $50.0 million of interest rate swaps which amortize and mature between February 2010 and February 2012 in line with the long-term debt maturity profile. At June 30, 2011 the interest rate swaps have been designated as a cash flow hedge against $25.0 million of underlying floating rate debt obligations, that stood at $33.0 million at June 30, 2011, and qualify for hedge accounting as at June 30, 2011 and December 31, 2010.

The carrying amount of long-term debt drawn under the three-year finance facility approximates fair value based on the period of time to maturity.

The commodity swaps are used to manage the Company's cash flow exposure to raw material cost volatility. They have been designated as cash flow hedges and all the commodity swaps qualify for hedge accounting as at June 30, 2011 and December 31, 2010.

The interest rate and commodity hedges were determined to be effective and consequently the net unrealized gain of $1.2 million at June 30, 2011 (2010—net unrealized loss of $0.5 million) has been recorded in other comprehensive income. Ineffectiveness was determined to be immaterial during the first half year ended June 30, 2011, and year ended December 31, 2010, and accordingly no gain or loss was recognized in earnings in either period. Based on the valuations as at June 30, 2011 the Company expects a net unrealized gain of $1.1 million to be reclassified into earnings in the next 12 months and the remaining $0.1 million to be reclassified into earnings in the following 12 months.

Foreign currency forward exchange contracts primarily relate to contracts entered into to hedge future known transactions or hedge balance sheet net cash positions. The movements in the carrying amounts and fair values of these contracts are largely due to changes in exchange rates against the U.S. dollar.