17. DERIVATIVE FINANCIAL INSTRUMENTS AND COMMODITY HEDGING ACTIVITIES

Foreign Currency Derivative and Hedging Activities

Currency Forward Contracts

We periodically enter into currency forward contracts primarily to hedge currency fluctuations of transactions denominated in currencies other than the functional currency of the respective entity. At June 30, 2012, the principal transactions hedged involved accounts receivable and accounts payable. When hedging currency exposures, our practice is to economically hedge such exposures with forward contracts denominated in the same currency and with similar critical terms as the underlying exposure, and therefore, the instruments are effective at generating offsetting changes in the fair value, cash flows or future earnings of the hedged item or transaction. The fair values of forward contracts are calculated each period. These forward contracts are not defined as hedging instruments and therefore, all changes in fair values are reported in other income (expense), net.

At June 30, 2012, net contractual notional amounts of forward contracts outstanding translated into U.S. dollars (“USD”) totals $324.8. Of this total, $260.6 was attributed to the exposure in forward selling/purchase of USD. The remaining $64.2 was attributable to the exposure in forward selling/purchase of Euros, translated into USD equivalent amounts. The net unfavorable fair values of currency contracts, based on forward exchange rates at June 30, 2012 and December 31, 2011 were $1.0 and $2.4, respectively.

Cash Flow Hedges

In the fourth quarter of 2011, we entered into a contract for the construction of certain manufacturing equipment, the payments of which are denominated in Swiss francs (CHF), and will total approximately 7.3 CHF. These CHF payments expose us to exchange rate fluctuations between CHF and USD. To hedge this risk, we entered into forward contracts to buy CHF and sell USD at agreed upon rates. To protect our consolidated earnings against the risk of foreign currency-related fluctuation associated with the forecasted CHF payments for the equipment, we designated the currency forward to buy CHF and sell USD on the forward’s maturity date (the “hedging instrument”) as a cash flow hedge of the foreign currency risks associated with our capitalization of the first, previously unhedged, forecasted CHF-denominated invoices.

As of June 30, 2012 and December 31, 2011, the notional amount of the forward contracts designated as a cash flow hedge was approximately $2.0 and $4.2, respectively, and the unrealized loss as of June 30, 2012 and December 31, 2011 was approximately $0.1 and $0.1, respectively. The remaining contract will settle in the third quarter of 2012. There was no hedge ineffectiveness for the contracts in 2012.

Cross Currency Swaps

We have used cross currency swaps to hedge the changes in the cash flows of certain Euro denominated intercompany loans receivable (“Euro loans”) held by U.S. entities and to hedge a portion of our net investment in Cytec Surface Specialties SA/NV (our largest Euro functional currency subsidiary).

The swaps were originally designated as cash flow hedges of the changes in value of the future Euro interest and principal receipts that resulted from changes in the USD to Euro exchange rates on certain Euro denominated intercompany loans receivable we have with one of our subsidiaries. Since the loans and underlying investment are denominated in Euros, we have foreign exchange exposure to the Euro/USD exchange rate changes. We hedge these foreign exchange exposures by using cross currency swaps with notional amounts of €207.9 ($250.0), which will settle on October 1, 2015 (“ten year swaps”). At the initial principal exchange, we paid $250.0 and received €207.9 from counterparties. At the final exchange of the ten year swaps on October 1, 2015, we will pay €207.9 and receive $250.0. The swaps have fixed interest rates on both legs. We pay 4.52% interest per annum on the Euro notional amount and we receive 6.0% interest per annum on the USD notional amount. The interest payment dates (April 1 and October 1) and Euro rates coincide with the Euro loans.

The swaps fixed the USD equivalent cash flows of the Euro loans and eliminated foreign exchange variability, since the notional amounts of the swaps equaled that of the loans, and all cash flow dates and interest rates coincided between the swaps and the loans; therefore no ineffectiveness was expected or occurred.

In September 2010, we de-designated our ten year swaps as hedging instruments due to the early settlement of a €41.6 portion of these swaps by one of our counterparties effective October 1, 2010. As a result of this termination, we executed a new cross currency swap effective October 1, 2010 to maintain the total notional amount of the ten year swaps at €207.9. With respect to this replacement swap, we pay 4.52% per annum on the Euro notional amount and receive 5.80% per annum on the USD notional amount on each April 1 and October 1, through the maturity date of the swap, which is also on October 1, 2015. We concurrently designated all the ten year swaps as a net investment hedge of the value of one of our U.S. subsidiaries’ net investment in our Belgium-based subsidiary, Cytec Surface Specialties SA/NV, against the risk of adverse foreign exchange movements in the USD value of the Euro. Since the critical terms of the ten year swaps match the critical terms of the net investment in Cytec Surface Specialties SA/NV, the ten year swaps are highly effective in offsetting the changes in the value of the net investment attributable to the change in USD value of the Euro.

All cross currency swaps are recorded at fair value as either assets or liabilities. Each period we record the change in the fair value of the ten year swaps in accumulated other comprehensive income. For the ten year swaps, prior to its de-designation as cash flow hedges in September 2010, we reclassified an amount out of accumulated other comprehensive income to the income statement to offset the foreign currency gain or loss on the remeasurement to USD of the Euro intercompany loans. The amount of such reclassification depended on changes in the USD/Euro exchange rate occurring during the period.

For cross currency swaps designated as a hedge of our net investment in Cytec Surface Specialties SA/NV, the fair value of the ten year swaps is calculated each period with changes in fair value reported in foreign currency translation adjustments within accumulated other comprehensive income (loss), net of tax. Such amounts reclassified to translation adjustments will remain in other comprehensive income (loss) until the complete or substantially complete liquidation of our investment in Cytec Surface Specialties SA/NV. We monitor the counterparty credit risk and the continued probability of the hedged cash flows as to amount and timing.

At June 30, 2012, the unfavorable fair value of the ten year cross currency swaps was $7.3. At December 31, 2011, the unfavorable fair value of the ten year cross currency swaps was $13.2.

In July 2012, we terminated all of our outstanding cross currency swaps to take advantage of the declining value of the Euro and to prepare for the anticipated divestiture of Coating Resins. The final payment of approximately $1.8 to settle the swaps was based on the fair value of the swaps at the time of termination.

Commodity Derivative and Hedging Activities

We purchase natural gas for utility consumption at our manufacturing facilities and therefore, our overall profitability and operating cash flows are exposed to the variability in the market price. From time to time and through June 2011, as set forth in Note 6 of Notes to Consolidated Financial Statements contained in our 2011 Annual Report on Form 10-K, we have used natural gas forward purchase contracts to hedge a portion of our utility requirements at certain of our North American manufacturing facilities.

In conjunction with the divestiture of the former Building Block Chemicals segment in the first quarter of 2011, we terminated our natural gas hedge contracts and, since June 2011, we have not held any natural gas forwards.

At June 30, 2012, we did not have derivative instruments that contained credit-related-risk contingent features or provisions that would trigger immediate settlement or require us to post collateral to our counterparties. Also as of June 30, 2012, we did not have any significant concentration of credit risk arising from our derivative instruments.

The following tables summarize the impact of derivative instruments on our consolidated balance sheets and consolidated statements of income:

Asset Derivatives

Liability Derivatives

June 30, 2012

December 31, 2011

June 30, 2012

December 31, 2011

Balance Sheet
Location

Fair Value

Balance Sheet
Location

Fair
Value

Balance Sheet
Location

Fair Value

Balance Sheet
Location

Fair
Value

Derivatives designated as hedging instruments:

Cross currency swaps

Other current assets

0.2

Other current assets

0.3

Other noncurrent liabilities

7.5

Other noncurrent liabilities

13.5

Foreign currency forwards

Accrued expenses

0.1

Accrued expenses

0.1

Total derivatives designated as hedging instruments:

0.2

0.3

7.6

13.6

Derivatives not designated as hedging instruments:

Foreign currency forwards

Other current assets

1.3

Other current assets

0.3

Accrued expenses

2.3

Accrued expenses

2.7

Total derivatives not designated as hedging instruments:

1.3

0.3

2.3

2.7

Total derivatives

1.5

0.6

9.9

16.3

The following tables summarize the amounts and locations of our hedging derivatives’ gains (losses) recognized for the three and six months ended June 30, 2012 and 2011:


	Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion), Net of Tax						Location of Gain or (Loss) Recognized from Accumulated OCI into Income (Effective Portion)	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)					Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Derivatives in Cash Flow Hedging Relationships:	Three Months Ended June 30,							Three Months Ended June 30,						Three Months Ended June 30,
	2012			2011				2012		2011				2012		2011
Natural gas forwards	$	0.0		$	(0.2	)	Manufacturing cost of sales	$	0.0	$	(0.3	)	Other expense, net	$	0.0	$	0.0
Foreign currency forwards		(0.1	)		0.0				0.0		0.0				0.0		0.0

Total	$	(0.1	)	$	(0.2	)		$	0.0	$	(0.3	)		$	0.0	$	0.0


Derivatives in Net Investment Hedge Relationships:	Three Months Ended June 30,							Three Months Ended June 30,						Three Months Ended June 30,
	2012			2011				2012		2011				2012		2011
Cross currency swaps	$	8.4		$	(4.1	)		$	0.0	$	0.0			$	0.0	$	0.0


	Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion), Net of Tax					Location of Gain or (Loss) Recognized from Accumulated OCI into Income (Effective Portion)	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)					Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Derivatives in Cash Flow Hedging Relationships:	Six Months Ended June 30,						Six Months Ended June 30,						Six Months Ended June 30,
	2012		2011				2012		2011				2012		2011
Natural gas forwards	$	0.0	$	0.0		Manufacturing cost of sales	$	0.0	$	(2.1	)	Other expense, net	$	0.0	$	0.0
Foreign currency forwards		0.0		0.0				0.0		0.0				0.0		0.0

Total	$	0.0	$	0.0			$	0.0	$	(2.1	)		$	0.0	$	0.0


Derivatives in Net Investment Hedge Relationships:	Six Months Ended June 30,						Six Months Ended June 30,						Six Months Ended June 30,
	2012		2011				2012		2011				2012		2011
Cross currency swaps	$	4.4	$	(10.4	)		$	0.0	$	0.0			$	0.0	$	0.0

The following table summarizes the amount and location of gains (losses) recognized in income for our derivatives not designated as hedges for the three months ended June 30, 2012 and 2011:


Derivatives not Designated as Hedging Instruments:	Location of Gain or (Loss) Recognized in Income on Derivative	Amount of Gain or (Loss) Recognized in Income on Derivative
		Three months ended June 30,					Six months ended June 30,
		2012			2011		2012			2011
Foreign currency forwards	Other expense, net	$	(7.2	)	$	0.2	$	(1.8	)	$	4.0

Total		$	(7.2	)	$	0.2	$	(1.8	)	$	4.0

Fair Value Measurements

We have certain assets and liabilities that are carried at fair value on a recurring basis in the financial statements, for which we determine the appropriate level in the fair value input hierarchy for each fair value measurement. The fair value hierarchy prioritizes the inputs, which refer broadly to assumptions market participants would use in pricing an asset or liability, into three levels. It gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The level in the fair value hierarchy within which a fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets, interest rates, exchange rates, and yield curves observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability.

All of our derivatives are valued based on Level 2 inputs. Our currency forwards are valued based on readily available published indices for commodity prices and currency exchange rates. Our cross currency swaps are valued using an income approach based on industry-standard techniques. This model includes a discounted cash flow analysis that nets the discounted future cash receipts and the discounted expected cash payments resulting from the swap. The analysis is based on the contractual terms of the swaps including the period to maturity and observable market-based inputs that include time value, interest rate curves, foreign exchange rates, implied volatilities, as well as other relevant economic measures. We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the counterparty’s nonperformance risk in the fair value measurements.

Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by us and our counterparties. However, as of June 30, 2012, we have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

A summary of the fair value measurements for each major category of derivatives at June 30, 2012 is outlined in the table below:


Description	Significant Other Observable Inputs (Level 2)
Currency forwards	$	(1.1	)
Cross currency swaps		(7.3	)

Total	$	(8.4	)

As of June 30, 2012, we did not have any non-financial assets and liabilities that are carried at fair value on a recurring basis in the consolidated financial statements or for which a fair value measurement was required for the six months ended June 30, 2012. Included among our non-financial assets and liabilities that are not required to be measured at fair value on a recurring basis are plant, equipment and facilities, goodwill, acquisition intangibles, and asset retirement obligations. For more information regarding our hedging activities and derivative financial instruments, refer to Note 6 to the Consolidated Financial Statements contained in our 2011 Annual Report on Form 10-K.