JOHNSONDIVERSEY HOLDINGS INC - FORM 10-Q

JOHNSONDIVERSEY HOLDINGS INC - FORM 10-Q - August 8, 2011

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10–Q

¨	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JULY 1, 2011

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 333-108853

DIVERSEY HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware

80-0010497

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

8310 16^th Street

Sturtevant, Wisconsin 53177-0902

(Address of Principal Executive Offices, Including Zip Code)

(262) 631-4001

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No x*

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

There is no public trading market for the registrant’s common stock. As of July 29, 2011, there were 99,764,706 outstanding shares of the registrant’s Class A common stock, $0.01 par value and 2,563,161 outstanding shares of the registrant’s Class B common stock, $0.01 par value.

*	Note: As a voluntary filer not subject to filing requirements, the registrant filed all reports under Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 90 days.

INDEX


Section	Topic	Page

	Forward-Looking Statements		i

PART I – FINANCIAL INFORMATION

Item 1	Financial Statements

	Consolidated Balance Sheets as of July 1, 2011 (unaudited) and December 31, 2010		1

	Consolidated Statements of Operations for the three and six months ended July 1, 2011 (unaudited) and July 2, 2010 (unaudited)		2

	Consolidated Statements of Cash Flows for the six months ended July 1, 2011 (unaudited) and July 2, 2010 (unaudited)		3

	Notes to Consolidated Financial Statements (unaudited)		4

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		23

Item 3	Quantitative and Qualitative Disclosures about Market Risk		42

Item 4	Controls and Procedures		42

PART II – OTHER INFORMATION

Item 1	Legal Proceedings		43

Item 6	Exhibits		43

SIGNATURES			44

Exhibit Index			45

Unless otherwise indicated, references to “Holdings,” “Company,” “we,” “our” and “us” in this report refer to Diversey Holdings, Inc. and its consolidated subsidiaries and references to “Diversey,” refer to Diversey, Inc., a wholly-owned subsidiary of Holdings.

Forward-Looking Statements

We make statements in this Quarterly Report on Form 10–Q that are not historical facts. These “forward-looking statements” can be identified by the use of terms such as “may,” “intend,” “might,” “will,” “should,” “could,” “would,” “expect,” “believe,” “estimate,” “anticipate,” “predict,” “project,” “potential,” or the negative of these terms, and similar expressions. You should be aware that these forward-looking statements are subject to risks and uncertainties that are beyond our control. Further, any forward-looking statement speaks only as of the date on which it is made, and except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. New factors emerge from time to time that may cause our business not to develop as we expect, and it is not possible for us to predict all of them. Factors that may cause actual results to differ materially from those expressed or implied by the forward-looking statements include, but are not limited to, the following:

•

our ability to execute our business strategies;

•

our ability to fully realize the anticipated benefits of the Transactions;

•

our substantial indebtedness and our ability to operate in accordance with the terms and conditions of the agreements governing the indebtedness incurred pursuant to the Transactions, including the indebtedness under Diversey’s Senior Secured Credit Facilities, Diversey’s Senior Notes and our Senior Notes;

•

potential conflicts of interest that any of our indirect principal stockholders may have with us in the future;

•

successful operation of outsourced functions, including information technology and certain financial shared services;

•

the vitality of the global market for institutional and industrial cleaning, sanitation and hygiene products and related services and conditions affecting the industry, including health-related, political, global economic and weather-related;

•

restraints on pricing flexibility due to competitive conditions in the professional market;

•

the loss or insolvency of a significant supplier or customer, or the inability of a significant supplier or customer to fulfill its obligations to us;

•

effectiveness in managing our manufacturing processes, including our inventory, fixed assets and system of internal control;

•

our ability and the ability of our competitors to maintain service levels, retain and attract customers, and introduce new products and technical innovations;

•

energy costs, the costs of raw materials and other operating expenses;

•

general global economic, political and regulatory conditions, interest rates, exposure to foreign currency risks and financial market volatility;

•

our ability to maintain our relationships and commercial arrangements with our key affiliates;

•

the loss of, or changes in, executive management or other key personnel, and other disruptions in operations or increased labor costs;

•

the costs and effects of complying with laws and regulations relating to the environment and to the manufacture, storage, distribution and labeling of our products;

•

the occurrence of litigation or claims;

•

tax, fiscal, governmental and other regulatory policies;

•

adverse or unfavorable publicity regarding us or our services;

•

natural and manmade disasters, including acts of terrorism, hostilities, war and other such events that cause business interruptions or affect our markets;

•

the effect of relocating manufacturing capability from our primary U.S. manufacturing facility;

•

the effect of future acquisitions or divestitures or other corporate transactions;

•

the ability to complete the pending Agreement and Plan of Merger; and

•

other factors listed from time to time in reports that we file with the SEC.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DIVERSEY HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share data)


	July 1,			December 31,
	2011			2010
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	71,723		$	169,094
Restricted cash		12,099			20,407
Accounts receivable, less allowance of $20,576 and $19,888, respectively		630,241			563,006
Accounts receivable - related parties		9,786			6,433
Inventories		327,487			263,247
Deferred income taxes		24,041			24,532
Other current assets		167,115			163,307

Total current assets		1,242,492			1,210,026
Property, plant and equipment, net		426,399			410,507
Capitalized software, net		53,087			52,980
Goodwill		1,331,271			1,263,431
Other intangibles, net		199,359			194,175
Other assets		170,702			152,894

Total assets	$	3,423,310		$	3,284,013


LIABILITIES, CLASS B SHARES AND EQUITY AWARDS SUBJECT TO CONTINGENT REDEMPTION AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term borrowings	$	40,041		$	24,205
Current portion of long-term borrowings		9,885			9,498
Accounts payable		357,531			327,831
Accounts payable – related parties		31,432			23,794
Accrued expenses		415,883			463,319

Total current liabilities		854,772			848,647
Pension and other post-retirement benefits		231,446			226,682
Long-term borrowings		1,476,259			1,445,678
Deferred income taxes		122,195			114,358
Other liabilities		120,458			125,893

Total liabilities		2,805,130			2,761,258

Commitments and contingencies

Class B shares and equity awards subject to contingent redemption features - $0.01 par value; 20,000,000 shares authorized; 2,563,161 shares issued and outstanding at July 1, 2011 and 1,490,971 shares issued and outstanding at December 31, 2010		36,686			35,871
Stockholders’ equity:
Class A common stock - $0.01 par value; 200,000,000 shares authorized; 99,764,706 shares issued and outstanding at July 1, 2011 and December 31, 2010		998			998
Capital in excess of par value		556,747			554,244
Accumulated deficit		(283,973	)		(309,785	)
Accumulated other comprehensive income		307,722			241,427

Total stockholders’ equity		581,494			486,884

Total liabilities, Class B shares and equity awards subject to contingent redemption and stockholders’ equity	$	3,423,310		$	3,284,013

The accompanying notes are an integral part of the consolidated financial statements

DIVERSEY HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands)


	Three Months Ended						Six Months Ended
	July 1,			July 2,			July 1,			July 2,
	2011			2010			2011			2010
	(unaudited)						(unaudited)
Net sales:
Net product and service sales	$	869,638		$	788,146		$	1,626,895		$	1,530,071
Sales agency fee income		6,367			6,171			12,865			11,906

		876,005			794,317			1,639,760			1,541,977
Cost of sales		511,307			449,222			959,026			879,657

Gross profit		364,698			345,095			680,734			662,320
Selling, general and administrative expenses		258,715			254,312			514,045			504,271
Research and development expenses		18,686			16,530			36,290			33,257
Restructuring credits		(925	)		(1,799	)		(1,149	)		(2,520	)

Operating profit		88,222			76,052			131,548			127,312
Other (income) expense:
Interest expense		30,154			35,472			67,284			69,908
Interest income		(583	)		(418	)		(1,209	)		(881	)
Other (income) expense, net		435			18			110			3,754

Income from continuing operations before income taxes		58,216			40,980			65,363			54,531
Income tax provision		25,425			20,506			39,466			39,908

Income from continuing operations		32,791			20,474			25,897			14,623
Loss from discontinued operations, net of income taxes		—			(8,743	)		—			(9,061	)

Net income	$	32,791		$	11,731		$	25,897		$	5,562

The accompanying notes are an integral part of the consolidated financial statements

DIVERSEY HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)


	Six Months Ended
	July 1, 2011			July 2, 2010
	(unaudited)
Cash flows from operating activities:
Net income	$	25,897		$	5,562
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		50,387			45,453
Amortization of intangibles		7,855			8,737
Amortization and direct expense of debt issuance costs		9,956			5,700
Accretion of original issue discount		3,195			1,478
Interest accreted on notes payable		—			12,469
Deferred income taxes		1,130			17,501
Loss on disposal of discontinued operations		—			754
Loss from divestitures		—			101
Japan inventory loss		701			—
Loss (Gain) on property, plant and equipment disposals		(193	)		103
Stock-based compensation		6,173			7,284
Other		3,319			8,476
Changes in operating assets and liabilities, net of effects from acquisitions and divestitures of businesses:
Accounts receivable		(49,148	)		(11,613	)
Inventories		(52,672	)		(30,751	)
Other current assets		2,176			(4,949	)
Accounts payable and accrued expenses		(33,730	)		(103,450	)
Other assets		(14,071	)		2,618
Other liabilities		(14,469	)		6,217

Net cash used in operating activities		(53,494	)		(28,310	)
Cash flows from investing activities:
Capital expenditures		(38,807	)		(30,237	)
Expenditures for capitalized computer software		(10,783	)		(5,977	)
Proceeds from property, plant and equipment disposals		646			3,200
Acquisitions of businesses and other intangibles		(2,463	)		—
Net costs of divestiture of businesses		—			(855	)

Net cash used in investing activities		(51,407	)		(33,869	)
Cash flows from financing activities:
Proceeds from short-term borrowings, net		15,606			(915	)
Repayments of long-term borrowings		(4,893	)		(4,619	)
Payment of costs for equity redemption and issuance		—			(961	)
Proceeds related to stock-based long-term incentive plans		60			9,467
Repurchase and redemption of Class B equity		(2,915	)		—
Payment of debt issuance costs		(2,806	)		(4,949	)
Dividends paid		(85	)		(81	)

Net cash provided by (used in) financing activities		4,967			(2,058	)
Effect of exchange rate changes on cash and cash equivalents		2,563			(4,256	)

Change in cash and cash equivalents		(97,371	)		(68,493	)
Beginning balance		169,094			249,713

Ending balance	$	71,723		$	181,220


Supplemental cash flows information
Cash paid during the period:
Interest, net	$	55,605		$	53,252
Income taxes		34,030			14,469

The accompanying notes are an integral part of the consolidated financial statements

DIVERSEY HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

July 1, 2011

(Unaudited)

1.	Description of the Company

Diversey Holdings, Inc. (“Holdings” or the “Company”) directly owns all of the shares of Diversey, Inc. (“Diversey”). The Company is a holding company and its sole business interest is the ownership and control of Diversey and its subsidiaries. Diversey is a leading global marketer and manufacturer of commercial cleaning, hygiene, operational efficiency, appearance enhancing products and equipment and related services and solutions for food safety and service, food and beverage plant operations, floor care, housekeeping and room care, laundry and skin care. Diversey serves institutional and industrial end-users such as food service providers, lodging establishments, food and beverage processing plants, building service contractors, building managers and property owners, retail outlets, schools and health-care facilities in more than 175 countries worldwide.

2.	Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required for complete financial statements. In the opinion of management, all normal recurring adjustments considered necessary to present fairly the financial position of the Company as of July 1, 2011 and its results of operations for the three and six months ended July 1, 2011 and cash flows for the six months ended July 1, 2011 have been included. The results of operations for the three and six months ended July 1, 2011 are not necessarily indicative of the results to be expected for any subsequent interim period or for the full fiscal year ending December 31, 2011. It is recommended that the accompanying consolidated financial statements be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010. As a public reporting company, the Company evaluates subsequent events through the date the financial statements are issued.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Diversey Holdings, Inc., Diversey, Inc., and its wholly owned subsidiaries. All inter-company balances and transactions have been eliminated upon consolidation.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.

The Company uses estimates and assumptions in accounting for the following significant matters, among others:

•

Allowances for doubtful accounts

•

Inventory valuation and allowances

•

Valuation of acquired assets and liabilities

•

Useful lives of property and equipment and intangible assets

•

Goodwill and other long-lived asset impairment

•

Contingencies

•

Accounting for income taxes

•

Stock-based compensation

•

Customer rebates and discounts

•

Environmental remediation costs

DIVERSEY HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

July 1, 2011

(Unaudited)

•

Pensions and other post-retirement benefits

Actual results may differ from previously estimated amounts, and such differences may be material to the consolidated financial statements. The Company periodically reviews estimates and assumptions, and the effects of revisions are reflected in the period in which the revision is made. No significant revisions to estimates or assumptions were made during the periods presented in the accompanying consolidated financial statements.

Unless otherwise indicated, all monetary amounts, except per share data, are stated in thousand dollars.

Accrued Employee-Related Expenses

The Company accrues employee compensation costs relating to payroll, payroll taxes, vacation, bonuses and incentives when incurred. During the three months ended July 1, 2011, the Company modified its performance-based compensation plans resulting in a $6,500 reduction of accrued expenses recorded as of April 1, 2011 and a reduction of selling, general, and administrative expense for the current quarter.

Reclassification

In 2010, as a result of integrating certain of the Company’s equipment business into the Americas and Europe segments, associated revenues, expenses, assets and liabilities have been reclassified from eliminations/Other to the Americas and Europe segments. Accordingly, prior period segment information in Note 19 has been restated for comparability and consistency.

3.	Recent Accounting Pronouncements

With the exception of those discussed below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the six months ended July 1, 2011, as compared to the recent accounting pronouncements described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, that are of significance, or potential significance, to the Company.

Comprehensive Income (ASC Topic 220)

In June 2011, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) to allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. It does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. This ASU is to be applied retrospectively and is effective for interim and annual periods beginning after December 15, 2011. Early adoption is permitted. The Company is currently evaluating the effect of this ASU on its financial statements.

Fair Value Measurement (ASC Topic 820)

In May 2011, the FASB issued an ASU incorporating amendments to achieve common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards. This ASU represents the converged guidance of the FASB and the International Accounting Standards Board on fair value measurement. The FASB does not intend for many of the amendments to result in a change in the application of ASC Topic 820.

DIVERSEY HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

July 1, 2011

(Unaudited)

This ASU is to be applied prospectively and is effective for interim and annual periods beginning after December 15, 2011. Early application is not permitted. The Company is currently evaluating the effect that this ASU may have on its financial statements.

Business Combinations (ASC Topic 805)

In December 2010, the FASB issued an ASU related to Disclosure of Supplementary Pro Forma Information for Business Combinations. The amendments in this ASU specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The Company adopted this ASU effective at the beginning of fiscal year 2011, and will apply the ASU prospectively to future business combinations for which the acquisition date is after December 31, 2010, as required. This ASU did not impact the Company’s consolidated financial statements.

Intangibles - Goodwill and Other (ASC Topic 350)

In December 2010, the FASB issued an ASU describing when to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. The amendments in this ASU modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The qualitative factors are consistent with the existing guidance and examples, which require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company adopted this ASU effective at the beginning of fiscal year 2011, as required. This ASU did not impact the Company’s consolidated financial statements.

4.	Master Sales Agency Terminations and Umbrella Agreement

In connection with the May 2002 acquisition of the DiverseyLever business, Diversey entered into a master sales agency agreement (the “Sales Agency Agreement”) with Unilever PLC and Unilever N.V. (“Unilever”), whereby Diversey acts as an exclusive sales agent in the sale of Unilever’s consumer branded products to various institutional and industrial end-users. At acquisition, Diversey assigned an intangible value to the Prior Agency Agreement of $13,000, which was fully amortized at May 2007.

In October 2007, Diversey and Unilever entered into the Umbrella Agreement (the “Umbrella Agreement”), to replace the Prior Agency Agreement, which includes; i) a new agency agreement with terms similar to the Prior Agency Agreement, covering Ireland, the United Kingdom, Portugal and Brazil, and ii) a Master Sub-License Agreement (the “License Agreement”) under which Unilever has agreed to grant 31 of Diversey’s subsidiaries a license to produce and sell professional size packs of Unilever’s consumer branded cleaning products. The entities covered by the License Agreement have also entered into agreements with Unilever to distribute Unilever’s consumer branded products. Except for some transitional arrangements in certain countries, the Umbrella Agreement became effective January 1, 2008, and, unless otherwise terminated or extended, will expire on December 31, 2017.

DIVERSEY HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

July 1, 2011

(Unaudited)

An agency fee is paid by Unilever to the Company in exchange for its sales agency services. An additional fee is payable by Unilever to the Company in the event that conditions for full or partial termination of the Prior Agency Agreement are met. At various times during the life of the Prior Agency Agreement, the Company elected, and Unilever agreed, to partially terminate the Prior Agency Agreement in several territories resulting in payment by Unilever to the Company of additional fees, which are recognized in the consolidated statements of operations over the life of the Umbrella Agreement. In association with the partial terminations, the Company recognized sales agency fee income of $159 and $150 during the three months ended July 1, 2011 and July 2, 2010, respectively; and $553 and $309 during the six months ended July 1, 2011 and July 2, 2010.

An additional fee is payable by Unilever to the Company in the event that conditions for full or partial termination of the License Agreement are met. The Company elected, and Unilever agreed, to partially terminate the License Agreement in several territories resulting in payment by Unilever to the Company of additional fees. In association with the partial terminations, the Company recognized sales income of $80 and $0 during the three months ended July 1, 2011 and July 2, 2010, respectively; and $159 and $0 during the six months ended July 1, 2011 and July 2, 2010.

Under the License Agreement, the Company recorded net product and service sales of $34,889 and $29,911 during the three months ended July 1, 2011 and July 2, 2010, respectively; and $65,332 and $60,878 during the six months ended July 1, 2011 and July 2, 2010, respectively.

5.	Acquisitions

Strategic Alliance

The Company entered into a strategic alliance agreement with Eulen, S.A. (“Eulen”), a Spain-based corporation engaged in cleaning services, whereby the Company acquired certain assets of Eulen for a total cash consideration of $3,600, of which approximately $2,500 was paid in the three months ended July 1, 2011 and $1,100 is payable in annual installments over the next 3 years. The Company expects to finalize the purchase accounting related to this acquisition in the second half of the year.

6.	Inventories

The components of inventories are summarized as follows:


	July 1, 2011		December 31, 2010

Raw materials and containers	$	67,695	$	56,412
Finished goods		259,792		206,835

Total inventories	$	327,487	$	263,247

Inventories are stated in the consolidated balance sheets net of allowance for excess and obsolete inventory of $ 23,098 and $21,806 on July 1, 2011 and December 31, 2010, respectively.

7.	Indebtedness and Credit Arrangements

DIVERSEY HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

July 1, 2011

(Unaudited)

In addition, the amendment changed various financial covenants and credit limits to provide greater flexibility to operate the business. These changes include the ability to issue incremental term loan facilities and the ability to issue dividends to Holdings to fund cash interest payments on the Holdings Senior Notes.

In connection with the amendment and in accordance with ASC 470-50, Debt Modifications and Extinguishments, the Company capitalized $443 and expensed $2,363 in transaction fees paid to third parties and wrote-off $160 in previously unamortized discounts and capitalized debt issuance costs. These amounts are included in interest expense in the consolidated statements of operations for the six months ended July 1, 2011. The effective interest rates on the Term loans were reduced from 5.70% – 6.91% to 4.19% – 5.40%.

In connection with the Company’s election to pay cash interest on the Holdings Senior Notes on November 15, 2011 and its expectation that future interest payments will be made in cash, the Company accelerated the amortization of unamortized discounts and capitalized debt issuance costs and recorded additional interest expense of $4,092 during the first quarter of 2011in the consolidated statements of operations.

The Company’s existing indebtedness is intended to be paid off in connection with the Merger Agreement discussed in Note 21. At July 1, 2011, the unamortized discount and debt issuance costs relating to the Company’s indebtedness were $19,432 and $57,751 respectively.

DIVERSEY HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

July 1, 2011

(Unaudited)

8.	Restructuring Liabilities

November 2005 Restructuring Program

On November 7, 2005, the Company announced a restructuring program (“November 2005 Plan”), which included redesigning the Company’s organizational structure, the closure of a number of manufacturing and other facilities, outsourcing the majority of information technology support worldwide, outsourcing certain financial services in Western Europe and a workforce reduction of approximately 15%. As of July 1, 2011, the Company has terminated 2,881 employees in the execution of this plan. Our November 2005 Plan activity is expected to continue through fiscal 2011, with the associated reserves expected to be substantially paid out through cash that has been transferred to irrevocable trusts established for the settlement of these obligations. These trusts have a balance of $ 12,099 as of July 1, 2011 and are classified as restricted cash in the Company’s consolidated balance sheet.

The activities associated with the November 2005 Plan for the three and six months ended July 1, 2011 were as follows:


	Employee- Related			Other			Total
Liability balances as of December 31, 2010	$	21,924		$	1,181		$	23,105
Net adjustments to restructuring liability		(224	)		—			(224	)
Cash paid ¹		(3,564	)		34			(3,530	)

Liability balances as of April 1, 2011	$	18,136		$	1,215		$	19,351
Net adjustments to restructuring liability		(946	)		21			(925	)
Cash paid ¹		(4,159	)		(18	)		(4,177	)

Liability balances as of July 1, 2011	$	13,031		$	1,218		$	14,249

¹	Cash paid includes the effects of foreign exchange.

The Company did not incur any long-lived asset impairment charges for the three and six month periods ended July 1, 2011. In connection with the November 2005 Plan, the Company recorded long-lived asset impairment charges of $115 and $519 for the three and six months ended July 2, 2010 respectively. The impairment charges are included in selling, general and administrative costs.

Total plan-to-date expense, net, associated with the November 2005 Plan, by reporting segment, is summarized as follows:


	Total Plan		Three Months Ended						Six Months Ended
	To-Date		July 1, 2011			July 2, 2010			July 1, 2011			July 2, 2010
Europe	$	147,484	$	(823	)	$	(1,184	)	$	(1,550	)	$	(1,576	)
Americas		41,512		4			(425	)		380			(617	)
Greater Asia Pacific		18,784		(93	)		311			34			200
Other		25,460		(13	)		(501	)		(13	)		(527	)

	$	233,240	$	(925	)	$	(1,799	)	$	(1,149	)	$	(2,520	)

9.	Exit or Disposal Activities

In June 2010, the Company announced plans to transition certain accounting functions in its corporate center and certain Americas locations to a third party provider. The Company expects to execute the plan between July 2010 and December 2011. The Company also affirmed its decision to cease manufacturing operations at Waxdale, its primary U.S. manufacturing facility, and to move some production to other locations in North America, as well as pursue contract manufacturing for a portion of its product lines. The timeline to transition out of Waxdale is not certain, but is expected to be largely completed during the first semester of fiscal 2012. In connection with these plans, the Company reduced its original estimate of $5,972 for the involuntary termination of employees by

DIVERSEY HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

July 1, 2011

(Unaudited)

$299 and $602 during the three and six months ended July 1, 2011, respectively. These costs are included in selling, general and administrative expenses in the consolidated statements of operations.

As of July 1, 2011, the Company carries a liability balance of $5,201 related to these involuntary terminations.

10.

Income Taxes

For the fiscal year ending December 31, 2011, the Company is projecting an effective income tax rate on pre-tax income from continuing operations of approximately 58%. The projected effective income tax rate for the fiscal year exceeds the statutory income tax rate primarily as a result of increased valuation allowances against deferred tax assets in certain jurisdictions and increases in reserves for uncertain tax positions.

The Company reported an effective income tax rate of 60.4% on pre-tax income from continuing operations for the six month period ended July 1, 2011, which is consistent with the projected effective income tax rate for the fiscal year ending December 31, 2011.

11.

Other (Income) Expense, Net

The components of other (income) expense, net in the consolidated statements of operations, include the following:


	Three Months Ended						Six Months Ended
	July 1, 2011			July 2, 2010			July 1, 2011			July 2, 2010

Foreign currency (gain) loss	$	(2,297	)	$	5,591		$	(7,913	)	$	8,975
Forward contracts (gain) loss		3,037			(5,440	)		8,464			(8,715	)
Hyperinflationary foreign currency (gain) loss		—			31			—			3,905
Other, net		(305	)		(164	)		(441	)		(411	)

	$	435		$	18		$	110		$	3,754

12.

Defined Benefit Plans and Other Post-Employment Benefit Plans

The components of net periodic benefit costs for the Company’s defined benefit pension plans and other post-employment benefit plans for the three and six months ended July 1, 2011 and July 2, 2010, are as follows:


	Defined Pension Benefits
	Three Months Ended						Six Months Ended
	July 1, 2011			July 2, 2010			July 1, 2011			July 2, 2010

Service cost	$	2,514		$	2,291		$	4,882		$	4,696
Interest cost		8,997			8,299			17,708			16,960
Expected return on plan assets		(10,906	)		(9,091	)		(21,466	)		(18,544	)
Amortization of net loss		1,477			1,568			2,927			3,229
Amortization of transition obligation		49			53			95			111
Amortization of prior service (credit) cost		(672	)		(371	)		(1,309	)		(757	)
Curtailments, settlements and special termination benefits		894			4,785			894			4,785

Net periodic pension cost	$	2,353		$	7,534		$	3,731		$	10,480

DIVERSEY HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

July 1, 2011

(Unaudited)


	Other Post-Employment Benefits
	Three Months Ended						Six Months Ended
	July 1, 2011			July 2, 2010			July 1, 2011			July 2, 2010

Service cost	$	314		$	326		$	628		$	653
Interest cost		1,129			1,157			2,257			2,316
Amortization of net (gain) loss		(17	)		(22	)		(34	)		(45	)
Amortization of prior service credit		(51	)		(51	)		(103	)		(102	)

Net periodic benefit cost	$	1,375		$	1,410		$	2,748		$	2,822

The Company made contributions to its defined benefit pension plans of $8,069 and $7,516 during the three months ended July 1, 2011 and July 2, 2010, respectively; and $16,723 and $13,443 during the six months ended July 1, 2011 and July 2, 2010, respectively.

In June 2011, the Company recognized a settlement of defined benefits to former U.S. employees resulting in a related loss of $894. The Company recorded this loss in selling, general and administrative expenses in the consolidated statement of operations.

In June 2010, the Company recognized a settlement of defined benefits to former U.S. employees resulting in a related loss of $3,974. The Company recorded $1,996 of this loss as a component of discontinued operations, and $1,978 in selling, general and administrative expenses in the consolidated statement of operations.

In June 2010, the Company recognized a curtailment and settlement of defined benefits to former Japan employees, resulting in a related loss of $571. The Company recorded this loss in selling, general and administrative expenses in the consolidated statement of operations.

In June 2010, the Company recognized a curtailment of defined benefits to former Ireland employees resulting in a related loss of $241. The Company recorded this loss in selling, general and administrative expenses in the consolidated statement of operations.

13.

Financial Instruments

The Company sells its products in more than 175 countries and approximately 85% of the Company’s revenues are generated outside the United States. The Company’s activities expose it to a variety of market risks, including the effects of changes in foreign currency exchange rates and interest rates. These financial risks are monitored and managed by the Company as an integral part of its overall risk management program.

The Company maintains a foreign currency risk management strategy that uses derivative instruments (foreign currency forward contracts) to protect its interests from fluctuations in earnings and cash flows caused by the volatility in currency exchange rates. Movements in foreign currency exchange rates pose a risk to the Company’s operations and competitive position, since exchange rate changes may affect the profitability and cash flow of the Company, and business and/or pricing strategies of competitors.

Certain of the Company’s foreign business unit sales and purchases are denominated in the customers’ or vendors’ local currency. The Company purchases foreign currency forward contracts as hedges of foreign currency denominated receivables and payables and as hedges of forecasted foreign currency denominated sales and purchases. These contracts are entered into to

DIVERSEY HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

July 1, 2011

(Unaudited)

protect against the risk that the future dollar-net-cash inflows and outflows resulting from such sales, purchases, firm commitments or settlements will be adversely affected by changes in exchange rates.

At July 1, 2011 and December 31, 2010, the Company held 33 and 23 foreign currency forward contracts, respectively, as hedges of foreign currency denominated receivables and payables with an aggregate notional amount of $164,612 and $163,092, respectively. Because the terms of such contracts are primarily less than three months, the Company did not elect hedge accounting treatment for these contracts. The Company records the changes in the fair value of these contracts within other (income) expense, net, in the consolidated statements of operations. Total net realized and unrealized (gains) losses recognized were $3,037 and $8,464 during the three and six months ended July 1, 2011, respectively compared with such (gains) losses of $(5,440) and $(8,715), respectively for the three and six months ended July 2, 2010.

As of July 1, 2011 and December 31, 2010, the Company held 141 and 194 foreign currency forward contracts, respectively, as hedges of forecasted foreign currency denominated sales and purchases with an aggregate notional amount of $44,798 and $62,983, respectively. The maximum length of time over which the Company typically hedges cash flow exposures is twelve months. To the extent that these contracts are designated and qualify as cash flow hedging instruments, the effective portion of the gain or loss on the derivative instrument is recorded in other comprehensive income and reclassified as a component to net income (loss) in the same period or periods during which the hedged transaction affects earnings. Net unrealized (gain) loss on cash flow hedging instruments of $(157) and $409 were included in accumulated other comprehensive income, net of tax, at July 1, 2011 and December 31, 2010, respectively. There was no ineffectiveness related to cash flow hedging instruments during the three and six months ended July 1, 2011 and July 2, 2010, respectively. Unrealized gains and losses existing at July 1, 2011, which are expected to be reclassified into the consolidated statements of operations from other comprehensive income during the next year, are not expected to be significant.

DIVERSEY HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

July 1, 2011

(Unaudited)

At July 1, 2011 and December 31, 2010, the location and fair value amounts of derivative instruments were as follows:

Asset Derivatives

Liability Derivatives

July 1, 2011

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Derivatives designated as hedging instruments

Foreign currency forward contracts

Other current assets

1,070

Accrued expenses

841

Derivatives not designated as hedging instruments

Foreign currency forward contracts

Other current assets

Accrued expenses

1,928

Total Derivatives

1,118

2,769

Asset Derivatives

Liability Derivatives

December 31, 2010

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Derivatives designated as hedging instruments

Foreign currency forward contracts

Other current assets

724

Accrued expenses

1,316

Derivatives not designated as hedging instruments

Foreign currency forward contracts

Other current assets

1,293

Accrued expenses

669

Total Derivatives

2,017

1,985

DIVERSEY HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

July 1, 2011

(Unaudited)

The effect of derivative instruments on the Consolidated Financial Statements for the three and six months ended July 1, 2011 and July 2, 2010, was as follows:


	Amount of (gain) loss recognized in OCI on derivatives (effective portion)				Amount of (gain) loss reclassified from accumulated OCI into income (effective portion)
Derivatives with cash flow hedging relationships	Three Months Ended July 1, 2011			Location of (gain) loss reclassified from accumulated OCI into income	Three Months Ended July 1, 2011

Foreign currency forward contracts	$	(392	)	Other (income) expense, net	$	(158	)


	Amount of (gain) loss recognized in OCI on derivatives (effective portion)				Amount of (gain) loss reclassified from accumulated OCI into income (effective portion)
Derivatives with cash flow hedging relationships	Three Months Ended July 2, 2010			Location of (gain) loss reclassified from accumulated OCI into income	Three Months Ended July 2, 2010

Foreign currency forward contracts	$	440		Other (income) expense, net	$	168


	Amount of (gain) loss recognized in OCI on derivatives (effective portion)				Amount of (gain) loss reclassified from accumulated OCI into income (effective portion)
Derivatives with cash flow hedging relationships	Six Months Ended July 1, 2011			Location of (gain) loss reclassified from accumulated OCI into income	Six Months Ended July 1, 2011

Foreign currency forward contracts	$	(229	)	Other (income) expense, net	$	(633	)


	Amount of (gain) loss recognized in OCI on derivatives (effective portion)				Amount of (gain) loss reclassified from accumulated OCI into income (effective portion)
Derivatives with cash flow hedging relationships	Six Months Ended July 2, 2010			Location of (gain) loss reclassified from accumulated OCI into income	Six Months Ended July 2, 2010

Foreign currency forward contracts	$	406		Other (income) expense, net	$	365

DIVERSEY HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

July 1, 2011

(Unaudited)

14.

Fair Value Measurements of Financial Instruments

Financial instruments measured at fair value on a recurring basis as of July 1, 2011 and December 31, 2010 were as follows:


	Balance at
	July 1, 2011		Level 1		Level 2		Level 3
Assets:
Foreign currency forward contracts	$	1,118	$	—	$	1,118	$	—


Liabilities:
Foreign currency forward contracts	$	2,769	$	—	$	2,769	$	—


	Balance at
	December 31, 2010		Level 1		Level 2		Level 3
Assets:
Foreign currency forward contracts	$	2,017	$	—	$	2,017	$	—


Liabilities:
Foreign currency forward contracts	$	1,985	$	—	$	1,985	$	—

The Company primarily uses readily observable market data in conjunction with globally accepted valuation model software when valuing its financial instruments portfolio and, consequently, the Company designates all financial instruments as Level 2. Under ASC Topic 820, Fair Value Measurements and Disclosures, there are three levels of inputs that may be used to measure fair value. Level 2 is defined as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

15.

Comprehensive Income (Loss)

Comprehensive income (loss) for the three and six months ended July 1, 2011 and July 2, 2010 are as follows:


	Three Months Ended						Six Months Ended
	July 1, 2011			July 2, 2010			July 1, 2011			July 2, 2010
Net income	$	32,791		$	11,731		$	25,897		$	5,562
Foreign currency translation adjustments		35,470			(41,886	)		68,310			(76,218	)
Adjustments to pension and post-retirement liabilities, net of tax		(2,297	)		(5,013	)		(2,581	)		(2,929	)
Unrealized gains on derivatives, net of tax		316			(232	)		566			(44	)

Total comprehensive income (loss)	$	66,280		$	(35,400	)	$	92,192		$	(73,629	)

DIVERSEY HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

July 1, 2011

(Unaudited)

16.

Stock-Based Compensation

Stock Incentive Plan

The Company maintains a Stock Incentive Plan (“SIP”) for the officers and most senior managers of the Company. The SIP provides for the purchase or award of new class B common stock of Holdings (“Shares”) and options to purchase new Shares representing in the aggregate up to 12% of the outstanding common stock of Holdings.

During the six months ended July 1, 2011, pursuant to the SIP, participants purchased 4,410 Shares in Holdings at $13.60 per share, and were awarded 11,759 matching options to purchase Shares pursuant to a matching formula, at an exercise price of $13.60 per share, with a contractual term of ten years. The matching options are subject to a vesting period of four years. In addition, the Company repurchased 27,500 Shares at $13.60 per share, relating to separated employees. In conjunction with these departures, 153,000 matching options were forfeited.

During the six months ended July 1, 2011, pursuant to the SIP, 1,251,478 Deferred Share Units (“DSUs” as defined in the SIP) granted in 2010 vested. 186,823 of these vested DSUs were redeemed for cash by the participants to pay all or a portion of their required withholding tax liability, and therefore were not converted into Shares. As a result of this redemption for cash, 627,099 matching options were forfeited. In addition, as a result of the departure of certain employees, 51,374 DSUs and 646,652 matching options were forfeited. Upon the closing of the Merger as discussed in Note 21, 548,473 of these options will be reinstated and accelerated pursuant to the terms of the Merger Agreement. As this event is solely contingent on the Merger closing, no compensation expense has been recognized for these options. For purposes of retention, 22,059 additional DSUs were granted to two participants, with no matching options. These DSUs have a weighted average grant-date fair value of $13.83, and are subject to vesting periods of two to three years.

The following table summarizes the stock option activity during the six months ended July 1, 2011:


	Number of Options			Exercise Price per Option¹		Remaining Contractual Term¹ (in years)		Aggregate Intrinsic Value
Outstanding at January 1, 2011		9,728,836		$	10.02
Granted		11,759			13.60
Forfeited		(1,273,751	)		10.00

Outstanding at July 1, 2011		8,466,844		$	10.03		8.5	$	138,389


Exercisable at July 1, 2011		646,950		$	10.00		8.5	$	10,591

¹	Weighted-average

The weighted-average grant-date fair value of all outstanding options at July 1, 2011 is $3.43.

DIVERSEY HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

July 1, 2011

(Unaudited)

The following table summarizes DSU activity during the six months ended July 1, 2011:


	Number of DSUs			Weighted- Average Grant-Date Fair Value
Nonvested DSUs at January 1, 2011		2,698,107		$	10.00
Granted		22,059			13.83
Vested		(1,251,478	)		10.00
Forfeited		(51,374	)		10.00

Nonvested DSUs at July 1, 2011		1,417,314		$	10.06

At July 1, 2011, there was $15,267 of unrecognized compensation cost related to DSUs and non-vested option compensation arrangements that is expected to be recognized as a charge to earnings over a weighted-average period of five years.

Director Stock Incentive Plan

The Company maintains a Director Stock Incentive Plan (“DIP”), which provides for the sale of Shares to certain non-employee directors of the Company, as well as the grant to these individuals of DSUs in lieu of receiving cash compensation for their services as a member of the Company’s Board of Directors.

The following table summarizes the Director DSU activity during the six months ended July 1, 2011:


	Number of DSUs			Weighted-Average Grant-Date Fair Value
Nonvested Director DSUs at January 1, 2011		45,729		$	10.36
Granted		51,291			13.60
Vested		(45,729	)		10.36

Nonvested Director DSUs at July 1, 2011		51,291		$	13.60

Compensation expenses related to the SIP and DIP were $2,671 and $3,794 for the three months ended July 1, 2011 and July 2, 2010, respectively; and $6,173 and $7,284 for the six months ended July 1, 2011 and July 2, 2010, respectively. These expenses are recorded as part of selling, general and administrative expenses in the consolidated statements of operations.

Stock Appreciation Rights Plan

The Company also maintains an incentive program for certain managers of the Company who are not in the SIP, which provides for cash awards based on stock appreciation rights (“SARs”). SARs have no effect on shares outstanding as appreciation awards are paid in cash and not in common stock. The Company accounts for SARs as liability awards in which the pro-rata portion of the awards’ fair value is recognized as expense over the vesting period, which approximates three years. The fair value of these awards in the current fiscal quarter was significantly affected by the merger price consideration described in Note 22.

DIVERSEY HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

July 1, 2011

(Unaudited)

Compensation expenses related to the SARs plan were $3,805 and $218 for the three months ended July 1, 2011 and July 2, 2010, respectively; and $4,164 and $404 for the six months ended July 1, 2011 and July 2, 2010, respectively. These expenses are recorded as part of selling, general and administrative expenses in the consolidated statements of operations.

Class B shares and equity awards subject to contingent redemption

The Company’s SIP and DIP programs are subject to a contingent redemption feature relating to any potential future change in control of the Company. Among other provisions, this feature provides for the cash settlement of Shares and DSUs at fair value as of the date of the change in control. Until the change in control occurs (see Note 22), applicable accounting guidance requires recognition of Shares and earned DSUs as mezzanine equity, which the Company has presented as Class B shares and equity awards subject to contingent redemption on its consolidated balance sheets.

At July 1, 2011, the Company’s mezzanine equity consisted of $21,926 related to DSUs, $13,660 related to the SIP equity offering and $1,100 related to the DIP equity offering.

17.

Commitments and Contingencies

The Company is subject to various legal actions and proceedings in the normal course of business. Although litigation is subject to many uncertainties and the ultimate exposure with respect to these matters cannot be ascertained, the Company does not believe the final outcome of any current litigation will have a material effect on the Company’s financial position, results of operations or cash flows.

The Company has purchase commitments for materials, supplies, and property, plant and equipment incidental to the ordinary conduct of business. In the aggregate, such commitments are not in excess of current market prices. Additionally, the Company normally commits to some level of marketing related expenditures that extend beyond the fiscal year. These marketing expenses are necessary in order to maintain a normal course of business and the risk associated with them is limited. It is not expected that these commitments will have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

In the fourth quarter of 2010, the Company concluded that it unconditionally pledged $6,000 to a charitable organization near its Sturtevant, Wisconsin headquarters, which it recognized as selling, general and administrative expense. The Company made its first of several installment payments in April 2011, and expects to make the final installment in 2012.

In the second quarter of 2011, a subsidiary of the company within the Americas segment was notified of a ruling by an administrative council regarding employment tax matters covering the years 2002 through 2006. While the Company believes it has defenses against these claims and other employment tax claims for the same period, and has not accrued for these contingencies because it does not believe that a loss is probable, the ultimate resolution of these matters could result in a loss of up to approximately $6,500.

The Company maintains environmental reserves for remediation, monitoring, assessment and other expenses at one of its domestic facilities. While the ultimate exposure at this site continues to be evaluated, the Company does not anticipate a material effect on its consolidated financial position, results of operations or cash flows.

In connection with the acquisition of the DiverseyLever business, the Company conducted environmental assessments and investigations at DiverseyLever facilities in various countries. These investigations disclosed the likelihood of soil and/or groundwater contamination, or potential environmental regulatory matters. The Company continues to evaluate the nature and extent of the identified contamination and is preparing and executing plans to address the contamination, including the potential to recover some of these costs from Unilever under the terms of the DiverseyLever purchase agreement. As of July 1, 2011, the Company

DIVERSEY HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

July 1, 2011

(Unaudited)

maintained related reserves of $10,593 on a discounted basis (using country specific rates ranging from 7.6% to 21.7%) and $13,576 on an undiscounted basis. The Company intends to seek recovery from Unilever under indemnification clauses contained in the purchase agreement.

18.

Japan Operations

Immediate impact of the disaster

On March 11, 2011, Japan suffered a significant natural disaster. The Company’s Japan subsidiary sustained damage to inventories at one of its leased facilities and recorded estimated losses and other charges totaling $1,300 in the first quarter, of which $461 was reversed in the second quarter, as actual losses were ascertained to be less than the estimated amounts. Most of the loss was recorded in cost of sales in the consolidated statements of operations. The Company expects that as a result of the nuclear crisis and the uncertain effects of the disaster on the Japanese economy, it may sustain further losses which are not yet currently estimable but are not expected to be material to the Company’s consolidated results. The Company’s Japan operations are based in Yokohama, which is approximately 150 miles from the damaged nuclear plant. The Company anticipates that certain losses, if sustained, will be covered by its insurance policies. The Company carries comprehensive property damage and business interruption policies that cover a maximum loss limit of $25,000, and subject to a minimum deductible of $1,000; inventory losses are subject to a $50 deductible.

For the six months ended July 1, 2011, the Company’s Japan business had net sales of $153,446, and operating profit of $8,963.

Longer term potential business disruption impact

The Company believes that the disaster may have an adverse effect on its sales and operating profits in Japan for the current fiscal year. It currently is not able to provide a reliable estimate of the potential loss this year or in future years and whether these losses will be offset by business interruption insurance policies carried by the Company.

Goodwill impairment assessment

During the Company’s 2010 impairment review, performed as of October 1, 2010, the Japan reporting unit had a fair value that exceeded its carrying value by 20%. The assumptions and estimates underlying fair value were determined with the assistance of a third party valuation firm and are subject to uncertainty. Failure of the Japanese business to realize financial forecasts or further weakening of the Japanese business environment, as a result of the disaster or other factors, could potentially impact the future recoverability of the $145,280 of goodwill held in our Japan reporting unit at July 1, 2011. The Company reviewed the events in Japan and based on qualitative and quantitative analyses performed as of July 1, 2011, including consideration of the Company’s implied valuation under the terms of the Merger Agreement (Note 21), concluded that there was no indicator of impairment that would require a Step 1 test under ASC 350, Intangibles – Goodwill and Other to be performed. The Company believes that the disaster may have an adverse effect on its sales and operating profits in Japan for the current year. However, future effects are still not determinable, and it currently believes that the long term assumptions remain appropriate.

DIVERSEY HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

July 1, 2011

(Unaudited)

19.

Segment Information

Business segment information is summarized as follows:


	Three Months Ended July 1, 2011
	Europe		Americas		Greater Asia Pacific		Eliminations/ Other ¹			Total Company
Net sales	$	463,958	$	260,065	$	164,113	$	(12,131	)	$	876,005
Operating profit		49,628		29,935		14,942		(6,283	)		88,222
Depreciation and amortization		10,956		6,011		4,054		7,782			28,803
Interest expense		8,598		4,173		316		17,067			30,154
Interest income		267		592		204		(480	)		583
Total assets		2,015,861		723,411		577,524		106,514			3,423,310
Goodwill		832,975		215,488		215,901		66,907			1,331,271
Capital expenditures, including capitalized computer software		18,370		6,688		3,690		1,122			29,870
Long-lived assets ²		1,100,811		316,460		303,048		297,821			2,018,140

	Three Months Ended July 2, 2010
	Europe		Americas		Greater Asia Pacific		Eliminations / Other ¹			Total Company
Net sales	$	411,054	$	245,224	$	146,337	$	(8,298	)	$	794,317
Operating profit		48,694		26,962		9,795		(9,399	)		76,052
Depreciation and amortization		10,782		5,489		3,740		5,761			25,772
Interest expense		10,199		4,456		578		20,239			35,472
Interest income		317		543		161		(603	)		418
Total assets		1,778,748		592,391		511,189		320,798			3,203,126
Goodwill		716,936		205,884		196,512		64,899			1,184,231
Capital expenditures, including capitalized computer software		6,292		5,401		3,762		4,808			20,263
Long-lived assets ²		955,443		299,448		273,027		296,146			1,824,064

¹	Eliminations/Other includes the Company’s corporate operating and holding entities, discontinued operations and corporate level eliminations and consolidating entries.

²	Long-lived assets includes property, plant and equipment, capital software, intangible items and investments in affiliates.

DIVERSEY HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

July 1, 2011

(Unaudited)


	Six Months Ended July 1, 2011
	Europe		Americas		Greater Asia Pacific		Eliminations/ Other ¹			Total Company
Net sales	$	869,094	$	481,039	$	311,748	$	(22,121	)	$	1,639,760
Operating profit		66,705		50,191		21,594		(6,942	)		131,548
Depreciation and amortization		22,382		11,847		8,231		15,782			58,242
Interest expense		17,698		8,082		625		40,879			67,284
Interest income		535		1,218		400		(944	)		1,209
Total assets		2,015,861		723,411		577,524		106,514			3,423,310
Goodwill		832,975		215,488		215,901		66,907			1,331,271
Capital expenditures, including capitalized computer software		29,317		11,385		6,542		2,346			49,590
Long-lived assets ²		1,100,811		316,460		303,048		297,821			2,018,140

	Six Months Ended July 2, 2010
	Europe		Americas		Greater Asia Pacific		Eliminations / Other ¹			Total Company
Net sales	$	818,270	$	459,228	$	280,314	$	(15,835	)	$	1,541,977
Operating profit		85,740		44,648		16,673		(19,749	)		127,312
Depreciation and amortization		22,304		11,726		7,428		12,732			54,190
Interest expense		21,303		8,890		1,121		38,594			69,908
Interest income		718		961		282		(1,080	)		881
Total assets		1,778,748		592,391		511,189		320,798			3,203,126
Goodwill		716,936		205,884		196,512		64,899			1,184,231
Capital expenditures, including capitalized computer software		11,972		9,761		6,110		8,371			36,214
Long-lived assets ²		955,443		299,448		273,027		296,146			1,824,064

¹	Eliminations/Other includes the Company’s corporate operating and holding entities, discontinued operations and corporate level eliminations and consolidating entries.

²	Long-lived assets includes property, plant and equipment, capital software, intangible items and investments in affiliates.

20.

European Principal Company

In May 2011, the Company approved, subject to successful works council consultations, plans to reorganize its European operations to function under a centralized management and value chain model. After completing the reorganization in 2012, the European Principal Company (“EPC”) will manage the European segment centrally. The European subsidiaries will execute sales and distribution locally, and local production companies will act as toll manufacturers on behalf of the EPC. The Company expects to incorporate the EPC in The Netherlands.

As a result of this approval, the Company recorded restructuring and implementation liabilities of $2,608 during the current fiscal quarter.

21.

Agreement and Plan of Merger

On May 31, 2011, the Company, Sealed Air Corporation (“Sealed Air”) and Solution Acquisition Corp. (“Merger Sub”), a wholly-owned subsidiary of Sealed Air, entered into an Agreement and Plan of Merger (the “Merger Agreement”) under which Sealed Air will acquire 100% of the common stock of the Company. Pursuant to the Merger Agreement, and subject to the terms and conditions set forth therein, Merger Sub will be merged with and into the Company (the “Merger”), with the Company continuing as the surviving corporation in the Merger and a wholly-owned subsidiary of Sealed Air.

DIVERSEY HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

July 1, 2011

(Unaudited)

Pursuant to the terms of the Merger Agreement, the Company’s stockholders and equity interest holders will receive an aggregate of approximately $2.1 billion in cash (subject to certain adjustments) and 31.7 million shares of Sealed Air common stock. The final merger price consideration will depend upon the closing price of Sealed Air common stock at the time of closing. Upon closing of the transaction, the Company’s stockholders are expected to own approximately 15% of Sealed Air’s common stock. Also pursuant to the Merger Agreement, $1.5 billion of existing indebtedness of the Company will be extinguished through payment by Sealed Air.

The completion of the Merger is subject to certain conditions, including, among others, (i) the absence of any law or order prohibiting the closing and (ii) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, the Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings, as amended, and the implementing regulation promulgated pursuant thereto and the laws or regulations of certain other foreign jurisdictions. Each of Sealed Air and the Company has made customary representations and warranties in the Merger Agreement. The Company has agreed to various covenants and agreements, including, among others things, (i) not to solicit alternate transactions and (ii) to conduct its business in the ordinary course during the period between the date of the Merger Agreement and the effectiveness of the Merger and refrain from taking various non-ordinary course actions during that period, and Sealed Air has also agreed to various covenants and agreements, including, among others things, to conduct its business in the ordinary course during the period between the date of the Merger Agreement and the effectiveness of the Merger and refrain from taking various non-ordinary course actions during that period.

The Merger Agreement may be terminated by each of Sealed Air and the Company under specified circumstances, including if the Merger is not consummated by December 31, 2011 (which date can be extended to March 31, 2012 in specified circumstances, including if regulatory approval has not been obtained). The Merger Agreement contains certain termination rights for both Sealed Air and the Company, and further provides that, upon the termination of the Merger Agreement in the event that the financing for the transaction is not obtained, Sealed Air will be required to pay to the Company a cash termination fee of $160 million.

Further details to the Merger Agreement can be found in the Company’s Form 8-K filed with the SEC on June 3, 2011.

Also on May 31, 2011, the Company’ stockholders representing 100% of its voting common stock executed a written consent adopting and approving the Merger Agreement. No further approval by the stockholders is necessary to approve the Merger Agreement and to consummate the Merger.

As of July 1, 2011, the estimated merger price consideration is approximately $2.9 billion, net of certain adjustments pursuant to the Merger Agreement, or about $26.37 per share of the Company’s common stock and common stock equivalents. The accompanying financial statements do not include any adjustments that may be necessary under purchase accounting, upon the consummation of the Merger, to reflect the impact of the transaction on the Company’s financial position, liquidity or financial commitments.

In connection with the Merger Agreement, the Company recorded certain transaction costs of approximately $3,941, mostly relating to legal fees, and is included in selling, general and administrative expenses in the current fiscal quarter. Upon the closing of the Merger and the occurrence of a change of control of the Company, the reinstatement and/or acceleration of certain vesting benefits in the Company’s stock-based compensation plans (Note 16) will result in the recognition of additional compensation expense, and the extinguishment of the Company’s indebtedness will result in a write-off of currently unamortized discounts and capitalized debt issuance costs (Note 7). The Company also expects to incur advisory fees of approximately $25,000 that are contingent on the Merger closing and hence have not been recorded at July 1, 2011.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Executive Overview

The following management discussion and analysis describes material changes in the financial condition and results of operations of Diversey Holdings, Inc. and its consolidated subsidiaries since December 31, 2010. This discussion should be read in conjunction with our consolidated financial statements as of, and for the six months ended July 1, 2011, our Annual Report on Form 10-K and the section entitled “Forward-Looking Statements” immediately preceding Part I of this report.

We operate our business through Diversey and its subsidiaries. We are a leading global provider of commercial cleaning, sanitation and hygiene products, services and solutions for food safety and service, food and beverage plant operations, floor care, housekeeping and room care, laundry and hand care. In addition, we offer a wide range of value-added services, including food safety and application training and consulting, and auditing of hygiene and water management. We serve institutional and industrial end-users such as food service providers, lodging establishments, food and beverage processing plants, building service contractors, building managers and property owners, retail outlets, schools and health care facilities in more than 175 countries worldwide.

As indicated in the following table, net sales for the three and six months ended July 1, 2011, increased by 10.3% and 6.3%, respectively, when compared to the comparable periods of the prior year. Excluding the impact of foreign currency exchange, our net sales increased by 1.1% and 0.4% during the three months and six months ended July 1, 2011 compared to the comparable period of the prior year.


	Three Months Ended							Six Months Ended
(dollars in millions)	July 1, 2011		July 2, 2010		Change			July 1, 2011		July 2, 2010		Change

Net sales	$	876.0	$	794.3		10.3	%	$	1,639.8	$	1,542.0		6.3	%

Variance due to foreign currency exchange				71.9							91.8

	$	876.0	$	866.2		1.1	%	$	1,639.8	$	1,633.8		0.4	%

Our net sales grew in the current quarter due to continued strength in our emerging markets and improved performance in certain developed markets. Each of our segments reported sales increases, reflecting successful implementation of growth initiatives and pricing strategies. Our improvement was driven by global equipment sales and an expanding food and beverage business, which grew in all regions. These increases were partially offset by our planned exit from non-strategic toll manufacturing in Europe and unforeseen events, such as the natural disaster in Japan and the instability in Egypt. We continue to invest in emerging markets and in the deployment of our sector-based organization model. We expect our investments in capabilities, new business models and technologies to promote further growth as the year progresses.

As indicated in the following table, the Company’s gross profit percentage declined in the second quarter of 2011 when compared to the second quarter of 2010 and during the six months ended July 1, 2011 when compared to the six months ended July 2, 2010.


Margin on Net Sales Three Months Ended						Margin on Net Sales Six Months Ended
July 1, 2011			July 2, 2010			July 1, 2011			July 2, 2010

	41.6	%		43.4	%		41.5	%		43.0	%

During the three and six months ended July 1, 2011, the Company experienced a 180 basis point decline and 150 basis point decline in margin, respectively, as compared to the comparable periods of the prior year. The decline in margin was primarily driven

by materials cost inflation, higher fuel and freight costs, and adverse mix changes, which were partially offset by price increases and savings derived from our global strategic sourcing initiatives. We expect to continue to leverage our pricing strategies, sourcing initiatives and process improvements to mitigate current and expected inflationary pressures.

As of July 1, 2011, we were in compliance with the financial covenants under the credit agreement for the Diversey Senior Secured Credit Facilities. We believe that our cash flows from continuing operations, together with available cash on hand, and borrowings available under the Diversey Senior Secured Credit Facilities will generate sufficient cash flow to meet our liquidity needs for the foreseeable future.

On May 31, 2011, the Company entered into an Agreement and Plan of Merger (“Merger Agreement”) with Sealed Air Corporation (“Sealed Air”) whereby Sealed Air will acquire 100% of the Company’s equity for approximately $2.1 billion in cash (subject to certain adjustments) and 31.7 million shares of Sealed Air common stock. The final merger price consideration will depend upon the closing price of Sealed Air common stock at the time of closing. Upon closing of the transaction, Holdings’ stockholders are expected to own approximately 15% of Sealed Air’s common stock. Also pursuant to the Merger Agreement, $1.5 billion of existing indebtedness of Holdings and the Company will be extinguished through payment by Sealed Air. The completion of the merger is subject to certain conditions and is more fully described in Note 22 to the consolidated financial statements.

In December 2010, the Company announced a further enhancement of its organizational structure. The new structure, expected to be completed during the third quarter of this fiscal year provides a focus on the role of emerging markets in our growth objectives, and will consist of four regions reporting to the CEO, as follows:

•

Europe – This region will be comprised of operating units in Western and Eastern Europe and Russia and will no longer include our operations in Turkey, Africa and Middle East countries. Europe will continue to be our largest region.

•

Americas – The operating units in this region will remain unchanged.

•

Asia Pacific, Africa, Middle East, Turkey (“APAT”) – This region will be comprised of our operations in Asia Pacific, Africa, Middle East, Turkey and the Caucasian and Asian Republics. This region will no longer include Japan.

•

Japan – Japan becomes a stand-alone region.

In addition, a new Customer Solutions and Innovation group is being organized to coordinate global sectors, marketing, research, development and engineering leadership, and to collaborate directly with the regions to build and deliver sector growth strategies. The implementation of this organizational redesign is currently in progress. Regional presidents for each of the four regions have been appointed and are currently transitioning. The Company will continue to report its operating segments under the current three region model until the new management, operating, and financial reporting structures are effectively in place, which currently is expected to be completed during the third quarter of this fiscal year.

Critical Accounting Policies and Estimates

There have been no material changes to the Company’s critical accounting policies as described in its Annual Report on Form 10-K for the year ended December 31, 2010.

Recent Accounting Pronouncements

For information with respect to recent accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note 3 to the consolidated financial statements in Part I, Item I of this report.

Three Months ended July 1, 2011 Compared to Three Months ended July 2, 2010

Net Sales:


	Three Months Ended				Change
(dollars in millions)	July 1, 2011		July 2, 2010		Amount			Percentage

Net product and service sales	$	869.6	$	788.1	$	81.5			10.3	%
Sales agency fee income		6.4		6.2		0.2			3.2	%

		876.0		794.3		81.7			10.3	%

Variance due to foreign currency exchange				71.9		(71.9	)

	$	876.0	$	866.2	$	9.8			1.1	%

•

Net sales for the three months ended July 1, 2011 increased by 10.3% when compared to the three months ended July 2, 2010.

•

The comparability of net sales reported in the two periods is affected by the impact of foreign exchange rate movements. As measured against prior period’s results, the weaker U.S. dollar against the euro and a majority of other foreign currencies resulted in a $71.9 million increase in net sales in the current quarter.

•

Excluding the impact of foreign currency exchange rates, net sales increased by 1.1%. Our net sales grew in the current quarter due to continued strength in our emerging markets and improved performance in certain developed markets. Each of our segments reported sales increases, reflecting successful implementation of growth initiatives and pricing strategies. Our improvement was driven by global equipment sales and an expanding food and beverage business, which grew in all regions. These increases were partially offset by our planned exit from non-strategic toll manufacturing in Europe and unforeseen events, such as the natural disaster in Japan and the instability in Egypt. We continue to invest in emerging markets and in the deployment of our sector-based organization model. We expect our investments in capabilities, new business models and technologies to promote further growth as the year progresses. Following is a review of the sales performance for each of our regions:

•

In our Europe, Middle East and Africa markets, net sales increased by 0.2% in the current quarter versus the same period last year. The increase is due to volume growth in the food and beverage sector and continued growth in equipment sales in addition to price increases, mainly in our emerging markets. This was partially offset by our exit from non-strategic toll manufacturing and decreased volume due to the instability in Egypt. We continue to experience positive performance in our emerging markets, a trend we expect through the remainder of this fiscal year. To offset the effects of inflation, the Company has deployed price increases in both emerging and developed markets which were effective at the beginning of the third quarter of this year.

•

In our Americas region, net sales increased by 2.7% in the current quarter versus the same period last year. Our emerging markets in Latin America, led by Brazil, Argentina and Chile, continued strong growth trends, particularly in the food and beverage sector. Canada grew based on steady performance in food service and sales through distribution channels. In addition to consumption growth, we expect that price increases, which were effective at the beginning of the third quarter this year, will mitigate cost trends in both emerging and developed markets, particularly in the U.S.

•

In our Greater Asia Pacific region, net sales improved by 1.3% in the current quarter versus the same period last year. The increase is mainly due to strong volume improvements in the food and beverage and lodging sectors in our emerging markets, particularly in Greater China and India. Sales growth was achieved through volume increases in our existing customer base, new customer acquisitions, as well as continuing improvement in equipment sales in most markets. Our growth in emerging markets was partially offset by a 6% sales decline in Japan, a result of the recent natural disaster. We expect continued negative effects on sales in the current fiscal year in Japan as a result of the disaster. The region plans to pursue specific country growth plans and customer acquisition strategies to accelerate growth in its emerging markets. The Company has deployed price increases effective at the beginning of the third quarter of this year, across all geographies to offset the continuing effects of inflation.

•

Sales Agency Fee. As explained in Note 4 to our consolidated financial statements, the Company entered into an Umbrella Agreement with Unilever consisting of a new sales agency (“Sales Agency Agreement”) and License Agreement, which became effective January 1, 2008, and unless otherwise terminated or extended, will expire on December 31, 2017. The amounts of sales agency fee income earned under the Sales Agency Agreement are reported in the preceding table.

Gross Profit:

Our gross profit and gross profit percentages for the three months ended July 1, 2011 and July 2, 2010 were as follows:


	Three Months Ended						Change
(dollars in millions)	July 1, 2011			July 2, 2010			Amount		Percentage

Gross Profit	$	364.7		$	345.1		$	19.6		5.7	%

Gross profit as a percentage of net sales		41.6	%		43.4	%

•

Gross profit for the three months ended July 1, 2011 increased by $19.6 million when compared to the three months ended July 2, 2010.

•

The comparability of gross profit between the two periods is affected by the impact of foreign exchange rate movements. As measured against the same period in the prior year, the weaker U.S. dollar against the euro and a majority of other foreign currencies resulted in a $31.9 million improvement in gross profit in the current quarter. Excluding the impact of foreign currency, gross profit decreased by $12.3 million.

•

Our gross profit percentage declined by 180 basis points in the second quarter of 2011 compared to the second quarter of 2010.

•

The decline in margin was primarily driven by materials cost inflation, higher fuel and freight costs, and adverse mix changes, which were partially offset by price increases and savings derived from our global strategic sourcing initiatives.

•

We expect further deployment of our pricing strategies to mitigate the effects of current and expected inflationary pressures. In addition, we expect margin improvement will result from the continued execution of our global sourcing initiatives and process enhancements.

Operating Expenses:


	Three Months Ended						Change
(dollars in millions)	July 1, 2011			July 2, 2010			Amount		Percentage

Selling, general and administrative expenses	$	258.7		$	254.3		$	4.4		1.7	%
Research and development expenses		18.7			16.5			2.2		13.3	%
Restructuring expenses (credits)		(0.9	)		(1.8	)		0.9		50.0	%

	$	276.5		$	269.0		$	7.5		2.8	%


As a percentage of net sales:
Selling, general and administrative expenses		29.5	%		32.0	%
Research and development expenses		2.1	%		2.1	%
Restructuring expenses		-0.1	%		-0.2	%

		31.5	%		33.9	%

•

Operating expenses for the three months July 1, 2011 increased by $7.5 million when compared to the three months ended July 2, 2010.

•

The comparability of operating expenses between the two periods is affected by the impact of foreign exchange rate movements. As measured against the same period in the prior year, the weaker U.S. dollar against the euro and a majority of other foreign currencies resulted in a $22.8 million increase in operating expenses. Excluding the impact of foreign currency, operating expenses decreased by $15.3 million.

•

Selling, general and administrative expenses. As a percentage of net sales, selling, general and administrative expenses were 29.5% for the second quarter of 2011 and 32.0% for the same period in the prior year. Selling, general and administrative expenses increased by $4.4 million during the current period. Excluding the impact of foreign currency, selling, general and administrative expenses decreased by $16.9 million during the second quarter of 2011 compared to the same period in the prior year. This decrease is primarily due to a reduction in performance-based compensation expense of $15.2 million (see Note 2 to the consolidated financial statements), the impact of non-recurring costs of $9.0 million in 2010 and improved operating efficiencies partially offset by costs incurred in the current fiscal quarter related to organizing the European Principal Company (see Note 20 to the consolidated financial statements) in the amount of $4.5 million, Merger-related transaction costs of $3.9 million (Note 21 to the consolidated financial statements) and increased compensation costs of $3.5 million related to the impact of the Merger on our SARs (Note 16 to the consolidated financial statements).

•

Research and development expenses. Research and development expenses increased by $2.2 million in the current period. Excluding the impact of foreign currency, research and development expenses increased by $0.7 million during the current quarter compared to the same period in the prior year.

•

Restructuring expenses (credits). As the November 2005 Plan winds down, credit adjustments related to previously recorded restructuring reserves decreased by $0.9 million during the current quarter compared to the same period in the prior year.

Restructuring:

A summary of all costs associated with the November 2005 Plan for the quarters ended July 1, 2011 and July 2, 2010, and since inception of the program in November 2005, is outlined below:


	Three Months Ended						Total Project to Date
(dollars in millions)	July 1, 2011			July 2, 2010			July 1, 2011

Reserve balance at beginning of period	$	19.4		$	39.0		$	—
Restructuring charges and adjustments		(0.9	)		(1.8	)		233.2
Payments of accrued costs		(4.2	)		(7.5	)		(218.9	)

Reserve balance at end of period	$	14.3		$	29.7		$	14.3


Period costs classified as selling, general and administrative expenses	$	1.2		$	3.9		$	322.2
Period costs classified as cost of sales		—			0.2			8.6

•

November 2005 Plan Restructuring Costs. During the three months ended July 1, 2011 and July 2, 2010, we reduced restructuring liabilities by $0.9 million and $1.8 million, respectively, for involuntary termination costs for certain individuals, formerly expected to be severed, who were either retained by the Company or resigned. Restructuring activities under the November 2005 Plan will continue to wind down during 2011.

•

November 2005 Plan Period Costs. Period costs of $1.2 and $3.9 million for 2011 and 2010, respectively, included in selling, general and administrative expenses and $0.2 million for 2010, included in cost of sales pertained to: (a) $0.9 million in 2011 ($1.7 million in 2010) for personnel related costs of employees and consultants associated with restructuring initiatives, (b) $(0.2) million in 2011 ($0.5 million in 2010) for value chain and cost savings projects, and (c) $0.5 million in 2011 ($1.9 million in 2010) related to facilities, asset impairment charges and various other costs. The overall decrease in these expenses over the prior period was mainly due to a reduction in restructuring activities within our Corporate center and Greater Asia Pacific segment.

Non-Operating Results:


	Three Months Ended						Change
(dollars in millions)	July 1, 2011			July 2, 2010			Amount			Percentage

Interest expense	$	30.1		$	35.5		$	(5.4	)		-15.2	%
Interest income		(0.6	)		(0.4	)		(0.2	)		-50.0	%

Net interest expense	$	29.5		$	35.1		$	(5.6	)		-16.0	%


Other expense (income), net		0.4			—			0.4			NM

•

Net interest expense decreased in the current quarter compared to the same period in the prior year primarily due to optional Term Loan repayments made in the second half of 2010, lower interest rates obtained from an improved leverage ratio, and the amendment to the Diversey Senior Secured Credit Facilities credit agreement (see Note 7 to the consolidated financial statements).

Income Taxes:


	Three Months Ended						Change
(dollars in millions)	July 1, 2011			July 2, 2010			Amount		Percentage

Income from continuing operations, before income taxes	$	58.2		$	41.0		$	17.2		42.0	%

Provision for income taxes		25.4			20.5			4.9		24.0	%

Effective income tax rate		43.7	%		50.0	%

•

For the fiscal year ending December 31, 2011, we are projecting an effective income tax rate of approximately 58% on pre-tax income from continuing operations. The projected effective income tax rate for the fiscal year exceeds the statutory income tax rate primarily as a result of increased valuation allowances against net deferred tax assets in certain jurisdictions and increases in reserves for uncertain tax positions.

•

We reported an effective income tax rate of 43.7% on the pre-tax income from continuing operations for the second quarter ended July 1, 2011. When compared to the estimated annual effective income tax rate, the effective income tax rate for the second quarter ended July 1, 2011, is lower primarily due to actual pacing of pre-tax income (loss) and income tax expense (benefit) in certain key jurisdictions. For example, the pre-tax income from continuing operations for the three month period ended July 1, 2011 includes a relatively low proportion of the projected annual U.S. pre-tax loss from continuing operations.

•

We reported an effective income tax rate of 50.0% on the pre-tax income from continuing operations for the second quarter ended July 2, 2010. The high effective income tax rate is primarily the result of increased valuation allowances against deferred tax assets in certain jurisdictions and increases in reserves for uncertain tax positions.

Net income:

Our net income of $32.8 million for the second quarter of 2011 increased by $21.1 million when compared to the second quarter of 2010. Excluding the impact of foreign currency exchange of $5.7 million, our net income increased by $15.4 million. The increase in net income is primarily due to higher operating profit, lower net interest expense and the impact of discontinued operations in 2010.

EBITDA and Diversey Credit Agreement EBITDA:

EBITDA is a non-U.S. GAAP financial measure, and you should not consider EBITDA as an alternative to U.S. GAAP financial measures such as (a) operating profit or net income (loss) as a measure of our operating performance or (b) cash flows provided by operating, investing and financing activities (as determined in accordance with U.S. GAAP) as a measure of our ability to meet cash needs.

We believe that, in addition to operating profit, net income (loss), and cash flows from operating activities, EBITDA is a useful financial measurement for assessing liquidity as it provides management, investors, lenders and financial analysts with an additional basis to evaluate our ability to incur and service debt and to fund capital expenditures. In addition, various covenants under Diversey’s Senior Secured Credit Facilities are based on EBITDA, as adjusted pursuant to the provisions of those facilities.

In evaluating EBITDA, management considers, among other things, the amount by which EBITDA exceeds interest costs for the period, how EBITDA compares to principal repayments on outstanding debt for the period and how EBITDA compares to capital expenditures for the period. Management believes many investors, lenders and financial analysts evaluate EBITDA for similar purposes. To evaluate EBITDA, the components of EBITDA, such as net sales and operating expenses and the variability of such components over time, should also be considered.

Accordingly, we believe that the inclusion of EBITDA in this report permits a more comprehensive analysis of our liquidity relative to other companies and our ability to service debt requirements. Because all companies do not calculate EBITDA identically, the presentation of EBITDA in this report may not be comparable to similarly titled measures of other companies.

EBITDA should not be construed as a substitute for, and should be considered together with, net cash flows provided by operating activities as determined in accordance with U.S. GAAP. The following table reconciles EBITDA to net cash flows provided by operating activities, which is the U.S. GAAP measure most comparable to EBITDA for the three months ended July 1, 2011 and July 2, 2010.


	Three Months Ended
(dollars in millions)	July 1, 2011			July 2, 2010
Net cash used in operating activities	$	(47.5	)	$	12.7
Changes in operating assets and liabilities, net of effects from acquisitions and divestitures of businesses		118.7			57.4
Changes in deferred income taxes		—			(8.5	)
Depreciation and amortization expense		(28.8	)		(25.8	)
Interest accreted on notes payable		—			(12.5	)
Japan inventory loss		0.5			—
Amortization and payment of debt issuance costs		(3.2	)		(3.1	)
Accretion of original issue discount		(0.7	)		(0.9	)
Stock-based compensation		(2.7	)		(3.8	)
Other		(3.5	)		(3.8	)

Net loss		32.8			11.7

Provision for income taxes		25.4			20.5
Interest expense, net		29.5			35.1
Depreciation and amortization expense		28.8			25.8

	$	116.5		$	93.1

EBITDA for the six months ended July 1, 2011 decreased by $23.4 million when compared to the same period in the prior year. Excluding the impact of foreign currency of $11.0 million, EBITDA declined by $12.4 million during the current period. This was primarily due to higher operating profit.

Diversey Credit Agreement EBITDA. For the purpose of calculating compliance with our financial covenants, the credit agreement for Diversey’s Senior Secured Credit Facilities (see discussion in Liquidity and Capital Resources, Debt and Contractual Obligations) requires Diversey to use a financial measure called Credit Agreement EBITDA, which is calculated as follows:


(dollars in millions)
EBITDA	$	116.5
Restructuring related costs		0.3
Non-cash expenses and charges		(0.7	)
Non-recurring gains or losses		13.8
Compensation adjustment and consulting fees		8.0

Credit Agreement EBITDA	$	137.9

We present Diversey Credit Agreement EBITDA because it is a financial measure that is used in the calculation of compliance with Diversey’s financial covenants under the credit agreement for the Diversey Senior Secured Credit Facilities. Credit Agreement EBITDA is not a measure under U.S. GAAP and should not be considered as a substitute for financial performance and liquidity measures determined in accordance with U.S. GAAP, such as net income, operating income or operating cash flow.

Borrowings under the Diversey Senior Secured Credit Facilities are a key source of our liquidity. Our ability to borrow under the Diversey Senior Secured Credit Facilities depends upon, among other things, compliance with certain representations, warranties and covenants under the credit agreement for the Diversey Senior Secured Credit Facilities. The financial covenants in the Diversey

Senior Secured Credit Facilities include a specified debt to Diversey Credit Agreement EBITDA leverage ratio and a specified Diversey Credit Agreement EBITDA to interest expense coverage ratio for specified periods.

Six Months Ended July 1, 2011 Compared to Six Months Ended July 2, 2010

Net Sales:


	Six Months Ended				Change
(dollars in millions)	July 1, 2011		July 2, 2010		Amount			Percentage

Net product and service sales	$	1,626.9	$	1,530.1	$	96.8			6.3	%
Sales agency fee income		12.9		11.9		1.0			8.4	%

		1,639.8		1,542.0		97.8			6.3	%

Variance due to foreign currency exchange				91.8		(91.8	)

	$	1,639.8	$	1,633.8	$	6.0			0.4	%

•

Net sales for the six months ended July 1, 2011 increased by 6.3% when compared to the six months ended July 2, 2010.

•

The comparability of net sales reported in the two periods is affected by the impact of foreign exchange rate movements. As measured against prior period’s results, the weaker U.S. dollar against the euro and a majority of other foreign currencies resulted in a $91.8 million increase in net sales in the first half of 2011.

•

Excluding the impact of foreign currency exchange rates, net sales increased by 0.4%. We continue to experience growth in our emerging markets, and have realized improvement in certain developed markets during the period. The following is a review of the sales performance for each of our regions:

•

In our Europe, Middle East and Africa markets, net sales decreased by 1.0% in the first six months of 2011 versus the same period last year. The decline was a result of a reduction in non-strategic toll manufacturing, and decreased volume due to the instability in Egypt. In addition, sales of consumer branded products were adversely impacted by competitive pressures. These challenges were partially offset by price increases, expansion in the food and beverage sector, and continued growth in equipment sales. We experienced strong growth across emerging markets, a trend we expect through the remainder of this fiscal year. To offset the effects of inflation, the Company has deployed price increases in both emerging and developed markets which were effective at the beginning of the third quarter of this year.

•

In our Americas region, net sales increased by 2.2% in the first six months of 2011 versus the same period last year. Our emerging markets in Latin America, led by Brazil, continued strong growth trends, particularly in the food and beverage sector. Canada grew based on steady performance in food service and sales through distribution channels. These gains were partially offset by sales declines in the U.S., primarily in the retail and food and beverage sectors. We expect a continued trend of consumption growth in emerging markets. In addition to consumption growth, we expect that price increases which were effective at the beginning of the third quarter this year, will mitigate cost trends in both emerging and developed markets, particularly in the US.

•

In our Greater Asia Pacific region, net sales improved by 1.6% in the first six months of 2011 versus the same period last year. The increase is mainly due to strong volume improvements in the food and beverage and lodging sectors in our emerging markets, particularly in Greater China and India. Sales growth was achieved through new customer acquisitions, volume increases in our existing customer base, as well as continuing improvement in equipment sales in most markets. Our growth in emerging markets was partially offset by a 4.9% sales decline in Japan, primarily a result of the recent natural disaster. We expect continued negative effects on sales in the current fiscal year in Japan as a result of the disaster. The Company has deployed price increases, effective at the beginning of the third quarter of this year, across all geographies to offset the continuing affects of inflation.

•

Gross Profit:

Our gross profit and gross profit percentages for the six months ended July 1, 2011 and July 2, 2010 were as follows:


	Six Months Ended						Change
(dollars in millions)	July 1, 2011			July 2, 2010			Amount		Percentage

Gross Profit	$	680.7		$	662.3		$	18.4		2.8	%

Gross profit as a percentage of net sales		41.5	%		43.0	%

•

Gross profit for the six months ended July 1, 2011 increased by $18.4 million when compared to the six months ended July 2, 2010.

•

The comparability of gross profit between the two periods is affected by the impact of foreign exchange rate movements. As measured against the same period in the prior year, the weaker U.S. dollar against the euro and a majority of other foreign currencies resulted in a $40.0 million improvement in gross profit in the current six months period. Excluding the impact of foreign currency, gross profit decreased by $21.6 million.

•

Our gross profit percentage declined by 150 basis points in the first half of 2011 compared to the first half of 2010.

•

The decline in margin was primarily driven by materials cost inflation, higher fuel and freight costs, and adverse mix changes, and which were partially offset by price increases and savings derived from our global strategic sourcing initiatives. Our margin was also adversely affected by inventory losses following the disaster in Japan (see Note 18 to the consolidated financial statements).

•

Operating Expenses:


	Six Months Ended						Change
(dollars in millions)	July 1, 2011			July 2, 2010			Amount		Percentage

Selling, general and administrative expenses	$	514.0		$	504.3		$	9.7		1.9	%
Research and development expenses		36.3			33.3			3.0		9.0	%
Restructuring expenses (credits)		(1.1	)		(2.5	)		1.4		56.0	%

	$	549.2		$	535.1		$	14.1		2.6	%


As a percentage of net sales:
Selling, general and administrative expenses		31.3	%		32.7	%
Research and development expenses		2.2	%		2.2	%
Restructuring expenses		-0.1	%		-0.2	%

		33.5	%		34.7	%

•

Operating expenses for the six months ended July 1, 2011 increased by $14.1 million when compared to the six months ended July 2, 2010.

•

The comparability of operating expenses between the two periods is affected by the impact of foreign exchange rate movements. As measured against the same period in the prior year, the weaker U.S. dollar against the euro and a majority of other foreign currencies resulted in a $29.2 million increase in operating expenses. Excluding the impact of foreign currency, operating expenses decreased by $15.1 million.

•

Selling, general and administrative expenses. As a percentage of net sales, selling, general and administrative expenses were 31.3% for the first half of 2011 and 32.7% for the same period in the prior year. Selling, general and administrative expenses increased by $9.7 million during the current period. Excluding the impact of foreign currency, selling, general and administrative expenses decreased by $17.7 million during the first half of 2011 compared to the same period in the prior year. This decrease is primarily due to a reduction in performance-based compensation expense of $17.4 million (see Note 2 to the consolidated financial statements), the impact of non-recurring costs in 2010 of $9.0 million and improved operating efficiencies partially offset by costs incurred related to organizing the European Principal Company (see Note 20 to the consolidated financial statements) in the amount of $9.9 million, Merger-related transaction costs of $3.9 million (Note 21 to the consolidated financial statements) and increased compensation costs of $3.5 million related to the impact of the Merger on our SARs (Note 16 to the consolidated financial statements).

•

Research and development expenses. Research and development expenses increased by $ 3.0 million in the current period. Excluding the impact of foreign currency, research and development expenses increased by $1.2 million during the first half of 2011 compared to the same period in the prior year.

•

Restructuring expenses (credits). As the November 2005 Plan winds down, credit adjustments related to previously recorded restructuring reserves decreased by $1.4 million during the first half of 2011 compared to the same period in the prior year.

Restructuring:

A summary of all costs associated with the November 2005 Plan for the six months ended July 1, 2011 and July 2, 2010, and since inception of the program in November 2005, is outlined below:


	Six Months Ended						Total Project to Date
(dollars in millions)	July 1, 2011			July 2, 2010			July 1, 2011

Reserve balance at beginning of period	$	23.1		$	48.4		$	—
Restructuring charges and adjustments		(1.1	)		(2.5	)		233.2
Payments of accrued costs		(7.7	)		(16.2	)		(218.9	)

Reserve balance at end of period	$	14.3		$	29.7		$	14.3


Period costs classified as selling, general and administrative expenses	$	2.9		$	6.7		$	322.2
Period costs classified as cost of sales		—			0.5			8.6

•

November 2005 Plan Restructuring Costs. During the first half of 2011 and 2010, we reduced restructuring liabilities by $1.1 million and $2.5 million, respectively, for involuntary termination costs for certain individuals, formerly expected to be severed, who were either retained by the Company or resigned. Restructuring activities under the November 2005 Plan will continue to wind down during 2011.

•

November 2005 Plan Period Costs. Period costs of $2.9 and $6.7 million for 2011 and 2010, respectively, included in selling, general and administrative expenses and $ 0.5 million for 2010, included in cost of sales pertained to: (a) $1.2 million in 2011 ($3.3 million in 2010) for personnel related costs of employees and consultants associated with restructuring initiatives, (b) $0.8 million in 2011 ($1.2 million in 2010) for value chain and cost savings projects, and (c) $0.9 million in 2011 ($2.7 million in 2010) related to facilities, asset impairment charges and various other costs. The overall decrease in these expenses over the prior period was mainly due to a reduction in restructuring activities within our Americas and Greater Asia Pacific segments.

Non-Operating Results:


	Six Months Ended						Change
(dollars in millions)	July 1, 2011			July 2, 2010			Amount			Percentage

Interest expense	$	67.2		$	69.9		$	(2.7	)		-3.9	%
Interest income		(1.2	)		(0.9	)		(0.3	)		-33.3	%

Net interest expense	$	66.0		$	69.0		$	(3.0	)		-4.3	%


Other expense (income), net		0.1			3.8			(3.7	)		-97.4	%

•

Net interest expense decreased in the first half of 2011 compared to the same period in the prior year primarily due to optional Term Loan repayments made in the second half of 2010, lower interest rates obtained from an improved leverage ratio, and the amendment to the Senior Secured Credit Facilities credit agreement (see Note 7 to the consolidated financial statements). This long term reduction in interest expense was offset by the expensing of $2.4 million of fees incurred related to the amendment.

•

Other (income) expense, net declined mainly due to the impact of $3.9 million foreign currency loss resulting from our adoption of highly inflationary accounting for our Venezuelan subsidiary in 2010.

Income Taxes:


	Six Months Ended						Change
(dollars in millions)	July 1, 2011			July 2, 2010			Amount			Percentage

Income from continuing operations, before income taxes	$	65.4		$	54.5		$	10.9			20.0	%

Provision for income taxes		39.5			39.9			(0.4	)		-1.0	%

Effective income tax rate		60.4	%		73.2	%

•

We reported an effective income tax rate of 60.4% on the pre-tax income from continuing operations for the six month period ended July 1, 2011, which approximates the estimated annual effective income tax rate.

•

We reported an effective income tax rate of 73.2% on the pre-tax income from continuing operations for the six month period ended July 2, 2010. The high effective income tax rate is primarily the result of increased valuation allowances against deferred tax assets in certain jurisdictions and increases in reserves for uncertain tax positions.

Net income:

Our net income of $25.9 million for the first six months of 2011 decreased by $20.4 million when compared to the first six months of 2010. Excluding the impact of foreign currency exchange of $7.1 million, our net income increased by $13.3 million. The increase in net income is primarily due to higher operating profit, lower interest expense, the impact of discontinued operations and the adoption of highly inflationary accounting in Venezuela in 2010.

EBITDA and Diversey Credit Agreement EBITDA:


	Six Months Ended
(dollars in millions)	July 1, 2011			July 2, 2010
Net cash used in operating activities	$	(53.5	)	$	(28.3	)
Changes in operating assets and liabilities, net of effects from acquisitions and divestitures of businesses		161.9			142.0
Changes in deferred income taxes		(1.1	)		(17.5	)
Depreciation and amortization expense		(58.2	)		(54.2	)
Interest accreted on notes payable					(12.5	)
Japan inventory loss		(0.7	)		—
Amortization and payment of debt issuance costs		(10.0	)		(5.7	)
Accretion of original issue discount		(3.2	)		(1.5	)
Stock-based compensation		(6.2	)		(7.3	)
Other		(3.1	)		(9.4	)

Net income		25.9			5.6

Provision for income taxes		39.5			39.9
Interest expense, net		66.0			69.0
Depreciation and amortization expense		58.2			54.2

	$	189.6		$	168.7

EBITDA for the six months ended July 1, 2011 increased by $20.9 million when compared to the same period in the prior year. Excluding the impact of foreign currency of $13.2 million, EBITDA improved by $7.7 million during the current period. This was primarily due to higher operating profit.

Diversey Credit Agreement EBITDA. For the purpose of calculating compliance with our financial covenants, the credit agreement for Diversey’s Senior Secured Credit Facilities (see discussion in Liquidity and Capital Resources, Debt and Contractual Obligations) requires Diversey to use a financial measure called Credit Agreement EBITDA, which is calculated as follows:


(dollars in millions)
EBITDA	$	189.6
Restructuring related costs		1.7
Non-cash expenses and charges		1.9
Non-recurring gains or losses		20.0
Compensation adjustment and consulting fees		12.4

Credit Agreement EBITDA	$	225.6

Liquidity and Capital Resources

The following table sets forth, for the periods presented, information relating to our liquidity and capital resources as summarized from our consolidated statements of cash flows:


	Six Months Ended						Change
(dollars in millions)	July 1, 2011			July 2, 2010			Amount			Percentage

Net cash used in operating activities	$	(53.5	)		(28.3	)	$	(25.2	)		-89.0	%
Net cash used in investing activities		(51.4	)		(33.9	)		(17.5	)		-51.6	%
Net cash provided by (used in) financing activities		5.0			(2.1	)		7.1			338.1	%
Capital expenditures		49.6			36.2			13.4			37.0	%

•

The increase in net cash used in operating activities during the six months ended July 1, 2011 as compared to the same period last year was primarily increase in working capital during the current period, explained below.

•

The increase in net cash used in investing activities during the six months ended July 1, 2011 as compared to the same period last year was primarily due to an increase of $13.4 million in capital expenditures and the acquisition of business and other intangibles (see Note 5 to the consolidated financial statements).

•

The increase in net cash provided by financing activities during the six months ended July 1, 2011 as compared to the same period last year was mainly due to an increase in proceeds from short-term borrowings.

The following table sets forth, for the periods presented, information relating to our liquidity and capital resources as summarized from our consolidated balance sheets:


	As of				Change
	July 1, 2011		December 31, 2010		Amount			Percentage
Cash and cash equivalents	$	71.7	$	169.1	$	(97.4	)		-57.6	%
Working capital*		578.6		481.1		97.5			20.3	%
Short-term borrowings		40.0		24.2		15.8			65.3	%
Total borrowings		1,526.2		1,479.4		46.8			3.2	%

*	Working capital is defined as net accounts receivable plus inventories less accounts payable (including related party amounts).

•

The decrease in cash and cash equivalents as of July 1, 2011 compared to December 31, 2010 resulted primarily from cash used in operating activities and $49.6 million in capital expenditures.

•

Working capital increased by $97.5 million during the six months ended July 1, 2011. This increase resulted primarily from a $64.2 million increase in inventories and an increase of $70.6 million in accounts receivable offset by an increase of $37.3 million in accounts payable. The increase in inventories was primarily driven by a build up for new product offerings, the transition of our manufacturing operations, and normal seasonal build patterns. The increase in accounts payable is primarily a result of the increase in inventories and the impact of a generally weaker U.S. dollar compared to other foreign currencies. The increase in accounts receivable is primarily the result of an increase in sales and the impact of a generally weaker U.S. dollar compared to other foreign currencies.

•

As of July 1, 2011, short-term borrowings primarily consisted of borrowings by our foreign subsidiaries on local lines of credit, which totaled $40.0 million at a weighted average interest rate of approximately 6.97%. Local credit arrangements vary by country and are primarily used to fund working capital. The maximum amount of short-term borrowings during 2011 was $49.2 million.

•

Total debt increased primarily as a result of the impact on our foreign currency denominated loans of a weaker dollar against the euro and other foreign currencies.

Debt and Contractual Obligations.

Holdings Senior Notes. On November 24, 2009, Holdings issued $250.0 million initial aggregate principal of its 10.50% senior notes due 2020 (“Original Holdings Senior Notes”).

The Holdings Senior Notes bear interest at a rate of 10.50% per annum, compounded semi-annually on each May 15 and November 15. Under the terms of the indenture governing the Holdings Senior Notes, prior to November 15, 2014, Holdings may elect to pay interest on the Holdings Senior Notes in cash or by increasing the principal amount of the Holdings Senior Notes. Thereafter, cash interest will be payable on the Holdings Senior Notes on May 15 and November 15 of each year, commencing on May 15, 2015; provided that cash interest will be payable only to the extent of funds actually available for distribution by the Company to Holdings under applicable law and under any agreement governing the Company’s indebtedness. The Holdings Senior Notes will mature on May 15, 2020. The Holdings Senior Notes are not guaranteed by the Company or any of its subsidiaries. The indenture governing the Holdings Senior Notes contains certain covenants and events of default that the Company believes are customary for indentures of this type.

On May 15, 2010, the principal of the Holdings Senior Notes increased by $12.5 million, in lieu of a cash interest payment, to $262.5 million.

Holdings paid cash interest on November 15, 2010 and has elected to pay cash interest on May 15, 2011 and November 15, 2011. The amount of each cash interest payment is $13.8 million. As a result of these elections and its expectation that future interest payments will be made in cash, Holdings accelerated the amortization of unamortized discounts and capitalized debt issuance costs and recorded an additional amount of interest expense of $4.1 million in the consolidated statement of operations.

Diversey Senior Secured Credit Facilities. Diversey, its Canadian subsidiary and one of its European subsidiaries, each as a borrower, entered into a credit agreement, whereby the lenders provided an aggregate principal amount of up to $1.25 billion available in U.S. dollars, euros, Canadian dollars and British pounds.

The Diversey Senior Secured Credit Facilities consist of (a) a revolving loan facility in an aggregate principal amount not to exceed $250.0 million, including a letter of credit sub-limit of $50.0 million and a swingline loan sub-limit of $30.0 million, that matures on November 24, 2014, and (b) term loan facilities in US dollars, euros and Canadian dollars maturing on November 24, 2015 (“Term Loans”). The Diversey Senior Secured Credit Facilities also provide for an increase in the revolving credit facility of up to $50.0 million under specified circumstances. The revolving facility will mature on November 24, 2014. As of July 1, 2011, we had $3.7 million in letters of credit outstanding under the revolving portion of the Diversey Senior Secured Credit Facilities and therefore had the ability to borrow an additional $246.3 million under this revolving facility.

The net proceeds of the Term Loans, after deducting the original issue discount of $15.0 million, but before offering expenses and other debt issuance costs, were approximately $985.0 million. The New Term Loans will mature on November 24, 2015 and will amortize in quarterly installments of 1.0% per annum with the balance due at maturity.

All obligations under the Diversey Senior Secured Credit Facilities are secured by all the assets of Holdings, Diversey and each subsidiary of Diversey (but limited to the extent necessary to avoid materially adverse tax consequences to Diversey and its subsidiaries, taken as a whole, and by restrictions imposed by applicable law).

Amendment to the Diversey Senior Secured Credit Facilities credit agreement. The Diversey Senior Secured Credit Facilities were amended in March 2011. This amendment reduced the interest rate payable with respect to the Term Loans, thereby reducing borrowing costs over the remaining life of the credit facilities. The spread on the U.S. dollar and Canadian dollar denominated borrowings was reduced from 325 basis points to 300 basis points, and the minimum LIBOR and BA floors were reduced from 2% to 1%. The spread on the euro denominated borrowing was reduced from 400 basis points to 350 basis points and the EURIBOR floor was reduced from 2.25% to 1.5%. In addition, the amendment changed various financial covenants and credit limits to provide Diversey with greater flexibility to operate our business. These changes include the ability to issue incremental term loan facilities, the ability to issue dividends to Holdings to fund cash interest payments on the Holdings Senior Notes, and the ability to settle the due from parent balance carried in Diversey’s consolidated financial statements.

In connection with the amendment and in accordance with ASC 470-50, Debt Modifications and Extinguishments, Diversey expensed $2.4 million in transaction fees paid to third parties and wrote-off $0.2 million in unamortized discounts and capitalized debt issuance costs. These amounts are included in interest expense in the consolidated statements of operations for the six months ended July 1, 2011. The effective interest rates on the Term loans were reduced from 5.70% – 6.91% to 4.19% – 5.40%.

Diversey Senior Notes. In 2009, Diversey issued $400.0 million aggregate principal amount of 8.25% senior notes due 2019. The net proceeds of the offering, after deducting the original issue discount of $3.3 million, but before estimated offering expenses and other debt issuance costs, were approximately $396.7 million.

Diversey pays interest on May 15 and November 15 of each year, beginning on May 15, 2010. The Diversey Senior Notes will mature on November 15, 2019.

The Diversey Senior Notes are unsecured and are effectively subordinated to the Diversey Senior Secured Credit Facilities to the extent of the value of Diversey’s assets and the assets of Diversey’s subsidiaries that secure such indebtedness. The indenture governing Diversey Senior Notes contains restrictions and limitations that could also significantly impact the ability of Diversey and its restricted subsidiaries to conduct certain aspects of the business.

As of July 1, 2011, we had total indebtedness of $1.546 billion, consisting of $262.5 million of Holdings Senior Notes, $400.0 million of Diversey Senior Notes, $843.1 million of borrowings under the Diversey Senior Secured Credit Facilities, and $40.0 million in other short-term credit lines. In addition, we had $173.6 million in operating lease commitments, $1.4 million in capital lease commitments and $3.7 million committed under letters of credit.

Our financial position and liquidity are, and will be, influenced by a variety of factors, including:

•

our ability to generate cash flows from operations;

•

the level of our outstanding indebtedness and the interest we are obligated to pay on this indebtedness; and

•

our capital expenditure requirements, which consist primarily of purchases of equipment.

We believe that the cash flows from continuing operations, together with available cash on hand and borrowings available under the Diversey Senior Secured Credit Facilities will generate sufficient cash flow to meet our liquidity needs for the foreseeable future. We will continue to closely monitor current economic and credit market conditions that may affect our liquidity and the future availability of credit. We believe that we are positioned to deal with inflationary concerns or economic downturns; however, we are not able to predict how much either would affect our business and our customers’ businesses going forward. From time to time, the company has considered and may in the future pursue debt or other financing alternatives, depending on market conditions and other factors.

We have obligations related to our pension and post-retirement plans that are discussed in detail in Note 12 to the consolidated financial statements. As of the most recent actuarial estimation, we anticipate making $28.1 million of contributions to pension plans in fiscal year 2011. Post-retirement medical claims are paid as they are submitted and are anticipated to be $5.3 million in fiscal year 2011.

Our operations are subject to volatility because of currency fluctuations, inflation changes and changes in political and economic conditions in the countries where we conduct business. Sales and expenses are frequently denominated in local currencies, and results of operations may be affected adversely as currency fluctuations affect product prices and operating costs. Consequently, we engage in hedging activities, including forward foreign exchange contracts, to reduce the exposure of our cash flows to fluctuations in foreign currency rates. See Notes 13 and 14 to the consolidated financial statements for gains and losses associated with these contracts.

Restricted Cash. As of July 1, 2011, we had $12.1 million classified as restricted cash in our consolidated balance sheets. These funds will be used to pay for our November 2005 Plan restructuring obligations (see Note 7 to the consolidated financial statements).

Measurement of income tax reserve position. For the fiscal year ending December 31, 2011, we expect to increase income tax reserve liabilities by $6.7 million, resulting in total income tax reserve liabilities of $43.8 million. Total income tax reserve liabilities for which payments are expected in less than one year are $7.7 million. We are not able to provide a reasonably reliable estimate of the timing of future payments relating to non-current income tax reserve liabilities.

Financial Covenants under the Diversey Senior Secured Credit Facilities

Under the terms of the credit agreement for the Diversey Senior Secured Credit Facilities, Diversey is subject to certain financial covenants. The financial covenants under Diversey Senior Secured Credit Facilities require Diversey to meet the following targets and ratios.

Maximum Leverage Ratio. Diversey is required to maintain a leverage ratio for each financial covenant period of no more than the maximum ratio specified in the credit agreement for the Diversey Senior Secured Credit Facilities for that financial covenant period. The maximum leverage ratio is the ratio of (1) Diversey’s consolidated indebtedness less cash and cash equivalents as of the last day of the financial covenant period to (2) Diversey Credit Agreement EBITDA as defined in the credit agreement for Diversey’s Senior Secured Credit Facilities for the same financial covenant period.

The March 2011 amendment to the Diversey Senior Secured Credit Facilities fixed the maximum leverage ratio at 4.75 to 1 for the duration of the facilities.

Minimum Interest Coverage Ratio. Diversey is required to maintain an interest coverage ratio for each financial covenant period of no less than the minimum ratio specified in the credit agreement for Diversey Senior Secured Credit Facilities for that financial covenant period. The minimum interest coverage ratio is the ratio of (1) Diversey’s Credit Agreement EBITDA for a financial covenant period to (2) Diversey’s cash interest expense for that same financial covenant period calculated in accordance with the Diversey Senior Secured Credit Facilities.

The March 2011 amendment to the Senior Secured Credit Facilities fixed the minimum interest coverage ratio at 2.75 to 1 for the duration of the facilities.

Failure to comply with these financial ratio covenants would result in a default under the credit agreement for Diversey Senior Secured Credit Facilities and, absent a waiver or amendment from Diversey’s lenders, would permit the acceleration of all the Diversey’s outstanding borrowings under Diversey Senior Secured Credit Facilities.

Compliance with Maximum Leverage Ratio and Minimum Interest Coverage Ratio. For Diversey’s financial covenant period ended on July 1, 2011, Diversey was in compliance with the maximum leverage ratio and minimum interest coverage ratio covenants contained in the credit agreement for Diversey Senior Secured Credit Facilities.

Plan of Merger

In connection with the Merger Agreement, the Company’s indebtedness consisting of the Senior Secured Credit Facilities, Diversey Senior Notes, certain local borrowings, as well as the Holding Senior Notes, will be paid off by Sealed Air. Upon the extinguishment of this indebtedness, the Company expects to write-off currently unamortized discounts and capitalized debt issuance costs, which are carried in the Company’s balance sheet as of July 1, 2011 at $19.4 million and $57.8 million, respectively.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no significant changes to our market risk since December 31, 2010. For a discussion of our exposure to market risk, refer to Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” contained in our Annual Report on Form 10-K for the year ended December 31, 2010 as filed with the SEC on March 17, 2011.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Diversey Holdings’ Disclosure Controls and Internal Controls. As of the end of the period covered by this quarterly report, we evaluated the effectiveness of the design and operation of our “disclosure controls and procedures” (“Disclosure Controls”). The controls evaluation was done under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”).

CEO & CFO Certifications. Attached as exhibits 31.1 and 31.2 to this quarterly report are certifications of the CEO and the CFO required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This portion of our quarterly report includes the information concerning the controls evaluation referred to in the certifications and should be read in conjunction with the certifications for a more complete understanding of the topics presented.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, the Company’s independent registered public accounting firm will provide an attestation report regarding the Company’s internal control over financial reporting with the issuance of its Annual Report on Form 10-K for fiscal 2011.

Disclosure Controls. As of the end of the period covered by this quarterly report, under the supervision and with the participation of senior management, including the Company’s President and Chief Executive Officer and its Executive Vice President and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our Disclosure Controls as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon the controls evaluation, our CEO and CFO have concluded that, as of the end of the period covered by this quarterly report, our Disclosure Controls are effective in recording, processing, summarizing, and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act, and that information is accumulated and communicated to the CEO and CFO, as appropriate, to allow timely discussions regarding required disclosure.

Changes in Internal Control Over Financial Reporting. There has not been any change in our internal control over financial reporting during the quarter ended July 1, 2011, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls. Our management, including the CEO and CFO, does not expect that our Disclosure Controls will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable assurance of achieving the designed control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are party to various legal proceedings in the ordinary course of our business which may, from time to time, include product liability, intellectual property, contract, employment matters (including employee benefits), environmental and tax claims as well as government or regulatory agency inquiries or investigations. We believe that, taking into account our insurance and reserves and the valid defenses with respect to legal matters currently pending against us, the ultimate resolution of these proceedings will not, individually or in the aggregate, have a material adverse effect on our business, financial condition, results of operations or cash flows.

ITEM 6. EXHIBITS


2.1		Agreement and Plan of Merger, dated as of May 31, 2011 by and among Sealed Air Corporation, Solution Acquisition Corp. and Diversey Holdings, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K, filed with the SEC on June 3, 2011).

10.1		Separation Agreement between Diversey, Inc. and David S. Andersen dated January 25, 2011 (effective March 18, 2011) (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q, filed with the SEC on May 12, 2011).

10.2		Diversey, Inc. Annual Incentive Plan, amended and restated effective as of December 31, 2010 (incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Q, filed with the SEC on May 12, 2011).

10.3		Diversey, Inc. Long-Term Cash Incentive Plan, as amended on December 31, 2010 (incorporated by reference to Exhibit 10.3 to the Company’s Form 10-Q, filed with the SEC on May 12, 2011).

10.4		Diversey, Inc. Profit Sharing Plan, as amended on December 31, 2010 (incorporated by reference to Exhibit 10.4 to the Company’s Form 10-Q, filed with the SEC on May 12, 2011).

10.5		Diversey, Inc. Severance Pay Plan, as amended on December 31, 2010 (incorporated by reference to Exhibit 10.5 to the Company’s Form 10-Q, filed with the SEC on May 12, 2011).

31.1		Principal Executive Officer’s Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Principal Financial Officer’s Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.1		XBRL Instance Document: File dhi-20110701.xml*

101.2		XBRL Taxonomy Extension Schema Document: File dhi-20110701.xsd*

101.3		XBRL Taxonomy Extension Calculation Linkbase Document: File dhi-20110701_cal.xml*

101.4		XBRL Taxonomy Extension Definition Linkbase Document: File dhi-20110701_def.xml*

101.5		XBRL Taxonomy Extension Label Linkbase Document: File dhi-20110701_lab.xml*

101.6		XBRL Taxonomy Extension Presentation Linkbase Document: File dhi-20110701_pre.xml*

Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Operations for the three and six months ended July 1, 2011, and July 2, 2010; (ii) Consolidated Balance Sheets at July 1, 2011, and December 31, 2010; (iii) Consolidated Statements of Cash Flows for the six months ended July 1, 2011, and July 2, 2010; and (vi) Notes to Consolidated Financial Statements. Users of this data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed “furnished” and not “filed” or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed “furnished” and not “filed” for purposes of section 18 of the Securities and Exchange Act of 1934, and otherwise is not subject to liability under these sections.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		DIVERSEY HOLDINGS, INC.

Date: August 8, 2011		/s/ Norman Clubb
		Norman Clubb, Executive Vice President and Chief Financial Officer

DIVERSEY HOLDINGS, INC.

EXHIBIT INDEX


31.1		Principal Executive Officer’s Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Principal Financial Officer’s Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.1		XBRL Instance Document: File dhi-20110701.xml*

101.2		XBRL Taxonomy Extension Schema Document: File dhi-20110701.xsd*

101.3		XBRL Taxonomy Extension Calculation Linkbase Document: File dhi-20110701_cal.xml*

101.4		XBRL Taxonomy Extension Definition Linkbase Document: File dhi-20110701_def.xml*

101.5		XBRL Taxonomy Extension Label Linkbase Document: File dhi-20110701_lab.xml*

101.6		XBRL Taxonomy Extension Presentation Linkbase Document: File dhi-20110701_pre.xml*

Large accelerated filer

Accelerated filer

Non-accelerated filer

x (Do not check if a smaller reporting company)

Smaller reporting company