UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10–Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED OCTOBER 1, 2010

¨	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 333-97427

DIVERSEY, INC.

(Exact name of registrant as specified in its charter)

Delaware

39-1877511

(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)

(Former name, former address and former fiscal year, if changed since last report)

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 x No ¨

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 month (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ 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 definition 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 November 05, 2010, there were 24,422 outstanding shares of the registrant’s common stock, $1.00 par value.

INDEX



Section	Topic	Page

	Forward-Looking Statements		i

PART I – FINANCIAL INFORMATION

Item 1	Financial Statements

	Consolidated Balance Sheets as of October 1, 2010 (unaudited) and December 31, 2009		1

	Consolidated Statements of Operations for the three and nine months ended October 1, 2010 (unaudited) and October 2, 2009 (unaudited)		2

	Consolidated Statements of Cash Flows for the nine months ended October 1, 2010 (unaudited) and October 2, 2009 (unaudited)		3

	Notes to Consolidated Financial Statements (unaudited)		4

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		26

Item 3	Quantitative and Qualitative Disclosure about Market Risk		47

Item 4	Controls and Procedures		47

PART II – OTHER INFORMATION

Item 1	Legal Proceedings		48

Item 6	Exhibits		48

SIGNATURES			49

Exhibit Index			50

Unless otherwise indicated, references to “Diversey,” “the Company,” “we,” “our” and “us” in this quarterly report refer to Diversey, Inc., formerly JohnsonDiversey, Inc., and its consolidated subsidiaries.

On October 7, 2009, the Company, together with its parent, Diversey Holdings, Inc., formerly JohnsonDiversey Holdings, Inc. (“Holdings”), entered into a series of agreements to recapitalize Holdings and refinance the Company’s and Holdings’ debt (the “Transactions”). The closing of the Transactions occurred on November 24, 2009. Additional information regarding the Transactions and the Company is disclosed in the Company’s Annual Report on Form 10-K and Form 10-K/A for the year ended December 31, 2009, and Current Report on Form 8-K, as filed with the Securities and Exchange Commission (“SEC”) on March 18, 2010, July 2, 2010 and May 27, 2010, respectively.

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 our senior secured credit facilities, our senior notes and Holdings senior notes;

•

our ability to operate in accordance with the terms and conditions of the agreements governing the indebtedness incurred pursuant to the Transactions;

•

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

•

our ability to sustain our brand equity subsequent to our name change to “Diversey, Inc.”

•

our ability to successfully execute and complete our restructuring program, including workforce reduction, achievement of cost savings, as well as plant closures and disposition of assets;

•

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

•

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

•

the vitality of the institutional and industrial cleaning and sanitation market 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 their obligations to us;

•

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

•

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

•

our ability and the ability of our competitors to introduce new products and technical innovations;

•

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;

•

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

•

adverse or unfavorable publicity regarding us or our services;

•

the loss of, or changes in, executive management or other key personnel;

•

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

•

the costs and effect of a relocation of manufacturing capability from our primary U.S. manufacturing facility; 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, INC.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share data)


	October 1, 2010			December 31, 2009
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	217,474		$	249,440
Restricted cash		23,064			39,654
Accounts receivable, less allowance of $21,681 and $20,645, respectively		586,717			556,720
Accounts receivable – related parties		10,021			21,943
Due from parent		13,834			92,247
Inventories		283,667			255,989
Deferred income taxes		30,342			30,288
Other current assets		174,373			170,253
Current assets of discontinued operations		60			60

Total current assets		1,339,552			1,416,594
Property, plant and equipment, net		403,556			415,645
Capitalized software, net		48,848			53,298
Due from parent—non current		52,327			—
Goodwill		1,251,018			1,253,704
Other intangibles, net		201,274			220,769
Other assets		142,393			148,309
Noncurrent assets of discontinued operations		—			3,919

Total assets	$	3,438,968		$	3,512,238

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term borrowings	$	46,663		$	27,661
Current portion of long-term borrowings		9,596			9,811
Accounts payable		304,539			380,378
Accounts payable – related parties		27,271			35,900
Accrued expenses		467,591			470,037
Current liabilities of discontinued operations		3,846			6,174

Total current liabilities		859,506			929,961
Pension and other post-retirement benefits		250,073			248,414
Long-term borrowings		1,277,519			1,353,631
Deferred income taxes		115,540			110,546
Other liabilities		155,087			160,361
Noncurrent liabilities of discontinued operations		5,000			4,522

Total liabilities		2,662,725			2,807,435
Commitments and contingencies
Stockholders' equity:
Common stock – $1.00 par value; 200,000 shares authorized; 24,422 shares issued and outstanding		24			24
Class A 8% cumulative preferred stock – $100.00 par value; 1,000 shares authorized; no shares issued and outstanding		—			—
Class B 8% cumulative preferred stock – $100.00 par value; 1,000 shares authorized; no shares issued and outstanding		—			—
Capital in excess of par value		744,313			744,313
Accumulated deficit		(198,452	)		(262,416	)
Accumulated other comprehensive income		230,358			222,882

Total stockholders’ equity		776,243			704,803

Total liabilities and stockholders’ equity	$	3,438,968		$	3,512,238

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

DIVERSEY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands)


	Three Months Ended						Nine Months Ended
	October 1, 2010			October 2, 2009			October 1, 2010			October 2, 2009
	(unaudited)						(unaudited)
Net sales:
Net product and service sales	$	776,308		$	808,231		$	2,306,379		$	2,293,332
Sales agency fee income		7,264			7,206			19,170			19,271

		783,572			815,437			2,325,549			2,312,603
Cost of sales		455,433			463,015			1,335,090			1,364,905

Gross profit		328,139			352,422			990,459			947,698
Selling, general and administrative expenses		224,693			251,925			728,955			732,767
Research and development expenses		15,572			15,598			48,829			46,591
Restructuring expenses		173			919			(2,347	)		8,162

Operating profit		87,701			83,980			215,022			160,178
Other (income) expense:
Interest expense		30,549			22,764			86,013			70,058
Interest income		(1,292	)		(1,242	)		(3,551	)		(3,760	)
Other (income) expense, net		(871	)		(765	)		2,883			(4,316	)

Income from continuing operations before income taxes		59,315			63,223			129,677			98,196
Income tax provision		15,086			23,370			55,523			54,822

Income from continuing operations		44,229			39,853			74,154			43,374
Income (loss) from discontinued operations, net of income taxes of $0, ($196), $0, and ($312)		(1,129	)		540			(10,190	)		(857	)

Net income	$	43,100		$	40,393		$	63,964		$	42,517

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

DIVERSEY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)


	Nine Months Ended
	October 1, 2010			October 2, 2009
	(unaudited)
Cash flows from operating activities:
Net income	$	63,964		$	42,517
Adjustments to reconcile net income to net cash used in operating activities:

Depreciation and amortization		70,999			67,658
Amortization of intangibles		13,101			14,361
Amortization of debt issuance costs		9,997			3,502
Accretion of original issue discount		2,272			—
Interest accrued on long-term receivables—related parties		—			(2,138	)
Deferred income taxes		8,265			14,693
Loss on disposal of discontinued operations		842			713
Loss from divestitures		108			19
Loss on property, plant and equipment disposals		353			173
Other		7,478			1,109
Changes in operating assets and liabilities, net of effects from acquisitions and divestitures of businesses:
Accounts receivable securitization		—			39,610
Accounts receivable		807			(28,585	)
Due from parent		26,086			(5	)
Inventories		(29,439	)		(5,939	)
Other current assets		(4,813	)		(24,663	)
Accounts payable and accrued expenses		(73,641	)		12,359
Other assets		(2,014	)		(31,214	)
Other liabilities		(19,276	)		(2,434	)

Net cash provided by operating activities		75,089			101,736
Cash flows from investing activities:
Capital expenditures		(45,866	)		(43,397	)
Expenditures for capitalized computer software		(8,690	)		(15,591	)
Proceeds from property, plant and equipment disposals		2,642			7,681
Acquisitions of businesses and other intangibles		—			(1,612	)
Cash from unconsolidated affiliates		598			—
Net costs of divestiture of businesses		(950	)		(1,044	)

Net cash used in investing activities		(52,266	)		(53,963	)
Cash flows from financing activities:
Proceeds from (repayments of) short-term borrowings, net		(1,351	)		8,999
Repayments of long-term borrowings		(56,382	)		(6,958	)
Payment of debt issuance costs		(4,254	)		(2,261	)
Dividends paid		(80	)		(22,043	)

Net cash used in financing activities		(62,067	)		(22,263	)
Effect of exchange rate changes on cash and cash equivalents		7,278			(4,683	)

Change in cash and cash equivalents		(31,966	)		20,827
Beginning balance		249,440			107,818

Ending balance	$	217,474		$	128,645


Supplemental cash flows information
Cash paid during the period:
Interest, net	$	68,456		$	48,560
Income taxes		27,353			22,644

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

DIVERSEY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 1, 2010

(Unaudited)

1. Description of the Company

Diversey, Inc., formerly known as JohnsonDiversey, Inc., (the “Company”) 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. The Company 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.

The Company is a wholly-owned subsidiary of Diversey Holdings, Inc., formerly known as JohnsonDiversey Holdings, Inc. (“Holdings”).

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 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 October 1, 2010 and its results of operations for the three and nine months ended October 1, 2010 and cash flows for the nine months ended October 1, 2010 have been included. The results of operations for the three and nine months ended October 1, 2010 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2010. 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, 2009 and the Company’s Current Report on Form 8-K filed with the SEC on May 27, 2010. As a public reporting company, the Company evaluates subsequent events through the date the financial statements are issued.

Except where noted, the consolidated financial statements and related notes, excluding the consolidated statements of cash flows, reflect the results of continuing operations excluding the divestiture of DuBois Chemicals (“DuBois”) and the Polymer Business segment (“Polymer Business”) (see Note 6).

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of 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

DIVERSEY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 1, 2010

(Unaudited)

•

Stock-based compensation

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 for share data, are stated in thousand dollars.

Segment Reporting

The Financial Standards Accounting Board (“FASB”) Accounting Standards Codification^TM (“ASC”) Topic 280, Segment Reporting, defines operating segments as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.

In June 2008, the Company announced plans to organize its operating structure to better position the Company to address consolidation and globalization trends among its customers and to enable the Company to more effectively deploy resources. These plans included a change in the organization of the Company’s operating segments from five to three regions. Effective January 2010, the Company completed its reorganization to the new three region model, having implemented the following:

•

Three regional presidents have been appointed to lead the operations of the three segments;

•

The three regional presidents report to the Company’s Chief Executive Officer (“CEO”), who is its chief operating decision maker;

•

Financial information is prepared separately and regularly for each of the three regions; and

•

The CEO regularly reviews the results of operations, manages the allocation of resources and assesses the performance of each of these regions.

The Company’s operations were previously organized in five regions: Europe/Middle East/Africa (“Europe”), North America, Latin America, Asia Pacific and Japan. The new three region model is composed of the following:

•

The existing Europe region;

•

A new Americas region combining the former North and Latin American regions; and

•

A new Greater Asia Pacific region combining the former Asia Pacific and Japan regions.

Segment reclassification and restatement. As a result of the integration of certain of the Company’s equipment business into the Americas segment, revenues, expenses and assets associated with the transfer have been reclassified from Eliminations/Other to the Americas segment. This reclassification is consistent with changes in the Company’s organizational reporting structure effective in the third quarter of 2010, and reflects the chief operating decision maker’s approach to assessing performance and asset allocation. Prior period results have been restated for consistency with this change in structure. See Note 19 for additional information.

Hyperinflationary accounting

Effective January 11, 2010, the Venezuelan government devalued its currency (bolivar) and moved to a two- tier exchange structure. The official exchange rate moved from 2.15 to 2.60 for essential goods and to 4.30 for non-essential goods and services. The Company’s goods meet the non-essential classification.

Beginning with fiscal year 2010, the Company accounted for its Venezuelan subsidiary as hyperinflationary and used the exchange rate at which it expects to be able to remit dividends to translate its earnings and month end balance sheet. This exchange rate is currently 4.30, the official rate currently applied to non-essential goods and

DIVERSEY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 1, 2010

(Unaudited)

services. In association with the conversion, the Company recorded a pretax loss of $3,874, as a component of other (income) expense, net, during the three months ended April 2, 2010.

Effective interest method

The Company amortizes the discount and related capitalized debt issuance costs on its loans under the effective interest method, which is based on a schedule of anticipated cash flows over the terms of the various debt instruments. Under this method, periodic amortization changes in relation to changes in expected cash flows. In the third quarter of fiscal 2010, as a result of an early optional principal payment of $50,000 on a portion of the Company’s indebtedness, the Company accelerated amortization of original issue discounts and capitalized debt issuance costs, resulting in a $2,491 increase in interest expense in the consolidated statement of operations.

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 nine months ended October 1, 2010, as compared to the recent accounting pronouncements described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, that are of significance, or potential significance, to the Company.

Foreign Currency Matters (ASC Topic 830)

In May 2010, the FASB issued an Accounting Standard Update (“ASU”) to codify the SEC staff’s views on certain foreign currency issues related to investments in Venezuela. Among other things, this announcement provides background on the two acceptable inflation indices for Venezuela, states that Venezuela is now considered highly inflationary and calendar year entities that have not previously accounted for their Venezuelan investment as such should be applying highly inflationary accounting beginning January 1, 2010. As discussed in Note 2, the Company has accounted for its Venezuelan subsidiary as highly inflationary effective January 2010; this update does not impact the Company’s consolidated financial statements.

Revenue Recognition (ASC Topic 605)

In October 2009, the FASB issued an ASU on its standard on Multiple-Deliverable Revenue Arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, specifically: (a) vendor-specific objective evidence; (b) third-party evidence; or (c) estimates. It also eliminates the residual method of allocation and requires that consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. In addition, this guidance significantly expands required disclosures related to a vendor’s multiple-deliverable revenue arrangements. This ASU is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company adopted this guidance at the beginning of the current fiscal quarter and its adoption did not impact the consolidated financial statements.

Fair Value Measurements (ASC Topic 820)

In January 2010, the FASB issued additional guidance to improve fair value disclosures and increase the transparency in financial reporting. These enhancements include: (1) a reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; and (2) in the reconciliation for fair value measurements using significant unobservable inputs, a reporting entity should present separately information about purchases, sales, issuances, and settlements. This new guidance is effective for interim and annual reporting periods beginning after December 15, 2009. The Company adopted this guidance at the beginning of fiscal year 2010 and its adoption did not impact the consolidated financial statements.

DIVERSEY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 1, 2010

(Unaudited)

Transfers and Servicing (ASC Topic 860)

In June 2009, the FASB eliminated the concept of a “qualifying special-purpose entity” and changed the requirements for derecognizing financial assets. As a result of this amendment to U.S. GAAP, many types of transferred financial assets that previously qualified for de-recognition in the balance sheet no longer qualify, including certain securitized accounts receivable. In particular, this amendment introduced the concept of a participating interest as a unit of account and reiterates the requirement that in order for a transfer of accounts receivable to qualify as a sale, effective control must be transferred; if the accounts receivable transferred meet the definition of a participating interest, the transfer qualifies for sale accounting. Because the accounts receivable transferred under our securitization arrangements do not meet the definition of a participating interest, the arrangement fails to meet the requirements of a complete transfer of control, and cannot continue to be treated as a sale. The Company adopted this guidance at the beginning of fiscal year 2010, the effective day of this guidance to the Company. As a result of the adoption of this standard, the Company restored the securitized accounts receivable in its balance sheet and recognized short-term borrowings. See Note 7 for additional information.

Consolidation (ASC Topic 810)

Variable Interest Entities (“VIEs”): In June 2009, the FASB amended the evaluation criteria used to identify the primary beneficiary of a VIE, potentially changing significantly the decision on whether or not a VIE should be consolidated. This statement requires companies to qualitatively assess the determination of the primary beneficiary of a VIE based on whether the entity (1) has the power to direct matters that most significantly impact the activities of the VIE, and (2) has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. Additionally, the new standard requires ongoing reassessments of whether an enterprise is the primary beneficiary. The Company adopted this guidance at the beginning of fiscal year 2010, the effective day of this guidance to the Company and its adoption did not impact the consolidated financial statements.

International Financial Reporting Standards (“IFRS”)

In February 2010, the SEC issued a statement that reaffirms its support for the potential use of IFRS in the preparation of financial statements by U.S. registrants. It announced a work plan by which it is expected to make a determination in 2011 whether or not it will mandate the conversion to IFRS. The Company is currently assessing the potential impact of IFRS on its financial statements and will continue to review developments of the work plan.

4. Master Sales Agency Terminations and Umbrella Agreement

In connection with the May 2002 acquisition of the DiverseyLever business, the Company entered into a master sales agency agreement (the “Sales Agency Agreement”) with Unilever PLC and Unilever N.V. (“Unilever”), whereby the Company acts as an exclusive sales agent in the sale of Unilever’s consumer branded products to various institutional and industrial end-users.

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 Sales Agency Agreement are met. The Company elected, and Unilever agreed, to partially terminate the Sales Agency 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 agency fee income of $154 and $164 during the three months ended October 1, 2010 and October 2, 2009, respectively; and $463 and $470 during the nine months ended October 1, 2010 and October 2, 2009, respectively.

DIVERSEY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 1, 2010

(Unaudited)

In October 2007, the Company and Unilever agreed on an Umbrella Agreement (the “Umbrella”), to replace the previous Sales Agency Agreement, which includes; i) a new agency agreement with terms similar to the previous Sales 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 the Company’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 will also enter agreements with Unilever to distribute Unilever’s consumer branded products. Except for some transitional arrangements in certain countries, the Umbrella became effective January 1, 2008, and, unless otherwise terminated or extended, will expire on December 31, 2017.

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 $78 during the three and nine months ended October 1, 2010.

Under the License Agreement, the Company recorded net product and service sales of $30,233 and $35,671 during the three months ended October 1, 2010 and October 2, 2009, respectively; and $91,111 and $99,905 during the nine months ended October 1, 2010 and October 2, 2009, respectively.

5. Divestitures

In December 2007, in conjunction with its November 2005 Plan (see Note 10), the Company executed a sales agreement for its Auto-Chlor Master Franchise and substantially all of its remaining Auto-Chlor branch operations in North America, a business that marketed and sold low-energy dishwashing systems, kitchen chemicals, laundry and housekeeping products and services to foodservice, lodging, healthcare, and institutional customers, for $69,800.

The sales agreement was subject to the approval of the Company’s Board of Directors and Unilever consent, both of which the Company considered necessary in order to meet “held for sale” criteria under ASC Topic 360, Property, Plant and Equipment. Accordingly, these assets were classified as “held and used” as of December 28, 2007. The Company obtained approval from its Board of Directors and consent from Unilever in January 2008.

The transaction closed on February 29, 2008, resulting in a net book gain of approximately $1,292 after taxes and related costs. The gain associated with these divestiture activities is included as a component of selling, general and administrative expenses in the consolidated statements of operations. In fiscal year 2009, the Company recorded adjustments to closing costs and pension-related settlement charges, reducing the gain by $106 and $19 during the three and nine months ended October 2, 2009, respectively. In fiscal year 2010, the Company recorded adjustments related to closing costs and pension-related settlement charges, reducing the gain by $7 during the three months ended October 1, 2010, and resulting in a net gain reduction of $108 for the nine months ended October 1, 2010. Additional post-closing adjustments are not anticipated to be significant.

6. Discontinued Operations

DuBois Chemicals

On September 26, 2008, the Company and JohnsonDiversey Canada, Inc., a wholly-owned subsidiary of the Company, sold substantially all of the assets of DuBois Chemicals (“DuBois”) to DuBois Chemicals, Inc. and DuBois Chemicals Canada, Inc., subsidiaries of The Riverside Company (collectively, “Riverside”), for approximately $69,700, of which, $5,000 was escrowed subject to meeting certain fiscal year 2009 performance measures and $1,000 was escrowed subject to resolution of certain environmental representations by the Company. The purchase price was also subject to certain post-closing adjustments that were based on net working capital targets. Finalization of this adjustment in the first quarter of 2009 did not require any purchase price adjustment. In July of 2009, the Company met certain environmental representations and Riverside released the $1,000 escrow to

DIVERSEY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 1, 2010

(Unaudited)

the Company. The Company and Riverside finalized the performance related adjustments during the second quarter of 2010 which did not require any purchase price adjustment.

DuBois is a North American based manufacturer and marketer of specialty chemicals, control systems and related services primarily for use by industrial manufacturers. DuBois was a non-core asset of the Company and a component of the Americas business segment. The sale resulted in a gain of approximately $14,774 ($10,696 after tax) being recorded in the fiscal year ended December 31, 2008, net of related costs. The Company reduced the gain by $122 ($37 after tax income) and $827 ($551 after tax) of additional one-time costs, pension-related settlement charges partially offset by proceeds from the environmental escrow, for the three and nine months ended October 2, 2009, respectively. During the three and nine months ended October 1, 2010, the Company reduced the gain by $0 ($0 after tax) and $91 ($91 after tax), respectively, as a result of additional one-time costs. Additional post-closing adjustments are not anticipated to be significant.

Polymer Business

On June 30, 2006, Johnson Polymer, LLC (“Johnson Polymer”) and Diversey Holdings II B.V. (“Holdings II”), an indirectly owned subsidiary of the Company, completed the sale of substantially all of the assets of Johnson Polymer, certain of the equity interests in, or assets of, certain Johnson Polymer subsidiaries and all of the equity interests owned by Holdings II in Johnson Polymer B.V. (collectively, the “Polymer Business”) to BASF Aktiengesellschaft (“BASF”) for approximately $470,000 plus an additional $8,119 in connection with the parties’ estimate of purchase price adjustments that are based upon the closing net asset value of the Polymer Business. Further, BASF paid the Company $1,500 for the option to extend the tolling agreement by up to six months. In December 2006, the Company and BASF finalized purchase price adjustments related to the net asset value and the Company received an additional $4,062.

The Polymer Business developed, manufactured, and sold specialty polymers for use in the industrial print and packaging industry, industrial paint and coatings industry, and industrial plastics industry. The Polymer Business was a non-core asset of the Company and had been reported as a separate business segment. The sale resulted in a gain of approximately $352,907 ($235,906 after tax), net of related costs.

During the fiscal year ended December 28, 2007, the Company recorded and paid certain pension-related adjustments; adjusted net assets disposed and recorded additional closing costs, reducing the gain by $1,742 ($216 after tax gain). The Company recorded additional closing costs, reducing the gain by $192 ($226 after tax loss), during the fiscal year ended December 31, 2008. During the three and nine months ended October 2, 2009, the Company recorded and refined additional closing costs and pension-related settlement charges reducing the gain by $182 ($145 after tax) and $198 ($162 after tax), respectively. During the three and nine months ended October 1, 2010, the Company recorded and refined additional closing costs and recorded and paid certain pension-related adjustments reducing the gain by $88 ($88 after tax) and $751 ($751 after tax). The Company recorded a loss from discontinued operations, net of tax, relating to the tolling agreement of ($1,041) and $648 during the three months ended October 1, 2010 and October 2, 2009, respectively and ($9,348) and ($144) respectively for the nine months ended October 1, 2010 and October 2, 2009.

7. Accounts Receivable Securitization

JWPR Corporation

The Company and certain of its subsidiaries entered into an agreement (the “Receivables Facility”) in March 2001, as amended, whereby they sell, on a continuous basis, certain trade receivables to JWPR Corporation (“JWPRC”), a wholly-owned, consolidated, special purpose, bankruptcy-remote subsidiary of the Company. JWPRC was formed for the sole purpose of buying and selling receivables generated by the Company and certain of its subsidiaries party to the Receivables Facility. JWPRC, in turn, sells an undivided interest in the accounts receivable to a nonconsolidated financial institution (the “Conduit”) for an amount equal to the value of all eligible

DIVERSEY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 1, 2010

(Unaudited)

receivables (as defined under the receivables sale agreement between JWPRC and the Conduit) less the applicable reserve.

The total potential for securitization of trade receivables under the Receivables Facility at October 1, 2010 and December 31, 2009 was $50,000. In December 2009, the Receivables Facility was amended to extend the maturity of the program to December 19, 2011.

As of October 1, 2010 and December 31, 2009, JWPRC sold no accounts receivable to the Conduit.

As of October 1, 2010 and December 31, 2009, the Company had a retained interest of $65,683, and $60,048, respectively, in the receivables of JWPRC. The retained interest is included in the accounts receivable balance and is reflected in the consolidated balance sheets.

In October 2010, JWPRC gave notice to the Conduit of its intention to terminate the Receivables Facility effective November 2010.

JDER Limited

In September 2009, certain subsidiaries of the Company entered into agreements (the “European Receivables Facility”) to sell, on a continuous basis, certain trade receivables originated in the United Kingdom, France and Spain to JDER Limited (“JDER”), a wholly-owned, consolidated, special purpose, bankruptcy-remote subsidiary of the Company. JDER was formed for the sole purpose of buying and selling receivables originated by subsidiaries subject to the European Receivables Facility. JDER will sell an undivided interest in the accounts receivable to a nonconsolidated financial institution (the “European Conduit”) for an amount equal to the value of the eligible receivables less the applicable reserve. The total amount available for securitization of trade receivables under the European Receivables Facility is €50,000. The maturity date of the European Receivables Facility is September 8, 2012.

Effective January 1, 2010, the accounting treatment for the Company’s receivables securitization facilities (see Note 3) required that accounts receivable sold to the Conduit and to the European Conduit be included in accounts receivable, with a corresponding increase in short-term borrowings. Accordingly, as of October 1, 2010, the Company included $ 17,699 in accounts receivable and short-term borrowings on its consolidated balance sheet. Prior to the effective date of the change in accounting treatment, as of December 31, 2009, the European Conduit held $18,703, of accounts receivable that were not included in the accounts receivable balance in the Company’s consolidated balance sheet.

As of October 1, 2010 and December 31, 2009, the Company had a retained interest of $93,496 and $110,445, respectively, in the receivables of JDER. The retained interest is included in the accounts receivable balance and is reflected in the consolidated balance sheets.

In October 2010, JDER gave notice to the European Conduit of its intention to terminate the European Receivables Facility effective November 2010.

8. Income Taxes

For the fiscal year ending December 31, 2010, the Company is projecting an effective income tax rate on pre-tax income from continuing operations of approximately 51%. 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 42.8% on pre-tax income from continuing operations for the nine month period ended October 1, 2010. When compared to the estimated annual effective income tax

DIVERSEY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 1, 2010

(Unaudited)

rate, the effective income tax rate for the nine months ended October 1, 2010 is lower primarily due to certain income tax expense (benefit) amounts that were recorded as discrete items during the period, rather than included in the annual effective income tax rate.

9. Inventories

The components of inventories are summarized as follows:


	October 1, 2010		December 31, 2009

Raw materials and containers	$	56,951	$	53,198
Finished goods		226,716		202,791

Total inventories	$	283,667	$	255,989

Inventories are stated in the consolidated balance sheets net of allowance for excess and obsolete inventory of $23,615 and $20,932 on October 1, 2010 and December 31, 2009, respectively.

10. Restructuring Liabilities

November 2005 Restructuring Program

On November 7, 2005, the Company announced a restructuring program (“November 2005 Plan”), the execution of which is expected to continue through fiscal 2011, with the associated reserves expected to be substantially paid out through our restricted cash balance. The November 2005 Plan has 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%.

In connection with the November 2005 Plan, the Company added liabilities of $176 for the involuntary termination of 8 employees during the three months ended October 1, 2010, most of which are associated with the European business segment. During the nine months ended October 1, 2010, the Company reduced liabilities by ($2,281) as certain individuals, formerly expected to be severed, either were retained by the Company or resigned. Most of the reduced liabilities are associated with the European business segment. The Company also reduced other restructuring costs by $3 and $66 during the three and nine months ended October 1, 2010.

In addition, and in connection with the November 2005 Plan, the Company recognized liabilities of $750 for the involuntary termination of 18 employees during the three months ended October 2, 2009, most of which are associated with the European business segment. During the nine months ended October 2, 2009, the Company recognized liabilities of $7,905 for the involuntary termination of 189 employees, most of which are associated with the European business segment. The Company also recorded $169 and $257 of other restructuring costs during the three and nine months ended October 2, 2009, respectively.

DIVERSEY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 1, 2010

(Unaudited)

The activities associated with the November 2005 Plan for the three and nine months ended October 1, 2010 were as follows:


	Employee- Related			Other			Total
Liability balances as of December 31, 2009	$	46,899		$	1,469		$	48,368
Restructuring charges and adjustments		(721	)		—			(721	)
Cash paid ¹		(8,547	)		(115	)		(8,662	)

Liability balances as of April 2, 2010	$	37,631		$	1,354		$	38,985

Restructuring charges and adjustments		(1,736	)		(63	)		(1,799	)
Cash paid ²		(7,301	)		(149	)		(7,450	)

Liability balances as of July 2, 2010	$	28,594		$	1,142		$	29,736


Restructuring charges and adjustments		176			(3	)		173
Cash paid ³		(2,013	)		57			(1,956	)

Liability balances as of October 1, 2010	$	26,757		$	1,196		$	27,953

¹ Cash paid is increased by $1 due to the effects of foreign exchange.

² Cash paid is reduced by $378 due to the effects of foreign exchange.

³ Cash paid is increased by $68 due to the effects of foreign exchange.

In connection with the November 2005 Plan, the Company recorded long-lived asset impairment charges of $283 and $802 for the three and nine months ended October 1, 2010, respectively. In addition, and in connection with the November 2005 Plan, the Company recorded long-lived asset impairment charges of ($10) and $546 for the three and nine months ended October 2, 2009 respectively. The impairment charges are included in selling, general and administrative costs in the consolidated statements of operations.

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


	Total Plan To-Date		Three Months Ended						Nine Months Ended
	Total Plan To-Date		October 1, 2010			October 2, 2009			October 1, 2010			October 2, 2009
Europe	$	148,373	$	576		$	764		$	(1,000	)	$	5,604
Americas		41,466		80			(607	)		(537	)		408
Greater Asia Pacific		18,650		(199	)		520			1			2,324
Other		25,830		(284	)		242			(811	)		(174	)

	$	234,319	$	173		$	919		$	(2,347	)	$	8,162

In December 2009 and December 2008, the Company transferred $27,404 and $49,463, respectively, to irrevocable trusts for the settlement of certain obligations associated with the November 2005 Restructuring Plan. The Company utilized a majority of the December 2008 funds during fiscal year 2009, and it expects to utilize a majority of the remaining December 2008 and the December 2009 funds in fiscal years 2010 and 2011. The Company classified the trust balances as restricted cash on its consolidated balance sheets.

11. 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 line. The timeline to transition out of Waxdale is expected to extend into fiscal 2013. In connection with these plans, the Company recognized liabilities of $46 and

DIVERSEY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 1, 2010

(Unaudited)

$6,291 for the involuntary termination of employees during the three and nine months ended October 1, 2010 respectively, most of which are associated with the Americas business segment. The related expenses are included in selling, general and administrative expenses in the consolidated statements of operations.

12. Other (Income) Expense, Net

The components of other (income) expense, net in the consolidated statements of operations are as follows:


	Three Months Ended						Nine Months Ended
	October 1, 2010			October 2, 2009			October 1, 2010			October 2, 2009

Foreign currency (gain)/loss	$	(7,269	)	$	(6,833	)	$	1,706		$	(15,301	)
Forward contracts (gain)/loss		7,948			6,328			(767	)		11,172
Loss on hyperinflationary country foreign currency translations		29			—			3,934			—
Other, net		(1,579	)		(260	)		(1,990	)		(187	)

	$	(871	)	$	(765	)	$	2,883		$	(4,316	)

13. 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 nine months ended October 1, 2010 and October 2, 2009, are as follows:


	Defined Pension Benefits
	Three Months Ended						Nine Months Ended
	October 1, 2010			October 2, 2009			October 1, 2010			October 2, 2009

Service cost	$	2,380		$	3,644		$	7,076		$	10,432
Interest cost		8,310			8,965			25,270			25,959
Expected return on plan assets		(9,193	)		(8,763	)		(27,737	)		(25,373	)
Amortization of net loss		1,762			2,258			4,991			6,592
Amortization of transition obligation		44			60			155			172
Amortization of prior service credit		(613	)		(234	)		(1,370	)		(672	)
Curtailments, settlements and special termination benefits		(10,140	)		5,144			(5,355	)		6,325

Net periodic pension cost (credit)	$	(7,450	)	$	11,074		$	3,030		$	23,435


	Other Post-Employment Benefits
	Three Months Ended						Nine Months Ended
	October 1, 2010			October 2, 2009			October 1, 2010			October 2, 2009

Service cost	$	326		$	431		$	979		$	1,290
Interest cost		1,157			1,264			3,473			3,786
Amortization of net (gain) loss		(22	)		18			(67	)		60
Amortization of prior service credit		(51	)		(50	)		(153	)		(151	)

Net periodic benefit cost	$	1,410		$	1,663		$	4,232		$	4,985

The Company made contributions to its defined benefit pension plans of $9,258 and $8,900 during the three months ended October 1, 2010 and October 2, 2009, respectively; and $22,701 and $34,659 during the nine months ended October 1, 2010 and October 2, 2009, respectively.

In September 2010, the Company recognized a curtailment gain of $11,348 relating to the announced freezing of its pension plan in The Netherlands. The company recorded this gain 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

DIVERSEY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 1, 2010

(Unaudited)

$1,978 in selling, general and administrative expenses in the consolidated statement of operations. In September 2010, the Company recognized an additional loss of $1,080. The Company recorded $682 of this loss as a component of discontinued operations, and $398 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. In September 2010, the Company recognized an additional loss of $128. The Company recorded these losses 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.

In September 2009, the Company recognized a settlement of defined benefits to former U.S. employees resulting in a related loss of $3,612. The Company recorded $1,741 of this loss as a component of discontinued operations, and $1,871 in selling, general and administrative expenses in the consolidated statement of operations.

In September 2009, in association with restructuring activities, the Company recognized special termination losses of $1,006 related to SERA pension benefits in the United Kingdom. The Company recorded this loss in selling, general and administrative expenses in the consolidated statement of operations.

In June 2009, the Company recognized a curtailment and settlement of defined benefits to former Japan employees, resulting in a related loss of $1,181. In September 2009, the Company recognized an additional loss of $526. The Company recorded these losses in selling, general, and administrative expenses in the consolidated statement of operations.

14. Financial Instruments

The Company sells its products in more than 175 countries and approximately 83% 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 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 October 1, 2010, the Company held 21 foreign currency forward contracts as hedges of foreign currency denominated receivables and payables with an aggregate notional amount of $168,853. 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 those contracts within other (income) expense, net, in the consolidated statements of operations. Total net realized and unrealized (gains) losses recognized on these contracts were $7,948 and ($767) during the three and nine months ended October 1, 2010, respectively.

DIVERSEY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 1, 2010

(Unaudited)

As of October 1, 2010, the Company held 155 foreign currency forward contracts as hedges of forecasted foreign currency denominated sales and purchases with an aggregate notional amount of $46,895. 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 accumulated 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 loss on cash flow hedging instruments of $108 was included in accumulated other comprehensive income, net of tax, at October 1, 2010. There was no ineffectiveness related to cash flow hedging instruments during the nine months ended October 1, 2010. Unrealized gains and losses existing at October 1, 2010, which are expected to be reclassified into the consolidated statements of operations from accumulated other comprehensive income during the next year, are not expected to be significant.

At October 1, 2010 the location and fair value amounts of derivative instruments is as follows:

Asset Derivatives

Liability Derivatives

October 1, 2010

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Derivatives designated as hedging instruments

Foreign currency forward contracts

Other current assets

886

Accrued expenses

1,064

Derivatives not designated as hedging instruments

Foreign currency forward contracts

Other current assets

236

Accrued expenses

2,474

Total Derivatives

1,122

3,538

The amounts of (gain) loss recognized in accumulated Other Comprehensive Income (“OCI”) at October 1, 2010, and the amounts reclassified into income from accumulated OCI for the three and nine months ended October 1, 2010 were as follows:


	Amount of (gain) loss recognized in OCI on derivatives (effective portion)		Location of (gain) loss reclassified from accumulated OCI into income	Amount of (gain) loss reclassified from accumulated OCI into income (effective portion)
Derivatives with cash flow hedging relationships	Nine months ended October 1, 2010			Three months ended October 1, 2010		Nine months ended October 1, 2010
Foreign currency forward contracts	$	178	Other (income) expense, net	$	168	$	533

15. Fair Value Measurements of Financial Instruments

Financial instruments measured at fair value on a recurring basis were as follows:


	Balance at October 1, 2010		Level 1		Level 2		Level 3
Assets:
Foreign currency forward contracts	$	1,122	$	—	$	1,122	$	—

Liabilities:
Foreign currency forward contracts	$	3,538	$	—	$	3,538	$	—

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;

DIVERSEY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 1, 2010

(Unaudited)

and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

16. Comprehensive Income (Loss)

Comprehensive income (loss) for three and nine months ended October 1, 2010 and October 2, 2009 are as follows:


	Three Months Ended					Nine Months Ended
	October 1, 2010			October 2, 2009		October 1, 2010			October 2, 2009
Net income	$	43,100		$	40,393	$	63,964		$	42,517
Foreign currency translation adjustments		94,028			44,688		17,810			66,683
Adjustments to pension and post-retirement liabilities, net of tax		(7,583	)		6,449		(10,512	)		11,254
Unrealized gains (losses) on derivatives, net of tax		222			1,703		178			1,166

Total comprehensive income	$	129,767		$	93,233	$	71,440		$	121,620

17. Stock-Based Compensation

Adoption of a New Stock-Based Long-Term Incentive Plan

In January 2010, Holdings and the Company approved a new Stock Incentive Plan (“SIP”), which replaced the cash-based Long-Term Incentive Program (“LTIP”) 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 nine months ended October 1, 2010, under terms of the approved SIP, participants were granted 2,982,002 Deferred Share Units (“DSUs”) and 7,879,381 matching options, which represent rights to Shares in the future subject to the satisfaction of service and performance conditions. The DSUs include 1,447,890 units related to the conversion of LTIP awards that have been earned but are not yet vested at adoption of the SIP. The conversion resulted in the reclassification of $14,479 from other liabilities to due from parent, as these awards are expected to be settled in Holdings’ equity rather than in cash. The DSUs have a grant-date fair value of $10 per share and the matching options have an exercise price of between $10 and $12.35 per share, with a contractual term of ten years. The DSUs and matching options are subject to vesting periods of one to two years and three to four years, respectively.

Also during the nine months ended October 1, 2010, pursuant to the conditions of the SIP, Holdings completed an equity offering resulting in the issuance of 1,448,471 Shares at $10 per share, and 2,850,925 matching options to purchase Shares pursuant to a matching formula, at an exercise price of between $10 and $12.35 per share, with a contractual term of ten years. The matching options are subject to a vesting period of four years.

The Company recognizes the cost of employee services in exchange for awards of Holdings’ equity instruments based on the grant-date fair value of those awards. That cost, based on the estimated number of awards that are expected to vest, is recognized on a straight-line basis over the period during which the employee is required to provide the service in exchange for the award. No compensation cost is recognized for awards for which the employees do not render the requisite service. The grant-date fair value of SIP matching options is estimated using the Black-Scholes valuation model. The grant-date fair value of SIP DSUs is equal to the purchase price of the equity offering pursuant to which the SIP DSUs are granted, as determined by the Board of Directors based on a third-party valuation.

The following weighted-average assumptions were used in calculating the fair value of SIP matching options for each award, as of the date of grant:

DIVERSEY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 1, 2010

(Unaudited)


Expected term of option (in years)	5.00
Expected volatility factor	34.51	%
Expected dividend yield	0.00	%
Risk-free interest rate	2.37	%

In determining a five-year expected term, the Company used management’s best estimate of the time period to potential liquidity activity. Expected volatility is based on the median monthly volatility of peer companies measured over a five-year period corresponding to the expected term of the option. The expected dividend yield is 0% based on the Company’s expectation that no dividends will be paid during the expected term of the option. The risk-free interest rate is based on the U.S. five-year treasury constant maturity as of February 2, 2010 for the expected term of the option.

The summary of stock option activity during the first nine months of 2010 is presented below:


	Number of Options		Exercise Price per Option ¹		Remaining Contractual Term¹ (in years)		Aggregate Intrinsic Value
Outstanding at beginning of the period		—	$	—
Granted ²		10,730,306		10.00
Exercised		—		—
Forfeited or expired		—		—


Outstanding at end of period		10,730,306	$	10.00		—	$	27,874


Exercisable at end of period				N/A		N/A		N/A

¹ Weighted-average

² An additional 10,617 options were granted during the third quarter of 2010, at an exercise price of $12.35 per share.

The weighted-average grant-date fair value of options granted was $3.43.

At October 1, 2010, there was $29,057 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.

The SIP expense was $3,703 and $10,820 for the three and nine months ended October 1, 2010, and is recorded as part of selling, general and administrative expenses in the consolidated statement of operations.

In conjunction with the approval of the SIP, the Company changed the LTIP from being measured on operational performance to stock appreciation for grants beginning in 2010. The new program provides for cash awards based on stock appreciation rights (“SARs”) and includes the managers of the Company who participated in the LTIP but are not subject to the SIP. 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.

In February 2010, Holdings approved the Holdings’ 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. In the first nine months of 2010, pursuant to the DIP, Holdings completed an equity offering of 85,000 Shares at $10 per share, and 29,167 Shares at $12 per share, to certain directors. Pursuant to the DIP, participating directors were granted 50,000 DSUs which represent rights to Shares in the first quarter of 2011, subject to the satisfaction of certain conditions at an acquisition price of $10 per share, and 8,229 DSUs at $12 per Share. In September 2010, Holdings purchased back 10,000 shares at $12.35 per share and 12,500 DSUs were forfeited following the departure of a director.

DIVERSEY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 1, 2010

(Unaudited)

18. 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 September 2010, the Company conditionally pledged $6,000 to a charitable organization near its Sturtevant, Wisconsin headquarters. The Company expects to expense the amount committed during the fourth quarter of 2010, following satisfaction of certain conditions.

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 October 1, 2010, the Company maintained related reserves of $10,200 on a discounted basis (using country specific rates ranging from 7.6% to 21.7%) and $13,200 on an undiscounted basis. The Company intends to seek recovery from Unilever under indemnification clauses contained in the purchase agreement.

DIVERSEY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 1, 2010

(Unaudited)

19. Segment Information

In accordance with the new operating segments described in Note 2, business segment information is summarized as follows:


	Three Months Ended October 1, 2010
	Europe		Americas		Greater Asia Pacific		Eliminations / Other¹			Total Company
Net sales	$	407,288	$	231,450	$	151,719	$	(6,885	)	$	783,572
Operating profit		55,720		22,169		11,024		(1,212	)		87,701
Depreciation and amortization		11,484		5,971		3,844		8,611			29,910
Interest expense		12,119		4,457		537		13,436			30,549
Interest income		335		686		157		114			1,292
Total assets		1,960,322		599,407		552,818		326,421			3,438,968
Goodwill		782,981		210,707		208,527		48,803			1,251,018
Capital expenditures, including capitalized computer software		5,817		4,457		3,398		4,670			18,342
Long-lived assets ²		1,034,057		305,696		288,896		287,029			1,915,678

	Three Months Ended October 2, 2009
	Europe		Americas		Greater Asia Pacific		Eliminations / Other¹			Total Company
Net sales	$	447,413	$	232,861	$	140,229	$	(5,066	)	$	815,437
Operating profit		53,071		30,714		8,895		(8,700	)		83,980
Depreciation and amortization		11,665		5,357		3,858		7,351			28,231
Interest expense		14,441		3,804		427		4,092			22,764
Interest income		1,110		420		79		(367	)		1,242
Total assets		1,981,178		564,322		499,948		287,449			3,332,897
Goodwill		810,507		204,800		193,671		49,628			1,258,606
Capital expenditures, including capitalized computer software		7,007		4,607		3,370		4,872			19,856
Long-lived assets ²		1,086,757		298,774		270,885		299,352			1,955,768

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, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 1, 2010

(Unaudited)


	Nine Months Ended October 1, 2010
	Europe		Americas		Greater Asia Pacific		Eliminations / Other¹			Total Company
Net sales	$	1,222,886	$	690,678	$	432,033	$	(20,048	)	$	2,325,549
Operating profit		138,475		66,817		27,697		(17,967	)		215,022
Depreciation and amortization		33,536		17,698		11,272		21,594			84,100
Interest expense		33,552		13,346		1,658		37,457			86,013
Interest income		1,053		1,647		439		412			3,551
Total assets		1,960,322		599,407		552,818		326,421			3,438,968
Goodwill		782,981		210,707		208,527		48,803			1,251,018
Capital expenditures, including capitalized computer software		17,790		14,218		9,508		13,040			54,556
Long-lived assets ²		1,034,057		305,696		288,896		287,029			1,915,678

	Nine Months Ended October 2, 2009
	Europe		Americas		Greater Asia Pacific		Eliminations / Other¹			Total Company
Net sales	$	1,251,801	$	681,601	$	393,175	$	(13,974	)	$	2,312,603
Operating profit		103,708		60,433		13,733		(17,696	)		160,178
Depreciation and amortization		33,728		15,799		11,356		21,136			82,019
Interest expense		41,402		11,554		1,330		15,772			70,058
Interest income		3,832		1,205		203		(1,480	)		3,760
Total assets		1,981,178		564,322		499,948		287,449			3,332,897
Goodwill		810,507		204,800		193,671		49,628			1,258,606
Capital expenditures, including capitalized computer software		20,025		14,071		7,757		17,135			58,988
Long-lived assets ²		1,086,757		298,774		270,885		299,352			1,955,768

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. Subsidiary Guarantors of Senior Subordinated Notes

The Company’s indebtedness includes new senior notes that are guaranteed by certain of the Company’s 100% owned subsidiaries (the “Guarantor Subsidiaries”). Such guarantees are full and unconditional, to the extent allowed by law, and joint and several. Separate financial statements of the Guarantor Subsidiaries are not presented because the guarantors are unconditionally, jointly, and severally liable under the guarantees, and the Company believes such separate statements or disclosures would not be useful to investors. The following supplemental financial information sets forth, on an unconsolidated basis, statements of operations, balance sheets and statements of cash flows information for the Company (“Parent Company”), for the Guarantor Subsidiaries and for the Company’s non-guarantor subsidiaries (the “Non-guarantor Subsidiaries”), each of which were determined on a combined basis with the exception of eliminating investments in combined subsidiaries and certain reclassifications, which are eliminated at the consolidated level. The supplemental financial information reflects the investments of the Company in the Guarantor Subsidiaries and Non-guarantor Subsidiaries using the equity method of accounting.

DIVERSEY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 1, 2010

(Unaudited)

Condensed consolidating statements of operations for the three months ended October 1, 2010:


	Parent Company			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Consolidating Adjustments			Consolidated
Net product and service sales	$	142,601		$	745		$	659,499		$	(26,537	)	$	776,308
Sales agency fee income		—			—			7,264			—			7,264

		142,601			745			666,763			(26,537	)		783,572
Cost of sales		92,553			656			387,392			(25,168	)		455,433

Gross profit		50,048			89			279,371			(1,369	)		328,139
Selling, general and administrative expenses		34,225			(107	)		190,575			—			224,693
Research and development expenses		7,223			—			8,349			—			15,572
Restructuring expense		(252	)		—			425			—			173

Operating profit		8,852			196			80,022			(1,369	)		87,701
Other expense (income):
Interest expense		21,787			41			13,277			(4,556	)		30,549
Interest income		(1,656	)		(3,343	)		(849	)		4,556			(1,292	)
Other (income) expense, net		(54,370	)		(578	)		(989	)		55,066			(871	)

Income (loss) before taxes		43,091			4,076			68,583			(56,435	)		59,315
Income tax provision		(1,050	)		1,777			14,359			—			15,086

Income (loss) from continuing operations		44,141			2,299			54,224			(56,435	)		44,229
Loss from discontinued operations, net of income taxes		(1,041	)		(88	)		—			—			(1,129	)

Net income (loss)	$	43,100		$	2,211		$	54,224		$	(56,435	)	$	43,100

Condensed consolidating statements of operations for the three months ended October 2, 2009:


	Parent Company			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Consolidating Adjustments			Consolidated
Net product and service sales	$	129,030		$	13,882		$	685,354		$	(20,035	)	$	808,231
Sales agency fee income		—			—			7,206			—			7,206

		129,030			13,882			692,560			(20,035	)		815,437
Cost of sales		78,209			6,785			398,054			(20,033	)		463,015

Gross profit		50,821			7,097			294,506			(2	)		352,422
Selling, general and administrative expenses		44,004			2,656			205,265			—			251,925
Research and development expenses		7,457			—			8,141			—			15,598
Restructuring expense		(6	)		—			925			—			919

Operating profit (loss)		(634	)		4,441			80,175			(2	)		83,980
Other expense (income):
Interest expense		25,420			21			15,297			(17,974	)		22,764
Interest income		(9,818	)		(8,031	)		(1,367	)		17,974			(1,242	)
Other (income) expense, net		(54,964	)		(28,056	)		342			81,913			(765	)

Income (loss) before taxes		38,728			40,507			65,903			(81,915	)		63,223
Income tax provision		(981	)		1,849			22,502			—			23,370

Income (loss) from continuing operations		39,709			38,658			43,401			(81,915	)		39,853
Loss from discontinued operations, net of income taxes		684			(146	)		2			—			540

Net income (loss)	$	40,393		$	38,512		$	43,403		$	(81,915	)	$	40,393

DIVERSEY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 1, 2010

(Unaudited)

Condensed consolidating statements of operations for the nine months ended October 1, 2010:


	Parent Company			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Consolidating Adjustments			Consolidated
Net product and service sales	$	417,259		$	2,225		$	1,956,659		$	(69,764	)	$	2,306,379
Sales agency fee income		—			—			19,170			—			19,170

		417,259			2,225			1,975,829			(69,764	)		2,325,549
Cost of sales		257,624			1,856			1,145,296			(69,686	)		1,335,090

Gross profit		159,635			369			830,533			(78	)		990,459
Selling, general and administrative expenses		128,345			(229	)		600,839			—			728,955
Research and development expenses		23,472			—			25,357			—			48,829
Restructuring expense		(1,164	)		—			(1,183	)		—			(2,347	)

Operating profit		8,982			598			205,520			(78	)		215,022
Other expense (income):
Interest expense		63,016			89			37,228			(14,320	)		86,013
Interest income		(5,533	)		(10,091	)		(2,247	)		14,320			(3,551	)
Other (income) expense, net		(124,091	)		(578	)		2,034			125,518			2,883

Income (loss) before taxes		75,590			11,178			168,505			(125,596	)		129,677
Income tax provision		2,187			5,417			47,919			—			55,523

Income (loss) from continuing operations		73,403			5,761			120,586			(125,596	)		74,154
Loss from discontinued operations, net of income taxes		(9,439	)		(751	)		—			—			(10,190	)

Net income (loss)	$	63,964		$	5,010		$	120,586		$	(125,596	)	$	63,964

Condensed consolidating statements of operations for the nine months ended October 2, 2009:


	Parent Company			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Consolidating Adjustments			Consolidated
Net product and service sales	$	392,693		$	39,309		$	1,924,782		$	(63,452	)	$	2,293,332
Sales agency fee income		—			—			19,271			—			19,271

		392,693			39,309			1,944,053			(63,452	)		2,312,603
Cost of sales		250,939			19,820			1,157,143			(62,997	)		1,364,905

Gross profit		141,754			19,489			786,910			(455	)		947,698
Selling, general and administrative expenses		126,277			8,571			597,919			—			732,767
Research and development expenses		24,178			—			22,413			—			46,591
Restructuring expense		(127	)		(5	)		8,294			—			8,162

Operating profit (loss)		(8,574	)		10,923			158,284			(455	)		160,178
Other expense (income):
Interest expense		78,408			61			44,444			(52,855	)		70,058
Interest income		(28,680	)		(23,725	)		(4,210	)		52,855			(3,760	)
Other (income) expense, net		(101,702	)		(38,284	)		(2,127	)		137,797			(4,316	)

Income (loss) before taxes		43,400			72,871			120,177			(138,252	)		98,196
Income tax provision		436			5,587			48,799			—			54,822

Income (loss) from continuing operations		42,964			67,284			71,378			(138,252	)		43,374
Loss from discontinued operations, net of income taxes		(447	)		(149	)		(261	)		—			(857	)

Net income (loss)	$	42,517		$	67,135		$	71,117		$	(138,252	)	$	42,517

DIVERSEY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 1, 2010

(Unaudited)

Condensed consolidating balance sheet at October 1, 2010:


	Parent Company		Guarantor Subsidiaries		Non-guarantor Subsidiaries		Consolidating Adjustments			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	55,715	$	511	$	161,248	$	—		$	217,474
Restricted cash		23,064		—		—		—			23,064
Accounts receivable		657		577		595,504		—			596,738
Intercompany receivables		—		453,039		—		(453,039	)		—
Due from parent		13,834		—		—		—			13,834
Inventories		50,360		216		233,229		(138	)		283,667
Other current assets		23,729		79		195,504		(14,597	)		204,715
Current assets of discontinued operations		60		—		—		—			60

Total current assets		167,419		454,422		1,185,485		(467,774	)		1,339,552
Property, plant and equipment, net		74,872		267		334,518		(6,101	)		403,556
Capitalized software, net		46,782		—		2,066		—			48,848
Goodwill and other intangibles, net		84,537		107,312		1,260,443		—			1,452,292
Intercompany advances		112,773		27,000		—		(87,446	)		52,327
Other assets		64,267		—		95,701		(17,575	)		142,393
Investments in subsidiaries		1,728,644		57,190		—		(1,785,834	)		—
Noncurrent assets of discontinued operations		—		—		—		—			—

Total assets	$	2,279,294	$	646,191	$	2,878,213	$	(2,364,730	)	$	3,438,968


Liabilities and Stockholders’ Equity
Current liabilities:
Short-term borrowings	$	—	$	299	$	46,364	$	—		$	46,663
Current portion of long-term borrowings		4,500		—		5,096		—			9,596
Accounts payable		53,034		94		278,682		—			331,810
Intercompany payables		345,133		—		107,906		(453,039	)		—
Accrued expenses		115,071		1,905		305,023		45,592			467,591
Current liabilities of discontinued operations		3,846		—		—		—			3,846

Total current liabilities		521,584		2,298		743,071		(407,447	)		859,506
Intercompany note payable		—		—		129,260		(129,260	)		—
Long-term borrowings		811,620		—		465,899		—			1,277,519
Other liabilities		164,847		23,053		369,092		(36,292	)		520,700
Noncurrent liabilities of discontinued operations		5,000		—		—		—			5,000

Total liabilities		1,503,051		25,351		1,707,322		(572,999	)		2,662,725
Stockholders’ equity		776,243		620,840		1,170,891		(1,791,731	)		776,243

Total liabilities and stockholders’ equity	$	2,279,294	$	646,191	$	2,878,213	$	(2,364,730	)	$	3,438,968

DIVERSEY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 1, 2010

(Unaudited)

Condensed consolidating balance sheet at December 31, 2009:


	Parent Company		Guarantor Subsidiaries		Non-guarantor Subsidiaries		Consolidating Adjustments			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	84,163	$	229	$	165,048	$	—		$	249,440
Restricted cash		39,654		—		—		—			39,654
Accounts receivable		6,468		602		571,593		—			578,663
Intercompany receivables		—		458,234		—		(458,234	)		—
Due from parent		92,247		—		—		—			92,247
Inventories		44,347		180		211,580		(118	)		255,989
Other current assets		18,107		77		189,805		(7,448	)		200,541
Current assets of discontinued operations		60		—		—		—			60

Total current assets		285,046		459,322		1,138,026		(465,800	)		1,416,594
Property, plant and equipment, net		80,727		307		340,652		(6,041	)		415,645
Capitalized software, net		50,851		—		2,447		—			53,298
Goodwill and other intangibles, net		86,443		107,362		1,280,668		—			1,474,473
Intercompany advances		62,585		27,097		—		(89,682	)		—
Other assets		52,799		1		95,635		(126	)		148,309
Investments in subsidiaries		1,627,878		60,117		—		(1,687,995	)		—
Noncurrent assets of discontinued operations		3,919		—		—		—			3,919

Total assets	$	2,250,248	$	654,206	$	2,857,428	$	(2,249,644	)	$	3,512,238


Liabilities and Stockholders’ Equity
Current liabilities:
Short-term borrowings	$	—	$	—	$	27,661	$	—		$	27,661
Current portion of long-term borrowings		4,500		—		5,311		—			9,811
Accounts payable		89,357		357		325,882		682			416,278
Intercompany payables		322,987		—		135,247		(458,234	)		—
Accrued expenses		124,943		4,695		296,080		44,319			470,037
Current liabilities of discontinued operations		6,174		—		—		—			6,174

Total current liabilities		547,961		5,052		790,181		(413,233	)		929,961
Intercompany note payable		—		—		122,243		(122,243	)		—
Long-term borrowings		837,792		—		515,839		—			1,353,631
Other liabilities		155,170		23,023		361,458		(20,330	)		519,321
Noncurrent liabilities of discontinued operations		4,522		—		—		—			4,522

Total liabilities		1,545,445		28,075		1,789,721		(555,806	)		2,807,435
Stockholders’ equity		704,803		626,131		1,067,707		(1,693,838	)		704,803

Total liabilities and stockholders' equity	$	2,250,248	$	654,206	$	2,857,428	$	(2,249,644	)	$	3,512,238

DIVERSEY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 1, 2010

(Unaudited)

Condensed consolidating statement of cash flows for the nine months ended October 1, 2010:


	Parent Company			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Consolidating Adjustments			Consolidated
Net cash provided by (used in) operating activities	$	92,759		$	1,824		$	97,252		$	(116,746	)	$	75,089
Cash flows from investing activities:
Capital expenditures, net		(14,347	)		(42	)		(37,525	)		—			(51,914	)
Acquisitions of businesses		2,819			2,926			(1	)		(5,744	)		—
Cash from unconsolidated affiliates		598			—			—			—			598
Net costs of divestiture of businesses		(199	)		(751	)		—			—			(950	)

Net cash provided by (used in) investing activities		(11,129	)		2,133			(37,526	)		(5,744	)		(52,266	)

Cash flows from financing activities:
Proceeds from (repayments of) short-term borrowings		—			300			(1,651	)		—			(1,351	)
Repayments of long-term borrowings		(27,030	)		—			(29,352	)		—			(56,382	)
Intercompany financing		12,317			6,227			(18,547	)		3			—
Proceeds from (repayments of) additional paid in capital		(94,586	)		(2,878	)		411			97,053			—
Payment of debt issuance costs		(2,540	)		—			(1,714	)		—			(4,254	)
Dividends paid		—			(7,324	)		(18,190	)		25,434			(80	)

Net cash provided by (used in) financing activities		(111,839	)		(3,675	)		(69,043	)		122,490			(62,067	)

Effect of exchange rate changes on cash and cash equivalents		1,761			—			5,517			—			7,278

Change in cash and cash equivalents		(28,448	)		282			(3,800	)		—			(31,966	)
Beginning balance		84,163			229			165,048			—			249,440

Ending balance	$	55,715		$	511		$	161,248		$	—		$	217,474


Condensed consolidating statement of cash flows for the nine months ended October 2, 2009:

	Parent Company			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Consolidating Adjustments			Consolidated
Net cash provided by (used in) operating activities	$	135,173		$	11,621		$	83,251		$	(128,309	)	$	101,736
Cash flows from investing activities:
Capital expenditures, net		(23,073	)		132			(28,366	)		—			(51,307	)
Acquisitions of businesses		(27,198	)		(18,004	)		(2,005	)		45,595			(1,612	)
Net costs of divestiture of businesses		(475	)		(198	)		(371	)		—			(1,044	)

Net cash provided by (used in) investing activities		(50,746	)		(18,070	)		(30,742	)		45,595			(53,963	)

Cash flows from financing activities:
Proceeds from (repayments of) short-term borrowings		—			—			8,999			—			8,999
Repayments of long-term borrowings		(4,375	)		—			(2,583	)		—			(6,958	)
Intercompany financing		9,158			1,880			(11,038	)		—			—
Proceeds from (repayments of) additional paid in capital		(64,554	)		54,560			27,538			(17,544	)		—
Payment of debt issuance costs		(2,261	)		—			—			—			(2,261	)
Dividends paid		(21,676	)		(58,931	)		(41,694	)		100,258			(22,043	)

Net cash provided by (used in) financing activities		(83,708	)		(2,491	)		(18,778	)		82,714			(22,263	)

Effect of exchange rate changes on cash and cash equivalents		14,870			8,929			(28,482	)		—			(4,683	)

Change in cash and cash equivalents		15,589			(11	)		5,249			—			20,827
Beginning balance		32,260			418			75,140			—			107,818

Ending balance	$	47,849		$	407		$	80,389		$	—		$	128,645

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, Inc. and its consolidated subsidiaries since December 31, 2009. This discussion should be read in conjunction with our consolidated financial statements as of, and for the three months and nine months ended October 1, 2010, our Annual Reports on Form 10-K and Form 10-K/A for the year ended December 31, 2009, our Current Report on Form 8-K filed with the SEC on May 27, 2010, and the section entitled “Forward-Looking Statements” immediately preceding Part I of this report.

We are an environmentally responsible, leading global marketer and manufacturer of cleaning, hygiene, operational efficiency, appearance enhancing products and equipment and related services for the institutional and industrial cleaning and sanitation market. We have net product and service sales (“net sales”) in more than 175 countries through our direct sales force, wholesalers and third-party distributors. Our sales are balanced geographically, with our principal markets being Western Europe, North America and Japan, with an increasing presence in the emerging markets of Asia Pacific, Latin America, Africa, and Eastern Europe.

•

Three regional presidents have been appointed to lead the operations of the three segments;

•

The three regional presidents report to the Company’s Chief Executive Officer (“CEO”), who is its chief operating decision maker;

•

Financial information is prepared separately and regularly for each of the three regions; and

•

The CEO regularly reviews the results of operations, manages the allocation of resources and assesses the performance of each of these regions.

•

The existing Europe region

•

A new Americas region combining the former North and Latin American regions; and

•

A new Greater Asia Pacific region combining the former Asia Pacific and Japan regions.

Accordingly, the following management discussion and analysis reflects segment information in conformity with the new three region model.

Also, except where noted, the management discussion and analysis below, excluding the consolidated statements of cash flows, reflects the results of continuing operations, which excludes the divestiture of DuBois Chemicals (“DuBois”), and the former Polymer business segment (“Polymer Business”) as discussed in Note 6 to the consolidated financial statements.

As indicated in the following table, after excluding the impact of foreign currency exchange rates, our net sales decreased by 2.1% and 0.9% for the three and nine months ended October 1, 2010, respectively, compared to the three months and nine months ended October 2, 2009.


	Three Months Ended								Nine Months Ended
(dollars in millions)	October 1, 2010		October 2, 2009			Change			October 1, 2010		October 2, 2009		Change

Net sales	$	783.6	$	815.4			-3.9	%	$	2,325.6	$	2,312.6		0.6	%
Variance due to foreign currency exchange				(15.4	)							34.6

	$	783.6	$	800.0			-2.1	%	$	2,325.6	$	2,347.2		-0.9	%

The decrease for the quarter was driven by the impact of H1N1 virus related sales in the comparable prior quarter. Excluding the impact of H1N1 virus related volume, the Company’s net sales for the quarter were effectively flat. We continued to experience challenging economic conditions in the developed markets of Western Europe, North America and Japan, where depressed customer demand continued to pressure sales. Our consistent application of successful pricing strategies, improved customer contract compliance and customer acquisitions have helped offset the adverse impact of decreased consumption of our products. In particular, emerging markets across the world and global equipment sales have demonstrated consistent growth trends since the beginning of fiscal 2010. We continue to believe that our differentiated value proposition, complemented by our diversified customer base, has allowed us to effectively execute our sales strategies and should help mitigate continued market uncertainty.

As indicated in the following table, the Company’s gross profit percentage declined for the third quarter of 2010 compared to the third quarter of 2009.


Gross Margin on Net Sales Three Months Ended						Gross Margin on Net Sales Nine Months Ended
October 1, 2010			October 2, 2009			October 1, 2010			October 2, 2009

	41.9	%		43.2	%		42.6	%		41.0	%

During the quarter, the Company experienced a 130 basis point decline in margin as compared to last year, which was driven by volume and product mix changes, including the decrease in higher margin H1N1 virus related sales. For the first nine months of this year compared to prior year, the Company’s margin improved by 160 basis points, despite the difficult economic conditions, largely the result of continued implementation of price increases and reductions in certain raw material costs and successful implementation of our restructuring program along with structural improvements built in to our global sourcing activities. We expect to leverage our process improvements to mitigate current and expected inflationary pressures.

As of October 1, 2010, we were in compliance with the financial covenants under the credit agreement for our new senior secured credit facilities and indentures. We believe that our cash flows from continuing operations, together with available cash on hand, and borrowings available under our new senior secured credit facilities will generate sufficient cash flow to meet our liquidity needs for the foreseeable future. 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 believe that the global economy is still recovering from the economic crisis and recession. We are not able to predict whether market conditions will continue to improve or deteriorate, or how long such changes will last or will affect our business or our customers’ businesses going forward.

During the third quarter of 2010, we continued to make significant progress with the operational restructuring of our Company in accordance with the November 2005 Plan. Key activities during this quarter included the continued transition to a new organizational model in our Europe region, and the continued progress on various supply chain optimization projects to improve capacity utilization and efficiency. Our November 2005 restructuring program activity is expected to continue through fiscal 2011, with the associated reserves expected to be paid out through our restricted cash balance.

In conjunction with its ongoing operational efficiency efforts, the Company announced plans to transition certain accounting functions in its corporate center and North America location to a third party provider. The Company commenced the plan and expects to complete execution by 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 its other locations in North America, as well as to pursue contract manufacturing for a portion of its product line. The timeline to transition out of Waxdale is not certain, but is expected to

be largely completed during the first semester of fiscal 2012.

Critical Accounting Policies and Estimates

As discussed in Note 3 to the consolidated financial statements in Part I, Item I, in June 2009, the FASB issued new guidance under ASC Topic 860, Transfers and Servicing, which changed the requirements for derecognizing financial assets. As a result of this amendment to U.S. GAAP, effective at the beginning of fiscal year 2010, the Company restored the securitized accounts receivable in its balance sheet and recognized related short-term borrowings. See Note 7 for additional information.

There have been no other material changes to the Company’s critical accounting policies as described in its Annual Report on Form 10-K and Form 10-K/A for the year ended December 31, 2009.

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 October 1, 2010 Compared to Three Months Ended October 2, 2009

Net Sales:


	Three Months Ended					Change
(dollars in millions)	October 1, 2010		October 2, 2009			Amount			Percentage

Net product and service sales	$	776.3	$	808.2		$	(31.9	)		-3.9	%
Sales agency fee income		7.3		7.2			0.1			0.8	%

		783.6		815.4			(31.8	)		-3.9	%

Variance due to foreign currency exchange		—		(15.4	)		15.4

	$	783.6	$	800.0		$	(16.4	)		-2.1	%

•

The comparability of net sales reported in the two periods is affected by the impact of foreign exchange rate movements. As measured against prior year’s results, the stronger U.S. dollar against the euro and certain other foreign currencies resulted in a $15.4 million decline in net sales in the third quarter of 2010.

•

Excluding the impact of foreign currency exchange rates, net sales decreased by 2.1%. The decrease for the quarter was driven by the impact of H1N1 virus related sales in the comparable prior quarter. Excluding the impact of H1N1 virus related volume, the Company’s net sales for the quarter were effectively flat. We continued to experience challenging economic conditions in the developed markets of Western Europe, North America and Japan, where depressed customer demand continued to pressure sales. Our consistent application of successful pricing strategies, improved customer contract compliance and customer acquisitions have helped offset the adverse impact of decreased consumption of our products. In particular, emerging markets across the world and global equipment sales have demonstrated consistent growth trends since the beginning of fiscal 2010. We continue to believe that our differentiated value proposition, complemented by our diversified customer base, has allowed us to effectively execute our sales strategies and should help mitigate continued market uncertainty. 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 3.0% in the third quarter of 2010 versus the same period last year. The decrease is substantially due to the impact of H1N1 virus related sales in the comparable prior period, which resulted in lower volumes in Western Europe across multiple customer sectors.

These volume challenges were offset by continued favorable increases in emerging markets and in equipment sales. We will continue to pursue the successful execution of our sales strategies to mitigate the economic challenges in the region.

•

In our Americas region, net sales decreased by 2.3% in the third quarter of 2010 versus the same period last year. The decline was driven by the impact of H1N1 virus related sales in the comparable prior period in the U.S. and Canada, downward pressure from the government and education sector due to budgetary constraints in the U.S., and the strategic exit from lower margin commodity sales in our food and beverage sector, offset by continued sales growth in our key emerging markets in the region. We expect a continued trend of consumption growth in emerging markets and will continue to pursue effective sales strategies to address the ongoing softness and economic uncertainty in many sectors of the U.S. and Canada marketplaces.

•

In our Greater Asia Pacific region, net sales improved by 0.9% in the third quarter of 2010 versus the same period last year. Growth in this region continues to be led by India and China, which experienced strong volume improvements across sectors and whose expanding economies reflect strengthening customer demand. In these markets, we experienced sales growth in the food and beverage sector due to customer acquisitions, while favorable occupancy rates helped sustain growth in the lodging sector. Equipment sales across various customer sectors continue to show favorable increases. Our growth trends in emerging markets are offset by volume decreases in Japan, consistent with certain other developed markets and the strategic shift away from commodity-based sales in our Japanese food and beverage sector and reductions in beverage consumption patterns. The region expects continued sales growth as general economic recovery and customer demand is restored and as we continue our focus on key customer acquisitions and emerging markets.

•

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 October 1, 2010 and October 2, 2009 were as follows:


	Three Months Ended						Change
(dollars in millions)	October 1, 2010			October 2, 2009			Amount			Percentage

Gross Profit	$	328.1		$	352.4		$	(24.3	)		-6.9	%

Gross profit as a percentage of net sales:		41.9	%		43.2	%

•

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 stronger U.S. dollar against the euro and certain other foreign currencies resulted in an $8.1 million decline in gross profit.

•

Our gross profit percentage declined by 130 basis points in the third quarter of 2010 compared to the third quarter of 2009.

•

The 130 basis point decline in margin was driven by volume and product mix changes, including the decrease in higher margin H1N1 virus related sales. The adverse effect of volume and product mix was partially offset by our continued implementation of price increases. Effective actions helping to mitigate inflation in the quarter included more efficient materials purchasing, improvements in our manufacturing and logistics footprint, rationalizing the number of product offerings, eliminating low margin products, and implementing internal processes to more effectively monitor

customer profitability. We expect to leverage our process improvements to manage current and expected inflationary pressures.

Operating Expenses:


	Three Months Ended						Change
(dollars in millions)	October 1, 2010			October 2, 2009			Amount			Percentage
Selling, general and administrative expenses	$	224.7		$	251.9		$	(27.2	)		-10.8	%
Research and development expenses		15.6			15.6		$	(0.0	)		0.0	%
Restructuring expenses		0.2			0.9		$	(0.7	)		-81.2	%

	$	240.5			268.4		$	(27.9	)		-10.4	%

As a percentage of net sales:
Selling, general and administrative expenses		28.7	%		30.9	%
Research and development expenses		2.0	%		1.9	%
Restructuring expenses		0.0	%		0.1	%

		30.7	%		32.9	%

Operating expenses. 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 stronger U.S. dollar against the euro and certain other foreign currencies resulted in a $4.9 million decline in operating expenses.

•

Selling, general and administrative expenses. Included in selling, general and administrative expenses are period costs associated with the November 2005 Plan in the amounts of $3.6 million and $9.7 million for the third quarter of 2010 and 2009, respectively.

Selling, general and administrative expenses as a percentage of net sales were 28.7% for the third quarter of 2010 and 30.9% for the same period in the prior year. Excluding the impact of foreign currency, selling, general and administrative expenses decreased by $22.9 million during the third quarter of 2010 compared to the same period in the prior year. This decrease is partially due to a net reduction in expenses arising from: (a) the recognition of pension related net curtailment and settlement gains, (b) lower period costs associated with the November 2005 Plan, offset by (c) increased environmental reserves. In addition, the Company has realized benefits from the continuing implementation of its restructuring program and expense control management.

•

Research and development expenses. Excluding the impact of foreign currency, research and development expenses increased by $0.7 million during the third quarter of 2010 compared to the same period in the prior year.

•

Restructuring expenses. Restructuring expenses decreased by $0.8 million during the third quarter of 2010 compared to the same period in the prior year, primarily due to the winding down of restructuring efforts and adjustments of previously recorded restructuring reserves.

Restructuring and Integration:

A summary of all costs associated with the November 2005 Plan for the quarters ended October 1, 2010 and October 2, 2009, and since inception of the program in November 2005, is outlined below:


	Three Months Ended						Total Project to Date October 1, 2010
(dollars in millions)	October 1, 2010			October 2, 2009			Total Project to Date October 1, 2010
Reserve balance at beginning of period	$	29.7		$	45.4		$	—
Restructuring expenses (credits)		0.2			0.9			234.7
Payments of accrued costs		(2.0	)		(15.4	)		(206.8	)

Reserve balance at end of period	$	27.9		$	30.9		$	27.9

Period costs classified as selling, general and administrative expenses		3.6			9.7			312.6
Period costs classified as cost of sales		0.3			0.1			7.0
Capital expenditures		2.8			1.9			90.6

•

During the third quarter of 2010 and 2009, we recorded $0.2 million and $0.9 million, respectively, of restructuring costs related to our November 2005 Plan, consisting primarily of involuntary termination costs. Our November 2005 restructuring program activity is expected to continue through fiscal 2011.

•

Period costs of $3.6 million and $9.7 million for 2010 and 2009, respectively, included in selling, general and administrative expenses and $0.3 million and $0.1 million for 2010 and 2009, respectively, included in cost of sales pertained to: (a) $1.4 million in 2010 ($6.2 million in 2009) for personnel related costs of employees and consultants associated with restructuring initiatives, (b) $0.6 million in 2010 ($0.1 million in 2009) related to asset impairments, (c) $0.3 million in 2010 ($1.7 million in 2009) for value chain and cost savings projects, (d) $0.2 million in 2010 ($0.4 million in 2009) of facilities related costs, and (e) $1.4 million in 2010 ($1.4 million in 2009) related to 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 as well as the Greater Asia Pacific and Americas business segments.

Non-Operating Results:


	Three Months Ended						Change
(dollars in millions)	October 1, 2010			October 2, 2009			Amount			Percentage

Interest expense	$	30.5		$	22.8		$	7.7			33.8	%
Interest income		(1.3	)		(1.2	)		(0.1	)		-4.0	%

Net interest expense	$	29.2		$	21.6		$	7.6			35.3	%

Other income, net		(0.9	)		(0.8	)		(0.1	)		-13.9	%

•

Net interest expense increased in the third quarter of 2010 compared to the same period in the prior year primarily due to higher loan principal balances and the recognition of $2.5 million of additional non-cash interest expense, as amortization of discounts and capitalized debt issuance costs were accelerated due to an early optional principal payment made by the Company on its New Term Loans.

Income Taxes:


	Three Months Ended						Change
(dollars in millions)	October 1, 2010			October 2, 2009			Amount			Percentage

Income from continuing operations	$	59.3		$	63.2		$	(3.9	)		-6.2	%
Provision for income taxes		15.1			23.4			(8.3	)		-35.4	%

Effective income tax rate		25.4	%		37.0	%

•

For the fiscal year ending December 31, 2010, we are projecting an effective income tax rate of approximately 51% 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 25.4% on the pre-tax income from continuing operations for the third quarter ended October 1, 2010. When compared to the estimated annual effective income tax rate, the effective income tax rate for the fiscal quarter ended October 1, 2010 is lower primarily due to certain income tax expense (benefit) amounts that were recorded as discrete items during the period, rather than included in the annual effective income tax rate.

•

We reported an effective income tax rate of 37.0% on the pre-tax income from continuing operations for the third quarter ended October 2, 2009, which approximated the statutory income tax rate.

Discontinued operations:


	Three Months Ended						Change
(dollars in millions)	October 1, 2010			October 2, 2009			Amount			Percentage
Income (loss) from discontinued operations	$	(1.1	)	$	0.3			(1.4	)		-432.1	%
(Benefit) provision from income taxes		—			(0.2	)		0.2			100.0	%

Income (loss) from discontinued operations, net of taxes	$	(1.1	)	$	0.5			(1.6	)		-309.1	%

The loss from discontinued operations during the three months ended October 1, 2010 includes $0.1 million in after-tax additional closing costs and certain pension-related adjustments ($0.1 million after-tax costs in 2009) related to the divestiture of Polymer business and $1.0 million after-tax loss related to the Polymer tolling agreement ($0.6 million after-tax gain in 2009). The amount of loss from discontinued operations in the third quarter of 2009 also includes after-tax additional one-time costs associated with the Dubois divestiture.

Net income:

Our net income of $43.1 million for the third quarter of 2010 represents an improvement of $2.7 million from the third quarter of 2009. Excluding the negative impact of foreign currency exchange of $2.4 million, our net income increased by $5.1 million. The increase in net income is primarily due to lower operating expenses in the current quarter compared to the same quarter last year.

EBITDA and 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 our 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 October 1, 2010 and October 2, 2009.


	Three Months Ended
(dollars in millions)	October 1, 2010			October 2, 2009

Net cash provided by operating activities	$	105.1		$	169.6
Changes in operating assets and liabilities, net of effects from acquisitions and divestitures of businesses		(35.7	)		(95.4	)
Changes in deferred income taxes		9.1			(2.5	)
Depreciation and amortization expense		(29.9	)		(28.2	)
Amortization of debt issuance costs		(4.8	)		(1.2	)
Accretion of original issue discount		(1.3	)		—
Interest accrued on long-term receivables-related parties		—			0.7
Other, net		0.6			(2.6	)

Net income		43.1			40.4

Provision for income taxes		15.1			23.2
Interest expense, net		29.2			21.6
Depreciation and amortization expense		29.9			28.2

	$	117.3		$	113.4

EBITDA, net of foreign currency impact, improved by $7.2 million for the third quarter ended October 1, 2010 compared to the same period in the prior year. This was primarily due to increased operating profit arising from lower operating expenses.

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


(dollars in millions)
EBITDA	$	117.3
Restructuring related costs		2.4
Acquisition and divestiture adjustments		1.1
Non-cash and other items, net		4.1
Compensation adjustment		5.1

Credit Agreement EBITDA	$	130.0

We present Credit Agreement EBITDA because it is a financial measure that is used in the calculation of compliance with our financial covenants under the credit agreement for our New Senior Secured Credit Facility. 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 our New Senior Secured Credit Facility are a key source of our liquidity. Our ability to borrow under our New Senior Secured Credit Facility depends upon, among other things, compliance with certain representations, warranties and covenants under the credit agreement for our New Senior Secured Credit Facility. The financial covenants in our New Senior Secured Credit Facility include a specified debt to Credit Agreement EBITDA leverage ratio and a specified Credit Agreement EBITDA to interest expense coverage ratio for specified periods.

Nine Months Ended October 1, 2010 Compared to Nine Months Ended October 2, 2009

Net Sales:


	Nine Months Ended				Change
(dollars in millions)	October 1, 2010		October 2, 2009		Amount			Percentage

Net product and service sales	$	2,306.4	$	2,293.3	$	13.1			0.6	%
Sales agency fee income		19.2		19.3		(0.1	)		-0.5	%

		2,325.6		2,312.6		13.0			0.6	%
Variance due to foreign currency exchange		—		34.6		(34.6	)

	$	2,325.6	$	2,347.2	$	(21.6	)		-0.9	%

•

The comparability of net sales reported in the two periods is significantly affected by the impact of foreign exchange rate movements. As measured against prior period’s results, the weaker U.S. dollar against certain foreign currencies resulted in a $34.6 million increase in net sales.

•

Excluding the impact of foreign currency exchange rates, net sales decreased by 0.9%, primarily a result of the impact of H1N1 related sales in the prior year and the continuing challenging global economic conditions. The depressed conditions in the developed markets are partially offset by the strong growth we are experiencing in emerging markets. The following is a review of the sales performance for each of our segments:

•

In our Europe, Middle East and Africa markets, net sales decreased by 1.3% during the nine months ended October 1, 2010 compared to the same period in the prior year. The decrease was substantially driven by the impact of H1N1 virus related sales in the prior period. We continue to experience pressures on sales volume in Western Europe primarily as a result of the stressed economic conditions and lower consumption, partially offset by pricing and new customer acquisitions. We gained sales in emerging markets. Equipment sales grew despite the challenging marketplace. We will continue to pursue the successful execution of our sales strategies to mitigate continuing economic challenges.

•

In our Americas region, net sales decreased by 2.3% during the nine months of 2010 versus the same period last year. The decline was a result of the significant impact of H1N1 virus related sales in the prior period in the U.S. and Canada, decreased consumption in the government and education sector due to their budgetary constraints and the voluntary exit from underperforming applications in the food and beverage sector. We continue to experience growth in our key emerging markets. We expect a continued trend of consumption growth in emerging markets and will continue to pursue effective sales strategies to address the ongoing softness and economic uncertainties in many sectors of the U.S. and Canada marketplaces.

•

In our Greater Asia Pacific region, net sales increased by 2.5% during the nine months of 2010 versus the same period last year. This increase is mainly due to strong volume improvements across sectors in our emerging markets, in particular, India and China. We experienced sales growth in the food and beverage sector due to customer acquisitions. This region also delivered growth in the lodging sector, related to improved occupancy rates, as well as continuing improvement in equipment sales across various customer sectors. Our growth trends in emerging markets are offset by volume decreases in Japan, consistent with certain other developed markets during this period. The region expects sales growth as economic recovery and customer demand is restored and as we continue our focus on key customer acquisitions and emerging markets.

•

Sales Agency Fee and License Agreement. 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 Fees and License Agreement revenues earned under these agreements are reported in the preceding tables.

Gross Profit:

Our gross profit percentages for the nine months ended October 1, 2010 and October 2, 2009 were as follows:


	Nine Months Ended						Change
(dollars in millions)	October 1, 2010			October 2, 2009			Amount		Percentage

Gross Profit	$	990.5		$	947.7		$	42.8		4.5	%

Gross profit as a percentage of net sales:		42.6	%		41.0	%

•

The comparability of gross profit between the two periods is significantly affected by the impact of foreign exchange rate movements. As measured against prior period’s results, the weaker U.S. dollar against certain foreign currencies resulted in a $9.7 million increase in gross profit.

•

Our gross profit percentage increased by 160 basis points for the nine months of 2010 compared to the same period in the prior year.

•

The 160 basis point improvement in margin was largely the result of continued successful implementation of price increases, and reduction in certain raw material costs. In addition, margins were enhanced through continuing successful implementation of our restructuring program along with structural improvements built in to our global sourcing activities. This includes more efficient materials purchasing, improvements in our manufacturing and logistics footprint, rationalizing the number of product offerings, eliminating low margin products, and implementing internal processes to more effectively monitor customer profitability.

Operating Expenses:


	Nine Months Ended						Change
(dollars in millions)	October 1, 2010			October 2, 2009			Amount			Percentage

Selling, general and administrative expenses	$	729.0		$	732.8		$	(3.8	)		-0.5	%
Research and development expenses		48.8			46.6			2.2			4.8	%
Restructuring expenses (credits)		(2.3	)		8.2			(10.5	)		-128.8	%

	$	775.5		$	787.6		$	(12.1	)		-1.5	%


As a percentage of net sales:
Selling, general and administrative expenses		31.3	%		31.7	%
Research and development expenses		2.1	%		2.0	%
Restructuring expenses (credits)		-0.1	%		0.4	%

		33.3	%		34.1	%

Operating expenses. The comparability of operating expenses between the two periods is significantly affected by the impact of foreign exchange rate movements. As measured against prior period’s results, the weaker U.S. dollar against certain foreign currencies resulted in a $10.4 million increase in operating expenses.

•

Selling, general and administrative expenses. Included in selling, general and administrative expenses are period costs associated with the November 2005 Plan, in the amounts of $10.3 million and $22.5 million for the first nine months of 2010 and 2009, respectively.

Selling, general and administrative expenses as a percentage of net sales were 31.3% for the nine months ended October 1, 2010 compared to 31.7% for the same period in the prior year. Excluding the impact of foreign currency, selling, general and administrative costs decreased $14.8 million during the nine months ended October 1, 2010, compared to the same period in the prior year. This decrease is substantially due to a net reduction in expenses arising from: (a) the recognition of pension related net settlement and curtailment gains, (b) lower period costs associated with the November 2005 Plan, offset by (c) employee termination costs related to the Company’s decision to move certain accounting functions to a third party provider and relocate its Waxdale manufacturing capability, and (d) increased environmental reserves.

•

Research and development expenses. Excluding the impact of foreign currency, research and development expenses increased by $2.8 million during the first nine months of 2010 compared to the same period in the prior year, the majority of which is related to the addition of engineering resources.

•

Restructuring expenses (credits). Excluding the impact of foreign currency, restructuring expenses decreased by $10.5 million during the first nine months of 2010 compared to the same period in the prior year, primarily due to the winding down of restructuring efforts and adjustments of previously recorded restructuring reserves.

Restructuring and Integration:

A summary of all costs associated with the November 2005 Plan for the nine months ended October 1, 2010 and October 2, 2009, and since inception of the program in November 2005, is outlined below:


	Nine Months Ended						Total Project to Date October 1, 2010
(dollars in millions)	October 1, 2010			October 2, 2009			Total Project to Date October 1, 2010

Reserve balance at beginning of period	$	48.4		$	60.1		$	—
Restructuring expenses (credits)		(2.3	)		8.2			234.7
Payments of accrued costs		(18.2	)		(37.4	)		(206.8	)

Reserve balance at end of period	$	27.9		$	30.9		$	27.9


Period costs classified as selling, general and administrative expenses		10.3			22.5			312.6
Period costs classified as cost of sales		0.8			0.8			7.0
Capital expenditures		5.0			13.4			90.6

•

During the first nine months of 2010 and 2009, we recorded $(2.3) million and $8.2 million, respectively, of restructuring costs related to our November 2005 Plan. Costs for the first nine months of both 2010 and 2009 consist primarily of involuntary termination costs. Our November 2005 restructuring program activity is expected to continue through fiscal 2011.

•

Period costs of $10.3 and $22.5 million for 2010 and 2009, respectively, included in selling, general and administrative expenses and $0.8 million and $0.8 million for 2010 and 2009, respectively, included in cost of sales pertained to: (a) $4.7 million in 2010 ($15.9 million in 2009) for personnel related costs of employees and consultative resources associated with restructuring initiatives, (b) $1.6 million in 2010 ($1.4 million in 2009) related to asset impairments, (c) $1.5 million in 2010 ($3.8 million in 2009) for value chain and cost savings projects, (d) $0.5 million of facilities related costs in 2010 ($1.5 million gain on sale of a manufacturing facility in Europe net of other facilities related costs in 2009), and (e) $2.8 million in 2010 ($3.7 million in 2009) related to 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 as well as the Greater Asia Pacific and Americas business segments.

Non-Operating Results:


	Nine Months Ended						Change
(dollars in millions)	October 1, 2010			October 2, 2009			Amount		Percentage

Interest expense	$	86.0		$	70.1		$	15.9		22.6	%
Interest income		(3.6	)		(3.8	)		0.2		5.6	%

Net interest expense	$	82.4		$	66.3		$	16.1		24.2	%

Other (income) expense, net		2.9			(4.3	)		7.2		166.8	%

•

Net interest expense increased during the nine months ended October 1, 2010 compared to the same period in the prior year primarily due to higher loan principal balances and the recognition of $2.5 million of additional non-cash interest expense, as amortization of discounts and capitalized debt issuance costs were accelerated due to an early optional principal payment made by the Company on its New Term Loans.

•

The change in other (income) expense, net, is primarily due to the recognition of $3.9 million in foreign currency loss resulting from our adoption of highly inflationary accounting for our Venezuelan subsidiary and gains on foreign currency positions in 2009.

Income Taxes:


	Nine Months Ended						Change
(dollars in millions)	October 1, 2010			October 2, 2009			Amount		Percentage

Income from continuing operations	$	129.7		$	98.2		$	31.5		32.1	%
Provision for income taxes		55.5			54.8			0.7		1.3	%

Effective income tax rate		42.8	%		55.8	%

•

For the fiscal year ending December 31, 2010, we are projecting an effective income tax rate of approximately 51%. 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 42.8% on the pre-tax income from continuing operations for the nine months ended October 1, 2010. When compared to the estimated annual effective income tax rate, the effective income tax rate for the nine month period ended October 1, 2010 is lower primarily due to certain income tax expense (benefit) amounts that were recorded as discrete items during the period, rather than included in the annual effective income tax rate.

•

We reported an effective income tax rate of 55.8% on the pre-tax income from continuing operations for the nine months ended October 2, 2009. The high effective income tax rate is primarily the result of increased valuation allowances against net deferred tax assets in certain jurisdictions and increases in reserves for uncertain tax positions.

Discontinued operations:


	Nine Months Ended						Change
(dollars in millions)	October 1, 2010			October 2, 2009			Amount			Percentage

Income (loss) from discontinued operations	$	(10.2	)	$	(1.2	)	$	(9.0	)		-780.7	%
(Benefit) provision from income taxes		—			(0.3	)		0.3			100.0	%

Income (loss) from discontinued operations, net of taxes	$	(10.2	)	$	(0.9	)	$	(9.3	)		-1089.0	%

The loss from discontinued operations during the nine months ended October 1, 2010 includes $0.8 million in after-tax additional closing costs and certain pension-related adjustments ($0.2 million after-tax costs in 2009) related to the divestiture of Polymer business and $9.3 million after-tax loss related to the Polymer tolling agreement ($0.1 million after-tax loss in 2009). The amounts of loss from discontinued operations in the first nine months of 2010 and 2009 also include one time costs associated with the Dubois divestiture.

Net Income:

Our net income of $64.0 million for the first nine months of 2010 represents an improvement of $21.5 million from the first nine months of 2009. Excluding the negative impact of foreign currency exchange of $3.9 million, our net income increased by $25.4 million. This increase is primarily due to an increase of $33.1 million in gross profit and decrease of $22.5 million in operating expenses offset by $16.1 million increase in net interest expense, $9.3 million in loss from discontinued operations and an increase in other expense. As previously discussed, the increase in gross margin is due to pricing action and a favorable reduction in certain raw material costs. The increase in net interest expense is mainly due to higher loan principal balances and accelerated amortization of discounts and capitalized debt issuance costs.

EBITDA and Credit Agreement EBITDA:

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 nine months ended October 1, 2010 and October 2, 2009.


	Nine Months Ended
(dollars in millions)	October 1, 2010			October 2, 2009

Net cash used in operating activities	$	75.1		$	101.7
Changes in operating assets and liabilities, net of effects from acquisitions and divestitures of businesses		102.4			40.9
Changes in deferred income taxes		(8.3	)		(14.7	)
Depreciation and amortization expense		(84.1	)		(82.0	)
Amortization of debt issuance costs		(10.0	)		(3.5	)
Accretion of original issue discount		(2.3	)		—
Interest accrued on long-term receivables-related parties		—			2.1
Other, net		(8.8	)		(2.0	)

Net income		64.0			42.5

Provision for income taxes		55.5			54.5
Interest expense, net		82.4			66.3
Depreciation and amortization expense		84.1			82.0

	$	286.0		$	245.3

EBITDA, net of foreign currency impact, increased by $43.6 million for the first nine months of this year compared to the same period in the prior year. This was primarily due to increased gross profit arising from pricing actions, favorable reduction in certain raw material costs and cost savings from successful implementation of our restructuring program.


(dollars in millions)
EBITDA	$	286.0
Restructuring related costs		4.4
Acquisition and divestiture adjustments		10.2
Non-cash and other items, net		25.7
Compensation adjustment		15.3

Credit Agreement EBITDA	$	341.6

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 and consolidated balance sheets:


	Nine Months Ended						Change
(dollars in millions)	October 1, 2010			October 2, 2009			Amount			Percentage

Net cash provided operating activities	$	75.1		$	101.7		$	(26.6	)		-26.2	%
Net cash used in investing activities		(52.3	)		(54.0	)		1.7			3.2	%
Net cash used in financing activities		(62.1	)		(22.3	)		(39.8	)		-178.3	%
Capital expenditures		54.6			59.0			(4.4	)		-7.5	%

	As of						Change
	October 1, 2010			December 31, 2009			Amount			Percentage
Cash and cash equivalents	$	217.5		$	249.4		$	(31.9	)		-12.8	%
Working capital*		548.6			418.4			130.2			31.1	%
Total debt		1,333.8			1,391.1			(57.3	)		-4.1	%

*	Working capital is defined as net accounts receivable, plus inventories less accounts payable.

•

The decrease in cash and cash equivalents and decrease in total debt at October 1, 2010 compared to December 31, 2009 resulted primarily from cash generated from operating activities offset by approximately $54.6 million in capital expenditures and $56.4 million in mandatory and optional repayments of long-term borrowings.

•

The decrease in net cash provided by operating activities during the nine months ended October 1, 2010 compared to the prior period was primarily due to the accounting treatment of securitized accounts receivable as an operating activity prior to the adoption of the new provisions of FASB ASC Topic 860, Transfers and Servicing.

•

The increase in net cash used in financing activities during the nine months ended October 1, 2010 compared to the prior period was mainly due to a $50 million optional principal repayment on the New Term Loans in September 2010.

•

Working capital increased by $130.2 million during the nine months ended October 1, 2010. This increase resulted primarily from a decrease of $84.5 million in accounts payable, a $27.6 million increase in inventories and an increase of $18.1 million in accounts receivable. We continue to effectively manage our receivable collection programs and have been successful in reducing days outstanding. The increase in accounts receivable was primarily due to the reinstatement of securitized accounts receivable in our balance sheet effective January 1, 2010, upon adoption of the new provisions of FASB ASC Topic 860, Transfers and Servicing. The increase in inventories is a result of seasonally higher inventory levels and variability in customer ordering patterns. The decrease in accounts payable is due to a number of factors, including taking advantage of negotiated discounts with vendors driven by our global strategic sourcing initiative.

Restricted Cash. In December 2009 and December 2008, we transferred $27.4 million and $49.5 million, respectively to the revocable trusts for the settlement of obligations associated with the November 2005 Restructuring Plan. As of October 1, 2010, we had $23.1 million classified as restricted cash in our consolidated balance sheets. The remaining balance will be used to pay for various restructuring actions that will occur over the next 12 to 18 months. We have expanded the period in which these actions will be completed in order to reduce the impact to the Company.

Debt and Contractual Obligations. In connection with the Transactions, we refinanced our debt and entered into new debt agreements:

New Senior Secured Credit Facility. We, our Canadian subsidiary, and one of our European subsidiaries, each as a borrower, entered into a new 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 new facility (“New Senior Secured Credit Facility”) consists 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 (“New Term Loans”). The New Senior Secured Credit Facility also provides 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 October 1, 2010, we had $3.7 million in letters of credit outstanding under the revolving portion of the New Senior Secured Credit Facility and therefore had the ability to borrow an additional $246.3 million under this revolving facility.

The net proceeds of the New 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.

Borrowings under the New Senior Secured Credit Facility bear interest based on LIBOR, EURIBOR, the BA rate or Base Rate (all as defined in the credit agreement to the New Senior Secured Facility), plus an agreed upon margin that adjusts based on the Company’s leverage ratio, and subject to a floor rate. As of October 1, 2010, the U.S. dollar denominated borrowings bear interest at 5.5%, which is LIBOR plus 350 basis points, subject to a minimum LIBOR floor of 2.00%. The Canadian dollar denominated borrowings bear interest at 5.5%, which is the BA rate plus 350 basis points, subject to a minimum BA floor of 2.00%. The euro denominated borrowings bear interest at 6.5%, which is EURIBOR plus 425 basis points, subject to a EURIBOR floor of 2.25%. Interest is generally payable quarterly in arrears.

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

On September 30, 2010, the Company made an optional pro rata principal repayment on the New Term Loans in the aggregate principal amount of $50.0 million in addition to the scheduled principal payment on the same day. The pro rata percentages were based on the U.S. dollar equivalent of the euro, Canadian dollar, and U.S. dollar denominated New Term Loans, bringing the total outstanding balance to $902.0 million. Pursuant to the above repayment of $50.0 million during the current quarter, the Company charged $2.5 million to the income statement consisting of accelerated original issue discount amortization of $0.6 million and capitalized debt issuance costs amortization of $1.9 million.

New Diversey Senior Notes. In 2009, we issued $400.0 million aggregate principal amount of 8.25% senior notes due 2019 (“New Senior Notes”). 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.

We pay interest on our New Senior Notes on May 15 and November 15 of each year, beginning on May 15, 2010. Our New Senior Notes will mature on November 15, 2019.

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

In connection with the issuance and sale of the New Senior Notes, the Company entered into an exchange and registration rights agreement, dated as of November 24, 2009, pursuant to which the Company agreed to either offer to exchange the New Senior Notes for substantially similar notes that are registered under the Securities Act of 1933 or, in certain circumstances, register the resale of the New Senior Notes. In compliance with this agreement, on July 14, 2010, the Company, upon the declaration of effectiveness by the SEC on July 12, 2010 of its registration statement filed on Form S-4, as amended, commenced an exchange offer whereby the notes were exchanged for new notes registered under the Securities Act of 1933 (“New Diversey Senior Notes”). The terms of the New Diversey Senior Notes are substantially identical to the terms of the old notes, except that the New Diversey Senior Notes are

registered under the Securities Act and will not be subject to restrictions on transfer or provisions relating to additional interest. The exchange offer was completed on August 11, 2010.

Accounts Receivable Securitization. Due to the adoption of the new guidance under the provisions of FASB ASC Topic 860, Transfers and Servicing, beginning this fiscal year as discussed in Notes 3 and 7 to the consolidated financial statements, the Company accounts for its accounts receivable securitization arrangements as a borrowing.

The total potential for securitization of trade receivables under the Receivables Facility at October 1, 2010 and December 31, 2009 was $50.0 million. In December 2009, the Receivables Facility was amended to extend the maturity of the program to December 19, 2011.

As of October 1, 2010 and December 31, 2009, JWPRC sold no accounts receivable to the Conduit.

As of October 1, 2010 and December 31, 2009, the Company had a retained interest of $65.7 million and $60.1 million, respectively, in the receivables of JWPRC. The retained interest is included in the accounts receivable balance and is reflected in the consolidated balance sheets.

In October 2010, JWPRC gave notice to the Conduit of its intention to terminate the Receivables Facility. The program will be terminated in November 2010.

In September 2009, certain subsidiaries of the Company entered into agreements (the “European Receivables Facility”) to sell, on a continuous basis, certain trade receivables originated in the United Kingdom, France and Spain to JDER Limited (“JDER”), a wholly-owned, consolidated, special purpose, bankruptcy-remote subsidiary of the Company. JDER was formed for the sole purpose of buying and selling receivables originated by subsidiaries subject to the European Receivables Facility. JDER, in turn, sells an undivided interest in the accounts receivable to a nonconsolidated financial institution (the “European Conduit”) for an amount equal to the value of the eligible receivables less the applicable reserve. The total amount available for securitization of trade receivables under the European Receivables Facility is €50.0 million. The maturity date of the European Receivables Facility is September 8, 2012.

Effective January 1, 2010, the accounting treatment for the Company’s receivables securitization facilities (see Note 3) required that accounts receivable sold to the European Conduit be included in accounts receivable, with a corresponding increase in short-term borrowings. Accordingly, as of October 1, 2010, the Company included $17.7 million in accounts receivable and short-term borrowings on its consolidated balance sheet. Prior to the effective date of the change in accounting treatment, as of December 31, 2009, the European Conduit held $18.7 million of accounts receivable that were not included in the accounts receivable balance in the Company’s consolidated balance sheet.

As of October 1, 2010 and December 31, 2009, the Company had a retained interest of $93.5 million and $110.4 million, respectively, in the receivables of JDER. The retained interest is also included in the accounts receivable balance and is reflected in the consolidated balance sheets.

For the nine months ended October 1, 2010, JDER’s cost of borrowing under the European Receivables Facility was at a weighted average rate of 3.64% per annum.

The net amount of trade receivables at any time outstanding under these and any other securitization facility that we may enter into may not exceed $200.0 million in the aggregate.

In October 2010, JDER gave notice to the European Conduit of its intention to terminate the European Receivables Facility. The program will be terminated in November 2010.

As of October 1, 2010, we had total indebtedness of $1.349 billion, consisting of $400.0 million of New Diversey Senior Notes, $902.0 million of borrowings under the New Senior Secured Credit Facility, $17.7 million in borrowing under our accounts receivable securitization facilities and $29.0 million in other short-term credit lines. In addition, we had $169.8 million in operating lease commitments, $1.8 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 our New Senior Secured Credit Facility will generate sufficient cash flow to meet our liquidity needs for the foreseeable future. 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 13 to the consolidated financial statements. As of the most recent actuarial estimation, we anticipate making $24.7 million of contributions to pension plans in fiscal year 2010. Post-retirement medical claims are paid as they are submitted and are anticipated to be $5.2 million in fiscal year 2010.

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 14 and 15 to the consolidated financial statements for gains and losses associated with these contracts.

Measurement of income tax reserve position. For the fiscal year ending December 31, 2010, we expect to increase income tax reserve liabilities by $2.5 million, resulting in total income tax reserve liabilities of $60.0 million. Total income tax reserve liabilities for which payments are expected in less than one year are $9.6 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 Our Senior Secured Credit Facilities

Under the terms of the credit agreement for our New Senior Secured Credit Facility, we are subject to certain financial covenants. The financial covenants under our New Senior Secured Credit Facility require us to meet the following targets and ratios.

Maximum Leverage Ratio. We are required to maintain a leverage ratio for each financial covenant period of no more than the maximum ratio specified in the credit agreement for our New Senior Secured Credit Facility for that financial covenant period. The maximum leverage ratio is the ratio of (1) our consolidated indebtedness (excluding up to $55 million of indebtedness incurred under our Receivables Facilities less cash and cash equivalents as of the last day of the financial covenant period to (2) Credit Agreement EBITDA for the same financial covenant period.

The maximum leverage ratio we are required to maintain for each period is set forth below:


Period Ending	Maximum Leverage Ratio

September 30, 2010		4.75 to 1
December 31, 2010		4.75 to 1
March 31, 2011		4.75 to 1
June 30, 2011		4.75 to 1
September 30, 2011		4.50 to 1
December 31, 2011		4.50 to 1
March 31, 2012		4.50 to 1
June 30, 2012		4.50 to 1
September 30, 2012		4.00 to 1
December 31, 2012		4.00 to 1
March 31, 2013		4.00 to 1
June 30, 2013		4.00 to 1
September 30, 2013		3.75 to 1
December 31, 2013		3.75 to 1
March 31, 2014		3.75 to 1
June 30, 2014		3.75 to 1
September 30, 2014 and thereafter		3.50 to 1

Minimum Interest Coverage Ratio. We are 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 our New Senior Secured Credit Facility for that financial covenant period. The minimum interest coverage ratio is the ratio of (1) our Credit Agreement EBITDA for a financial covenant period to (2) our cash interest expense for that same financial covenant period calculated in accordance with the New Senior Secured Credit Facility.

The minimum interest coverage ratio we are required to maintain for each period is set forth below:


Period Ending	Minimum Interest Coverage Ratio

September 30, 2010		2.75 to 1
December 31, 2010		2.75 to 1
March 31, 2011		2.75 to 1
June 30, 2011		2.75 to 1
September 30, 2011		3.00 to 1
December 31, 2011		3.00 to 1
March 31, 2012		3.00 to 1
June 30, 2012		3.00 to 1
September 30, 2012 and thereafter		3.25 to 1

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

Compliance with Maximum Leverage Ratio and Minimum Interest Coverage Ratio. For our financial covenant period ended on October 1, 2010, we were in compliance with the maximum leverage ratio and minimum interest coverage ratio covenants contained in the credit agreement for our New Senior Secured Credit Facility.

Capital Expenditures. Capital expenditures are limited under the New Senior Secured Credit Facility (with certain exceptions) to $150.0 million per fiscal year. To the extent that we make capital expenditures of less than the limit in any fiscal year, however, we may carry forward into the subsequent year the difference between the limit and the actual amount we expended, provided that

the amounts we carry forward from the previous year will be allocated to capital expenditures in the current fiscal year only after the amount allocated to the current fiscal year is exhausted. As of October 1, 2010, we were in compliance with the limitation on capital expenditures for fiscal year 2010.

The credit agreement for our New Senior Secured Credit Facility contains additional covenants that restrict our ability to declare dividends and to redeem and repurchase capital stock. The credit agreement for our New Senior Secured Credit Facility also limits our ability to incur additional liens, engage in sale-leaseback transactions, incur additional indebtedness and make investments, among other restrictions.

New Holdings Senior Notes

In connection with the Transactions, on November 24, 2009, Holdings issued $250.0 million initial aggregate principal of its 10.50% senior notes due 2020 (“Holdings Senior Notes”) in a private transaction exempt from the registration requirements of the Securities Act of 1933. The New 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.

On April 26, 2010, Holdings provided notice to the trustee appointed under the indenture as required therein, of its election to pay interest in cash on the Holdings Senior Notes on November 15, 2010. The amount of such cash interest is $13.8 million. Holdings has also elected to pay in cash, the interest of $13.8 million on Holdings Senior Notes, due on May 15, 2011.

In connection with the issuance and sale of the Holdings Senior Notes, Holdings entered into an exchange and registration rights agreement, dated as of November 24, 2009, with the purchasers party thereto, pursuant to which Holdings agreed to either offer to exchange the Holdings Senior Notes for substantially similar notes that are registered under the Securities Act of 1933 or, in certain circumstances, register the resale of the Holdings Senior Notes. In compliance with this agreement, on July 14, 2010, the Company, upon the declaration of effectiveness by the SEC on July 12, 2010 of its registration statement filed on Form S-4, as amended, commenced an exchange offer whereby the notes will be exchanged for new notes registered under the Securities Act of 1933 (“New Holdings Senior Notes”). The terms of the New Holdings Senior Notes will be substantially identical to the terms of the old notes, except that the New Holdings Senior Notes will be registered under the Securities Act and will not be subject to restrictions on transfer or provisions relating to additional interest. The exchange offer was completed on August 11, 2010.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

There have been no significant changes to our market risk since December 31, 2009. 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, 2009 as filed with the SEC on March 18, 2010, as amended on July 2, 2010 on Form 10-K/A.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Diversey’s 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 2010.

Disclosure 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 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 October 1, 2010, 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, 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


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.

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, INC.

Date: November 15, 2010		/s/ Norman Clubb
		Norman Clubb, Executive Vice President and Chief Financial Officer

DIVERSEY, 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.

Large accelerated filer

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Smaller reporting company

DIVERSEY, INC. 10-Q