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DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
 6 Months Ended
Jun. 30, 2016
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

NOTE 7. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company is exposed to global market risks, including risks from changes in FX rates and changes in interest rates. Accordingly, the Company uses derivatives in certain instances to manage the aforementioned financial exposures that occur in the normal course of business. The Company does not hold or issue derivatives for speculative purposes.

Derivatives and non-derivative instruments designated as accounting hedges:

Interest Rate Swaps

In the second quarter of 2014, the Company entered into interest rate swaps with a total notional amount of $250 million to convert the fixed interest rate on the 2010 Senior Notes to a floating interest rate based on the 3-month LIBOR. In the third quarter of 2014, the Company entered into interest rate swaps with a total notional amount of $250 million to convert the fixed interest rate on the remaining balance of the 2010 Senior Notes to a floating interest rate based on the 3-month LIBOR. The purpose of these hedges is to mitigate the risk associated with changes in the fair value of the 2010 Senior Notes, thus the Company has designated these swaps as fair value hedges. The fair value of the swaps is adjusted quarterly with a corresponding adjustment to the carrying value of the 2010 Senior Notes. The changes in the fair value of the hedges and the underlying hedged item generally offset and the net cash settlements on the swaps are recorded each period within interest income (expense), net, in the Company’s consolidated statement of operations.

In the third quarter of 2014, the Company entered into interest rate swaps with a total notional amount of $250 million to convert the fixed interest rate on a portion of the 2014 Senior Notes (5-year) to a floating interest rate based on the 3-month LIBOR. In the first quarter of 2015, the Company entered into interest rate swaps with a total notional amount of $200 million to convert the fixed interest rate on the remaining balance of the 2014 Senior Notes (5-year) to a floating interest rate based on the 3-month LIBOR. The purpose of these hedges is to mitigate the risk associated with changes in the fair value of the 2014 Senior Notes (5-year), thus the Company has designated these swaps as fair value hedges. The fair value of the swaps is adjusted quarterly with a corresponding adjustment to the carrying value of the 2014 Senior Notes (5-year). The changes in the fair value of the hedges and the underlying hedged item generally offset and the net cash settlements on the swaps are recorded each period within interest income (expense), net, in the Company’s consolidated statement of operations.

The following table summarizes the impact to the statement of operations of the Company’s interest rate swaps designated as fair value hedges:

Amount of income recognized in the consolidated statements of operations
Three Months EndedSix Months Ended
June 30,June 30,
Derivatives designated as fair value accounting hedgesLocation on Statement of Operations2016201520162015
Interest rate swaps Interest income(expense), net$3.1$4.1$6.1$7.6

Cross-currency swaps

In conjunction with the issuance of the 2015 Senior Notes, the Company entered into a cross-currency swap to exchange €100 million for U.S. dollars on the date of the settlement of the notes. The purpose of this cross-currency swap is to mitigate FX risk on the remaining principal balance on the 2015 Senior Notes that was not designated as a net investment hedge as more fully discussed below. Under the terms of the swap, the Company will pay the counterparty interest on the $110.5 million received at 3.945% per annum and the counterparty will pay the Company interest on the €100 million paid at 1.75% per annum. These interest payments will be settled in March of each year, beginning in 2016, until either the maturity of the cross-currency swap in 2027 or upon early termination at the discretion of the Company. The principal payments on this cross currency swap will be settled in 2027, concurrent with the repayment of the 2015 Senior Notes at maturity or upon early termination at the discretion of the Company. In March 2016, the Company designated these cross-currency swaps as cash flow hedges. Accordingly, changes in fair value subsequent to the date the swaps were designated as cash flow hedges will initially be recognized in OCI. Gains and losses on the swaps initially recognized in OCI will be reclassified to the statement of operations in the period in which changes in the underlying hedged item affects net income. Ineffectiveness, if any, will be recognized in other non-operating (expense), income, net in the Company’s consolidated statement of operations.

Net investment hedges

The Company enters into foreign currency forward contracts which are designated as net investment hedges and has designated €400 million of the 2015 Senior Notes as a net investment hedge. These hedges are intended to mitigate FX exposure related to non-U.S. dollar net investments in certain foreign subsidiaries against changes in foreign exchange rates. These net investment hedges are designated as accounting hedges under the applicable sections of Topic 815 of the ASC.

Hedge effectiveness is assessed based on the overall changes in the fair value of the hedge. For hedges that meet the effectiveness requirements, changes in the fair value are recorded in AOCI in the foreign currency translation account. Any change in the fair value of these hedges that is the result of ineffectiveness is recognized immediately in other non-operating (expense) income in the Company’s consolidated statement of operations.

The following table summarizes the notional amounts of the Company’s outstanding net investment hedges:

June 30,December 31,
20162015
Notional amount of net investment hedges:
Long-term debt designated as net investment hedge€400.0€400.0
Contracts to sell GBP for euros£22.1£21.2
Contracts to sell Japanese yen for USD￥19,400￥19,400

The outstanding contracts to sell Japanese yen for USD expire in November 2016. The outstanding contracts to sell GBP for euros expire in December 2016. The hedge relating to the portion of the 2015 Senior Notes that was designated as a net investment hedge will end upon the repayment of the notes in 2027 unless terminated earlier at the discretion of the Company.

The following table provides information on the gains/(losses) on the Company’s net investment and cash flow hedges:

Amount of Gain/(Loss) Recognized in AOCI on Derivative (Effective Portion)Location of Gain/(Loss) Reclassified from AOCI into Income (Effective Portion)Amount of Gain/(Loss) Reclassified from AOCI into Income (Effective Portion)
Derivatives and non-derivative instruments in Net Investment Hedging RelationshipsThree Months EndedThree Months Ended
June 30,June 30,
2016201520162015
FX forwards$(8.6)$2.1N/A$-$-
Long-term debt7.1(9.7)N/A--
Total net investment hedges$(1.5)$(7.6)N/A$-$-
Three Months EndedThree Months Ended
Derivatives in cash flow hedging relationshipsJune 30,June 30,
2016201520162015
Cross currency swap$(2.9)$-Other non-operating income, net$(1.7)$-
Total cash flow hedges(2.9)-(1.7)-
Total $(4.4)$(7.6)Total $(1.7)$-
Amount of Gain/(Loss) Recognized in AOCI on Derivative (Effective Portion)Location of Gain/(Loss) Reclassified from AOCI into Income (Effective Portion)Amount of Gain/(Loss) Reclassified from AOCI into Income (Effective Portion)
Derivatives and non-derivative instruments in Net Investment Hedging RelationshipsSix Months EndedSix Months Ended
June 30,June 30,
2016201520162015
FX forwards$(13.2)$13.4N/A$-$-
Long-term debt(6.0)(2.1)N/A--
Total net investment hedges$(19.2)$11.3N/A$-$-
Six Months EndedSix Months Ended
June 30,June 30,
Derivatives in cash flow hedging relationships2016201520162015
Cross currency swap$(1.7)$-Other non-operating income, net$(0.3)$-
Total cash flow hedges(1.7)-(0.3)-
Total $(20.9)$11.3Total $(0.3)$-

The cumulative amount of realized and unrecognized net investment hedge and cash flow hedge gains (losses) recorded in AOCI is as follows:

Gains/(Losses), net of tax
June 30,December 31,
Net investment hedges20162015
FX forwards $21.1$34.3
Long-term debt (1.3)4.7
Total gains on net investment hedges$19.8$39.0
Cash flow hedges
Treasury rate lock$(1.1)$(1.1)
Cross currency swap(1.4)-
Total losses on cash flow hedges(2.5)(1.1)
Total net gains in AOCI$17.3$37.9

Derivatives not designated as accounting hedges:

Foreign exchange forwards

The Company also enters into foreign exchange forwards to mitigate the change in fair value on certain assets and liabilities denominated in currencies other than a subsidiary’s functional currency. These forward contracts are not designated as accounting hedges under the applicable sections of Topic 815 of the ASC. Accordingly, changes in the fair value of these contracts are recognized immediately in other non-operating income, net in the Company’s consolidated statements of operations along with the FX gain or loss recognized on the assets and liabilities denominated in a currency other than the subsidiary’s functional currency. These contracts have expiration dates at various times through December 2016.

The following table summarizes the notional amounts of the Company’s outstanding foreign exchange forwards:

June 30,December 31,
20162015
Notional amount of currency pair:
Contracts to sell USD for euros$72.6$70.1
Contracts to purchase euros with other foreign currencies€34.4€35.5
Contracts to sell euros for other foreign currencies€-€1.4
Contracts to sell euros for GBP€36.2€23.1

The following table summarizes the impact to the consolidated statements of operations relating to the net gain (loss) on the Company’s derivatives which are not designated as hedging instruments:

Three Months EndedSix Months Ended
June 30,June 30,
Derivatives not designated as accounting hedgesLocation on Statement of Operations2016201520162015
Foreign exchange forwardsOther non-operating income (expense), net$(5.7)$2.5$(5.2)$(1.9)

The table below shows the classification between assets and liabilities on the Company’s consolidated balance sheets for the fair value of the derivative instrument as well as the carrying value of its nonderivative debt instruments designated and qualifying as net investment hedges:

Derivative and Non-derivative Instruments
Balance Sheet LocationJune 30, 2016#REF!
Assets:
Derivatives not designated as accounting hedges:
FX forwards on certain assets and liabilitiesOther current assets-0.1
Derivatives designated as accounting hedges:
FX forwards on net investment in certain foreign subsidiariesOther current assets$1.6$0.4
Interest rate swapsOther assets37.412.1
Total assets$39.0$12.6
Liabilities:
Derivatives designated as accounting hedges:
Cross-currency swapOther liabilities$5.0-
FX forwards on net investment in certain foreign subsidiariesAccounts payable and accrued liabilities28.31.2
Interest rate swapsOther liabilities-0.3
Non-derivative instrument designated as accounting hedge:
Long-term debt designated as net investment hedgeLong-term debt$444.4$434.5
Derivatives not designated as accounting hedges:
Cross-currency swapOther liabilities-7.0
FX forwards on certain assets and liabilitiesAccounts payable and accrued liabilities3.71.9
Total liabilities$481.4$444.9