DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company utilizes derivative financial instruments to manage exposure to certain risks related to the Company's ongoing operations. The primary risks managed through the use of derivative instruments include interest rate risk and foreign currency exchange risk. The Company recognizes derivative instruments as either assets or liabilities and measures those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. For a derivative instrument designated as a fair value hedge, the gain or loss is recognized in earnings in the period of change together with the offsetting gain or loss on the hedged item attributed to the risk being hedged. For a derivative instrument designated as a cash flow hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of AOCI and subsequently reclassified into earnings when the hedged exposure affects earnings. Any ineffective portion of the change in fair value is immediately recognized in earnings. For derivative instruments that are not designated as accounting hedges, changes in fair value are recognized in earnings in the period of change.

All derivative instruments are managed on a consolidated basis to efficiently net exposures and thus take advantage of any natural offsets. The absolute value of the notional amounts of derivative contracts for the Company approximated $492.5 million and $494.9 million at March 29, 2014 and June 29, 2013, respectively. Gains and losses related to the derivative instruments are expected to be largely offset by gains and losses on the original underlying asset or liability. The Company does not use derivative financial instruments for speculative purposes.

The Company is exposed to credit loss in the event of nonperformance by the counterparties on derivative contracts. It is the Company’s policy to manage its credit risk on these transactions by dealing only with financial institutions having a long-term credit rating of “A” or better and by distributing the contracts among several financial institutions to diversify credit concentration risk. Should a counterparty default, the Company's maximum exposure to loss is the asset balance of the instrument.

Interest Rate Risk Management - The Company is exposed to the impact of interest rate changes. The Company's objective is to manage the impact of interest rate changes on cash flows and the market value of the Company's borrowings. The Company utilizes a mix of debt maturities along with both fixed-rate and variable-rate debt to manage changes in interest rates. In addition, the Company may enter into treasury-lock agreements ("T-Locks") and interest rate swap agreements on certain investing and borrowing transactions to manage its interest rate changes and to reduce its overall cost of borrowing.

Foreign Currency Exchange Risk Management - The Company conducts business in several major international currencies and is subject to risks associated with changing foreign exchange rates. The Company's objective is to reduce cash flow volatility associated with foreign exchange rate changes to allow management to focus its attention on business operations. Accordingly, the Company enters into various contracts that change in value as foreign exchange rates change to protect the value of existing foreign currency assets and liabilities, commitments and anticipated foreign currency revenue and expenses.

Fair Value Hedges

In anticipation of the acquisition of Elan, during the first quarter of fiscal 2014, the Company entered into three pay-floating interest rate swaps with a total notional amount of $425 million to hedge changes in the fair value of the Company's senior notes from fluctuations in interest rates. These swaps were designated and qualified as fair value hedges of the Company's fixed rate debt. Accordingly, the gain or loss recorded on the pay-floating interest rate swaps was directly offset by the change in fair value of the underlying debt. During the second quarter of fiscal 2014, the fair value hedges reduced the Company's interest expense by $2.2 million. Both the derivative instrument and the underlying debt were adjusted to market value at the end of each period with any resulting gain or loss recorded in other expense, net. As a result, the Company recorded a net hedge loss of $3.2 million in other expense, net during the second quarter of fiscal 2014.

Due to the retirement of the underlying senior notes as described in Note 7, the Company terminated its fair value hedges by settling the swap contracts during the second quarter, resulting in net proceeds of $0.9 million. In addition, a loss of $4.1 million was recognized on the change in the fair value of the underlying debt and was recorded in other expense, net, during the second quarter of fiscal 2014.

Cash Flow Hedges

The Company enters into derivative instruments to hedge its exposure to changes in cash flows attributable to interest rate and foreign currency fluctuations associated with certain forecasted transactions. These derivative instruments are designated and qualify as cash flow hedges. Accordingly, the effective portion of the gain or loss on the derivative instrument is reported as a component of OCI and reclassified into earnings in the same line item associated with the forecasted transaction and in the same period during which the hedged transaction affects earnings. Any ineffective portion of the change in fair value is immediately recognized in earnings.

The Company previously entered into forward interest rate swaps to manage variability of expected future cash flows from changing interest rates. Due to the retirement of the underlying private placement senior notes (the Notes as described in Note 7), on December 23, 2013, the Company terminated the cash flow hedges related to the Notes, resulting in a loss of $2.6 million recorded to other expense, net upon repayment of the debt in the second quarter of fiscal 2014.

During the first quarter of fiscal 2014, the Company entered into forward interest rate swap agreements to hedge against changes in interest rates that could impact the Company's new senior notes (the Bonds as described in Note 7). These swaps were designated as cash flow hedges of expected future debt issuances with a notional amount totaling $725 million. These agreements hedged the variability in future probable interest payments due to changes in the benchmark interest rate between the date the swap agreements were entered into and the date of future debt issuances. On December 18, 2013, the hedges were settled for $15.1 million, and $0.5 million for the ineffective portion was recorded to other expense, net. The effective portion remains in OCI at March 29, 2014 and is being amortized to earnings over the life of the debt.

The Company’s foreign currency hedging program includes cash flow hedges. The Company enters into foreign currency forward contracts in order to hedge the impact of fluctuations of foreign exchange on expected future purchases and related payables denominated in a foreign currency. These forward contracts have a maximum maturity date of 15 months. In addition, the Company enters into foreign currency forward contracts in order to hedge the impact of fluctuations of foreign exchange on expected future sales and related receivables denominated in a foreign currency. These forward contracts also have a maximum maturity date of 15 months. The Company did not have any foreign currency put or call contracts as of March 29, 2014.

Economic (Non-Designated) Hedges

The Company enters into foreign currency contracts to manage its foreign exchange exposure related to intercompany financing transactions and other balance sheet items subject to revaluation that do not meet the requirements for hedge accounting treatment. Accordingly, these derivative instruments are adjusted to current market value at the end of each period through earnings. The gain or loss on these instruments is substantially offset by the remeasurement adjustment on the foreign currency denominated asset or liability. The settlement of the derivative instrument and the remeasurement adjustment on the foreign currency denominated asset or liability are both recorded in other income (expense), net at the end of each period.

The effects of all derivative instruments on the Company’s Condensed Consolidated Balance Sheets as of March 29, 2014 and June 29, 2013, and on the Company’s income and OCI for the three and nine months ended March 29, 2014 and March 30, 2013, were as follows (amounts presented exclude any income tax effects) (in millions):

Fair Values of Derivative Instruments in Condensed Consolidated Balance Sheet

(Designated as (non)hedging instruments)



	Asset Derivatives
	Balance Sheet Presentation	Fair Value
		March 29, 2014		June 29, 2013
Hedging derivatives:
Foreign currency forward contracts	Other current assets	$	3.3	$	7.2
Total hedging derivatives		$	3.3	$	7.2
Non-hedging derivatives:
Foreign currency forward contracts	Other current assets	$	0.2	$	0.8
Total non-hedging derivatives		$	0.2	$	0.8

	Liability Derivatives
	Balance Sheet Presentation	Fair Value
		March 29, 2014		June 29, 2013
Hedging derivatives:
Foreign currency forward contracts	Accrued liabilities	$	—	$	0.2
Interest rate swap agreements	Other non-current liabilities	8.9		10.8
Total hedging derivatives		$	8.9	$	11.0
Non-hedging derivatives:
Foreign currency forward contracts	Accrued liabilities	$	1.2	$	0.2
Total non-hedging derivatives		$	1.2	$	0.2

Effects of Derivative Instruments on Income and OCI for the three months ended March 29, 2014, and March 30, 2013



Derivatives in Cash Flow Hedging Relationships	Amount of (Gain)/Loss Recognized in OCI on Derivative (Effective Portion)						Location and Amount of (Gain)/Loss Reclassified from Accumulated OCI into Income (Effective Portion)							Location and Amount of (Gain)/Loss Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
	March 29, 2014			March 30, 2013				March 29, 2014			March 30, 2013				March 29, 2014			March 30, 2013
T-Locks	$	—		$	—		Interest, net	$	—		$	(0.1	)	Other expense, net	$	—		$	—
Interest rate swap agreements	2.1			(1.0		)	Interest, net	(0.9		)	1.2			Other expense, net	—			—
Foreign currency forward contracts	(1.0		)	(2.5		)	Net sales	(0.8		)	(0.2		)	Net sales	(0.2		)	—
							Cost of sales	(2.7		)	0.3			Cost of sales	0.2			—
							Other expense, net	(0.2		)	(0.6		)
Total	$	1.1		$	(3.5	)		$	(4.6	)	$	0.6			$	—		$	—

Effects of Derivative Instruments on Income and OCI for the nine months ended March 29, 2014, and March 30, 2013



Derivatives in Fair Value Hedge Relationships	Location and Amount of (Gain)/Loss Recognized into Income						Hedged Item in Fair Value Hedge Relationship	Location and Amount of (Gain)/Loss Recognized in Income on Related Hedged Item
		March 29, 2014			March 30, 2013				March 29, 2014		March 30, 2013
Interest rate swap agreements	Other expense, net	$	(0.9	)	$	—	Fixed-rate debt	Other expense, net	$	4.1	$	—



Derivatives in Cash Flow Hedging Relationships	Amount of (Gain)/Loss Recognized in OCI on Derivative (Effective Portion)						Location and Amount of (Gain)/Loss Reclassified from Accumulated OCI into Income (Effective Portion)							Location and Amount of (Gain)/Loss Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
	March 29, 2014			March 30, 2013				March 29, 2014			March 30, 2013				March 29, 2014			March 30, 2013
T-Locks	$	—		$	—		Interest, net	$	(0.2	)	$	(0.3	)	Other expense, net	$	(2.3	)	$	—
Interest rate swap agreements	(9.0		)	(1.9		)	Interest, net	(3.0		)	3.7			Other expense, net	5.4			—
Foreign currency forward contracts	(6.6		)	(9.3		)	Net sales	(2.0		)	0.1			Net sales	(0.1		)	—
							Cost of sales	(5.5		)	2.8			Cost of sales	0.3			0.1
							Interest, net	(0.1		)	0.1
							Other expense, net	(1.9		)	(1.8		)
Total	$	(15.6	)	$	(11.2	)		$	(12.7	)	$	4.6			$	3.3		$	0.1

The Company also has forward foreign currency contracts that are not designated as hedging instruments and recognizes the gain or loss associated with these contracts in other expense, net. The Company recorded losses of $0.9 million and $0.3 million for the three and nine months ended March 29, 2014, respectively, and gains of $1.0 million and $1.4 million for the three and nine months ended March 30, 2013, respectively. The net hedge result offsets the revaluation of the underlying balance sheet exposure, which is also recorded in other expense, net.