DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

We enter into certain derivative financial instruments, when available on a cost-effective basis, to mitigate our risk associated with changes in interest rates and foreign currency exchange rates as follows:

Interest rate risk management - We are exposed to the impact of interest rate changes through our cash investments and borrowings. We utilize a variety of strategies to manage the impact of changes in interest rates including using a mix of debt maturities along with both fixed-rate and variable-rate debt. In addition, we may enter into treasury-lock agreements and interest rate swap agreements on certain investing and borrowing transactions to manage our exposure to interest rate changes and our overall cost of borrowing.

Foreign currency exchange risk management - We conduct business in several major currencies other than the U.S. dollar and are subject to risks associated with changing foreign exchange rates. Our objective is to reduce cash flow volatility associated with foreign exchange rate changes on a consolidated basis to allow management to focus its attention on business operations. Accordingly, we enter 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 sales and expenses.

All derivative instruments are managed on a consolidated basis to efficiently net exposures and thus take advantage of any natural offsets. Gains and losses related to the derivative instruments are expected to be offset largely by gains and losses on the original underlying asset or liability. We do not use derivative financial instruments for speculative purposes.

All of our designated derivatives were classified as cash flow hedges as of April 1, 2017 and December 31, 2016. Designated derivatives meet hedge accounting criteria, which means the fair value of the hedge is recorded in shareholders’ equity as a component of OCI, net of tax. The deferred gains and losses are recognized in income in the period in which the hedged item affects earnings. Any ineffective portion of the change in fair value of the derivative is immediately recognized in earnings. All of our designated derivatives are assessed for hedge effectiveness quarterly.

We also have economic non-designated derivatives that do not meet hedge accounting criteria. These derivative instruments are adjusted to current market value at the end of each period through earnings. Gains or losses on these instruments are offset substantially by the remeasurement adjustment on the hedged item.

Interest Rate Swaps and Treasury Locks

Interest rate swap agreements are contracts to exchange floating rate for fixed rate payments (or vice versa) over the life of the agreement without the exchange of the underlying notional amounts. The notional amounts of the interest rate swap agreements are used to measure interest to be paid or received and do not represent the amount of exposure to credit loss. The differential paid or received on the interest rate swap agreements is recognized as an adjustment to interest expense.

During the six months ended December 31, 2015, we entered into a forward interest rate swap to hedge against changes in the benchmark interest rate between the date the interest rate swap was entered into and the date of expected future debt issuance. The interest rate swap was designated as a cash flow hedge and had a notional amount totaling $200.0 million. The interest rate swap was settled upon the issuance of an aggregate $1.2 billion principal amount of senior notes on March 7, 2016 for a cumulative after-tax loss of $7.0 million in OCI during the three months ended April 2, 2016.

Foreign Currency Derivatives

We enter into foreign currency forward contracts, both designated and non-designated, in order to manage the impact of foreign exchange fluctuations on expected future purchases and related payables denominated in a foreign currency, as well as to hedge the impact of foreign exchange fluctuations on expected future sales and related receivables denominated in a foreign currency. Both types of forward contracts have a maximum maturity date of 18 months. The total notional amount for these contracts was $469.3 million and $533.5 million as of April 1, 2017 and December 31, 2016, respectively.

Effects of Derivatives on the Financial Statements

The below tables indicate the effects of all derivative instruments on the Condensed Consolidated Financial Statements. All amounts exclude income tax effects and are presented in millions.

The balance sheet location and gross fair value of our outstanding derivative instruments were as follows:



	Asset Derivatives
	Balance Sheet Location	Fair Value
		April 1, 2017		December 31, 2016
Designated derivatives:
Foreign currency forward contracts	Other current assets	$	3.0	$	3.1
Non-designated derivatives:
Foreign currency forward contracts	Other current assets	$	3.5	$	0.7



	Liability Derivatives
	Balance Sheet Location	Fair Value
		April 1, 2017		December 31, 2016
Designated derivatives:
Foreign currency forward contracts	Accrued liabilities	$	1.9	$	3.0
Non-designated derivatives:
Foreign currency forward contracts	Accrued liabilities	$	0.6	$	2.0

The gains (losses) recorded in OCI for the effective portion of our designated cash flow hedges were as follows:



	Amount of Gain/(Loss) Recorded in OCI (Effective Portion)
	Three Months Ended
Designated Cash Flow Hedges	April 1, 2017		April 2, 2016
Interest rate swap agreements	$	—	$	(9.0	)
Foreign currency forward contracts	2.5		1.6
Total	$	2.5	$	(7.4	)

The gains (losses) reclassified from AOCI into earnings for the effective portion of our designated cash flow hedges were as follows:



		Amount of Gain/(Loss) Reclassified from AOCI to Income (Effective Portion)
		Three Months Ended
Designated Cash Flow Hedges	Income Statement Location	April 1, 2017			April 2, 2016
Interest rate swap agreements	Interest expense, net	$	(0.6	)	$	(0.5	)
Foreign currency forward contracts	Net sales	0.2			0.5
	Cost of sales	0.7			0.3
	Interest expense, net	(0.6		)	(0.4		)
	Other (income) expense, net	(0.5		)	0.2
Total		$	(0.8	)	$	0.1

The gains (losses) recognized against earnings for the ineffective portion of our designated cash flow hedges were as follows:



		Amount of Gain/(Loss) Recognized in Income (Ineffective Portion)
		Three Months Ended
Designated Cash Flow Hedges	Income Statement Location	April 1, 2017		April 2, 2016
Interest rate swap agreements	Other (income) expense, net	$	—	$	(0.1	)
Foreign currency forward contracts	Net sales	—		(0.1		)
	Cost of sales	—		0.1
	Other (income) expense, net	0.9		—
Total		$	0.9	$	(0.1	)

The effects of our non-designated derivatives on the Condensed Consolidated Statements of Operations were as follows:



		Amount of Gain/(Loss) Recognized in Income
		Three Months Ended
Non-Designated Derivatives	Income Statement Location	April 1, 2017			April 2, 2016
Foreign currency forward contracts	Other (income) expense, net	$	(8.9	)	$	(6.9	)
	Interest expense, net	(0.4		)	0.1
Total		$	(9.3	)	$	(6.8	)