DERIVATIVE FINANCIAL INSTRUMENTS

For purposes of mitigating the effect of changes in exchange rates, we hold derivative financial instruments to hedge the risks of certain identifiable and anticipated transactions and recorded assets and liabilities in our consolidated balance sheets. The types of risks hedged are those relating to the variability of future earnings and cash flows caused by movements in foreign currency exchange rates. Our policy is to hold derivatives only for the purpose of hedging risks associated with anticipated foreign currency purchases and sales created in the normal course of business, and not for trading purposes where the objective is solely to generate profit.

Generally, we enter into hedging relationships such that changes in the fair values or cash flows of the transactions being hedged are expected to be offset by corresponding changes in the fair value of the derivatives. For derivative instruments that qualify as a cash flow hedge, the effective portion of the gain or loss of the derivative, which does not include the time value component of a forward currency rate, is reported as a component of other comprehensive income (“OCI”) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. For derivative instruments not designated as hedging instruments, any change in the fair value of those instruments are reflected in earnings in the period such change occurs.

We hold the following types of derivative instruments:

Foreign exchange rate forward contracts - The purpose of these instruments is to hedge the risk of changes in future cash flows of anticipated purchase or sale commitments denominated in foreign currencies and recorded assets and liabilities in our consolidated balance sheets. At September 30, 2018, we held the following material net positions:



	Net Notional Amount Bought (Sold)
(In millions)			USD Equivalent
Euro	602.3		706.9
British pound	202.3		266.3
Norwegian krone	1,876.2		230.0
Australian dollar	219.0		158.9
Brazilian real	450.9		112.6
Malaysian ringgit	402.0		97.3
Japanese yen	4,034.0		35.8
Singapore dollar	42.8		31.3
Mexican peso	(248.0	)	(13.1	)
Argentinian peso	(717.4	)	(18.0	)
Canadian dollar	(243.5	)	(187.6	)
U.S. dollar	(906.1	)	(906.1	)

Foreign exchange rate instruments embedded in purchase and sale contracts - The purpose of these instruments is to match offsetting currency payments and receipts for particular projects, or comply with government restrictions on the currency used to purchase goods in certain countries. At September 30, 2018, our portfolio of these instruments included the following material net positions:



	Net Notional Amount Bought (Sold)
(In millions)			USD Equivalent
Brazilian real	(37.9	)	(9.5	)
Norwegian krone	(72.6	)	(8.9	)
U.S. dollar	11.8		11.8

Fair value amounts for all outstanding derivative instruments have been determined using available market information and commonly accepted valuation methodologies. See Note 18 to our condensed consolidated financial statements of this Quarterly Report for further disclosures related to the fair value measurement process. Accordingly, the estimates presented may not be indicative of the amounts that we would realize in a current market exchange and may not be indicative of the gains or losses we may ultimately incur when these contracts are settled.

The following table presents the location and fair value amounts of derivative instruments reported in the consolidated balance sheets:



	September 30, 2018				December 31, 2017
(In millions)	Assets		Liabilities		Assets		Liabilities
Derivatives designated as hedging instruments
Foreign exchange contracts
Current - Derivative financial instruments	$	81.0	$	78.6	$	65.6	$	51.0
Long-term - Derivative financial instruments	13.6		14.8		28.0		1.7
Total derivatives designated as hedging instruments	94.6		93.4		93.6		52.7
Derivatives not designated as hedging instruments
Foreign exchange contracts
Current - Derivative financial instruments	16.0		13.5		12.7		18.0
Long-term - Derivative financial instruments	—		—		4.7		4.2
Total derivatives not designated as hedging instruments	16.0		13.5		17.4		22.2
Long-term - Derivative financial instruments - Synthetic Bonds - Call Option Premium	66.4		—		62.2		—
Long-term - Derivative financial instruments - Synthetic Bonds - Embedded Derivatives	—		66.4		—		62.2
Total derivatives	$	177.0	$	173.3	$	173.2	$	137.1

We recognized a gain of $3.2 million and $10.8 million for the three months ended September 30, 2018 and 2017, respectively, and a loss of $1.9 million and a gain of $26.9 million for the nine months ended September 30, 2018 and 2017, respectively, due to hedge ineffectiveness as it was probable that the original forecasted transaction would not occur. Cash flow derivative hedges of forecasted transactions, net of tax, which qualify for hedge accounting, resulted in accumulated other comprehensive loss of $0.4 million and accumulated other comprehensive income of $28.5 million at September 30, 2018 and December 31, 2017, respectively. We expect to transfer approximately $11.5 million of income from accumulated OCI to earnings during the next 12 months when the anticipated transactions actually occur. All anticipated transactions currently being hedged are expected to occur by the second half of 2023.

The following table presents the location of gains (losses) on the consolidated statements of income related to derivative instruments designated as fair value hedges:



	Gain (Loss) Recognized in Income
Location of Fair Value Hedge Gain (Loss) Recognized in Income	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In millions)	2018		2017		2018		2017
Other income (expense), net	$	33.4	$	12.2	$	22.7	$	61.9

The following tables present the location of gains (losses) on the consolidated statements of other comprehensive income and/or the consolidated statements of income related to derivative instruments designated as cash flow hedges:



	Gain (Loss) Recognized in OCI (Effective Portion)
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In millions)	2018		2017		2018			2017
Foreign exchange contracts	$	16.5	$	38.3	$	(24.0	)	$	98.7



	Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
Location of Cash Flow Hedge Gain (Loss) Reclassified from Accumulated OCI into Income	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(In millions)	2018			2017			2018			2017
Foreign exchange contracts
Revenue	$	(0.8	)	$	(6.3	)	$	2.8		$	(31.6	)
Cost of sales	1.1			0.2			6.2			1.7
Selling, general and administrative expense	(0.1		)	0.5			(0.1		)	0.7
Research and development expense	—			—			—			(0.1		)
Other income (expense), net	4.8			(20.4		)	0.1			(70.6		)
Total	$	5.0		$	(26.0	)	$	9.0		$	(99.9	)



	Gain (Loss) Recognized in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Location of Cash Flow Hedge Gain (Loss) Recognized in Income	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(In millions)	2018			2017			2018			2017
Foreign exchange contracts
Revenue	$	(5.7	)	$	3.7		$	(4.9	)	$	7.9
Cost of sales	6.1			(2.8		)	4.1			(7.3		)
Other income (expense), net	(26.6		)	10.6			(23.4		)	24.6
Total	$	(26.2	)	$	11.5		$	(24.2	)	$	25.2

The following table presents the location of gains (losses) on the consolidated statements of income related to derivative instruments not designated as hedging instruments:



	Gain (Loss) Recognized in Income on Derivatives (Instruments Not Designated as Hedging Instruments)
Location of Gain (Loss) Recognized in Income	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(In millions)	2018			2017			2018			2017
Foreign exchange contracts
Revenue	$	—		$	0.7		$	(0.9	)	$	0.7
Cost of sales	0.2			0.1			0.4			(0.4		)
Other income (expense), net	(5.3		)	(5.6		)	(6.9		)	26.6
Total	$	(5.1	)	$	(4.8	)	$	(7.4	)	$	26.9

Balance Sheet Offsetting - We execute derivative contracts only with counterparties that consent to a master netting agreement, which permits net settlement of the gross derivative assets against gross derivative liabilities. Each instrument is accounted for individually and assets and liabilities are not offset. As of September 30, 2018 and December 31, 2017, we had no collateralized derivative contracts. The following tables present both gross information and net information of recognized derivative instruments:



	September 30, 2018							December 31, 2017
(In millions)	Gross Amount Recognized		Gross Amounts Not Offset, But Permitted Under Master Netting Agreements			Net Amount		Gross Amount Recognized		Gross Amounts Not Offset, But Permitted Under Master Netting Agreements			Net Amount
Derivative assets	$	177.0	$	(151.9	)	$	25.1	$	173.2	$	(114.4	)	$	58.8
Derivative liabilities	$	173.3	$	(151.9	)	$	21.4	$	137.1	$	(114.4	)	$	22.7