Financial Instruments:

Fair Value

Accounting guidance on fair value measurements specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. These two types of inputs create the following fair value hierarchy:


•	Level 1–Quoted prices for identical instruments in active markets.


•	Level 2–Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.


•	Level 3–Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

This hierarchy requires us to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. We determine the fair value of structured liabilities (where performance is linked to structured interest rates, inflation or currency risks) using the LIBOR swap curve and forward interest and exchange rates at period end. Such instruments are classified as Level 2 based on the observability of significant inputs to the model. We do not have any instruments classified as Level 1 or Level 3, other than those included in pension asset trusts as discussed in Note 14 of our 2016 Form 10-K.

These valuations take into consideration our credit risk and our counterparties’ credit risk. The estimated change in the fair value of these instruments due to such changes in our own credit risk (or instrument-specific credit risk) was immaterial as of September 30, 2017.

The amounts recorded in the balance sheet (carrying amount) and the estimated fair values of financial instruments at September 30, 2017 and December 31, 2016 consisted of the following:



	September 30, 2017				December 31, 2016
(DOLLARS IN THOUSANDS)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Cash and cash equivalents ⁽¹⁾	$	316,002	$	316,002	$	323,992	$	323,992
Credit facilities and bank overdrafts ⁽²⁾	9,807		9,807		13,599		13,599
Commercial paper ⁽²⁾	39,957		39,957		—		—
Long-term debt: ⁽³⁾
Senior notes - 2007	249,765		297,010		499,676		556,222
Senior notes - 2013	298,594		307,675		297,986		302,376
Euro Senior notes - 2016	582,514		614,498		512,764		546,006
Senior notes - 2017	492,653		497,998		—		—


(1)	The carrying amount of cash and cash equivalents approximates fair value due to the short maturity of those instruments.


(2)	The carrying amount of our credit facilities, bank overdrafts and commercial paper approximates fair value as the interest rate is reset frequently based on current market rates as well as the short maturity of those instruments.


(3)	The fair value of our long-term debt was calculated using discounted cash flows applying current interest rates and current credit spreads based on our own credit risk.

Derivatives

The Company periodically enters into foreign currency forward contracts with the objective of reducing exposure to cash flow volatility associated with our intercompany loans, foreign currency receivables and payables, and anticipated purchases of certain raw materials used in operations. These contracts generally involve the exchange of one currency for a second currency at a future date, have maturities not exceeding twelve months and are with counterparties which are major international financial institutions.

During the nine months ended September 30, 2017 and the year ended December 31, 2016, the Company entered into several forward currency contracts which qualified as net investment hedges, in order to mitigate a portion of our net European investments from foreign currency risk. The effective portions of net investment hedges are recorded in Other comprehensive income (“OCI”) as a component of Foreign currency translation adjustments in the accompanying Consolidated Statement of Comprehensive Income. Realized gains (losses) are deferred in accumulated other comprehensive income ("AOCI") where they will remain until the net investments in our European subsidiaries are divested. The outstanding forward currency contracts have remaining maturities of approximately one year. Fourteen of these forward currency contracts matured during the nine months ended September 30, 2017.

Subsequent to the issuance of the Euro Senior Notes - 2016 during the first quarter of 2016, the Company designated the debt as a hedge of a portion of its net European investments. Accordingly, the change in the value of the debt that is attributable to foreign exchange movements is recorded in OCI as a component of Foreign currency translation adjustments in the accompanying Consolidated Statement of Comprehensive Income.

During the nine months ended September 30, 2017 and the year ended December 31, 2016, the Company entered into several forward currency contracts which qualified as cash flow hedges. The objective of these hedges is to protect against the currency risk associated with forecasted U.S. dollar (USD) denominated raw material purchases made by Euro (EUR) functional currency entities which result from changes in the EUR/USD exchange rate. The effective portions of cash flow hedges are recorded in OCI as a component of gains/(losses) on derivatives qualifying as hedges in the accompanying Consolidated Statement of Comprehensive Income. Realized gains/(losses) in AOCI related to cash flow hedges of raw material purchases are recognized as a component of Cost of goods sold in the accompanying Consolidated Statement of Comprehensive Income in the same period as the related costs are recognized.

The Company has entered into interest rate swap agreements that effectively converted the fixed rate on a portion of our long-term borrowings to a variable short-term rate based on the LIBOR plus an interest markup. These swaps are designated as fair value hedges. Amounts recognized in Interest expense were immaterial for the three and nine months ended September 30, 2017.

During the first quarter of 2016, the Company entered into and terminated two Euro interest rate swap agreements to hedge the anticipated issuance of fixed-rate debt. These swaps were designated as cash flow hedges. The effective portions of cash flow hedges are recorded in OCI as a component of Losses on derivatives qualifying as hedges in the accompanying Consolidated Statement of Comprehensive Income. The Company incurred a loss of Euro 2.9 million ($3.2 million) due to the termination of these swaps. The loss is being amortized as interest expense over the life of the Euro Senior Notes - 2016.

During the fourth quarter of 2016 and the first quarter of 2017, the Company entered into interest rate swap agreements to hedge the anticipated issuance of fixed-rate debt, which are designated as cash flow hedges. The various hedge instruments were settled upon issuance of the debt on May 18, 2017 and resulted in a loss of approximately $5.3 million. As discussed in Note 6, the loss is being amortized as interest expense over the life of the Senior Notes - 2017.

The effective portions of cash flow hedges are recorded in OCI as a component of Losses/gains on derivatives qualifying as hedges in the accompanying Consolidated Statement of Comprehensive Income.

The following table shows the notional amount of the Company’s derivative instruments outstanding as of September 30, 2017 and December 31, 2016:



(DOLLARS IN THOUSANDS)	September 30, 2017		December 31, 2016
Foreign currency contracts	$	756,631	$	527,500
Interest rate swaps	150,000		412,500

The following tables show the Company’s derivative instruments measured at fair value (Level 2 of the fair value hierarchy), as reflected in the Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016:



	September 30, 2017
(DOLLARS IN THOUSANDS)	Fair Value of Derivatives Designated as Hedging Instruments		Fair Value of Derivatives Not Designated as Hedging Instruments		Total Fair Value
Derivative assets ^(a)
Foreign currency contracts	$	1,171	$	14,335	$	15,506
	$	1,171	$	14,335	$	15,506
Derivative liabilities ^(b)
Foreign currency contracts	$	9,942	$	2,016	$	11,958
Interest rate swaps	604		—		604
	$	10,546	$	2,016	$	12,562



	December 31, 2016
(DOLLARS IN THOUSANDS)	Fair Value of Derivatives Designated as Hedging Instruments		Fair Value of Derivatives Not Designated as Hedging Instruments		Total Fair Value
Derivative assets ^(a)
Foreign currency contracts	$	13,765	$	7,737	$	21,502
Interest rate swaps	335		—		335
	$	14,100	$	7,737	$	21,837
Derivative liabilities ^(b)
Foreign currency contracts	$	46	$	2,209	$	2,255
Interest rate swaps	725		—		725
	$	771	$	2,209	$	2,980


(a)	Derivative assets are recorded to Prepaid expenses and other current assets in the Consolidated Balance Sheet.


(b)	Derivative liabilities are recorded as Other current liabilities in the Consolidated Balance Sheet.

The following table shows the effect of the Company’s derivative instruments which were not designated as hedging instruments in the Consolidated Statement of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016 (in thousands):



Derivatives Not Designated as Hedging Instruments	Amount of Gain (Loss) Recognized in Income on Derivative						Location of Gain (Loss) Recognized in Income on Derivative
	Three Months Ended September 30,
	2017			2016
Foreign currency contracts	$	4,024		$	(3,313	)	Other (income) expense, net
Derivatives Not Designated as Hedging Instruments	Amount of Gain (Loss) Recognized in Income on Derivative						Location of Gain (Loss) Recognized in Income on Derivative
	Nine Months Ended September 30,
	2017			2016
Foreign currency contracts	$	(9,157	)	$	(6,860	)	Other (income) expense, net

Most of these net gains (losses) offset any recognized gains (losses) arising from the revaluation of the related intercompany loans during the same respective periods.

The following table shows the effect of the Company’s derivative instruments designated as cash flow and net investment hedging instruments, net of tax, in the Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016 (in thousands):



	Amount of (Loss) Gain Recognized in OCI on Derivative (Effective Portion)						Location of (Loss) Gain Reclassified from AOCI into Income (Effective Portion)	Amount of (Loss) Gain Reclassified from Accumulated OCI into Income (Effective Portion)
	Three Months Ended September 30,							Three Months Ended September 30,
	2017			2016				2017			2016
Derivatives in Cash Flow Hedging Relationships:
Foreign currency contracts	$	(4,229	)	$	98		Cost of goods sold	$	1,815		$	(544	)
Interest rate swaps ⁽¹⁾	216			171			Interest expense	(216		)	(171		)
Derivatives in Net Investment Hedging Relationships:
Foreign currency contracts	(1,130		)	(224		)	N/A	—			—
Euro Senior notes - 2016	(11,861		)	(2,856		)	N/A	—			—
Total	$	(17,004	)	$	(2,811	)		$	1,599		$	(715	)

	Amount of (Loss) Gain Recognized in OCI on Derivative (Effective Portion)						Location of (Loss) Gain Reclassified from AOCI into Income (Effective Portion)	Amount of (Loss) Gain Reclassified from Accumulated OCI into Income (Effective Portion)
	Nine Months Ended September 30,							Nine Months Ended September 30,
	2017			2016				2017			2016
Derivatives in Cash Flow Hedging Relationships:
Foreign currency contracts	$	(13,505	)	$	(6,293	)	Cost of goods sold	$	4,062		$	4,808
Interest rate swaps ⁽¹⁾	(4,027		)	(2,830		)	Interest expense	(573		)	(428		)

Derivatives in Net Investment Hedging Relationships:
Foreign currency contracts	(4,258		)	(694		)	N/A	—			—
Euro Senior notes - 2016	(43,050		)	6,793			N/A	—			—
Total	$	(64,840	)	$	(3,024	)		$	3,489		$	4,380

(1) Interest rate swaps were entered into as pre-issuance hedges.

No ineffectiveness was experienced in the above noted cash flow or net investment hedges during the three and nine months ended September 30, 2017 and 2016.

The Company expects that approximately $5.4 million (net of tax) of derivative loss included in AOCI at September 30, 2017, based on current market rates, will be reclassified into earnings within the next 12 months. The majority of this amount will vary due to fluctuations in foreign currency exchange rates.