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 the Company's 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 the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. The Company determines the fair value of structured liabilities (where performance is linked to structured interest rates, inflation or currency risks) using the London Interbank Offer Rate ("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. The Company does not have any instruments classified as Level 3, other than those included in pension asset trusts as discussed in Note 14 of our 2017 Form 10-K.

These valuations take into consideration the Company's credit risk and its counterparties’ credit risk. The estimated change in the fair value of these instruments due to such changes in its own credit risk (or instrument-specific credit risk) was immaterial as of September 30, 2018.

The principal amounts and the estimated fair values of financial instruments at September 30, 2018 and December 31, 2017 consisted of the following:



	September 30, 2018				December 31, 2017
(DOLLARS IN THOUSANDS)	Principal⁽⁴⁾		Fair Value		Principal⁽⁴⁾		Fair Value
LEVEL 1
TEUs	$	825,000	$	948,750	$	—	$	—
Cash and cash equivalents⁽¹⁾	$	5,274,459	$	5,274,459	$	368,046	$	368,046
LEVEL 2
Credit facilities and bank overdrafts⁽²⁾	111,029		111,029		7,993		7,993
Commercial paper ⁽²⁾	—				—		—
Long-term debt:⁽³⁾
Senior notes - 2007	—		—		250,000		293,232
Senior notes - 2013	300,000		292,870		300,000		304,219
Euro Senior notes - 2016	586,950		603,989		594,400		627,782
Senior notes - 2017	500,000		455,060		500,000		525,906
2020 Notes	300,000		301,634		—		—
2021 Euro Notes	352,170		352,691		—		—
2026 Euro Notes	939,120		940,360		—		—
2028 Notes	400,000		401,405		—		—
2048 Notes	800,000		799,208		—		—

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


(2)	The carrying amount 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 the Company's long-term debt was calculated using discounted cash flows applying current interest rates and current credit spreads based on its own credit risk.


(4)	See Note 7 for carrying amounts.

Derivatives

The Company periodically enters into foreign currency forward contracts with the objective of reducing exposure to cash flow volatility associated with its 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 year ended December 31, 2017, the Company entered into several forward currency contracts which qualified as net investment hedges, in order to mitigate a portion of its 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 Income and Comprehensive Income. Realized gains/(losses) are deferred in accumulated other comprehensive income (loss) ("AOCI") where they will remain until the net investments in the Company's European subsidiaries are divested. Four of these forward currency contracts matured during the nine months ended September 30, 2018 and as of September 30, 2018, there were no remaining contracts outstanding.

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 Income and Comprehensive Income.

During the year ended December 31, 2017, 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 Income and 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 Income and Comprehensive Income in the same period as the related costs are recognized.

In the second quarter of 2018, the Company entered into a foreign currency contract and two interest rate swap agreements (collectively, the "Deal Contingent Swaps"), which were contingent upon the closing of the Frutarom acquisition, for a total notional amount of $1.9 billion. In the third quarter of 2018, the Company completed the offering and sale of the 2018 Senior Unsecured Notes (see Note 7 for additional information) and settled the Deal Contingent Swaps. The Company received $12.2 million for the foreign currency contract and $0.4 million for the two interest rate swap agreements which is included in Other income, net and Interest Expense, respectively, in the accompanying Consolidated Statement of Income and Comprehensive Income for the nine months ended September 30, 2018.

In prior years, the Company has entered into interest rate swap agreements to hedge the anticipated issuance of fixed-rate debt, which are designated as cash flow hedges. The amount of gains and losses realized upon termination of these agreements is amortized over the life of the corresponding debt issuance.

The following table shows the notional amount of the Company’s derivative instruments outstanding as of September 30, 2018 and December 31, 2017:



(DOLLARS IN THOUSANDS)	September 30, 2018		December 31, 2017
Foreign currency contracts	$	411,788	$	896,947
Interest rate swaps	—		150,000

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 Sheet as of September 30, 2018 and December 31, 2017:



	September 30, 2018
(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	$	2,644	$	7,689	$	10,333
Derivative liabilities ^(b)
Foreign currency contract	371		4,400		4,771



	December 31, 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	$	1,159	$	3,978	$	5,137
Derivative liabilities ^(b)
Foreign currency contracts	7,842		4,344		12,186
Interest rate swaps	1,369		—		1,369
Total derivative liabilities	$	9,211	$	4,344	$	13,555

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(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 Income and Comprehensive Income for the three and nine months ended September 30, 2018 and 2017 (in thousands):



	Amount of Gain (Loss)				Location of Gain (Loss) Recognized in Income on Derivative
(DOLLARS IN THOUSANDS)	Three Months Ended September 30,
(DOLLARS IN THOUSANDS)	2018		2017
Foreign currency contracts	$	8,277	$	4,024	Other income, net
Deal contingent swaps
Foreign currency contract	1,175		—		Other income, net
Interest rate swaps	25,289		—		Interest expense
	$	34,741	$	4,024



	Amount of Gain (Loss)					Location of Gain (Loss) Recognized in Income on Derivative
	Nine Months Ended September 30,
(DOLLARS IN THOUSANDS)	2018		2017
Foreign currency contracts ⁽¹⁾	$	9,347	$	(9,157	)	Other income, net
Deal contingent swaps
Foreign currency contract	12,154		—			Other income, net
Interest rate swaps	352		—			Interest expense
	$	21,853	$	(9,157	)

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(1)	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 Statement of Income and Comprehensive Income for the three and nine months ended September 30, 2018 and 2017 (in thousands):



	Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion)						Location of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)	Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
	Three Months Ended September 30,							Three Months Ended September 30,
	2018			2017				2018			2017
Derivatives in Cash Flow Hedging Relationships:
Foreign currency contracts	$	2,206		$	(4,229	)	Cost of goods sold	$	(2,848	)	$	1,815
Interest rate swaps ⁽¹⁾	216			216			Interest expense	(216		)	(216		)
Derivatives in Net Investment Hedging Relationships:
Foreign currency contracts				(1,130		)	N/A	—			—
Euro Senior notes - 2016	(7,104		)	(11,861		)	N/A	—			—
2021 Euro Notes & 2026 Euro Notes	705			—			N/A	—			—
Total	$	(3,977	)	$	(17,004	)		$	(3,064	)	$	1,599

	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,
	2018			2017				2018			2017
Derivatives in Cash Flow Hedging Relationships:
Foreign currency contracts	$	11,704		$	(13,505	)	Cost of goods sold	$	(7,371	)	$	4,062
Interest rate swaps ⁽¹⁾	648			(4,027		)	Interest expense	(648		)	(573		)

Derivatives in Net Investment Hedging Relationships:
Foreign currency contracts	(518		)	(4,258		)	N/A	—			—
Euro Senior notes - 2016	5,601			(43,050		)	N/A	—			—
2021 Euro Notes & 2026 Euro Notes	705			—			N/A	—			—
Total	$	18,140		$	(64,840	)		$	(8,019	)	$	3,489

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

The ineffective portion of the above noted cash flow hedges and net investment hedges were not material during the three and nine months ended September 30, 2018 and 2017.

The Company expects that approximately $6.9 million (net of tax) of derivative loss included in AOCI at September 30, 2018, 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.