Note 13 – Derivatives

We are exposed to market risk from changes in foreign currency exchange rates and interest rates, which could affect our operating results, financial condition and cash flows. We manage our exposure to these risks through our regular operating and financial activities and, when appropriate, through the use of derivative financial instruments. These derivative instruments are utilized to hedge economic exposures, as well as to reduce earnings and cash flow volatility resulting from shifts in market rates. We enter into limited types of derivative contracts including foreign currency spot and forward, as well as interest rate swap contracts, to manage foreign currency and interest rate exposures. Our primary foreign currency exposure is the Euro. The fair market values of all our derivative contracts change with fluctuations in interest rates and currency rates and are designed so that any changes in their values are offset by changes in the values of the underlying exposures. Derivative financial instruments are held solely as risk management tools and not for trading or speculative purposes.

We record all derivative instruments as either assets or liabilities at fair value in our Condensed Consolidated Balance Sheets. Certain of these derivative contracts have been designated as cash flow hedges, whereby gains and losses are reported within AOCI in our Condensed Consolidated Balance Sheets, until the underlying transaction occurs, at which point they are reported in earnings as gains and losses in our Condensed Consolidated Statements of Income. Certain of our derivatives, for which hedge accounting is not applied, are effective as economic hedges. These derivative contracts are required to be recognized each period at fair value, with gains and losses reported in earnings in our Condensed Consolidated Statements of Income and therefore do result in some level of earnings volatility. The level of volatility will vary with the type and amount of derivative hedges outstanding, as well as fluctuations in the currency and interest rate markets during the period. The related cash flow impacts of all our derivative activities are reflected as cash flows from operating activities.

Derivatives, by their nature, involve varying degrees of market and credit risk. The market risk associated with these instruments resulting from currency exchange and interest rate movements is expected to offset the market risk of the underlying transactions, assets and liabilities being hedged. We do not believe there is significant risk of loss in the event of non-performance by the counterparties associated with these instruments, because these transactions are executed with a diversified group of major financial institutions. Furthermore, our policy is to contract only with counterparties having a minimum investment grade or better credit rating. Credit risk is managed through the continuous monitoring of exposure to such counterparties.

Foreign Exchange Risk Management

We use foreign exchange contracts to hedge the price risk associated with foreign denominated forecasted purchases of materials used in our manufacturing process and to manage currency risk associated with operating costs in certain operating units, including foreign currency denominated intercompany loans and other foreign currency denominated assets. These contracts generally mature within two to five years. The majority of these contracts are designated as cash flow hedges.

At December 31, 2014 and June 30, 2014, we had outstanding foreign exchange contracts, primarily forward contracts, which are summarized below:


	December 31, 2014					June 30, 2014
	Gross Notional Value		Fair Value Asset/ (Liability)⁽¹⁾			Gross Notional Value		Fair Value Asset/ (Liability)⁽¹⁾
Currency Hedged (Buy/Sell):
U.S. Dollar/Euro	$	1,442,850	$	143,670		$	1,558,950	$	(21,418	)
Euro/U.S. Dollar		217,676		(5,470	)		214,781		1,077
Euro/Swiss Franc		35,202		(130	)		0		0
Swiss Franc/Euro		65,376		179			0		0
U.S. Dollar/Indian Rupee		35,000		309			35,000		(583	)
Japanese Yen/Euro		12,443		(718	)		0		0
British Pound/U.S. Dollar		9,346		(390	)		0		0
Chinese Yuan/U.S. Dollar		8,380		(36	)		0		0
Chinese Yuan/Euro		7,328		635			0		0
Hungarian Forint/Euro		6,013		(20	)		0		0
Euro/Russian Rubles		4,939		2,435			8,828		(141	)
U.S. Dollar/Brazilian Real		0		0			5,052		(95	)
U.S. Dollar/Russian Rubles		2,685		221			0		0
Euro/Brazilian Real		0		0			8,490		(123	)

Total	$	1,847,238	$	140,685		$	1,831,101	$	(21,283	)

⁽¹⁾	Represents the net receivable/(payable) included in our Condensed Consolidated Balance Sheets.

Cash Flow Hedges

We designate a portion of our foreign exchange contracts as cash flow hedges of foreign currency denominated purchases. As of December 31, 2014 and June 30, 2014, we had $1,378.6 million and $1,467.7 million of forward contracts maturing through June 2018. These contracts are recorded at fair value in the accompanying Condensed Consolidated Balance Sheets. During the fiscal year ended June 30, 2014, we changed our election to now include forward points in our effectiveness assessment. Prior to this change, the changes in fair value for these contracts were calculated on a spot to spot rate basis. Effective September 30, 2013, the changes in fair value for these contracts are calculated on a forward to forward rate basis. These changes in fair value are reported in AOCI and are reclassified to either Cost of sales or Selling, general and administrative expenses (“SG&A”), depending on the nature of the underlying asset or liability that is being hedged, in our Condensed Consolidated Statements of Income, in the period or periods during which the underlying transaction occurs.

Changes in the fair value of the derivatives are highly effective in offsetting changes in the cash flows of the hedged items because the amounts and the maturities of the derivatives approximate those of the forecasted exposures. Any ineffective portion of the derivative is recognized in the current period in our Condensed Consolidated Statements of Income, in the same line item in which the foreign currency gain or loss on the underlying hedged transaction was recorded. We recognized zero and $0.9 million of ineffectiveness in our Condensed Consolidated Statement of Income in the three months ended December 31, 2014 and 2013, respectively, and $2.0 million and $1.1 million in the six months ended December 31, 2014 and 2013, respectively. Prior to September 30, 2013, all components of each derivative’s gain or loss, with the exception of forward points (see below), were included in the assessment of hedge ineffectiveness. Effective September 30, 2013, we changed our election and now include forward points in our effectiveness assessment. At December 31, 2014 and June 30, 2014, the fair values of these contracts were a net asset of $133.4 million and a net liability of $19.9 million, respectively. The amount associated with these hedges that is expected to be reclassified from AOCI to earnings within the next 12 months is a gain of $50.3 million.

For the three months ended December 31, 2014 and 2013, we recognized zero and $0.1 million, respectively, of net gains related to the change in forward points. For the six months ended December 31, 2014 and 2013, we recognized zero and $0.6 million, respectively, of net gains related to the change in forward points.

Economic Hedges

When hedge accounting is not applied to derivative contracts, or after former cash flow hedges have been de-designated as balance sheet hedges, we recognize the gain or loss on the associated contracts directly in current period earnings in our Condensed Consolidated Statements of Income as either Foreign exchange (gains) losses, net or Cost of sales according to the underlying exposure. As of December 31, 2014 and June 30, 2014, we had $468.6 million and $363.4 million, respectively, of forward contracts maturing through June 2015 and December 2014, respectively, in various currencies to hedge foreign currency denominated intercompany loans and other foreign currency denominated assets. At December 31, 2014 and June 30, 2014, the fair values of these contracts were net assets of $7.3 million and net liabilities of $1.4 million, respectively. Adjustments to the carrying value of the foreign currency forward contracts offset the gains and losses on the underlying loans and other foreign denominated assets in Foreign exchange (gains) losses, net in our Condensed Consolidated Statements of Income.

Interest Rate Risk Management

We had one interest rate swap contract which matured on September 30, 2013 with a notional amount of $19.7 million in order to manage our interest rate exposure and effectively convert interest on an operating lease from a variable rate to a fixed rate. The objective of the swap was to offset changes in rent expenses caused by interest rate fluctuations. The interest rate swap contract was designated as a cash flow hedge. At the end of each reporting period, the discounted fair value of the swap contract was calculated and recorded in AOCI and reclassified to rent expense within SG&A in our Condensed Consolidated Statements of Income, in the then applicable period when rent was paid. If the hedge was determined to be ineffective, the ineffective portion would have been reclassified from AOCI and recorded as rent expense within SG&A. For the three and six months ended December 31, 2013, we recognized an immaterial amount of ineffectiveness in our Condensed Consolidated Statements of Income. All components of the derivative were included in the assessment of the hedges’ effectiveness.

Fair Value of Derivatives

The following tables provide a summary of the fair value amounts of our derivative instruments as of December 31, 2014 and June 30, 2014:


	Balance Sheet Location	Fair Value
	Balance Sheet Location	December 31, 2014		June 30, 2014
Derivatives Designated as Cash Flow Hedges, Gross:
Other assets:
Foreign exchange contracts	Other current assets	$	134,111	$	1,141

Total assets			134,111		1,141
Other liabilities:
Foreign exchange contracts	Accrued liabilities		728		20,997

Net asset/(liability) for derivatives designated as hedging instruments			133,383		(19,856	)


Derivatives Designated as Economic Hedges, Gross:
Other assets:
Foreign exchange contracts	Other current assets		13,641	$	1,094
Other liabilities:
Foreign exchange contracts	Accrued liabilities		6,339		2,521

Net asset (liability) for economic hedges:			7,302		(1,427	)

Total net derivative asset/(liability)		$	140,685	$	(21,283	)

Derivative Activity:

The following tables show derivative activity for derivatives designated as cash flow hedges for the three months ended December 31, 2014 and 2013:


Derivative	Location of Derivative Gain/(Loss) Recognized in Income	Gain/(Loss) Reclassified from AOCI into Income (Effective Portion)					Gain/(Loss) Recognized in Income on Derivatives (Ineffective Portion)						Gain/(Loss) from Amounts Excluded from Effectiveness Testing
		Three Months Ended December 31,
		2014		2013			2014			2013			2014			2013
Foreign exchange contracts	Cost of sales	$	7,353	$	(1,483	)	$	(19	)	$	(905	)	$	0		$	0
Foreign exchange contracts	SG&A		165		0			0			0			0			0
Foreign exchange contracts	Foreign exchange (gains) losses, net		0		0			0			0			(5	)		58

Total cash flow hedges		$	7,518	$	(1,483	)	$	(19	)	$	(905	)	$	(5	)	$	58


Derivative	Gain/(Loss) Recognized in AOCI (Effective Portion)
	Three Months Ended December 31,
	2014		2013
Foreign exchange contracts	$	55,680	$	(19,904	)

The following tables show derivative activity for derivatives designated as cash flow hedges for the six months ended December 31, 2014 and 2013:


Derivative	Location of Derivative Gain/(Loss) Recognized in Income	Gain/(Loss) Reclassified from AOCI into Income (Effective Portion)					Gain/(Loss) Recognized in Income on Derivatives (Ineffective Portion)					Gain/(Loss) from Amounts Excluded from Effectiveness Testing
		Six Months Ended December 31,
		2014		2013			2014		2013			2014			2013
Foreign exchange contracts	Cost of sales	$	6,550	$	(546	)	$	2,023	$	(1,129	)	$	0		$	0
Foreign exchange contracts	SG&A		218		0			0		0			0			0
Foreign exchange contracts	Foreign exchange (gains) losses, net		0		0			0		0			(9	)		578
Interest rate swap	SG&A		0		(192	)		0		(1	)		0			0

Total cash flow hedges		$	6,768	$	(738	)	$	2,023	$	(1,130	)	$	(9	)	$	578


Derivative	Gain/(Loss) Recognized in AOCI (Effective Portion)
	Six Months Ended December 31,
	2014		2013
Foreign exchange contracts	$	163,111	$	(39,717	)
Interest rate swap		0		35

Total cash flow hedges	$	163,111	$	(39,682	)

The following table summarizes gains and losses from our derivative instruments that are not designated as hedging instruments for the three and six months ended December 31, 2014 and 2013:


	Location of Derivative Gain/(Loss)	Three Months Ended December 31,						Six Months Ended December 31,
Derivative	Location of Derivative Gain/(Loss)	2014			2013			2014			2013
Foreign exchange contracts – forwards	Cost of sales	$	3,796		$	(1,927	)	$	12,133		$	(5,436	)
Foreign exchange contracts – forwards	Foreign exchange (gains) losses, net		(5,736	)		4,139			(22,372	)		13,373