Note 10—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 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 Consolidated Balance Sheets, until the underlying transaction occurs, at which point they are reported in earnings as gains and losses in our 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 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 three years. The majority of these contracts are designated as cash flow hedges.

At June 30, 2015 and June 30, 2014, we had outstanding foreign exchange contracts, primarily forward contracts, which are summarized below:


	June 30, 2015					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	$	1,479,685	$	208,532		$	1,558,950	$	(21,418	)
Indian Rupee/U.S. Dollar		205,150		(935	)		0		0
Euro/U.S. Dollar		153,549		(15,994	)		214,781		1,077
Swiss Franc/Euro		32,050		4,262			0		0
U.S. Dollar/Brazilian Real		6,148		318			5,052		(95	)
U.S. Dollar/Indian Rupee		0		0			35,000		(583	)
Euro/Russian Rubles		5,963		(865	)		8,828		(141	)
U.S. Dollar/Russian Rubles		1,613		24			0		0
Euro/Brazilian Real		0		0			8,490		(123	)

Total	$	1,884,158	$	195,342		$	1,831,101	$	(21,283	)

⁽¹⁾	Represents the net receivable/(payable) included in our Consolidated Balance Sheets within Other current assets, Other assets, Accrued liabilities and Other non-current liabilities, as applicable.

Cash Flow Hedges

We designate a portion of our foreign exchange contracts as cash flow hedges of foreign currency denominated purchases. As of June 30, 2015 and June 30, 2014, we had $1,577.8 million and $1,467.7 million of forward contracts maturing through June 2018, respectively. These contracts are recorded at fair value in the accompanying 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 SG&A, depending on the nature of the underlying asset or liability that is being hedged, in our 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 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 $1.9 million, $2.0 million and less than $0.1 million of ineffectiveness in our Consolidated Statement of Income in the fiscal years ended June 30, 2015, 2014 and 2013, respectively. At June 30, 2015 and 2014, the fair values of these contracts were a net asset of $191.9 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 $86.6 million.

Prior to September 30, 2013 we elected to exclude forward points from the effectiveness assessment. At the end of the reporting period, we calculated the excluded amount, which is the fair value relating to the change in forward points that is recorded in current earnings as Foreign exchange losses, net in our Consolidated Statements of Income. For the fiscal years ended June 30, 2015, 2014 and 2013, we recognized $0, $0.6 million and $2.7 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 Consolidated Statements of Income as either Foreign exchange (gains) losses, net or Cost of sales according to the underlying exposure. As of June 30, 2015 and 2014, we had $306.4 million and $363.4 million, respectively, of forward contracts maturing through October 2017 and December 2014, respectively, in various currencies to hedge foreign currency denominated intercompany loans and other foreign currency denominated assets. At June 30, 2015 and 2014, the fair values of these contracts were a net asset of $3.5 million and a net liability 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 Consolidated Statements of Income.

Interest Rate Risk Management

Interest Rate Swap

We had one interest rate swap contract which matured on September 30, 2013 with a notional amount of $19.7 million at June 30, 2013, 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 Consolidated Statements of Income, in the then current period. 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. We recognized an immaterial amount of ineffectiveness in our Consolidated Statements of Income in each of the fiscal years ended June 30, 2014 and 2013. All components of the derivative were included in the assessment of the hedges’ effectiveness.

Interest Rate Lock

In May 2015, we entered into an interest rate lock on the 2.000 Percent Senior Notes. The interest rate lock was used to protect the interest rate on the 2.000 Percent Senior Notes between the time the lock was initiated and the time the 2.000 Percent Senior Notes were issued, therefore eliminating any interest rate risk leading up to the bond issuance. We recognized $0.1 million in AOCI which will be amortized into Interest expense, net in our Consolidated Statements of Income over the term of the 2.000 Percent Senior Notes.

Fair Value of Derivatives

The following tables provide a summary of the fair value amounts of our derivative instruments as of June 30, 2015 and 2014:


	Balance Sheet Location	Fair Value
	Balance Sheet Location	June 30, 2015		June 30, 2014
Derivatives Designated as Cash Flow Hedges, Gross:
Other assets:
Foreign exchange contracts	Other current assets	$	73,082	$	1,141
Foreign exchange contracts	Other assets		121,496		0

Total assets			194,578		1,141
Other liabilities:
Foreign exchange contracts	Accrued liabilities	$	1,034		5,532
Foreign exchange contracts	Other non-current
	liabilities		1,654		15,465

Total liabilities			2,688		20,997

Net asset/(liability) for derivatives designated as hedging instruments			191,890		(19,856	)


Derivatives Designated as Economic Hedges, Gross:
Other assets:
Foreign exchange contracts	Other current assets		20,226		1,094
Foreign exchange contracts	Other assets		85		0

Total assets			20,311		1,094
Other liabilities:
Foreign exchange contracts	Accrued liabilities		13,288		2,521
Foreign exchange contracts	Other non-current
	liabilities		3,571		0

Total liabilities			16,859		2,521

Net asset/(liability) for economic hedges:			3,452		(1,427	)

Total net derivative asset/(liability)		$	195,342	$	(21,283	)

Derivative Activity:

The following tables show derivative activity for derivatives designated as cash flow hedges for the years ended June 30, 2015, 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
		Year Ended June 30,
		2015		2014			2013			2015		2014			2013			2015			2014		2013
Foreign exchange contracts	Cost of sales	$	51,720	$	(8,980	)	$	25,798		$	1,943	$	(2,048	)	$	0		$	0		$	0	$	0
Foreign exchange contracts	SG&A		245		(206	)		833			0		0			0			0			0		0
Foreign exchange contracts	Foreign exchange (losses) gains, net		0		0			0			0		0			0			(20	)		588		2,721
Interest rate swap	SG&A		0		(192	)		(766	)		0		(1	)		(4	)		0			0		0

Total cash flow hedges		$	51,965	$	(9,378	)	$	25,865		$	1,943	$	(2,049	)	$	(4	)	$	(20	)	$	588	$	2,721


Derivative	Gain/(Loss) Recognized in AOCI (Effective Portion)
	Year Ended June 30,
	2015		2014			2013
Foreign exchange contracts	$	271,019	$	(37,714	)	$	(1,089	)
Interest rate lock		134		0			0
Interest rate swap		0		35			(76	)

Total cash flow hedges	$	271,153	$	(37,679	)	$	(1,165	)

The following table summarizes gains and losses from our derivative instruments that are not designated as hedging instruments for the years ended June 30, 2015, 2014 and 2013:


Derivative	Location of Derivative Gain/(Loss)	Year Ended June 30,
		2015		2014		2013
Foreign exchange contracts	Cost of sales	$	20,053	$	(5,536)	$	(3,927)
Foreign exchange contracts	Foreign exchange (losses) gains, net	$	(35,104)	$	10,882	$	963