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 in the next three years. The majority of these contracts are designated as cash flow hedges.

At December 31, 2015 and June 30, 2015, we had outstanding foreign exchange contracts, primarily forward contracts, which are summarized below:


	December 31, 2015					June 30, 2015
	Gross Notional Value		Fair Value Asset/ (Liability)⁽¹⁾			Gross Notional Value		Fair Value Asset/ (Liability)⁽¹⁾
Currency Hedged (Buy/Sell):
U.S. Dollar/Euro	$	1,735,012	$	215,788		$	1,479,685	$	208,532
Indian Rupee/U.S. Dollar		217,600		(1,387	)		205,150		(935	)
Euro/U.S. Dollar		150,531		(8,434	)		153,549		(15,994	)
Swiss Franc/U.S. Dollar		26,949		498			0		0
U.S. Dollar/Swiss Franc		26,949		242			0		0
Chinese Yuan/U.S. Dollar		26,810		(405	)		0		0
Japanese Yen/Euro		15,963		655			0		0
Mexican Pesos/U.S. Dollar		14,594		(172	)		0		0
U.S. Dollar/Brazilian Real		8,731		168			6,148		318
Euro/Russian Rubles		4,550		217			5,963		(865	)
U.S. Dollar/Russian Rubles		4,245		170			1,613		24
Russian Rubles/U.S. Dollar		2,164		(139	)		0		0
Russian Rubles/Euro		1,379		(40	)		0		0
U.S. Dollar/Australian Dollar		729		(15	)		0		0
Swiss Franc/Euro		0		0			32,050		4,262

Total	$	2,236,206	$	207,146		$	1,884,158	$	195,342

(1)	Represents the net receivable/(payable) included in our Condensed 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 December 31, 2015 and June 30, 2015, we had $1,874.4 million and $1,577.8 million of forward and option contracts maturing through October 2019 and June 2018, respectively. These contracts are recorded at fair value in the accompanying Condensed Consolidated Balance Sheets. 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 $0.1 million and $0 of ineffectiveness in our Condensed Consolidated Statement of Income in the three months ended December 31, 2015 and 2014, respectively, and $0.1 million and $2.0 million in the six months ended December 31, 2015 and 2014, respectively At December 31, 2015 and June 30, 2015, the fair values of these contracts were net assets of $196.9 million and $191.9 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 $99.3 million.

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, 2015 and June 30, 2015, we had $361.8 million and $306.4 million, respectively, of forward contracts maturing through October 2017 in various currencies to hedge foreign currency denominated intercompany loans and other foreign currency denominated assets. At December 31, 2015 and June 30, 2015, the fair values of these contracts were net assets of $10.2 million and $3.5 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

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.

The following tables provide a summary of the fair value amounts of our derivative instruments as of December 31, 2015 and June 30, 2015:


		Fair Value
Derivatives Designated as Cash Flow Hedges, Gross:	Balance Sheet Location	December 31, 2015		June 30, 2015
Other assets:
Foreign exchange contracts	Other current assets	$	82,994	$	73,082
Foreign exchange contracts	Other assets		116,993		121,496

Total assets			199,987		194,578
Other liabilities:
Foreign exchange contracts	Accrued liabilities	$	1,789	$	1,034
Foreign exchange contracts	Other non-current liabilities		1,252		1,654

Total liabilities			3,041		2,688

Net asset for derivatives designated as hedging instruments		$	196,946	$	191,890


Derivatives Designated as Economic Hedges, Gross:
Other assets:
Foreign exchange contracts	Other current assets	$	18,987	$	20,226
Foreign exchange contracts	Other assets		0		85

Total assets			18,987		20,311
Other liabilities:
Foreign exchange contracts	Accrued liabilities	$	6,661	$	13,288
Foreign exchange contracts	Other non-current liabilities		2,126		3,571

Total liabilities			8,787		16,859

Net asset for economic hedges:		$	10,200	$	3,452

Total net derivative asset		$	207,146	$	195,342

Derivative Activity:

The following tables show derivative activity for derivatives designated as cash flow hedges for the three months ended December 31, 2015 and 2014:


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,
		2015			2014		2015			2014			2015			2014
Foreign exchange contracts	Cost of sales	$	21,042		$	7,353	$	(88	)	$	(19	)	$	0		$	0
Foreign exchange contracts	SG&A		24			165		0			0			0			0
Foreign exchange contracts	Foreign exchange losses, net		0			0		0			0			(3	)		(5	)
Interest rate lock	Interest expense, net		(5	)		0		0			0			0			0

Total cash flow hedges		$	21,061		$	7,518	$	(88	)	$	(19	)	$	(3	)	$	(5	)


Derivative	Gain/(Loss) Recognized in AOCI (Effective Portion)
	Three Months Ended December 31,
	2015		2014
Foreign exchange contracts	$	41,467	$	55,680

The following tables show derivative activity for derivatives designated as cash flow hedges for the six months ended December 31, 2015 and 2014:


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,
		2015			2014		2015			2014		2015			2014
Foreign exchange contracts	Cost of sales	$	43,299		$	6,550	$	(116	)	$	2,023	$	0		$	0
Foreign exchange contracts	SG&A		24			218		0			0		0			0
Foreign exchange contracts	Foreign exchange losses, net		0			0		0			0		(1	)		(9	)
Interest rate lock	Interest expense, net		(10	)		0		0			0		0			0

Total cash flow hedges		$	43,313		$	6,768	$	(116	)	$	2,023	$	(1	)	$	(9	)


Derivative	Gain/(Loss) Recognized in AOCI (Effective Portion)
	Six Months Ended December 31,
	2015		2014
Foreign exchange contracts	$	51,448	$	163,111

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, 2015 and 2014:


		Three Months Ended December 31,					Six Months Ended December 31,
Derivative	Location of Derivative Gain/(Loss)	2015		2014			2015			2014
Foreign exchange contracts – forwards	Cost of sales	$	3,605	$	3,796		$	4,489		$	12,133
Foreign exchange contracts – forwards	Foreign exchange (gains) losses, net		2,963		(5,736	)		(3,479	)		(22,372	)