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 volatility in earnings and cash flows 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 over the next three years. The majority of these contracts are designated as cash flow hedges.

At December 31, 2016 and June 30, 2016, we had outstanding foreign exchange contracts, primarily forward contracts, which are summarized below:

	December 31, 2016					June 30, 2016
	Gross Notional Value		Fair Value Asset/ (Liability)⁽¹⁾			Gross Notional Value		Fair Value Asset/ (Liability)⁽¹⁾
Currency Hedged (Buy/Sell):
U.S. Dollar/Euro	$	1,099,086	$	157,961		$	1,516,094	$	149,901
Indian Rupee/U.S. Dollar		260,200		7,068			251,355		(721	)
U.S. Dollar/Chinese Yuan		158,071		961			-		-
Euro/U.S. Dollar		140,579		(8,424	)		224,921		(6,280	)
Chinese Yuan/U.S. Dollar		25,486		(954	)		-		-
Mexican Peso/U.S. Dollar		16,519		(271	)		-		-
GBP/Euro		8,939		(95	)		-		-
Euro/Russian Rubles		8,125		(526	)		3,601		(667	)
U.S. Dollar/Russian Rubles		4,712		(590	)		9,517		(478	)
U.S. Dollar/Brazilian Real		3,863		(652	)		20,958		(2,459	)
U.S. Dollar/Australian Dollar		-		-			745		(37	)
Total	$	1,725,580	$	154,478		$	2,027,191	$	139,259

⁽¹⁾	Represents the net receivable 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 and cash flow hedges of foreign currency denominated intercompany loans. As of December 31, 2016 and June 30, 2016, we had $1.448 billion and $1.608 billion of forward contracts maturing through May 2022. 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, Foreign exchange losses (gains), net, 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 of ineffectiveness in our Condensed Consolidated Statement of Income in the three months ended December 31, 2016 and 2015 and $(0.1) million and $0.1 million in the six months ended December 31, 2016 and 2015, respectively. At December 31, 2016 and June 30, 2016, the fair values of these contracts were net assets of $141.7 million and $131.9 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 $110.2 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 losses (gains), net, Cost of sales, or SG&A according to the underlying exposure. As of December 31, 2016 and June 30, 2016, we had $277.5 million and $419.1 million, respectively, of forward contracts maturing through October 2018 in various currencies to hedge foreign currency denominated intercompany loans and other foreign currency denominated assets. At December 31, 2016 and June 30, 2016, the fair values of these contracts were net assets of $12.8 million and $7.4 million, respectively. Adjustments to the carrying value of the foreign currency forward contracts offset the gains and losses on the underlying loans in Foreign exchange losses (gains), 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 is being amortized into Interest expense, net in our Condensed 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, 2016 and June 30, 2016:

		Fair Value
Derivatives Designated as Cash Flow Hedges, Gross:	Balance Sheet Location	December 31, 2016		June 30, 2016
Other assets:
Foreign exchange contracts	Other current assets	$	93,467	$	69,122
Foreign exchange contracts	Other assets		52,375		67,232
Total assets			145,842		136,354
Other liabilities:
Foreign exchange contracts	Accrued liabilities	$	1,887	$	3,482
Foreign exchange contracts	Other non-current liabilities		2,232		993
Total liabilities			4,119		4,475
Net asset for derivatives designated as hedging instruments		$	141,723	$	131,879
Derivatives Designated as Economic Hedges, Gross:
Other assets:
Foreign exchange contracts	Other current assets	$	21,217	$	14,761
Foreign exchange contracts	Other assets		251		345
Total assets			21,468		15,106
Other liabilities:
Foreign exchange contracts	Accrued liabilities	$	8,187	$	5,763
Foreign exchange contracts	Other non-current liabilities		526		1,963
Total liabilities			8,713		7,726
Net asset for economic hedges		$	12,755	$	7,380
Total net derivative asset		$	154,478	$	139,259

Derivative Activity:

The following tables summarize the activity of our derivative instruments designated as cash flow hedges for the three months ended December 31, 2016 and 2015:

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,
		2016			2015			2016			2015			2016		2015
Foreign exchange contracts	Cost of sales	$	22,065		$	21,042		$	(94	)	$	(88	)	$	-	$	-
Foreign exchange contracts	SG&A		(93	)		24			-			-			-		-
Foreign exchange contracts	Foreign exchange losses (gains), net		(3,953	)		-			-			-			-		(3	)
Interest rate lock	Interest expense, net		(6	)		(5	)		-			-			-		-
Total cash flow hedges		$	18,013		$	21,061		$	(94	)	$	(88	)	$	-	$	(3	)

Derivative	Gain/(Loss) Recognized in AOCI (Effective Portion)
	Three Months Ended December 31,
	2016		2015
Foreign exchange contracts	$	55,613	$	41,467

The following tables summarize the activity of our derivative instruments designated as cash flow hedges for the six months ended December 31, 2016 and 2015:

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,
		2016			2015			2016		2015			2016		2015
Foreign exchange contracts	Cost of sales	$	42,158		$	43,299		$	111	$	(116	)	$		$	-
Foreign exchange contracts	SG&A		(80	)		24			-		-			-		-
Foreign exchange contracts	Foreign exchange losses (gains), net		(3,335	)		-			-		-			-		(1	)
Interest rate lock	Interest expense, net		(11	)		(10	)		-		-			-		-
Total cash flow hedges		$	38,732		$	43,313		$	111	$	(116	)	$	-	$	(1	)

Derivative	Gain/(Loss) Recognized in AOCI (Effective Portion)
	Six months ended December 31,
	2016		2015
Foreign exchange contracts	$	53,944	$	51,448

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, 2016 and 2015:

	Location of Derivative Gain/(Loss)	Three Months Ended December 31,					Six Months Ended December 31,
Derivative	Recognized in Income	2016			2015		2016			2015
Foreign exchange contracts	Cost of sales	$	8,686		$	3,605	$	7,375		$	4,489
Foreign exchange contracts	Foreign exchange losses (gains), net		(5,266	)		2,963		(4,948	)		(3,479	)
Foreign exchange contracts	SG&A		(24	)		-		(26	)		-