Footnote 12 — Derivatives

From time to time, the Company enters into derivative transactions to hedge its exposures to interest rate, foreign currency rate and commodity price fluctuations. The Company does not enter into derivative transactions for trading purposes.

Interest Rate Contracts

The Company manages its fixed and floating rate debt mix using interest rate swaps. The Company may use fixed and floating rate swaps to alter its exposure to the impact of changing interest rates on its consolidated results of operations and future cash outflows for interest. Floating rate swaps would be used, depending on market conditions, to convert the fixed rates of long-term debt into short-term variable rates. Fixed rate swaps would be used to reduce the Company’s risk of the possibility of increased interest costs. Interest rate swap contracts are therefore used by the Company to separate interest rate risk management from the debt funding decision. The cash paid and received from the settlement of interest rate swaps is included in interest expense.

Fair Value Hedges

At September 30, 2018, the Company had approximately $527 million notional amount of interest rate swaps that exchange a fixed rate of interest for variable rate (LIBOR) of interest plus a weighted average spread. These floating rate swaps are designated as fair value hedges against $277 million of principal on the 4.7% senior notes due 2020 and $250 million of principal on the 4.0% senior notes due 2024 for the remaining life of these notes. The effective portion of the fair value gains or losses on these swaps is offset by fair value adjustments in the underlying debt.

Cross-Currency Contracts

The Company uses cross-currency swaps to hedge foreign currency risk on certain intercompany financing arrangements with foreign subsidiaries. During 2018, all the Company’s cross-currency interest rate swaps matured. The cross-currency interest rate swaps were intended to eliminate uncertainty in cash flows in U.S. Dollars and British Pounds in connection with the intercompany financing arrangements.

Foreign Currency Contracts

The Company uses forward foreign currency contracts to mitigate the foreign currency exchange rate exposure on the cash flows related to forecasted inventory purchases and sales and have maturity dates through December 2019. The derivatives used to hedge these forecasted transactions that meet the criteria for hedge accounting are accounted for as cash flow hedges. The effective portion of the gains or losses on these derivatives is deferred as a component of AOCL and is recognized in earnings at the same time that the hedged item affects earnings and is included in the same caption in the statements of operations as the underlying hedged item. At September 30, 2018, the Company had approximately $501 million notional amount outstanding of forward foreign currency contracts that are designated as cash flow hedges of forecasted inventory purchases and sales.

The Company also uses foreign currency contracts, primarily forward foreign currency contracts, to mitigate the foreign currency exposure of certain other foreign currency transactions. At September 30, 2018, the Company had approximately $723 million notional amount outstanding of these foreign currency contracts that are not designated as effective hedges for accounting purposes and have maturity dates through July 2019. Fair market value gains or losses are included in the results of operations and are classified in other (income) expense, net.

The following table presents the fair value of derivative financial instruments as of the dates indicated (in millions):


	September 30, 2018				December 31, 2017
	Fair Value of Derivatives				Fair Value of Derivatives
	Asset (a)		Liability (a)		Asset (a)		Liability (a)
Derivatives designated as effective hedges:
Cash flow hedges:
Cross-currency swaps	$	—	$	—	$	—	$	21.5
Foreign currency contracts		4.8		1.5		2.0		6.6
Fair value hedges:
Interest rate swaps		—		20.5		—		7.8
Derivatives not designated as effective hedges:
Foreign currency contracts		10.8		4.9		12.7		20.8
Commodity contracts		0.1		—		0.2		—

Total	$	15.7	$	26.9	$	14.9	$	56.7

(a) Consolidated balance sheet location:
Asset: Prepaid expenses and other, and other non-current assets
Liability: Other accrued liabilities, and current and non-current liabilities

The following tables presents gain and loss activity (on a pretax basis) for the three and nine months ended September 30, 2018 and 2017 related to derivative financial instruments designated or previously designated, as effective hedges (in millions):


		Three Months Ended September 30, 2018						Three Months Ended September 30, 2017
		Gain/(Loss)						Gain/(Loss)
	Location of gain/(loss) recognized in income	Recognized in OCI (a) (effective portion)			Reclassified from AOCL to Income			Recognized in OCI (a) (effective portion)			Reclassified from AOCL to Income
Interest rate swaps	Interest expense, net	$	—		$	(1.9	)	$	—		$	(2.1	)
Foreign currency contracts	Sales and cost of sales		1.7			(3.0	)		(12.8	)		(0.4	)
Cross-currency swaps	Other income (expense), net		—			—			(0.4	)		(0.7	)

Total		$	1.7		$	(4.9	)	$	(13.2	)	$	(3.2	)


		Nine Months Ended September 30, 2018						Nine Months Ended September 30, 2017
		Gain/(Loss)						Gain/(Loss)
	Location of gain/(loss) recognized in income	Recognized in OCI (a) (effective portion)			Reclassified from AOCL to Income			Recognized in OCI (a) (effective portion)			Reclassified from AOCL to Income
Interest rate swaps	Interest expense, net	$	—		$	(5.7	)	$	—		$	(6.2	)
Foreign currency contracts	Sales and cost of sales		11.7			(15.5	)		(35.8	)		12.4
Cross-currency swaps	Other income (expense), net		(1.7	)		(3.0	)		(1.6	)		(6.3	)

Total		$	10.0		$	(24.2	)	$	(37.4	)	$	(0.1	)

(a)	Represents effective portion recognized in OCI.

The amount of ineffectiveness related to cash flow hedges during the three and nine months ended September 30, 2018 and 2017 was not material. At September 30, 2018, deferred net gains of approximately $10 million within AOCL are expected to be reclassified to earnings over the next twelve months.

During the three and nine months ended September 30, 2018 and 2017, the Company recognized expense (income) of $8.1 million and $12.7 million, respectively, and $11.1 million and $45.3 million, respectively, in other (income) expense, net, related to derivatives that are not designated as hedging instruments, which is mostly offset by foreign currency movement in the underlying exposure.