FINANCIAL INSTRUMENTS AND DERIVATIVES

Derivative Instruments and Hedging Activities

The Company’s activities expose it to a variety of market risks, which primarily include the risks related to the effects of changes in foreign currency exchange rates, interest rates and commodity prices. These financial exposures are monitored and managed by the Company as part of its overall risk management program. The objective of this risk management program is to reduce the volatility that these market risks may have on the Company’s operating results and equity. The Company employs derivative financial instruments to hedge certain anticipated transactions, firm commitments, or assets and liabilities denominated in foreign currencies. Additionally, the Company utilizes interest rate swaps to convert variable rate debt to fixed rate debt and to convert fixed rate debt to variable rate debt, cross currency basis swaps to convert debt denominated in one currency to another currency and commodity swaps to fix certain variable raw material costs.

Derivative Instruments Designated as Hedging

Cash Flow Hedges

The following table summarizes the notional amounts of cash flow hedges by derivative instrument type at June 30, 2015 and the notional amounts expected to mature during the next 12 months, with a discussion of the various cash flow hedges by derivative instrument type following the table:



	Aggregate Notional Amount		Aggregate Notional Amount Maturing within 12 Months

(in thousands)

Foreign exchange forward contracts	$	337,017	$	253,842
Interest rate swaps	172,169		—
Commodity contracts	1,396		1,396
Total derivative instruments designated as cash flow hedges	$	510,582	$	255,238

Foreign Exchange Risk Management

The Company uses a layered hedging program to hedge select anticipated foreign currency cash flows to reduce volatility in both cash flows and reported earnings of the consolidated Company. The Company accounts for the designated foreign exchange forward contracts as cash flow hedges. As a result, the Company records the fair value of the contracts primarily through AOCI based on the tested effectiveness of the foreign exchange forward contracts. The Company measures the effectiveness of cash flow hedges of anticipated transactions on a spot-to-spot basis rather than on a forward-to-forward basis. Accordingly, the spot-to-spot change in the derivative fair value will be deferred in AOCI and released and recorded on the Consolidated Statements of Operations in the same period that the hedged transaction is recorded. The time value component of the fair value of the derivative is deemed ineffective and is reported currently in “Other expense (income), net” on the Consolidated Statements of Operations in the period which it is applicable. Any cash flows associated with these instruments are included in cash from operating activities on the Consolidated Statements of Cash Flows. The Company hedges various currencies, with the most significant activity occurring in euros, Swedish kronor, Canadian dollars, and Swiss francs.

These foreign exchange forward contracts generally have maturities up to 18 months and the counterparties to the transactions are typically large international financial institutions.

Interest Rate Risk Management

The Company uses interest rate swaps to convert a portion of its variable interest rate debt to fixed interest rate debt. At June 30, 2015, the Company has two significant exposures hedged with interest rate contracts. One exposure is hedged with derivative contracts having notional amounts totaling 12.6 billion Japanese yen, which effectively converts the underlying variable interest rate debt facility to a fixed interest rate of 0.9% for an intial term of five years ending September 2019. Another exposure hedged with derivative contracts has a notional amount of 65.0 million Swiss francs, and effectively converts the underlying variable interest rate of a Swiss franc denominated loan to a fixed interest rate of 0.7% for an initial term of five years, ending in September 2016.

The Company enters into interest rate swap contracts infrequently as they are only used to manage interest rate risk on long-term debt instruments and not for speculative purposes. Any cash flows associated with these instruments are included in cash from operating activities on the Consolidated Statements of Cash Flows.

Commodity Risk Management

The Company enters into precious metal commodity swap contracts to effectively fix certain variable raw material costs typically for up to 18 months. These swaps are used to stabilize the cost of components used in the production of certain of the Company’s products. The Company generally accounts for the commodity swaps as cash flow hedges. As a result, the Company records the fair value of the contracts primarily through AOCI based on the tested effectiveness of the commodity swaps. The Company measures the effectiveness of cash flow hedges of anticipated transactions on a spot-to-spot basis rather than on a forward-to-forward basis. Accordingly, the spot-to-spot change in the derivative fair value will be deferred in AOCI and released and recorded on the Consolidated Statements of Operations in the same period that the hedged transaction is recorded. The time value component of the fair value of the derivative is deemed ineffective and is reported currently in “Interest expense” on the Consolidated Statements of Operations in the period which it is applicable. Any cash flows associated with these instruments are included in cash from operating activities on the Consolidated Statements of Cash Flows.

The following tables summarize the amount of gains (losses) recorded in AOCI in the Consolidated Balance Sheets and income (expense) in the Company’s Consolidated Statements of Operations related to all cash flow hedges for the three months ended June 30, 2015 and 2014:



June 30, 2015
	Gain (Loss) in AOCI			Consolidated Statements of Operations Location	Effective Portion Reclassified from AOCI into Income (Expense)			Ineffective Portion Recognized in Income (Expense)

(in thousands)

Effective Portion:
Interest rate swaps	$	(58	)	Interest expense	$	(1,074	)	$	—
Foreign exchange forward contracts	(2,069		)	Cost of products sold	6,839			—
Foreign exchange forward contracts	(139		)	SG&A expenses	181			—
Commodity contracts	(96		)	Cost of products sold	(121		)	—

Ineffective Portion:
Foreign exchange forward contracts	—			Other expense (income), net	—			(160		)
Commodity contracts	—			Interest expense	—			(4		)
Total in cash flow hedging	$	(2,362	)		$	5,825		$	(164	)



June 30, 2014
	Gain (Loss) in AOCI			Consolidated Statements of Operations Location	Effective Portion Reclassified from AOCI into Income (Expense)			Ineffective Portion Recognized in Income (Expense)

(in thousands)

Effective Portion:
Interest rate swaps	$	(149	)	Interest expense	$	(929	)	$	—
Foreign exchange forward contracts	(4,636		)	Cost of products sold	(1,651		)	—
Foreign exchange forward contracts	45			SG&A expenses	(58		)	—
Commodity contracts	101			Cost of products sold	(158		)	—

Ineffective Portion:
Foreign exchange forward contracts	—			Other expense (income), net	—			(151		)
Commodity contracts	—			Interest expense	—			(11		)
Total for cash flow hedging	$	(4,639	)		$	(2,796	)	$	(162	)



June 30, 2015
	Gain (Loss) in AOCI			Consolidated Statements of Operations Location	Effective Portion Reclassified from AOCI into Income (Expense)			Ineffective Portion Recognized in Income (Expense)

(in thousands)

Effective Portion:
Interest rate swaps	$	(1,239	)	Interest expense	$	(2,040	)	$	—
Foreign exchange forward contracts	22,018			Cost of products sold	10,726			—
Foreign exchange forward contracts	324			SG&A expenses	344			—
Commodity contracts	(96		)	Cost of products sold	(250		)	—

Ineffective Portion:
Foreign exchange forward contracts	—			Other expense (income), net	—			167
Commodity contracts	—			Interest expense	—			(8		)
Total in cash flow hedging	$	21,007			$	8,780		$	159



June 30, 2014
	Gain (Loss) in AOCI			Consolidated Statements of Operations Location	Effective Portion Reclassified from AOCI into Income (Expense)			Ineffective Portion Recognized in Income (Expense)

(in thousands)

Effective Portion:
Interest rate swaps	$	(537	)	Interest expense	$	(1,856	)	$	—
Foreign exchange forward contracts	(3,569		)	Cost of products sold	(3,296		)	—
Foreign exchange forward contracts	35			SG&A expenses	(157		)	—
Commodity contracts	203			Cost of products sold	(403		)	—

Ineffective Portion:
Foreign exchange forward contracts	—			Other expense (income), net	—			(45		)
Commodity contracts	—			Interest expense	—			(24		)
Total for cash flow hedging	$	(3,868	)		$	(5,712	)	$	(69	)

Overall, the derivatives designated as cash flow hedges are considered to be highly effective. At June 30, 2015, the Company expects to reclassify $9.6 million of deferred net gains on cash flow hedges recorded in AOCI to the Consolidated Statements of Operations during the next 12 months. This reclassification is primarily due to the sale of inventory that includes hedged purchases and recognized interest expense on interest rate swaps. The term over which the Company is hedging exposures to variability of cash flows (for all forecasted transactions, excluding interest payments on variable interest rate debt) is typically 18 months.

For the rollforward of derivative instruments designated as cash flow hedges in AOCI see Note 3, Comprehensive Income.

Hedges of Net Investments in Foreign Operations

The Company has significant investments in foreign subsidiaries the most significant of which are denominated in euros, Swiss francs, Japanese yen and Swedish kronor. The net assets of these subsidiaries are exposed to volatility in currency exchange rates. The Company employs both derivative and non-derivative financial instruments to hedge a portion of this exposure . The derivative instruments consist of foreign exchange forward contracts and cross currency basis swaps. The non-derivative instruments consist of foreign currency denominated debt held at the parent company level. Translation gains and losses related to the net assets of the foreign subsidiaries are offset by gains and losses in derivative and non-derivative financial instruments designated as hedges of net investments, which are included in AOCI. Any cash flows associated with these instruments are included in investing activities on the Consolidated Statements of Cash Flows except for derivative instruments that include an other-than-insignificant financing element, in which case all cash flows will be classified as financing activities on the Consolidated Statements of Cash Flows.

The following table summarizes the notional amounts of hedges of net investments by derivative instrument type at June 30, 2015 and the notional amounts expected to mature during the next 12 months:



	Aggregate Notional Amount		Aggregate Notional Amount Maturing within 12 Months

(in thousands)

Foreign exchange forward contracts	$	420,892	$	236,079

The fair value of the cross currency basis swaps and foreign exchange forward contracts is the estimated amount the Company would receive or pay at the reporting date, taking into account the effective interest rates, cross currency swap basis rates and foreign exchange rates. The effective portion of the change in the value of these derivatives is recorded in AOCI, net of tax effects.

The following tables summarize the amount of gains (losses) recorded in AOCI on the Consolidated Balance Sheets and other income (expense) on the Company’s Consolidated Statements of Operations related to the hedges of net investments for the three months ended June 30, 2015 and 2014:



June 30, 2015
	Gain (Loss) in AOCI			Consolidated Statements of Operations Location	Recognized in Income (Expense)

(in thousands)

Effective Portion:
Foreign exchange forward contracts	$	(15,819	)	Other expense (income), net	$	1,191
Total for net investment hedging	$	(15,819	)		$	1,191



June 30, 2014
	Gain (Loss) in AOCI		Consolidated Statements of Operations Location	Recognized in Income (Expense)

(in thousands)

Effective Portion:
Cross currency basis swaps	$	1,572	Interest income	$	674
			Interest expense	(384		)
Foreign exchange forward contracts	1,272		Other expense (income), net	(73		)
Total for net investment hedging	$	2,844		$	217

The following table summarizes the amount of gains (losses) recorded in AOCI on the Consolidated Balance Sheets and other income (expense) on the Company’s Consolidated Statement of Operations related to the hedges of net investments for the six months ended June 30, 2015 and 2014:



June 30, 2015
	Gain (Loss) in AOCI			Consolidated Statements of Operations Location	Recognized in Income (Expense)

(in thousands)

Effective Portion:
Foreign exchange forward contracts	$	(3,320	)	Other expense (income), net	$	855
Total for net investment hedging	$	(3,320	)		$	855



June 30, 2014
	Gain (Loss) in AOCI			Consolidated Statements of Operations Location	Recognized in Income (Expense)

(in thousands)

Effective Portion:
Cross currency basis swaps	$	(3,087	)	Interest income	$	1,351
				Interest expense	157
Foreign exchange forward contracts	4,341			Other expense (income), net	175
Total for net investment hedging	$	1,254			$	1,683

Fair Value Hedges

The Company uses interest rate swaps to convert a portion of its fixed interest rate debt to variable interest rate debt. The Company has U.S. dollar denominated interest rate swaps with an initial total notional value of $150.0 million to effectively convert the underlying fixed interest rate of 4.1% on the Company’s $250.0 million Private Placement Notes (“PPN”) to variable rate for an initial term of five years, ending February 2016. The notional value of the swaps will decline proportionately as portions of the PPN mature. These interest rate swaps are designated as fair value hedges of the interest rate risk associated with the hedged portion of the fixed rate PPN. Accordingly, the Company will carry the portion of the hedged debt at fair value, with the change in debt and swaps offsetting each other on the Consolidated Statements of Operations. Any cash flows associated with these instruments are included in operating activities on the Consolidated Statements of Cash Flows.

The following table summarizes the notional amounts of fair value hedges by derivative instrument type at June 30, 2015 and the notional amounts expected to mature during the next 12 months:



	Aggregate Notional Amount		Aggregate Notional Amount Maturing within 12 Months

(in thousands)

Interest rate swaps	$	45,000	$	45,000

The following tables summarize the amount of income (expense) recorded on the Company’s Consolidated Statements of Operations related to the hedges of fair value for the three and six months ended June 30, 2015 and 2014:



	Consolidated Statements of Operations Location
		Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)		2015		2014		2015		2014

Interest rate swaps	Interest expense	$	41	$	133	$	158	$	220

Derivative Instruments Not Designated as Hedges

The Company enters into derivative instruments with the intent to partially mitigate the foreign exchange revaluation risk associated with recorded assets and liabilities that are denominated in a non-functional currency. The gains and losses on these derivative transactions offset the gains and losses generated by the revaluation of the underlying non-functional currency balances and are recorded in “Other expense (income), net” on the Consolidated Statements of Operations. The Company primarily uses foreign exchange forward contracts and cross currency basis swaps to hedge these risks. Any cash flows associated with the foreign exchange forward contracts and interest rate swaps not designated as hedges are included in cash from operating activities on the Consolidated Statements of Cash Flows. Any cash flows associated with the cross currency basis swaps not designated as hedges are included in investing activities on the Consolidated Statements of Cash Flows except for derivative instruments that include an other-than-insignificant financing element, in which case the cash flows will be classified as financing activities on the Consolidated Statements of Cash Flows.

The following tables summarize the aggregate notional amounts of the Company’s economic hedges not designated as hedges by derivative instrument types at June 30, 2015 and the notional amounts expected to mature during the next 12 months:



	Aggregate Notional Amount		Aggregate Notional Amount Maturing within 12 Months

(in thousands)

Foreign exchange forward contracts	$	478,338	$	478,338
Interest rate swaps	2,213		805
Total for instruments not designated as hedges	$	480,551	$	479,143

The Company had a Swiss franc denominated cross currency basis swaps to offset an intercompany Swiss franc note receivable at a U.S. dollar functional entity. The hedge matured during the second quarter of 2015 to coincide with the repayment of the note.

The following table summarizes the amounts of gains (losses) recorded on the Company’s Consolidated Statements of Operations related to the economic hedges not designated as hedging for the three and six months ended June 30, 2015 and 2014:



	Consolidated Statements of Operations Location	Gain (Loss) Recognized
		Three Months Ended June 30,
(in thousands)		2015			2014

Foreign exchange forward contracts (a)	Other expense (income), net	$	(766	)	$	(716	)
DIO equity option contracts	Other expense (income), net	102			90
Interest rate swaps	Interest expense	1			(16		)
Cross currency basis swaps (a)	Other expense (income), net	(603		)	(4,005		)
Total for instruments not designated as hedges		$	(1,266	)	$	(4,647	)

(a) The gains and losses on these derivative transactions offset the gains and losses generated by the revaluation of the underlying non-functional currency balances which are recorded in “Other expense (income), net” on the Consolidated Statements of Operations.



	Consolidated Statements of Operations Location	Gain (Loss) Recognized
		Six Months Ended June 30,
(in thousands)		2015			2014

Foreign exchange forward contracts (a)	Other expense (income), net	$	7,789		$	(5,157	)
DIO equity option contracts	Other expense (income), net	107			(138		)
Interest rate swaps	Interest expense	(2		)	(27		)
Cross currency basis swaps (a)	Other expense (income), net	(1,825		)	(3,180		)
Total for instruments not designated as hedges		$	6,069		$	(8,502	)

Consolidated Balance Sheets Location of Derivative Fair Values

The following tables summarize the fair value and consolidated balance sheet location of the Company’s derivatives at June 30, 2015 and December 31, 2014:



	June 30, 2015
(in thousands)	Prepaid Expenses and Other Current Assets, Net		Other Noncurrent Assets, Net		Accrued Liabilities		Other Noncurrent Liabilities
Designated as Hedges	Prepaid Expenses and Other Current Assets, Net		Other Noncurrent Assets, Net		Accrued Liabilities		Other Noncurrent Liabilities

Foreign exchange forward contracts	$	32,398	$	1,833	$	1,490	$	2,675
Commodity contracts	—		—		152		—
Interest rate swaps	324		282		1,164		742
Total	$	32,722	$	2,115	$	2,806	$	3,417

Not Designated as Hedges

Foreign exchange forward contracts	$	7,273	$	—	$	3,465	$	—
Interest rate swaps	—		—		51		77
Total	$	7,273	$	—	$	3,516	$	77



	December 31, 2014
(in thousands)	Prepaid Expenses and Other Current Assets, Net		Other Noncurrent Assets, Net		Accrued Liabilities		Other Noncurrent Liabilities
Designated as Hedges	Prepaid Expenses and Other Current Assets, Net		Other Noncurrent Assets, Net		Accrued Liabilities		Other Noncurrent Liabilities

Foreign exchange forward contracts	$	28,036	$	12,542	$	2,740	$	1,707
Commodity contracts	—		—		233		—
Interest rate swaps	617		135		575		377
Total	$	28,653	$	12,677	$	3,548	$	2,084

Not Designated as Hedges

Foreign exchange forward contracts	$	4,798	$	—	$	4,764	$	—
DIO equity option contracts	—		—		—		115
Interest rate swaps	—		—		63		129
Cross currency basis swaps	2,683		—		—		—
Total	$	7,481	$	—	$	4,827	$	244

Balance Sheet Offsetting

Substantially all of the Company’s derivative contracts are subject to netting arrangements, whereby the right to offset occurs in the event of default or termination in accordance with the terms of the arrangements with the counterparty. While these contracts contain the enforceable right to offset through netting arrangements with the same counterparty, the Company elects to present them on a gross basis on the Consolidated Balance Sheets.

Offsetting of financial assets and liabilities under netting arrangements at June 30, 2015:



							Gross Amounts Not Offset in the Consolidated Balance Sheets
(in thousands)	Gross Amounts Recognized		Gross Amount Offset in the Consolidated Balance Sheets		Net Amounts Presented in the Consolidated Balance Sheets		Financial Instruments			Cash Collateral Received/Pledged		Net Amount

Assets
Foreign exchange forward contracts	$	41,504	$	—	$	41,504	$	(9,363	)	$	—	$	32,141
Interest rate swaps	606		—		606		(173		)	—		433
Total Assets	$	42,110	$	—	$	42,110	$	(9,536	)	$	—	$	32,574



							Gross Amounts Not Offset in the Consolidated Balance Sheets
(in thousands)	Gross Amounts Recognized		Gross Amount Offset in the Consolidated Balance Sheets		Net Amounts Presented in the Consolidated Balance Sheets		Financial Instruments			Cash Collateral Received/Pledged		Net Amount

Liabilities
Foreign exchange forward contracts	$	7,630	$	—	$	7,630	$	(7,630	)	$	—	$	—
Commodity contracts	152		—		152		—			—		152
Interest rate swaps	2,034		—		2,034		(1,906		)	—		128
Total Liabilities	$	9,816	$	—	$	9,816	$	(9,536	)	$	—	$	280

Offsetting of financial assets and liabilities under netting arrangements at December 31, 2014:



							Gross Amounts Not Offset in the Consolidated Balance Sheets
(in thousands)	Gross Amounts Recognized		Gross Amount Offset in the Consolidated Balance Sheets		Net Amounts Presented in the Consolidated Balance Sheets		Financial Instruments			Cash Collateral Received/Pledged		Net Amount

Assets
Foreign exchange forward contracts	$	45,377	$	—	$	45,377	$	(7,797	)	$	—	$	37,580
Interest rate swaps	751		—		751		(274		)	—		477
Cross currency basis swaps	2,683		—		2,683		(1,067		)	—		1,616
Total Assets	$	48,811	$	—	$	48,811	$	(9,138	)	$	—	$	39,673



							Gross Amounts Not Offset in the Consolidated Balance Sheets
(in thousands)	Gross Amounts Recognized		Gross Amount Offset in the Consolidated Balance Sheets		Net Amounts Presented in the Consolidated Balance Sheets		Financial Instruments			Cash Collateral Received/Pledged		Net Amount

Liabilities
Foreign exchange forward contracts	$	9,208	$	—	$	9,208	$	(8,186	)	$	—	$	1,022
Commodity contracts	235		—		235		—			—		235
DIO equity option contracts	115		—		115		—			—		115
Interest rate swaps	1,145		—		1,145		(952		)	—		193
Total Liabilities	$	10,703	$	—	$	10,703	$	(9,138	)	$	—	$	1,565