Derivative and Other Hedging Financial Instruments

9 Months Ended

Sep. 30, 2015

Derivative and Other Hedging Financial Instruments

8. Derivative and Other Hedging Financial Instruments

Interest Rate Contracts

The Company manages its fixed and floating rate debt mix using interest rate swaps. The Company uses 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 are used, depending on market conditions, to convert the fixed rates of long-term debt into short-term variable rates. Fixed rate swaps are 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.

Fair Value Hedges

At September 30, 2015, the Company had $650 notional amount of interest rate swaps that exchange a fixed rate of interest for variable rate of interest (LIBOR) plus a weighted average spread of approximately 605 basis points. These floating rate swaps are designated as fair value hedges against $650 of principal on the Senior Subordinated Notes 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. During October 2015, the Company terminated these swap agreements and received approximately $6 in net proceeds. The gain on the termination of these swaps is deferred as a component of the Senior Subordinated Notes and will be amortized over the remaining life of these notes.

Cash Flow Hedges

At September 30, 2015, the Company had $850 notional amount outstanding in swap agreements, which includes $350 notional amount of forward-starting swaps that become effective commencing December 31, 2015, that exchange a variable rate of interest (LIBOR) for fixed interest rates over the terms of the agreements and are designated as cash flow hedges of the interest rate risk attributable to forecasted variable interest payments and have maturity dates through June 2020. At September 30, 2015, the weighted average fixed rate of interest on these swaps, excluding the forward-starting swaps, was approximately 1.3%. The effective portion of the after-tax fair value gains or losses on these swaps is included as a component of accumulated other comprehensive income (loss) (“AOCI”).

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 March 2017. 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 AOCI 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, 2015, the Company had approximately $630 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, 2015, the Company had approximately $535 notional amount outstanding of these foreign currency contracts that are not designated as effective hedges for accounting purposes and have maturity dates through September 2016. Fair market value gains or losses are included in the results of operations and are classified in SG&A.

Commodity Contracts

The Company enters into commodity-based derivatives in order to mitigate the risk that the rising price of these commodities could have on the cost of certain of the Company’s raw materials. These commodity-based derivatives provide the Company with cost certainty, and in certain instances, allow the Company to benefit should the cost of the commodity fall below certain dollar thresholds. At September 30, 2015, the Company had approximately $39 notional amount outstanding of commodity-based derivatives that are not designated as effective hedges for accounting purposes and have maturity dates through December 2016. Fair market value gains or losses are included in the results of operations and are classified in cost of sales.

The following table presents the fair value of derivative financial instruments as of September 30, 2015 and December 31, 2014:

	September 30, 2015				December 31, 2014
	Fair Value of Derivatives				Fair Value of Derivatives
(in millions)	Asset (a)		Liability (a)		Asset (a)		Liability (a)
Derivatives designated as effective hedges:
Cash flow hedges:
Interest rate swaps	$	—	$	11.0	$	0.6	$	7.2
Foreign currency contracts		25.1		5.8		25.9		3.8
Fair value hedges:
Interest rate swaps		3.3		—		—		2.2
Subtotal		28.4		16.8		26.5		13.2
Derivatives not designated as effective hedges:
Foreign currency contracts		8.3		5.4		2.8		1.3
Commodity contracts		—		9.4		—		9.0
Subtotal		8.3		14.8		2.8		10.3
Total	$	36.7	$	31.6	$	29.3	$	23.5

(a) Consolidated balance sheet location:

Asset:      Other current and non-current assets

Liability: Other current and non-current liabilities

The following table presents gain and loss activity (on a pretax basis) for the three and nine months ended September 30, 2015 and 2014 related to derivative financial instruments designated as effective hedges:

	Three months ended September 30, 2015									Three months ended September 30, 2014
	Gain/(Loss)									Gain/(Loss)
(in millions)	Recognized in OCI (a) (effective portion)			Reclassified from AOCI to Income			Recognized in Income (b)			Recognized in OCI (a) (effective portion)			Reclassified from AOCI to Income		Recognized in Income (b)
Derivatives designated as effective hedges:
Cash flow hedges:
Interest rate swaps	$	(2.9	)	$	—		$	—		$	2.8		$	—	$	—
Foreign currency contracts		15.8			7.4			(1.2	)		16.0			1.1		1.0
Total	$	12.9			7.4		$	(1.2	)	$	18.8		$	1.1	$	1.0
Location of gain/(loss) in the consolidated results of operations:
Net sales				$	(0.1	)	$	—					$	0.5	$	—
Cost of sales					7.5			—						0.6		—
SG&A					—			(1.2	)					—		1.0
Total				$	7.4		$	(1.2	)				$	1.1	$	1.0
	Nine months ended September 30, 2015									Nine months ended September 30, 2014
	Gain/(Loss)									Gain/(Loss)
(in millions)	Recognized in OCI (a) (effective portion)			Reclassified from AOCI to Income			Recognized in Income (b)			Recognized in OCI (a) (effective portion)			Reclassified from AOCI to Income		Recognized in Income (b)
Derivatives designated as effective hedges:
Cash flow hedges:
Interest rate swaps	$	(4.4	)	$	—		$	—		$	(0.7	)	$	—	$	—
Foreign currency contracts		25.2			26.0			(4.7	)		13.7			5.3		(2.9	)
Total	$	20.8		$	26.0		$	(4.7	)	$	13.0		$	5.3	$	(2.9	)
Location of gain/(loss) in the consolidated results of operations:
Net sales				$	0.7		$	—					$	1.5	$	—
Cost of sales					25.3			—						3.8		—
SG&A					—			(4.7	)					—		(2.9	)
Total				$	26.0		$	(4.7	)				$	5.3	$	(2.9	)

(a) Represents effective portion recognized in Other Comprehensive Income (Loss) (“OCI”).

(b) Represents portion excluded from effectiveness testing.

At September 30, 2015, deferred net gains of approximately $23 within AOCI are expected to be reclassified to earnings over the next twelve months.

The following table presents gain and loss activity (on a pretax basis) for the three and nine months ended September 30, 2015 and 2014 related to derivative financial instruments not designated as effective hedges:

	Gain/(Loss) Recognized in Income (a)
	Three months ended September 30,						Nine months ended September 30,
(in millions)	2015			2014			2015			2014
Derivatives not designated as effective hedges:
Cash flow hedges:
Foreign currency contracts	$	4.3		$	6.9		$	9.5		$	0.5
Commodity contracts		(8.2	)		(1.1	)		(7.5	)		(0.2	)
Total	$	(3.9	)	$	5.8		$	2.0		$	0.3

(a) Classified in SG&A.

Net Investment Hedge

The Company has designated €300 of the principal balance of its Euro-denominated 3 ^3⁄₄% senior notes due October 2021 (the “Hedging Instrument”) as a net investment hedge of the foreign currency exposure of its net investment in certain Euro-denominated subsidiaries. Foreign currency gains and losses on the Hedging Instrument are included as a component of AOCI. At September 30, 2015, $45.2 of after-tax deferred gains have been recorded in AOCI.