Derivative Financial Instruments

12 Months Ended

Dec. 31, 2015

Derivative Financial Instruments

10. Derivative Financial Instruments

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 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

During October 2015, the Company terminated $650 notional amount of interest rate swaps that exchange a fixed rate of interest for variable rate of interest (LIBOR) plus a basis point spread and received approximately $6 in net proceeds. These floating rate swaps were designated as fair value hedges against the Senior Subordinated Notes. 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 December 31, 2015, the Company had $350 notional amount outstanding in swap agreements 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 December 31, 2015, the weighted average fixed rate of interest on these swaps was approximately 1.9%. The effective portion of the after-tax fair value gains or losses on these swaps is included as a component of 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 December 31, 2015, the Company had approximately $590 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 December 31, 2015, the Company had approximately $621 notional amount outstanding of these foreign currency contracts 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 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 December 31, 2015, the Company had approximately $28 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.

At December 31, 2015 and 2014, the fair value of derivative financial instruments is as follows:

	2015				2014
	Fair Value of Derivatives				Fair Value of Derivatives				Weighted Average Remaining Term (years)
(in millions)	Asset (a)		Liability (a)		Asset (a)		Liability (a)
Derivatives designated as effective hedges:
Cash flow hedges:
Interest rate swaps	$	—	$	7.4	$	0.6	$	7.2		2.7
Foreign currency contracts		23.6		4.7		25.9		3.8		0.6
Fair value hedges:
Interest rate swaps		—		—		—		2.2		—
Subtotal		23.6		12.1		26.5		13.2
Derivatives not designated as effective hedges:
Foreign currency contracts		8.3		4.9		2.8		1.3		0.6
Commodity contracts		—		8.9		—		9.0		0.5
Subtotal		8.3		13.8		2.8		10.3
Total	$	31.9	$	25.9	$	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 2015, 2014 and 2013 related to derivative financial instruments designated as effective hedges:

	2015								2014								2013
	Gain/(Loss)								Gain/(Loss)								Gain/(Loss)
(in millions)	Recognized in OCI (a)			Reclassified from AOCI to Income		Recognized in Income (b)			Recognized in OCI (a)			Reclassified from AOCI to Income		Recognized in Income (b)			Recognized in OCI (a)		Reclassified from AOCI to Income		Recognized in Income (b)
Derivatives designated as effective hedges:
Cash flow hedges:
Interest rate swaps	$	(0.8	)	$	—	$	—		$	(3.0	)	$	—	$	—		$	8.9	$	—	$	—
Foreign currency contracts		35.9			32.4		(8.0	)		27.7			6.3		(1.9	)		13.9		18.2		(5.5	)
Total	$	35.1		$	32.4	$	(8.0	)	$	24.7		$	6.3	$	(1.9	)	$	22.8	$	18.2	$	(5.5	)
Location of gain/(loss) in the consolidated results of operations:
Net sales				$	1.0	$	—					$	2.0	$	—				$	0.1	$	—
Cost of sales					31.4		—						4.3		—					18.1		—
SG&A					—		(8.0	)					—		(1.9	)				—		(5.5	)
Total				$	32.4	$	(8.0	)				$	6.3	$	(1.9	)			$	18.2	$	(5.5	)

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

(b) Represents portion excluded from effectiveness testing.

At December 31, 2015, deferred net gains of $27 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 2015, 2014 and 2013 related to derivative financial instruments not designated as effective hedges:

	Gain/(Loss) Recognized in Income (a)
(in millions)	2015			2014			2013
Derivatives not designated as effective hedges:
Cash flow derivatives:
Foreign currency contracts	$	14.7		$	4.3		$	(2.7	)
Commodity contracts		(11.2	)		(8.9	)		0.9
Total	$	3.5		$	(4.6	)	$	(1.8	)

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 December 31, 2015, $51.1 of after-tax deferred gains have been recorded in AOCI.