Derivative Financial Instruments

The Company is exposed to market risk from changes in foreign currency exchange rates, interest rates, stock prices and commodity prices. As part of the Company’s risk management program, a variety of financial instruments such as interest rate swaps, currency swaps, purchased currency options, foreign exchange contracts and commodity contracts may be used to mitigate interest rate exposure, foreign currency exposure and commodity price exposure.

Financial instruments are not utilized for speculative purposes. If the Company elects to do so and if the instrument meets the criteria specified in ASC 815, Derivatives and Hedging, management designates its derivative instruments as cash flow hedges, fair value hedges or net investment hedges. Generally, commodity price exposures are not hedged with derivative financial instruments and instead are actively managed through customer pricing initiatives, procurement-driven cost reduction initiatives and other productivity improvement projects.

A summary of the fair value of the Company’s derivatives recorded in the Condensed Consolidated Balance Sheets at July 2, 2016 and January 2, 2016 follows:



(Millions of Dollars)	Balance Sheet Classification	July 2, 2016		January 2, 2016		Balance Sheet Classification	July 2, 2016		January 2, 2016
Derivatives designated as hedging instruments:
Interest Rate Contracts Cash Flow	LT other assets	$	—	$	—	LT other liabilities	$	95.1	$	41.1
Interest Rate Contracts Fair Value	Other current assets	—		14.9		Accrued expenses	—		2.5
	LT other assets	—		1.4		LT other liabilities	—		5.2
Foreign Exchange Contracts Cash Flow	Other current assets	11.6		21.9		Accrued expenses	4.3		1.8
	LT other assets	4.6		3.7		LT other liabilities	0.4		—
Net Investment Hedge	Other current assets	92.3		30.3		Accrued expenses	1.5		4.8
	LT other assets	—		—		LT other liabilities	20.5		—
Total Designated		$	108.5	$	72.2		$	121.8	$	55.4
Derivatives not designated as hedging instruments:
Foreign Exchange Contracts	Other current assets	$	37.3	$	7.1	Accrued expenses	$	85.2	$	40.7
Total Undesignated		$	37.3	$	7.1		$	85.2	$	40.7

The counterparties to all of the above mentioned financial instruments are major international financial institutions. The Company is exposed to credit risk for net exchanges under these agreements, but not for the notional amounts. The credit risk is limited to the asset amounts noted above. The Company limits its exposure and concentration of risk by contracting with diverse financial institutions and does not anticipate non-performance by any of its counterparties. Further, as more fully discussed in Note L, Fair Value Measurements, the Company considers non-performance risk of its counterparties at each reporting period and adjusts the carrying value of these assets accordingly. The risk of default is considered remote.

During the six months ended July 2, 2016 and July 4, 2015, cash flows related to derivatives, including those that are separately discussed below, resulted in net cash received of $26.6 million and $48.3 million, respectively.

CASH FLOW HEDGES

As of July 2, 2016 and January 2, 2016, there was an after-tax mark-to-market loss of $105.3 million and $52.1 million, respectively, reported for cash flow hedge effectiveness in Accumulated other comprehensive loss. An after-tax loss of $6.6 million is expected to be reclassified to earnings as the hedged transactions occur or as amounts are amortized within the next twelve months. The ultimate amount recognized will vary based on fluctuations of the hedged currencies and interest rates through the maturity dates.

The tables below detail pre-tax amounts reclassified from Accumulated other comprehensive loss into earnings for active derivative financial instruments during the periods in which the underlying hedged transactions affected earnings for the three and six months ended July 2, 2016 and July 4, 2015 (in millions):



Second Quarter 2016	Gain (Loss) Recorded in OCI			Classification of Gain (Loss) Reclassified from OCI to Income	Gain (Loss) Reclassified from OCI to Income (Effective Portion)		Gain (Loss) Recognized in Income (Ineffective Portion*)
Interest Rate Contracts	$	(22.5	)	Interest expense	$	—	$	—
Foreign Exchange Contracts	$	17.5		Cost of sales	$	5.0	$	—



Year-to-Date 2016	Gain (Loss) Recorded in OCI			Classification of Gain (Loss) Reclassified from OCI to Income	Gain (Loss) Reclassified from OCI to Income (Effective Portion)		Gain (Loss) Recognized in Income (Ineffective Portion*)
Interest Rate Contracts	$	(54.1	)	Interest expense	$	—	$	—
Foreign Exchange Contracts	$	(4.4	)	Cost of sales	$	23.6	$	—



Second Quarter 2015	Gain (Loss) Recorded in OCI			Classification of Gain (Loss) Reclassified from OCI to Income	Gain (Loss) Reclassified from OCI to Income (Effective Portion)		Gain (Loss) Recognized in Income (Ineffective Portion*)
Interest Rate Contracts	$	35.0		Interest expense	$	—	$	—
Foreign Exchange Contracts	$	(3.6	)	Cost of sales	$	16.2	$	—



Year-to-Date 2015	Gain (Loss) Recorded in OCI		Classification of Gain (Loss) Reclassified from OCI to Income	Gain (Loss) Reclassified from OCI to Income (Effective Portion)		Gain (Loss) Recognized in Income (Ineffective Portion*)
Interest Rate Contracts	$	19.5	Interest expense	$	—	$	—
Foreign Exchange Contracts	$	34.4	Cost of sales	$	22.9	$	—

* Includes ineffective portion and amount excluded from effectiveness testing on derivatives.

For the three and six months ended July 2, 2016, the hedged items' impact to the Consolidated Statements of Operations and Comprehensive Income was a loss of $5.0 million and $23.6 million, respectively, in Cost of sales, which is offsetting the amounts shown above. For the three and six months ended July 4, 2015, the hedged items’ impact to the Consolidated Statements of Operations and Comprehensive Income was a loss of $16.2 million and $22.9 million, respectively. There was no impact related to the interest rate contracts' hedged items for all periods presented.

For the three and six months ended July 2, 2016, an after-tax gain of $0.5 million and $9.8 million, respectively, was reclassified from Accumulated other comprehensive loss into earnings (inclusive of the gain/loss amortization on terminated derivative instruments) during the periods in which the underlying hedged transactions affected earnings. For the three and six months ended July 4, 2015, an after-tax gain of $4.9 million and $6.0 million, respectively, was reclassified from Accumulated other comprehensive loss into earnings (inclusive of the gain/loss amortization on terminated derivative instruments) during the periods in which the underlying hedged transactions affected earnings.

Interest Rate Contracts

The Company enters into interest rate swap agreements in order to obtain the lowest cost source of funds within a targeted range of variable to fixed-debt proportions. At July 2, 2016 and January 2, 2016, the Company had $400 million of forward starting swaps outstanding which were executed in 2014. The objective of the hedges is to offset the expected variability on future payments associated with the interest rate on debt instruments expected to be issued in 2018. Gains or losses on the swaps are recorded in Accumulated other comprehensive income (loss) and will be subsequently reclassified into earnings as the future interest expense is recognized in earnings or as ineffectiveness occurs.

Foreign Currency Contracts

Forward Contracts: Through its global businesses, the Company enters into transactions and makes investments denominated in multiple currencies that give rise to foreign currency risk. The Company and its subsidiaries regularly purchase inventory from subsidiaries with non-U.S. dollar functional currencies which creates currency-related volatility in the Company’s results of operations. The Company utilizes forward contracts to hedge these forecasted purchases and sales of inventory. Gains and losses reclassified from Accumulated other comprehensive income (loss) for the effective and ineffective portions of the hedge, as well as any amounts excluded from effectiveness testing, are recorded in Cost of sales. Gains and losses incurred after a hedge has been de-designated are not recorded in Accumulated other comprehensive income (loss), but are recorded directly to the Consolidated Statements of Operations in Other-net. At July 2, 2016, the notional value of forward currency contracts outstanding was $673.2 million, maturing on various dates through 2017. At January 2, 2016, the notional value of forward currency contracts outstanding was $439.3 million, maturing on various dates through 2017.

Purchased Option Contracts: The Company and its subsidiaries have entered into various intercompany transactions whereby the notional values are denominated in currencies other than the functional currencies of the party executing the trade. In order to better match the cash flows of its intercompany obligations with cash flows from operations, the Company enters into purchased option contracts. Gains and losses reclassified from Accumulated other comprehensive income (loss) for the effective and ineffective portions of the hedge as well as any amounts excluded from effectiveness testing are recorded in Cost of sales. At July 2, 2016, the notional value of purchased option contracts was $109.5 million maturing on various dates through 2016. As of January 2, 2016, the notional value of purchased option contracts was $197.4 million, maturing on various dates through 2016.

FAIR VALUE HEDGES

Interest Rate Risk: In an effort to optimize the mix of fixed versus floating rate debt in the Company’s capital structure, the Company enters into interest rate swaps. In previous years, the Company entered into interest rate swaps on the first five years of the Company's $400 million 5.75% notes due 2053 and interest rate swaps with notional values which equaled the Company's $400 million 3.40% notes due 2021 and the Company's $150 million 7.05% notes due 2028. These interest rate swaps effectively converted the Company's fixed rate debt to floating rate debt based on LIBOR, thereby hedging the fluctuation in fair value resulting from changes in interest rates. In the second quarter of 2016, the Company terminated all of the above interest rate swaps. The terminations resulted in cash receipts of $27.0 million. This gain was deferred and will be amortized to earnings over the remaining life of the notes.

The changes in fair value of the interest rate swaps during the period were recognized in earnings as well as the offsetting changes in fair value of the underlying notes. There were no open contracts as of July 2, 2016. The notional value of open contracts was $950.0 million as of January 2, 2016. A summary of the fair value adjustments relating to these swaps is as follows (in millions):



	Second Quarter 2016					Year-to-Date 2016
Income Statement Classification	Gain/(Loss) on Swaps*			Gain /(Loss) on Borrowings		Gain/(Loss) on Swaps*			Gain /(Loss) on Borrowings
Interest Expense	$	(28.6	)	$	29.0	$	(3.3	)	$	3.8



	Second Quarter 2015					Year-to-Date 2015
Income Statement Classification	Gain/(Loss) on Swaps*			Gain /(Loss) on Borrowings		Gain/(Loss) on Swaps*			Gain /(Loss) on Borrowings
Interest Expense	$	(18.6	)	$	18.3	$	(1.4	)	$	1.5

*Includes ineffective portion and amount excluded from effectiveness testing.

In addition to the fair value adjustments in the table above, the net swap accruals for each period and amortization of the gains on terminated swaps are also reported as a reduction of interest expense and totaled $2.3 million and $5.3 million for the three and six months ended July 2, 2016, respectively, and $3.6 million and $7.4 million for the three and six months ended July 4, 2015, respectively. Interest expense on the underlying debt was $8.1 million and $19.9 million for the three and six months ended July 2, 2016, respectively, and $11.8 million and $23.7 million for the three and six months ended July 4, 2015, respectively.

NET INVESTMENT HEDGES

Foreign Exchange Contracts: The Company utilizes net investment hedges to offset the translation adjustment arising from re-measurement of its investment in the assets and liabilities of its foreign subsidiaries. The total after-tax amounts in Accumulated other comprehensive loss were gains of $35.5 million and $11.8 million at July 2, 2016 and January 2, 2016, respectively. As of July 2, 2016, the Company had foreign exchange forward contracts maturing on various dates through 2017 with notional values totaling $1.4 billion outstanding hedging a portion of its British pound sterling, Mexican peso, Swedish krona, Euro and Canadian dollar denominated net investments and a cross currency swap with a notional value totaling $250.0 million maturing in 2023 hedging a portion of its Japanese yen denominated net investment. As of January 2, 2016, the Company had foreign exchange contracts maturing on various dates through 2016 with notional values totaling $1.9 billion outstanding hedging a portion of its British pound sterling, Mexican peso, Swedish krona, Japanese yen, Euro and Canadian dollar denominated net investments. For the six months ended July 2, 2016 and July 4, 2015, maturing foreign exchange contracts resulted in net cash receipts of $5.5 million and $63.9 million, respectively. Gains and losses on net investment hedges remain in Accumulated other comprehensive income (loss) until disposal of the underlying assets.

The pre-tax gain or loss from fair value changes recorded in Accumulated other comprehensive loss was as follows (in millions):



	Second Quarter 2016						Year-to-Date 2016
Income Statement Classification	Amount Recorded in OCI Gain (Loss)		Effective Portion Recorded in Income Statement		Ineffective Portion* Recorded in Income Statement		Amount Recorded in OCI Gain (Loss)		Effective Portion Recorded in Income Statement		Ineffective Portion* Recorded in Income Statement
Other, net	$	35.2	$	—	$	—	$	37.8	$	—	$	—



	Second Quarter 2015							Year-to-Date 2015
Income Statement Classification	Amount Recorded in OCI Gain (Loss)			Effective Portion Recorded in Income Statement		Ineffective Portion* Recorded in Income Statement		Amount Recorded in OCI Gain (Loss)			Effective Portion Recorded in Income Statement		Ineffective Portion* Recorded in Income Statement
Other, net	$	(39.4	)	$	—	$	—	$	(2.5	)	$	—	$	—

*Includes ineffective portion and amount excluded from effectiveness testing.

UNDESIGNATED HEDGES

Foreign Exchange Contracts: Currency swaps and foreign exchange forward contracts are used to reduce risks arising from the change in fair value of certain foreign currency denominated assets and liabilities (such as affiliate loans, payables and receivables). The objective of these practices is to minimize the impact of foreign currency fluctuations on operating results. The total notional amount of the forward contracts outstanding at July 2, 2016 was $2.3 billion, maturing on various dates through 2017. The total notional amount of the forward contracts outstanding at January 2, 2016 was $2.0 billion, maturing at various dates in 2016. The income statement impacts related to derivatives not designated as hedging instruments for the three and six months ended July 2, 2016 and July 4, 2015 are as follows (in millions):



Derivatives Not Designated as Hedging Instruments under ASC 815	Income Statement Classification	Second Quarter 2016 Amount of Gain (Loss) Recorded in Income on Derivative			Year-to-Date 2016 Amount of Gain (Loss) Recorded in Income on Derivative
Foreign Exchange Contracts	Other, net	$	(31.0	)	$	(37.0	)



Derivatives Not Designated as Hedging Instruments under ASC 815	Income Statement Classification	Second Quarter 2015 Amount of Gain (Loss) Recorded in Income on Derivative		Year-to-Date 2015 Amount of Gain (Loss) Recorded in Income on Derivative
Foreign Exchange Contracts	Other, net	$	50.1	$	20.7