FINANCIAL INSTRUMENTS

In the first quarter of 2018, the Company elected to early adopt ASU 2017-12, Derivatives And Hedging (Topic 815): Targeted Improvements to Accounting for Hedge Activities, which amends the hedge accounting recognition and presentation requirements of ASC 815. ASU 2017-12 requires the presentation and disclosure requirements to be applied prospectively and as a result, certain disclosures for the three and six month periods ending July 1, 2017 conform to the presentation and disclosure requirements prior to the adoption.

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.

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. Financial instruments are not utilized for speculative purposes.

A summary of the fair values of the Company’s derivatives recorded in the Condensed Consolidated Balance Sheets at June 30, 2018 and December 30, 2017 is as follows:



(Millions of Dollars)	Balance Sheet Classification	June 30, 2018		December 30, 2017		Balance Sheet Classification	June 30, 2018		December 30, 2017
Derivatives designated as hedging instruments:
Interest Rate Contracts Cash Flow	Other current assets	$	—	$	—	Accrued expenses	$	33.9	$	55.7
Foreign Exchange Contracts Cash Flow	Other current assets	7.3		4.1		Accrued expenses	5.4		33.4
	LT other assets	1.8		—		LT other liabilities	1.0		5.2
Net Investment Hedge	Other current assets	10.2		6.6		Accrued expenses	1.5		7.0
	LT other assets	—		—		LT other liabilities	15.8		5.8
Non-derivative designated as hedging instrument:
Net Investment Hedge		—		—		Short-term borrowings	924.5		—
Total designated as hedging		$	19.3	$	10.7		$	982.1	$	107.1
Derivatives not designated as hedging instruments:
Foreign Exchange Contracts	Other current assets	$	17.6	$	7.3	Accrued expenses	$	21.3	$	6.9
Total		$	36.9	$	18.0		$	1,003.4	$	114.0

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 M, 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 June 30, 2018 and July 1, 2017, cash flows related to derivatives, including those that are separately discussed below, resulted in net cash received of $23.5 million and $22.8 million, respectively.

CASH FLOW HEDGES

There were after-tax mark-to-market losses of $57.3 million and $112.6 million as of June 30, 2018 and December 30, 2017, respectively, reported for cash flow hedge effectiveness in Accumulated other comprehensive loss. An after-tax loss of $29.8 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 of derivatives designated as cash flow hedges in Accumulated other comprehensive loss for active derivatives during the periods in which the underlying hedged transactions affected earnings for the three and six months ended June 30, 2018 and July 1, 2017:



	Second Quarter 2018
(Millions of dollars)	Gain (Loss) Recorded in OCI		Classification of Gain (Loss) Reclassified from OCI to Income	Gain (Loss) Reclassified from OCI to Income			Gain (Loss) Recognized in Income on Amounts Excluded from Effectiveness Testing
Interest Rate Contracts	$	3.8	Interest expense	$	—		$	—
Foreign Exchange Contracts	$	29.7	Cost of sales	$	(9.2	)	$	—



	Year-to-Date 2018
(Millions of dollars)	Gain (Loss) Recorded in OCI		Classification of Gain (Loss) Reclassified from OCI to Income	Gain (Loss) Reclassified from OCI to Income			Gain (Loss) Recognized in Income on Amounts Excluded from Effectiveness Testing
Interest Rate Contracts	$	21.8	Interest expense	$	—		$	—
Foreign Exchange Contracts	$	23.0	Cost of sales	$	(12.0	)	$	—



	Second Quarter 2017
(Millions of dollars)	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	$	(11.0	)	Interest expense	$	—	$	—
Foreign Exchange Contracts	$	(29.9	)	Cost of sales	$	5.2	$	—



	Year-to-Date 2017
(Millions of dollars)	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	$	(7.2	)	Interest expense	$	—	$	—
Foreign Exchange Contracts	$	(38.6	)	Cost of sales	$	9.7	$	—

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

A summary of the pre-tax effect of cash flow hedge accounting on the Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2018 is as follows:



	Second Quarter 2018						Year-to-Date 2018
(Millions of dollars)	Cost of Sales			Interest Expense			Cost of Sales			Interest Expense
Total amount in the Consolidated Statements of Operations and Comprehensive Income in which the effects of the cash flow hedges are recorded	$	2,356.5		$	69.0		$	4,400.1		$	132.2
Gain (loss) on cash flow hedging relationships:
Foreign Exchange Contracts:
Hedged Items	$	9.2		$	—		$	12.0		$	—
Gain (loss) reclassified from OCI into Income	$	(9.2	)	$	—		$	(12.0	)	$	—
Interest Rate Swap Agreements:
Gain (loss) reclassified from OCI into Income ¹	$	—		$	(3.8	)	$	—		$	(7.6	)

¹Inclusive of the gain/loss amortization on terminated derivative financial instruments.

For the three and six months ended July 1, 2017, the hedged items’ impact to the Consolidated Statements of Operations and Comprehensive Income was a loss of $5.2 million and $9.7 million, respectively in Cost of sales. There was no impact related to the interest rate contracts' hedged items for all periods presented.

An after-tax loss of $7.1 million and an after-tax gain of $1.0 million was reclassified from Accumulated other comprehensive loss into earnings (inclusive of the gain/loss amortization on terminated derivative instruments) for the three months ended June 30, 2018 and July 1, 2017, respectively. An after-tax loss of $11.7 million and an after-tax gain of $1.4 million was reclassified from Accumulated other comprehensive loss into earnings (inclusive of the gain/loss amortization on terminated derivative instruments) for the six months ended June 30, 2018 and July 1, 2017, respectively, 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 June 30, 2018 and December 30, 2017, the Company had forward starting interest rate swaps on $400 million of future debt issuances 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 loss and will be subsequently reclassified into earnings as interest expense as the future interest expense on debt is recognized in earnings.

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 functional currencies different than their own, 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 loss are recorded in Cost of sales as the hedged item affects earnings. There are no components excluded from the assessment of effectiveness for these contracts. At June 30, 2018 and December 30, 2017, the notional value of forward currency contracts outstanding was $264.1 million and $559.9 million, respectively, maturing on various dates through 2018.

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 loss are recorded in Cost of sales as the hedged item affects earnings. There are no components excluded from the assessment of effectiveness for these contracts. As of June 30, 2018 and December 30, 2017, the notional value of purchased option contracts was $375.5 million and $400.0 million, respectively, maturing on various dates through 2019.

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 prior years, the Company entered into interest rate swaps related to certain of its notes payable which were subsequently terminated. Amortization of the gain/loss on previously terminated swaps is reported as a reduction of interest expense. Prior to termination, the changes in the fair value of the swaps and the offsetting changes in fair value related to the underlying notes were recognized in earnings. As of June 30, 2018 and December 30, 2017, the Company did not have any active fair value interest rate swaps.

A summary of the pre-tax effect of fair value hedge accounting on the Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2018 is as follows:



(Millions of dollars)	Second Quarter 2018 Interest Expense		Year-to-Date 2018 Interest Expense
Total amount in the Consolidated Statements of Operations and Comprehensive Income in which the effects of the fair value hedges are recorded	$	69.0	$	132.2
Amortization of gain/loss on terminated swaps	$	0.8	$	1.6

Amortization of the gain/loss on terminated swaps of $0.8 million and $1.6 million is reported as a reduction of interest expense for the three and six months ended July 1, 2017, respectively.

A summary of the amounts recorded on the balance sheet related to cumulative basis adjustments for fair value hedges for the six months ended June 30, 2018 is as follows:



	Year-to-Date 2018
(Millions of dollars)	Carrying Amount of Hedged Liability		Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Liability
Current Maturities of Long-Term Debt	$	—	Terminated Swaps	$	3.2
Long-Term Debt	$	—	Terminated Swaps	$	(8.4	)

NET INVESTMENT HEDGES

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 a gain of $46.8 million and $3.4 million at June 30, 2018 and December 30, 2017, respectively.

As of June 30, 2018, the Company had foreign exchange forward contracts maturing on various dates in 2018 with notional values totaling $701.4 million outstanding hedging a portion of its British pound sterling, Swedish krona, Euro and Canadian dollar denominated net investments; 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; an option contract with a notional value totaling $36.2 million maturing in 2018 hedging a portion of its Mexican peso denominated net investment; and Euro denominated commercial paper with a value of $924.5 million maturing in 2018 hedging a portion of its Euro denominated net investments. As of December 30, 2017, the Company had foreign exchange contracts maturing on various dates through 2018 with notional values totaling $751.2 million 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.

Maturing foreign exchange contracts resulted in net cash received of $20.3 million and net cash paid of $3.7 million for the six months ended June 30, 2018 and July 1, 2017, respectively.

Gains and losses on net investment hedges remain in Accumulated other comprehensive income (loss) until disposal of the underlying assets. Upon adoption of ASU 2017-12, gains and losses representing components excluded from the assessment of effectiveness are recognized in earnings in Other, net on a straight-line basis over the term of the hedge. Prior to the adoption of ASU 2017-12, no components were excluded from the assessment of effectiveness. Refer to Note B, New Accounting Standards, for further discussion.

The pre-tax gain or loss from fair value changes for the three and six ended June 30, 2018 and July 1, 2017 was as follows:



	Second Quarter 2018
(Millions of Dollars)	Total Gain (Loss) Recorded in OCI		Excluded Component Recorded in OCI		Income Statement Classification	Total Gain (Loss) Reclassified from OCI to Income		Excluded Component Amortized from OCI to Income
Forward Contracts	$	48.7	$	2.3	Other, net	$	2.3	$	2.3
Cross Currency Swap	$	1.4	$	1.4	Other, net	$	1.7	$	1.7
Option Contracts	$	2.6	$	—	Other, net	$	—	$	—
Non-derivative designated as Net Investment Hedge	$	51.5	$	—	Other, net	$	—	$	—



	Year-to-Date 2018
(Millions of Dollars)	Total Gain (Loss) Recorded in OCI			Excluded Component Recorded in OCI		Income Statement Classification	Total Gain (Loss) Reclassified from OCI to Income		Excluded Component Amortized from OCI to Income
Forward Contracts	$	22.2		$	6.2	Other, net	$	4.1	$	4.1
Cross Currency Swap	$	2.9		$	8.3	Other, net	$	3.4	$	3.4
Option Contracts	$	(0.9	)	$	—	Other, net	$	—	$	—
Non-derivative designated as Net Investment Hedge	$	38.9		$	—	Other, net	$	—	$	—



	Second Quarter 2017							Year-to-Date 2017
(Millions of Dollars)	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	$	(73.3	)	$	—	$	—	$	(89.0	)	$	—	$	—

*Includes ineffective portion and amount excluded from effectiveness testing.

UNDESIGNATED HEDGES

Foreign Exchange Contracts: 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 is to minimize the impact of foreign currency fluctuations on operating results. The total notional amount of the forward contracts outstanding at June 30, 2018 was $1.4 billion, maturing on various dates through 2018. The total notional amount of the forward contracts outstanding at December 30, 2017 was $1.0 billion, maturing on various dates through 2018. The impacts of changes in the fair value related to derivatives not designated as hedging instruments under ASC 815 for the three and six months ended June 30, 2018 and July 1, 2017 are as follows:



(Millions of Dollars)	Income Statement Classification	Second Quarter 2018 Amount of Gain (Loss) Recorded in Income on Derivative			Year-to-Date 2018 Amount of Gain (Loss) Recorded in Income on Derivative
Foreign Exchange Contracts	Other, net	$	(2.2	)	$	14.9



(Millions of Dollars)	Income Statement Classification	Second Quarter 2017 Amount of Gain (Loss) Recorded in Income on Derivative		Year-to-Date 2017 Amount of Gain (Loss) Recorded in Income on Derivative
Foreign Exchange Contracts	Other, net	$	1.1	$	29.7