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 fiscal years 2017 and 2016 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, 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 Consolidated Balance Sheets at December 29, 2018 and December 30, 2017 follows:



(Millions of Dollars)	Balance Sheet Classification	2018		2017		Balance Sheet Classification	2018		2017
Derivatives designated as hedging instruments:
Interest Rate Contracts Cash Flow	Other current assets	$	—	$	—	Accrued expenses	$	—	$	55.7
	LT other assets	—		—		LT other liabilities	—		—
Foreign Exchange Contracts Cash Flow	Other current assets	18.1		4.1		Accrued expenses	0.6		33.4
	LT other assets	—		—		LT other liabilities	—		5.2
Net Investment Hedge	Other current assets	5.7		6.6		Accrued expenses	1.5		7.0
	LT other assets	—		—		LT other liabilities	13.8		5.8
Non-derivative designated as hedging instrument:
Net Investment Hedge		—		—		Short-term borrowings	228.9		—
Total Designated as hedging instruments		$	23.8	$	10.7		$	244.8	$	107.1
Derivatives not designated as hedging instruments:
Foreign Exchange Contracts	Other current assets	$	9.1	$	7.3	Accrued expenses	$	5.4	$	6.9
Total		$	32.9	$	18.0		$	250.2	$	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.

In 2018, 2017 and 2016, cash flows related to derivatives, including those that are separately discussed below, resulted in net cash received of $2.4 million, $2.6 million and $94.7 million, respectively.

CASH FLOW HEDGES — There were after-tax mark-to-market losses of $26.8 million and $112.6 million as of December 29, 2018 and December 30, 2017, respectively, reported for cash flow hedge effectiveness in Accumulated other comprehensive loss. An after-tax loss of $1.9 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 2018, 2017 and 2016:



2018 (Millions of Dollars)	(Loss) Gain 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	$	33.1	Interest expense	$	—		$	—
Foreign Exchange Contracts	$	35.9	Cost of sales	$	(17.9	)	$	—



2017 (Millions of Dollars)	(Loss) Gain 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	$	(8.4	)	Interest expense	$	—	$	—
Foreign Exchange Contracts	$	(66.6	)	Cost of sales	$	8.4	$	—



2016 (Millions of Dollars)	(Loss) Gain 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	$	(6.2	)	Interest expense	$	—	$	—
Foreign Exchange Contracts	$	19.3		Cost of sales	$	21.7	$	—

* 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 for 2018 is as follows:



	2018
(Millions of dollars)	Cost of Sales			Interest Expense
Total amount in the Consolidated Statements of Operations in which the effects of the cash flow hedges are recorded	$	9,131.3		$	277.9
Gain (loss) on cash flow hedging relationships:
Foreign Exchange Contracts:
Hedged Items	$	17.9		$	—
Gain (loss) reclassified from OCI into Income	$	(17.9	)	$	—
Interest Rate Swap Agreements:
Gain (loss) reclassified from OCI into Income ¹	$	—		$	(15.3	)

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

For 2017 and 2016, the hedged items’ impact to the Consolidated Statement of Operations were losses of $8.4 million and $21.7 million, respectively, in Cost of Sales which are offsetting the amounts shown above. There was no impact related to the interest rate contracts’ hedged items for any period presented.

For 2018 and 2017, an after-tax loss of $15.4 million and $4.7 million, respectively, and for 2016 an after-tax gain of $3.3 million were reclassified from Accumulated other comprehensive loss into earnings (inclusive of the gain/loss amortization on terminated derivative financial 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-rate debt proportions. As of December 29, 2018, all interest rate swaps designated as cash flow hedges matured as discussed below. As of December 30, 2017, the Company had $400 million of forward starting swaps which were executed in 2014.

In November 2018, forward starting interest rate swaps with an aggregate notional amount of $400 million fixing 10 years of interest payments ranging from 4.25%-4.85% matured. The objective of the hedges was to offset the expected variability on future payments associated with the interest rate on debt instruments. This resulted in a loss of $22.7 million, which was recorded in Accumulated other comprehensive loss and is being amortized to earnings as interest expense over future periods. The cash flows stemming from the maturity of such interest rate swaps designated as cash flow hedges are presented within other financing activities in the Consolidated Statements of Cash Flows.

In January and February 2019, the Company entered into forward starting interest rate swaps totaling $450 million to offset the expected variability on future interest payments associated with debt instruments expected to be issued in the future.

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 December 29, 2018, and December 30, 2017 the notional values of the forward currency contracts outstanding was $240.0 million and $559.9 million, respectively, maturing on various dates through 2019.

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. At December 29, 2018 and December 30, 2017, the notional value of option contracts outstanding was $370.0 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 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 2016, the Company terminated all of the above interest rate swaps and there were no open contracts as of December 29, 2018 and December 30, 2017. The terminations resulted in cash receipts of $27.0 million. This gain was deferred and is being amortized to earnings over the remaining life of the notes.

A summary of the pre-tax effect of fair value hedge accounting on the Consolidated Statements of Operations for 2018 is as follows:



(Millions of dollars)	2018 Interest Expense
Total amount in the Consolidated Statements of Operations in which the effects of the fair value hedges are recorded	$	277.9
Amortization of gain on terminated swaps	$	(3.2	)

Prior to termination of the Company's interest rate swaps discussed above, the changes in fair value of the swaps and the offsetting changes in fair value related to the underlying notes were recognized in earnings. A summary of the fair value adjustments relating to these swaps is as follows:



	2017				2016
Income Statement Classification (Millions of Dollars)	(Loss)/Gain on Swaps*		Gain /(Loss) on Borrowings		Gain/(Loss) on Swaps*			(Loss)/Gain on Borrowings
Interest expense	$	—	$	—	$	(3.3	)	$	3.8

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

Amortization of the gain on terminated swaps of $3.2 million was reported as a reduction of interest expense in 2017. In addition to the fair value adjustments in the table above, net swap accruals and amortization of the gain/loss on terminated swaps of $6.9 million was reported as a reduction of interest expense in 2016. Interest expense on the underlying debt was $19.9 million in 2016 when the hedges were active.

A summary of the amounts recorded in the Consolidated Balance Sheets related to cumulative basis adjustments for fair value hedges as of December 29, 2018 is as follows:



(Millions of dollars)	Carrying Amount of Hedged Liability¹		Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Liability
Current maturities of long-term debt	$	2.5	Terminated Swaps	$	2.1
Long-Term Debt	$	3,819.8	Terminated Swaps	$	(10.0	)

¹Represents hedged items no longer designated in qualifying fair value hedging relationships.

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 a gain of $63.3 million and $3.4 million at December 29, 2018 and December 30, 2017, respectively.

As of December 29, 2018, the Company had foreign exchange contracts that mature on various dates through 2019 with notional values totaling $262.4 million outstanding hedging a portion of its British pound sterling, Swedish krona and Euro denominated net investments; a cross currency swap with a notional value totaling $250.0 million maturing 2023 hedging a portion of its Japanese yen denominated net investment; an option contract with a notional value totaling $35.1 million maturing in 2019 hedging a portion of its Mexican peso denominated net investment; and Euro denominated commercial paper with a value of $228.9 million maturing in 2019 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 denominated net investment and a cross currency swap with a notional value totaling $250.0 million maturing 2023 hedging a portion of its Japanese yen denominated net investment.

In January 2019, the Company entered into cross currency swaps with notional values totaling $1.25 billion maturing 2020 hedging a portion of its Euro, Swedish krona and Swiss franc denominated net investments.

Maturing foreign exchange contracts resulted in net cash received of $25.7 million, cash paid of $23.3 million and cash received of $104.7 million during 2018, 2017 and 2016, respectively.

Gains and losses on net investment hedges remain in Accumulated other comprehensive 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 A, Significant Accounting Policies, for further discussion. Gains and losses after a hedge has been de-designated are recorded directly to the Consolidated Statements of Operations in Other, net.

The pre-tax gain or loss from fair value changes for 2018 was as follows:



	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	$	37.1		$	8.6	Other, net	$	8.2	$	8.2
Cross Currency Swap	$	(2.3	)	$	5.8	Other, net	$	6.8	$	6.8
Option Contracts	$	(2.0	)	$	—	Other, net	$	—	$	—
Non-derivative designated as Net Investment Hedge	$	61.8		$	—	Other, net	$	—	$	—

The pre-tax gain or loss from fair value changes for 2017 and 2016 was as follows:



	2017							2016
Income Statement Classification (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	$	(131.3	)	$	—	$	—	$	117.8	$	—	$	—

*Includes ineffective portion.

As discussed in Note H, Long-Term Debt and Financing Arrangements, the Company amended its existing $2.0 billion commercial paper program in 2017 to increase the maximum amount of notes authorized to be issued to $3.0 billion and to include Euro denominated borrowings in addition to U.S. Dollars. Euro denominated borrowings against this commercial paper program during 2018 and 2017 were designated as a Net Investment Hedge against a portion of its Euro denominated net investment. As of December 29, 2018, the Company has $228.9 million in Euro denominated borrowings outstanding against this commercial paper program. As of December 30, 2017, the Company had no borrowings outstanding against this commercial paper program.

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 December 29, 2018 was $1.0 billion maturing on various dates through 2019. The total notional amount of the forward contracts outstanding at December 30, 2017 was $1.0 billion maturing on various dates through 2018. The income statement impacts related to derivatives not designated as hedging instruments under ASC 815 for 2018, 2017 and 2016 are as follows:



(Millions of Dollars)	Income Statement Classification	2018 Amount of Gain (Loss) Recorded in Income on Derivative		2017 Amount of Gain (Loss) Recorded in Income on Derivative		2016 Amount of (Loss) Gain Recorded in Income on Derivative
Foreign Exchange Contracts	Other-net	$	17.0	$	51.5	$	(21.1	)