6. Financial Instruments

Foreign Exchange Derivative Instruments

The company enters into readily marketable forward and option contracts with financial institutions to help reduce its exposure to foreign currency exchange rate fluctuations. These contracts limit volatility because gains and losses associated with foreign currency exchange rate movements are generally offset by movements in the underlying hedged item. The notional value of the company’s forward currency and option currency contracts was $191.1 million and $148.9 million at December 31, 2014 and 2013, respectively.

Interest Rate Derivative Instruments

The company may use interest rate swap contracts to manage its net exposure to interest rates and to help reduce its overall cost of borrowing on certain long-term debt. The notional value of the company’s outstanding interest rate swap contract is $250 million that effectively converts its 2.875% fixed-rate notes due 2016 to a floating-rate instrument.

On December 12, 2014, the company entered into a forward starting interest rate swap contract to manage its exposure to interest rate volatility in anticipation of issuing fixed-rate debt. The company’s forward swap contract has a notional value of $250 million and a mandatory termination date of May 2016.

The location and fair value of derivative instruments that are designated as hedging instruments recognized in the consolidated balance sheets at December 31, are as follows:


	Balance Sheet Location	Fair Value of Derivatives
Derivatives Designated as Hedging Instruments	Balance Sheet Location	2014		2013
(dollars in millions)
Forward currency contracts	Other current assets	$	1.9	$	1.2
Option currency contracts	Other current assets		9.3		1.3
Interest rate swap contracts	Other assets		4.9		8.9

		$	16.1	$	11.4

Forward currency contracts	Accrued expenses	$	6.6	$	0.5

		$	6.6	$	0.5

The location and amounts of gains and losses on derivative instruments designated as cash flow hedges and the impact on shareholders’ investment for the years ended December 31, are as follows:


	Gain/(Loss) Recognized in Other Comprehensive Income (Loss)									Location of Gain/(Loss) Reclassified from Accumulated Other Comprehensive Loss into Income	Gain/(Loss) Reclassified from Accumulated Other Comprehensive Loss into Income
(dollars in millions)	2014			2013			2012				2014			2013			2012
Forward currency contracts	$	(4.6	)	$	4.2		$	4.0		Cost of goods sold	$	1.4		$	3.0		$	(1.3	)
Option currency contracts		6.8			(1.7	)		(0.5	)	Cost of goods sold		(2.0	)		(1.8	)		2.5
Interest rate swap contract		0.2			—			—		Interest expense		—			—			—

	$	2.4		$	2.5		$	3.5			$	(0.6	)	$	1.2		$	1.2

At December 31, 2014, the company had gains of approximately $0.9 million in accumulated other comprehensive loss in the consolidated balance sheet that are expected to be reclassified into earnings in 2015.

The location and amounts of gains and losses on the derivative instrument designated as a fair value hedge for the years ended December 31, are as follows:


			(Loss)/Gain Recognized on Swap								Gain/(Loss) Recognized on Long-Term Debt
(dollars in millions)	Income Statement Location		2014			2013			2012		2014		2013		2012
Interest rate swap contract		Interest expense	$	(4.3	)	$	(4.4	)	$	1.2	$	4.3	$	4.4	$	(1.2	)

Financial Instruments Measured at Fair Value on a Recurring Basis

Fair value is defined as the exit price that would be received to sell an asset or paid to transfer a liability. Fair value is a market-based measurement that is determined using assumptions that market participants would use in pricing an asset or liability. The fair value guidance establishes a three-level hierarchy which maximizes the use of observable inputs and minimizes the use of unobservable inputs used in measuring fair value. The levels within the hierarchy range from Level 1 having observable inputs to Level 3 having unobservable inputs.

The following table summarizes certain financial instrument assets measured at fair value on a recurring basis at December 31:


	2014			2013
(dollars in millions)
Forward currency contracts	$	(4.7	)	$	0.7
Option currency contracts		9.3			1.3
Interest rate swap contracts		4.9			8.9

The fair values were measured using significant other observable inputs and valued by reference to similar financial instruments, adjusted for restrictions and other terms specific to each instrument. These financial instruments are categorized as Level 2 under the fair value hierarchy.

The fair value of the liability for contingent consideration related to acquisitions was measured using significant unobservable inputs and is categorized as Level 3 under the fair value hierarchy. The change in the liability for contingent consideration is as follows:


	2014			2013
(dollars in millions)
Balance, January 1	$	95.7		$	77.1
Purchase price contingent consideration		3.0			17.2
Payments		(100.4	)		(1.0	)
Change in fair value of contingent consideration		24.8			2.4

Balance, December 31	$	23.1		$	95.7

Financial Instruments Not Measured at Fair Value

The fair value of commercial paper borrowings of $78.0 million at December 31, 2014 approximated the carrying value. There were no commercial paper borrowings outstanding at December 31, 2013.

The estimated fair value of long-term debt including the effect of the related swap contract was $1,481.7 million and $1,435.4 million at December 31, 2014 and 2013, respectively. The fair value was estimated using dealer quotes for similarly-rated debt instruments over the remaining contractual term of the company’s obligation. Long-term debt is categorized as Level 2 under the fair value hierarchy.

Concentration Risks

The company is potentially subject to concentration of credit risk through its cash equivalents and accounts receivable. The company performs periodic evaluations of the relative credit standing of its financial institutions and limits the amount of credit exposure with any one institution. Concentrations of risk with respect to trade accounts receivable are limited due to the large number of customers dispersed across many geographic areas. However, accounts receivable balances include sales to government-supported healthcare systems outside the United States. The company monitors economic conditions and evaluates accounts receivable in certain countries for potential collection risks. Economic conditions and other factors in certain countries, particularly in Spain, Italy, Greece and Portugal, have resulted in, and may continue to result in, an increase in the average length of time that it takes to collect these accounts receivable and may require the company to re-evaluate the collectability of these receivables in future periods. At December 31, 2014, the company’s accounts receivable, net of allowances, from the national healthcare systems in these countries and amounts past due greater than 365 days are as follows:


	Accounts Receivable, net		Greater Than 365 Days Past Due
(dollars in millions)
Spain	$	12.6	$	0.4
Italy		13.3		1.6
Greece		8.9		4.6
Portugal		3.0		1.0

	$	37.8	$	7.6

Sales to distributors, which supply the company’s products to many end-users, accounted for approximately 34% of the company’s net sales in 2014, and the five largest distributors combined, including the company’s Medicon joint venture, accounted for approximately 66% of distributors’ sales. One large distributor accounted for approximately 9% of the company’s net sales in each of 2014, 2013 and 2012. This distributor represented gross receivables of approximately $39.5 million and $35.8 million as of December 31, 2014 and 2013, respectively.