5. Financial Instruments

For further discussion regarding the company’s use of derivative instruments, see Note 1 of the notes to consolidated financial statements in Bard’s 2015 Annual Report on Form 10-K.

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 $321.4 million and $191.6 million at September 30, 2016 and December 31, 2015, respectively.

Interest Rate Derivative Instruments

In January 2016, the company’s outstanding interest rate swap contract was terminated concurrent with the maturity of the underlying 2.875% fixed-rate notes. The notional value of the company’s interest rate swap contract was $250 million and effectively converted these fixed-rate notes to a floating-rate instrument.

In May 2016, the company’s forward starting interest rate swap contract was settled concurrent with the issuance of 3.000% fixed-rate notes due 2026. The fair value of the forward starting interest rate swap contract at settlement recorded in accumulated other comprehensive loss was a loss of $23.3 million. This loss will be recognized as interest expense over the term of these notes. The notional value of the company’s forward swap contract was $250 million.

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


	Balance Sheet Location		Fair Value of Derivatives
Derivatives Designated as Hedging Instruments	Balance Sheet Location		September 30, 2016		December 31, 2015
(dollars in millions)
Forward currency contracts		Other current assets	$	1.3	$	2.9
Option currency contracts		Other current assets		0.2		3.8
Interest rate swap contract		Other current assets		—		0.2
Forward currency contracts		Other assets		0.3		—

			$	1.8	$	6.9

Forward currency contracts		Accrued expenses	$	11.4	$	6.2
Interest rate swap contract		Accrued expenses		—		8.0
Forward currency contracts		Other long-term liabilities		2.5		—

			$	13.9	$	14.2

The location and amounts of gains and losses on derivative instruments designated as cash flow hedges and the impact on shareholders’ investment 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
	Quarter Ended September 30,								Quarter Ended September 30,
	2016			2015					2016			2015
(dollars in millions)
Forward currency contracts	$	(3.5	)	$	(3.6	)		Cost of goods sold	$	(1.2	)	$	(1.6	)
Option currency contracts		(0.3	)		(2.4	)		Cost of goods sold		(0.8	)		4.5
Interest rate swap contract		—			(12.9	)		Interest expense		(0.5	)		—

	$	(3.8	)	$	(18.9	)			$	(2.5	)	$	2.9


	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
	Nine Months Ended September 30,								Nine Months Ended September 30,
	2016			2015					2016			2015
(dollars in millions)
Forward currency contracts	$	(15.3	)	$	(5.4	)		Cost of goods sold	$	(5.9	)	$	(1.0	)
Option currency contracts		(3.3	)		8.0			Cost of goods sold		0.2			9.0
Interest rate swap contract		(15.3	)		(10.7	)		Interest expense		(0.9	)		—

	$	(33.9	)	$	(8.1	)			$	(6.6	)	$	8.0

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 and (liabilities) measured at fair value on a recurring basis:


	September 30, 2016			December 31, 2015
(dollars in millions)
Forward currency contracts	$	(12.3	)	$	(3.3	)
Option currency contracts		0.2			3.8
Interest rate swap contracts		—			(7.8	)

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 $19.7 million and $11.2 million at September 30, 2016 and December 31, 2015, respectively. The increase in the fair value of the liability for contingent consideration was primarily related to the addition of contingent consideration due to the acquisition of Embo and was partly offset by a reduction in the probability of the achievement of other unrelated revenue-based and manufacturing-related milestones. See Note 2 of the notes to condensed consolidated financial statements. The fair value was measured using significant unobservable inputs and is categorized as Level 3 under the fair value hierarchy.

Financial Instruments Not Measured at Fair Value

The company maintains a $1 billion five-year committed syndicated bank credit facility that expires in November 2020. The credit facility supports the company’s commercial paper program and can be used for general corporate purposes. The facility includes pricing based on the company’s long-term credit ratings and includes a financial covenant that limits the amount of total debt to total capitalization. At September 30, 2016 the company was in compliance with this covenant. There were no commercial paper borrowings outstanding at September 30, 2016 or December 31, 2015.

On May 9, 2016, the company issued $500 million aggregate principal amount of 3.000% senior unsecured notes due 2026. Interest on the notes is payable semi-annually. Net proceeds from this offering were approximately $495.6 million, after deducting debt offering costs, consisting of underwriting commissions and offering expenses of $4.3 million and a debt issuance discount of $0.1 million, which were both recorded to long-term debt. The debt offering costs and debt issuance discount will be amortized over the term of the notes. Net proceeds from the issuance of the notes were used for general corporate purposes, including repayment of outstanding commercial paper.

The estimated fair value of long-term debt (including current maturities and the effect of the related interest rate swap contract for the prior year period) was approximately $1,748.7 million and $1,449.8 million at September 30, 2016 and December 31, 2015, respectively. The fair value was estimated using dealer quotes for similarly-rated debt instruments over the remaining contractual term of the company’s obligation and is categorized as Level 2 under the fair value hierarchy.

The fair value of the non-contingent future payments related to the Medicon, Inc. acquisition of $79.1 million and $66.0 million at September 30, 2016 and December 31, 2015, respectively, approximated the carrying value. At September 30, 2016 and December 31, 2015, future payments of $60.3 million and $50.3 million, respectively, were recorded to other long-term liabilities. These payments will be paid in Japanese Yen and are subject to exchange rate fluctuations. The fair value was estimated by discounting the future payments based upon the timing of such payments and is categorized as Level 2 under the fair value hierarchy.

Concentration Risk

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 September 30, 2016, the company’s accounts receivable, net of allowances, from the national healthcare systems and private sector customers in these four countries was $45.9 million, of which $4.2 million was greater than 365 days past due.