
9.	DERIVATIVES

Our business and financial results are affected by fluctuations in world financial markets, including interest rates and currency exchange rates. Our hedging policy has been developed to manage these risks to an acceptable level based on management’s judgment of the appropriate trade-off between risk, opportunity and cost. We do not hold financial instruments for trading or speculative purposes.

On January 1, 2018, we early adopted new accounting guidance under Accounting Standards Update (ASU) 2017-12 - Targeted Improvements for Hedging Activities (Topic 815). ASU 2017-12 is intended to better align the risk management activities of a company with the company's financial reporting for hedging relationships. This guidance expands and refines several aspects of hedge accounting. The most applicable changes to AAM as a result of the new guidance are as follows: 1) the concept of risk component hedging is introduced in ASU 2017-12, which could allow us to hedge contractually specified components in a contract; 2) the guidance now allows entities to utilize a 31-day period in assessing whether the critical terms of a forecasted transaction match the maturity of the hedging derivative, which could allow for expanded use of hedging instruments for certain sales and purchases; and 3) we may now qualitatively assess hedge effectiveness on a quarterly basis when the facts and circumstances related to the hedging relationship have not changed significantly. The early adoption of this guidance did not have any impact on the measurement of our existing hedging relationships.

Currency derivative contracts From time to time, we use foreign currency forward and option contracts to reduce the effects of fluctuations in exchange rates relating to the Mexican Peso, Euro, Brazilian Real, British Pound Sterling, Thai Baht, Swedish Krona, Chinese Yuan, Polish Zloty and Indian Rupee. As of September 30, 2018, we have currency forward contracts outstanding with a notional amount of $199.2 million that hedge our exposure to changes in foreign currency exchange rates for certain payroll expenses into the second quarter of 2021 and other items into the first quarter of 2019.

Variable-to-fixed interest rate swap In 2017, we entered into a variable-to-fixed interest rate swap to reduce the variability of cash flows associated with interest payments on our variable rate debt. In the second quarter of 2018, we discontinued this variable-to-fixed interest rate swap, which was in an asset position of $5.6 million on the date that it was discontinued.

Also in the second quarter of 2018, we entered into a new variable-to-fixed interest rate swap to reduce the variability of cash flows associated with interest payments on our variable rate debt. We have the following notional amounts hedged in relation to our variable-to-fixed interest rate swap: $900.0 million through May 2019, $750.0 million through May 2020, $500.0 million through May 2021, $400.0 million through May 2022 and $400.0 million through May 2023.

The following table summarizes the reclassification of derivative gains and losses into net income from accumulated other comprehensive income (loss) for those derivative instruments designated as cash flow hedges under ASC 815 - Derivatives and Hedging:



	Location	Gain (Loss) Reclassified During												Total of Financial		Gain Expected
	of Gain (Loss)	Three Months Ended						Nine Months Ended						Statement		to be Reclassified
	Reclassified into	September 30,						September 30,						Line Item		During the
	Net Income	2018			2017			2018			2017			2018		Next 12 Months
		(in millions)

Currency forward contracts	Cost of Goods Sold	$	(0.9	)	$	(0.7	)	$	(3.7	)	$	(4.6	)	$	4,661.2	$	2.9
Variable-to-fixed interest rate swap	Interest Expense	0.8			—			2.1			—			162.5		4.3

See Note 14 - Reclassifications Out of Accumulated Other Comprehensive Income (Loss) (AOCI) for amounts recognized in other comprehensive income (loss) during the three and nine months ended September 30, 2018 and 2017.

The following table summarizes the amount and location of gains and losses recognized in the Condensed Consolidated Statements of Income for those derivative instruments not designated as hedging instruments under ASC 815:



		Gain (Loss) Recognized During									Total of Financial
	Location of Gain (Loss)	Three Months Ended					Nine Months Ended				Statement Line
	Recognized in	September 30,					September 30,				Item
	Net Income	2018			2017		2018		2017		2018
		(in millions)

Currency forward contracts	Cost of Goods Sold	$	2.3		$	0.4	$	2.8	$	6.1	$	4,661.2
Currency forward contracts	Other Income (Expense), net	(0.5		)	—		1.3		—		(4.6		)
Currency option contracts	Cost of Goods Sold	—			0.3		—		1.4		4,661.2