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FINANCIAL INSTRUMENTS AND DERIVATIVES | 9 Months Ended
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Sep. 30, 2019
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
FINANCIAL INSTRUMENTS AND DERIVATIVES | FINANCIAL INSTRUMENTS AND DERIVATIVES Derivative Instruments and Hedging Activities The Company’s activities expose it to a variety of market risks, which primarily include the risks related to the effects of changes in foreign currency exchange rates and interest rates. These financial exposures are monitored and managed by the Company as part of its overall risk management program. The objective of this risk management program is to reduce the volatility that these market risks may have on the Company’s operating results and equity. The Company employs derivative financial instruments to hedge certain anticipated transactions, firm commitments, or assets and liabilities denominated in foreign currencies. Additionally, the Company has utilized interest rate swaps to convert variable rate debt to fixed rate debt. Derivative Instruments Designated as Hedging Cash Flow Hedges The following summarizes the notional amounts of cash flow hedges by derivative instrument type at September 30, 2019 and the notional amounts expected to mature during the next 12 months, with a discussion of the various cash flow hedges by derivative instrument type following the table:
(in millions) |  | Aggregate Notional Amount |  | Aggregate Notional Amount Maturing within 12 Months
Foreign exchange forward contracts |  | $ | 323.3 |  |  | $ | 240.5 |
Interest rate swaps |  | 150.0 |  |  | — |
Total derivative instruments designated as cash flow hedges |  | $ | 473.3 |  |  | $ | 240.5 |
Foreign Exchange Risk Management The Company uses a program to hedge select anticipated foreign currency cash flows to reduce volatility in both cash flows and reported earnings of the consolidated Company. The Company accounts for the designated foreign exchange forward contracts as cash flow hedges. As a result, the Company records the fair value of the contracts primarily through AOCI based on the assessed effectiveness of the foreign exchange forward contracts. The Company measures the effectiveness of cash flow hedges of anticipated transactions on a spot-to-spot basis rather than on a forward-to-forward basis. Accordingly, the spot-to-spot change in the derivative fair value will be deferred in AOCI and released and recorded in the Consolidated Statements of Operations in the same period that the hedged transaction is recorded. The time value component of the fair value of the derivative is reported on a straight line basis in Cost of products sold in the Consolidated Statements of Operations in the period which it is applicable. Any cash flows associated with these instruments are included in operating activities in the Consolidated Statements of Cash Flows. The Company hedges various currencies, with the most significant activity occurring in euros, Swedish kronor, Canadian dollars, British pounds, Swiss francs and Australian dollars. Interest Rate Risk Management On March 11, 2019, the Company entered into a Treasury Rate Lock ("T-Lock") transaction to hedge the base interest rate variability exposure on a planned $150.0 million ten year debt issuance in 2021. The T-Lock is designated as a cash flow hedge of interest rate risk. The T-Lock will be cash settled when the debt is issued, with the fair value of the T-Lock recognized as an asset or liability with an offsetting position in AOCI. As interest is accrued on this debt in the future, a pro-rata amount from AOCI will be released and recorded in Other expense (income) in the Consolidated Statements of Operations. The Company enters into interest rate swap contracts infrequently as they are only used to manage interest rate risk on long-term debt instruments and not for speculative purposes. Any cash flows associated with these instruments are included in operating activities in the Consolidated Statements of Cash Flows. Cash Flow Hedge Activity The following summarizes the amount of gains and losses recorded in AOCI in the Consolidated Balance Sheets, interest expense and cost of products sold in the Company's Consolidated Statements of Operations related to the cash flow hedges for the nine months ended September 30, 2019:
|  | September 30, 2019 |  |  |  |  |  |
|  | Gain (Loss) in AOCI |  | Consolidated Statements of Operations Location |  | Effective Portion Reclassified from AOCI into Income (Expense) |  | Ineffective Portion Recognized in Income (Expense)
(in millions) |  |  |  |  |  |  |  |
Effective Portion: |  |  |  |  |  |  |  |
Interest rate swaps |  | $ | (14.6) |  |  | Interest expense |  | $ | (1.8) |  |  | $ | — |
Foreign exchange forward contracts |  | (4.0) |  |  | Cost of products sold |  | 0.4 |  |  | — |
Ineffective Portion: |  |  |  |  |  |  |  |
Foreign exchange forward contracts |  | — |  |  | Cost of products sold |  | — |  |  | 1.5 |
Total in cash flow hedging |  | $ | (18.6) |  |  |  |  | $ | (1.4) |  |  | $ | 1.5 |
Gains and losses recorded in AOCI in the Consolidated Balance Sheets and Cost of products sold in the Company’s Consolidated Statements of Operations related to all cash flow hedges for the three months ended September 30, 2019 and the three months and nine months ended September 30, 2018 were insignificant. For the rollforward of derivative instruments designated as cash flow hedges in AOCI see Note 3, Comprehensive Income (Loss). Hedges of Net Investments in Foreign Operations The Company has significant investments in foreign subsidiaries the most significant of which are denominated in euros, Swiss francs, Japanese yen and Swedish kronor. The net assets of these subsidiaries are exposed to volatility in currency exchange rates. The Company employs both derivative and non-derivative financial instruments to hedge a portion of this exposure. The derivative instruments consist of foreign exchange forward contracts and cross currency basis swaps. The non-derivative instruments consist of foreign currency denominated debt held at the parent company level. Translation gains and losses related to the net assets of the foreign subsidiaries are offset by gains and losses in derivative and non-derivative financial instruments; which are designated as hedges of net investments and are included in AOCI. The time value component of the fair value of the derivative is reported on a straight line basis in Other expense (income), net in the Consolidated Statements of Operations in the period which it is applicable Any cash flows associated with these instruments are included in investing activities in the Consolidated Statements of Cash Flows except for derivative instruments that include an other-than-insignificant financing element, for which all cash flows are classified as financing activities in the Consolidated Statements of Cash Flows. During the nine months ended September 30, 2019, the Company early terminated its existing 245.6 million euro cross currency basis swap and entered into a new 263.4 million euro cross currency basis swap maturing in August 2021. The cross currency basis swap is designated as a hedge of net investments. This contract effectively converts the $295.7 million bond coupon from 4.1% to 1.2%, which will result in a net reduction of interest expense through maturity in 2021. The early termination resulted in a cash receipt of $17.4 million. The following summarizes the notional amount of hedges of net investments by derivative instrument at September 30, 2019 and the notional amounts expected to mature during the next 12 months:
(in millions) |  | Aggregate Notional Amount |  | Aggregate Notional Amount Maturing within 12 Months
Foreign exchange forward contracts |  | $ | 753.0 |  |  | $ | 251.0 |
Cross currency basis swaps |  | 287.1 |  |  | — |
Total for instruments designated as hedges of net investment |  | $ | 1,040.1 |  |  | $ | 251.0 |
The following summarizes the amount of gains and losses recorded in AOCI in the Consolidated Balance Sheets and Other expense (income), net in the Company's Consolidated Statements of Operations related to the hedges of net investments for the three months ended September 30, 2019:
|  | September 30, 2019 |  |  |  |
|  | Gain (Loss) in AOCI |  | Consolidated Statements of Operations Location |  | Recognized in Income (Expense)
(in millions) |  |  |  |  |  |
Effective Portion: |  |  |  |  |  |
Cross currency basis swaps |  | $ | 12.4 |  |  | Interest Expense |  | $ | 2.2 |
Foreign exchange forward contracts |  | 25.5 |  |  | Other expense (income), net |  | 6.1 |
Total for net investment hedging |  | $ | 37.9 |  |  |  |  | $ | 8.3 |
Gains (losses) recorded in AOCI on the Consolidated Balance Sheets and Other expense (income), net on the Company's Consolidated Statements of Operations related to the hedges of net investments for the three months ended September 30, 2018 were insignificant.
The following summarizes the amount of gains and losses recorded in AOCI in the Consolidated Balance Sheets and Other expense (income), net in the Company's Consolidated Statements of Operations related to the hedges of net investments for the nine months ended September 30, 2019 and 2018:
|  | September 30, 2019 |  |  |  |
|  | Gain (Loss) in AOCI |  | Consolidated Statements of Operations Location |  | Recognized in Income (Expense)
(in millions) |  |  |  |  |  |
Effective Portion: |  |  |  |  |  |
Cross currency basis swaps |  | $ | 13.1 |  |  | Interest expense |  | $ | 6.3 |
Foreign exchange forward contracts |  | 31.7 |  |  | Other expense (income), net |  | 15.7 |
Total for net investment hedging |  | $ | 44.8 |  |  |  |  | $ | 22.0 |
|  | September 30, 2018 |  |  |  |
|  | Gain (Loss) in AOCI |  | Consolidated Statements of Operations Location |  | Recognized in Income (Expense)
(in millions) |  |  |  |  |  |
Effective Portion: |  |  |  |  |  |
Cross currency basis swaps |  | $ | 11.0 |  |  | Interest expense |  | $ | 5.5 |
|  |  |  | Other expense (income), net |  | (7.1) |
Foreign exchange forward contracts |  | 17.9 |  |  | Other expense (income), net |  | 9.9 |
Total for net investment hedging |  | $ | 28.9 |  |  |  |  | $ | 8.3 |
Fair Value Hedges Foreign Exchange Risk Management The Company has an intercompany loan denominated in Swedish kronor that is exposed to volatility in currency exchange rates. The Company employs derivative financial instruments to hedge this exposure. The Company accounts for these designated foreign exchange forward contracts as fair value hedges. The Company measures the effectiveness of fair value hedges of anticipated transactions on a spot-to-spot basis rather than on a forward-to-forward basis. Accordingly, the spot-to-spot change in the derivative fair value will be recorded in the Consolidated Statements of Operations. Any cash flows associated with these instruments are included in investing activities in the Consolidated Statements of Cash Flows. The following summarizes the notional amounts of fair value hedges by derivative instrument type at September 30, 2019 and the notional amounts expected to mature during the next 12 months:
(in millions) |  | Aggregate Notional Amount |  | Aggregate Notional Amount Maturing within 12 Months
Foreign exchange forward contracts |  | $ | 104.7 |  |  | $ | 36.6 |
Total derivative instruments as fair value hedges |  | $ | 104.7 |  |  | $ | 36.6 |
Gains (losses) recorded in AOCI on the Consolidated Balance Sheets and Other expense (income), net on the Company's Consolidated Statements of Operations related to the fair value hedges for the three and nine months ended September 30, 2019 were insignificant.
Derivative Instruments Not Designated as Hedges The Company enters into derivative instruments with the intent to partially mitigate the foreign exchange revaluation risk associated with recorded assets and liabilities that are denominated in a non-functional currency. The gains and losses on these derivative transactions offset the gains and losses generated by the revaluation of the underlying non-functional currency balances and are recorded in Other expense (income), net in the Consolidated Statements of Operations. The Company primarily uses foreign exchange forward contracts to hedge these risks. Any cash flows associated with the foreign exchange forward contracts and interest rate swaps not designated as hedges are included in cash from operating activities in the Consolidated Statements of Cash Flows. The following summarizes the aggregate notional amounts of the Company’s economic hedges not designated as hedges by derivative instrument types at September 30, 2019 and the notional amounts expected to mature during the next 12 months:
(in millions) |  | Aggregate Notional Amount |  | Aggregate Notional Amount Maturing within 12 Months
Foreign exchange forward contracts |  | $ | 210.8 |  |  | $ | 210.8 |
Total for instruments not designated as hedges |  | $ | 210.8 |  |  | $ | 210.8 |
Gains and losses recorded in the Company’s Consolidated Statements of Operations related to the economic hedges not designated as hedging for the three and nine months ended September 30, 2019 and 2018 were insignificant. Balance Sheet Offsetting Substantially all of the Company’s derivative contracts are subject to netting arrangements, whereby the right to offset occurs in the event of default or termination in accordance with the terms of the arrangements with the counterparty. While these contracts contain the enforceable right to offset through netting arrangements with the same counterparty, the Company elects to present them on a gross basis in the Consolidated Balance Sheets. Offsetting of financial liabilities under netting arrangements at September 30, 2019 were insignificant. Offsetting of financial assets under netting arrangements at September 30, 2019 were as follows:
|  |  |  |  |  |  |  | Gross Amounts Not Offset in the Consolidated Balance Sheets |  |  |  |
(in millions) |  | Gross Amounts Recognized |  | Gross Amount Offset in the Consolidated Balance Sheets |  | Net Amounts Presented in the Consolidated Balance Sheets |  | Financial Instruments |  | Cash Collateral Received/Pledged |  | Net Amount
Assets |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange forward contracts |  | $ | 70.5 |  |  | $ | — |  |  | $ | 70.5 |  |  | $ | (11.7) |  |  | $ | — |  |  | $ | 58.8 |
Cross currency basis swaps |  | 10.9 |  |  | — |  |  | 10.9 |  |  | (2.1) |  |  | — |  |  | 8.8 |
Total Assets |  | $ | 81.4 |  |  | $ | — |  |  | $ | 81.4 |  |  | $ | (13.8) |  |  | $ | — |  |  | $ | 67.6 |
Offsetting of financial liabilities under netting arrangements at December 31, 2018 were insignificant. Offsetting of financial assets under netting arrangements at December 31, 2018 were as follows:
|  |  |  |  |  |  |  | Gross Amounts Not Offset in the Consolidated Balance Sheets |  |  |  |
(in millions) |  | Gross Amounts Recognized |  | Gross Amount Offset in the Consolidated Balance Sheets |  | Net Amounts Presented in the Consolidated Balance Sheets |  | Financial Instruments |  | Cash Collateral Received/Pledged |  | Net Amount
Assets |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange forward contracts |  | $ | 33.7 |  |  | $ | — |  |  | $ | 33.7 |  |  | $ | (1.8) |  |  | $ | — |  |  | $ | 31.9 |
Cross currency basis swaps |  | 11.6 |  |  | — |  |  | 11.6 |  |  | (1.6) |  |  | — |  |  | 10.0 |
Total Assets |  | $ | 45.3 |  |  | $ | — |  |  | $ | 45.3 |  |  | $ | (3.4) |  |  | $ | — |  |  | $ | 41.9 |

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
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