Derivatives

3 Months Ended

Mar. 31, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Footnote 10—Derivatives

From time to time, the Company enters into derivative transactions to hedge its exposures to interest rate, foreign currency rate and commodity price fluctuations. The Company does not enter into derivative transactions for trading purposes.

Interest Rate Contracts

The Company manages its fixed and floating rate debt mix using interest rate swaps. The Company may use fixed and floating rate swaps to alter its exposure to the impact of changing interest rates on its consolidated results of operations and future cash outflows for interest. Floating rate swaps would be used, depending on market conditions, to convert the fixed rates of long-term debt into short-term variable rates. Fixed rate swaps would be used to reduce the Company’s risk of the possibility of increased interest costs. Interest rate swap contracts are therefore used by the Company to separate interest rate risk management from the debt funding decision. The cash paid and received from the settlement of interest rate swaps is included in interest expense.

Fair Value Hedges

At March 31, 2019, the Company had approximately $527 million notional amount of interest rate swaps that exchange a fixed rate of interest for variable rate (LIBOR) of interest plus a weighted average spread. These floating rate swaps are designated as fair value hedges against $277 million of principal on the 4.7% senior notes due 2020 and $250 million of principal on the 4.0% senior notes due 2024 for the remaining life of these notes. The effective portion of the fair value gains or losses on these swaps is offset by fair value adjustments in the underlying debt.

Cross-Currency Contracts

The Company uses cross-currency swaps to hedge foreign currency risk on certain intercompany financing arrangements with foreign subsidiaries. During 2018, all the Company’s cross-currency interest rate swaps matured. As such, there were no cross-currency swaps outstanding at March 31, 2019 and December 31, 2018. The cross-currency interest rate swaps were intended to eliminate uncertainty in cash flows in U.S. Dollars and British Pounds in connection with the intercompany financing arrangements.

Foreign Currency Contracts

The Company uses forward foreign currency contracts to mitigate the foreign currency exchange rate exposure on the cash flows related to forecasted inventory purchases and sales and have maturity dates through December 2019. The derivatives used to hedge these forecasted transactions that meet the criteria for hedge accounting are accounted for as cash flow hedges. The effective portion of the gains or losses on these derivatives is deferred as a component of AOCL and is recognized in earnings at the same time that the hedged item affects earnings and is included in the same caption in the statements of operations as the underlying hedged item. At March 31, 2019, the Company had approximately $383 million notional amount outstanding of forward foreign currency contracts that are designated as cash flow hedges of forecasted inventory purchases and sales.

The Company also uses foreign currency contracts, primarily forward foreign currency contracts, to mitigate the foreign currency exposure of certain other foreign currency transactions. At March 31, 2019, the Company had approximately $

925 million notional amount outstanding of these foreign currency contracts that are not designated as effective hedges for accounting purposes and have maturity dates through October 2020. Fair market value gains or losses are included in the results of operations and are classified in other (income) expense, net.

Commodity Contracts

To a lesser extent, the Company also enters into commodity-based derivatives in order to mitigate the risk that the rising price of these commodities could have on the cost of certain of the Company’s raw materials. These commodity-based derivatives provide the Company with cost certainty. At March 31, 2019, the Company had approximately $

million notional amount outstanding of commodity-based derivatives that are designated as effective hedges for accounting purposes and approximately $

million notional amount outstanding of commodity-based derivatives that are not designated as effective hedges for accounting purposes. These commodity-based derivatives have expiration dates through January 2020.

The following table presents the fair value of derivative financial instruments as of the dates indicated (in millions):

	March 31, 2019				December 31, 2018
	Fair Value of Derivatives				Fair Value of Derivatives
	Asset (a)		Liability (a)		Asset (a)		Liability (a)
Derivatives designated as effective hedges:
Cash flow hedges:
Foreign currency contracts	$	7.9	$	3.6	$	13.3	$	0.7
Fair value hedges:
Interest rate swaps		—		6.0		—		11.5
Derivatives not designated as effective hedges:
Foreign currency contracts		8.6		8.2		12.9		4.2
Commodity contracts		—		1.3		—		0.9
Total	$	16.5	$	19.1	$	26.2	$	17.3
(a) Consolidated balance sheet location:
Asset: Prepaid expenses and other, and other non-current assets
Liability: Other accrued liabilities, and current and non-current liabilities

The following tables presents gain and loss activity (on a pretax basis) for the three months ended March 31, 2019 and 2018 related to derivative financial instruments designated or previously designated, as effective hedges (in millions):

		Three Months Ended March 31, 2019						Three Months Ended March 31, 2018
		Gain/(Loss)						Gain/(Loss)
	Location of gain/ (loss) recognized in income	Recognized in OCI (a) (effective portion)			Reclassified from AOCL to Income			Recognized in OCI (a) (effective portion)			Reclassified from AOCL to Income
Interest rate swaps	Interest expense, net	$	—		$	(1.5	)	$	—		$	(1.9	)
Foreign currency contracts	Net sales and cost of products sold		(6.1	)		5.7			(5.3	)		(6.4	)
Commodity contracts	Cost of products sold		(0.6	)		—			—			—
Cross-currency swaps	Other expense (income), net		—			—			(3.4	)		(4.8	)
Total		$	(6.7	)	$	4.2		$	(8.7	)	$	(13.1	)

(a)	Represents effective portion recognized in Other Comprehensive Income (Loss) (“OCI”).

At March 31, 2019, deferred net gains of approximately $8.2 million within AOCL are expected to be reclassified to earnings over the next twelve months.

During the three months ended March 31, 2019 and 2018, the Company recognized expense of $5.6 million and $9.5 million, respectively, in other

expense

(

income)

, net, related to derivatives that are not designated as hedging instruments, which was mostly offset by foreign currency movement in the underlying exposure.