Derivative Financial Instruments

Our derivative financial instruments reduce our exposure to fluctuations in foreign exchange rates. We predominantly designate

our derivative financial instruments as cash flow hedges.

Counterparties expose us to credit loss in the event of non-performance on hedges. We monitor our exposure to counterparty non-performance risk both at inception of the hedge and at least quarterly thereafter. However, because the contracts are entered into with highly rated financial institutions, we do not anticipate non-performance by any of these counterparties. The exposure is usually the amount of the unrealized gains, if any, in such contracts.

17. Derivative Financial Instruments (continued)

Because of the high degree of effectiveness between the hedging instrument and the underlying exposure being hedged, fluctuations in the value of the derivative instruments are generally offset by changes in the cash flows or fair value of the underlying exposures being hedged. In addition, we perform an assessment of hedge effectiveness, both at inception and at least quarterly thereafter, to determine whether the financial instruments that are used in hedging transactions are effective at offsetting changes in the cash flows or fair value of the related underlying exposures. A cash flow hedge requires that the change in the fair value of a derivative instrument be recognized in other comprehensive income, a component of shareholders’ equity, and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings and is presented in the same income statement line item as the earnings effect of the hedged item.

Certain of our derivative instruments contain provisions that require the current credit relationship between us and our counterparty to be maintained throughout the term of the derivative instruments. If that credit relationship changes, certain provisions could be triggered, and the counterparty could request immediate collateralization of derivative instruments in net liability position above a certain threshold. There are derivative instruments with a credit-risk-related contingent feature that are in a liability position on March 30, 2018, however they are immaterial to our financial condition and results of operation. As of March 30, 2018, no triggering event has occurred and thus we are not required to post collateral. If the credit-risk-related contingent features underlying these agreements were triggered on March 30, 2018, we would not be required to post collateral to the counterparty, because the collateralization threshold has not been met.

Foreign Currency Hedges

We are exposed to fluctuations in currency exchange rates against the U.S. dollar on our results of operations and financial condition and we mitigate that exposure by entering into foreign currency forward contracts. Certain of our subsidiaries periodically enter into foreign currency forward contracts in order to hedge portions of forecasted sales or cost of sales denominated in foreign currencies, which generally mature within one year. Our foreign currency hedges were entered into for the purpose of hedging portions of our 2018 foreign currency exposure.

The foreign currency forward contracts qualifying as cash flow hedges were designated as single-purpose cash flow hedges of forecasted cash flows.

We had the following outstanding foreign currency forward contracts as of March 30, 2018 (in millions):



Foreign currency contracts qualifying as cash flow hedges:	Notional amount
Euro	EUR	96.1
British pound	GBP	5.3
Japanese yen	JPY	1,029.4
Korean won	KRW	23,068.0

17. Derivative Financial Instruments (continued)

The following table reflects the fair values of derivative instruments, all of which are designated as Level 2 in the fair value hierarchy, as of March 30, 2018 and December 29, 2017 (U.S. dollars in millions):



Derivatives designated as hedging instruments ⁽¹⁾
	Foreign exchange contracts
Balance Sheet location:	March 30, 2018 ⁽²⁾		December 29, 2017
Asset derivatives:
Prepaid expenses and other current assets	$	0.1	$	—
Total asset derivatives	$	0.1	$	—

Liability derivatives:
Accounts payable and accrued expenses	$	3.3	$	1.4
Total liability derivatives	$	3.3	$	1.4

⁽¹⁾ See Note 18, "Fair Value Measurements", for fair value disclosures.

⁽²⁾ We expect that $3.2 million of the net fair value of hedges recognized as a net loss in accumulated other comprehensive income ("AOCI") will be transferred to earnings during the next 12 months, along with the earnings effect of the related forecasted transactions.

The following table reflects the effect of derivative instruments on the Consolidated Statements of Income for the quarters ended March 30, 2018 and March 31, 2017 (U.S. dollars in millions):



Derivatives in effective cash flow hedging relationships	Amount of (loss) gain recognized in other comprehensive income on derivatives (effective portion)						Location of (loss) income reclassified from AOCI into income (effective portion)	Amount of (loss) income reclassified from AOCI into income (effective portion)
	Quarter ended							Quarter ended
	March 30, 2018			March 31, 2017				March 30, 2018			March 31, 2017
Foreign exchange contracts	$	(1.8	)	$	(1.8	)	Net sales	$	0.8		$	1.1
Foreign exchange contracts	—			(0.7		)	Cost of products sold	(0.2		)	0.3
Total	$	(1.8	)	$	(2.5	)		$	0.6		$	1.4

As a subsequent event, on April 13, 2018, we entered into six-year interest rate swaps with a combined notional amount of $200.0 million to hedge our LIBOR-based borrowings from a variable rate to a fixed rate of 2.747% beginning June 1, 2018. The swap expires on June 1, 2024.