We are exposed to certain market risks relating to our ongoing business operations, including foreign currency exchange rate risk, commodity price risk, interest rate risk and credit risk. We manage our exposure to these and other market risks through regular operating and financing activities. Currently, the only risks that we manage through the use of derivative instruments are interest rate risk and foreign currency exchange rate risk.

In prior years, we entered into various fixed-to-variable interest rate swap agreements that were accounted for as fair value hedges of a portion of our 4.625% Senior Notes due 2019 and all of our 3.375% Senior Notes due 2021. In August 2016, we received cash for these interest rate swap assets by terminating the hedging instruments with the counterparties. The remaining unamortized balance as of September 30, 2019 related to these discontinued hedges was $8.4 million, which will be recognized using the effective interest rate method over the remaining maturity period of the hedged notes. As of September 30, 2019 and December 31, 2018, the following amounts were recorded on our condensed consolidated balance sheets related to cumulative basis adjustments for fair value hedges (in millions):

In 2014, we entered into forward starting interest rate swaps that were designated as cash flow hedges of our thirty-year tranche of senior notes (the 4.450% Senior Notes due 2045) we expected to issue in 2015. The forward starting interest rate swaps mitigated the risk of changes in interest rates prior to the completion of the offering of senior notes in connection with our merger with LVB Acquisition, Inc., the parent company of Biomet, Inc. (“Biomet”) (which merger is sometimes referred to herein as the “Biomet merger”). The interest rate swaps were settled, and the remaining loss to be recognized at September 30, 2019 was $26.6 million, which will be recognized using the effective interest rate method over the remaining maturity period of the hedged notes.

In September 2016, we entered into various variable-to-fixed interest rate swap agreements with a notional amount of $375.0 million that were accounted for as cash flow hedges of U.S. Term Loan B. The interest rate swaps minimized the exposure to changes in the LIBOR interest rates while the variable-rate debt was outstanding. In the first quarter of 2019, we terminated these interest rate swaps concurrently with the repayment of the remaining balance of U.S. Term Loan B, and we recognized proceeds and interest income of $2.8 million related to the termination.

We operate on a global basis and are exposed to the risk that our financial condition, results of operations and cash flows could be adversely affected by changes in foreign currency exchange rates. To reduce the potential effects of foreign currency exchange rate movements on net earnings, we enter into derivative financial instruments in the form of foreign currency exchange forward contracts with major financial institutions. We also designated our Euro Notes as net investment hedges of investments in foreign subsidiaries. We are primarily exposed to foreign currency exchange rate risk with respect to transactions and net assets denominated in Euros, Swiss Francs, Japanese Yen, British Pounds, Canadian Dollars, Australian Dollars, Korean Won, Swedish Krona, Czech Koruna, Thai Baht, Taiwan Dollars, South African Rand, Russian Rubles, Indian Rupees, Turkish Lira, Polish Zloty, Danish Krone, and Norwegian Krone. We do not use derivative financial instruments for trading or speculative purposes.

We are exposed to the impact of foreign exchange rate fluctuations in the investments in our wholly-owned foreign subsidiaries that are denominated in currencies other than the U.S. Dollar. In order to mitigate the volatility in foreign exchange rates, we issued Euro Notes in December 2016 and designated 100 percent of the Euro Notes to hedge our net investment in certain wholly-owned foreign subsidiaries that have a functional currency of the Euro. All changes in the fair value of a hedging instrument designated as a net investment hedge are recorded as a component of AOCI in the condensed consolidated balance sheets.

At September 30, 2019, we had receive-fixed-rate, pay-fixed-rate cross-currency interest swaps with notional amounts outstanding of Euro 1,450 million, Japanese Yen 7 billion and Swiss Franc 50 million. These transactions further hedge our net investment in certain wholly-owned foreign subsidiaries that have a functional currency of Euro, Japanese Yen and Swiss Franc. All changes in the fair value of a derivative instrument designated as a net investment hedge are recorded as a component of AOCI in the condensed consolidated balance sheets. The portion of this change related to the excluded component will be amortized into earnings over the life of the derivative while the remainder will be recorded in AOCI until the hedged net investment is sold or substantially

liquidated. We recognize the excluded component in interest expense, net on our condensed consolidated statements of earnings. The net cash received related to the receive-fixed-rate, pay-fixed-rate component of the cross-currency interest rate swaps is reflected in investing cash flows in our condensed consolidated statements of cash flows.

Our revenues are generated in various currencies throughout the world. However, a significant amount of our inventory is produced in U.S. Dollars. Therefore, movements in foreign currency exchange rates may have different proportional effects on our revenues compared to our cost of products sold. To minimize the effects of foreign currency exchange rate movements on cash flows, we hedge intercompany sales of inventory expected to occur within the next 30 months with foreign currency exchange forward contracts. We designate these derivative instruments as cash flow hedges.

We perform quarterly assessments of hedge effectiveness by verifying and documenting the critical terms of the hedge instrument and confirming that forecasted transactions have not changed significantly. We also assess on a quarterly basis whether there have been adverse developments regarding the risk of a counterparty default. For derivatives which qualify as hedges of future cash flows, the gains and losses are temporarily recorded in AOCI and then recognized in cost of products sold when the hedged item affects net earnings. On our condensed consolidated statements of cash flows, the settlements of these cash flow hedges are recognized in operating cash flows.

For foreign currency exchange forward contracts and options outstanding at September 30, 2019, we had obligations to purchase U.S. Dollars and sell Euros, Japanese Yen, British Pounds, Canadian Dollars, Australian Dollars, Korean Won, Swedish Krona, Czech Koruna, Thai Baht, Taiwan Dollars, South African Rand, Russian Rubles, Indian Rupees, Polish Zloty, Danish Krone, and Norwegian Krone and obligations to purchase Swiss Francs and sell U.S. Dollars. These derivatives mature at dates ranging from October 2019 through February 2022. As of September 30, 2019, the notional amounts of outstanding forward contracts and options entered into with third parties to purchase U.S. Dollars were $1,425.5 million. As of September 30, 2019, the notional amounts of outstanding forward contracts and options entered into with third parties to purchase Swiss Francs were $266.8 million.

We enter into foreign currency forward exchange contracts with terms of one month to manage currency exposures for monetary assets and liabilities denominated in a currency other than an entity’s functional currency. As a result, any foreign currency re-measurement gains/losses recognized in earnings are generally offset with gains/losses on the foreign currency forward exchange contracts in the same reporting period. The net amount of these offsetting gains/losses is recorded in other expense, net. These contracts are settled on the last day of each reporting period. Therefore, there is no outstanding balance related to these contracts recorded on the balance sheet as of the end of the reporting period. The notional amounts of these contracts are typically in a range of $1.5 billion to $2.0 billion per quarter.

Derivative instruments designated as cash flow hedges had the following effects, before taxes, on AOCI and net earnings on our condensed consolidated statements of earnings, condensed consolidated statements of comprehensive income and condensed consolidated balance sheets (in millions):

	Amount of Gain (Loss)											Amount of Gain (Loss)
	Recognized in AOCI											Reclassified from AOCI
	Three Months Ended					Nine Months Ended						Three Months Ended						Nine Months Ended
	September 30,					September 30,					Location on	September 30,						September 30,
Derivative Instrument	2019		2018			2019		2018			Statements of Earnings	2019			2018			2019			2018
Foreign exchange forward contracts	$	33.6	$	38.8		$	46.4	$	68.3		Cost of products sold	$	11.3		$	(4.9	)	$	25.8		$	(26.5	)
Interest rate swaps		-		(0.7	)		-		(0.6	)	Interest expense, net		-			-			2.8			-
Forward starting interest rate swaps		-		-			-		-		Interest expense, net		(0.1	)		(0.1	)		(0.4	)		(0.4	)
	$	33.6	$	38.1		$	46.4	$	67.7			$	11.2		$	(5.0	)	$	28.2		$	(26.9	)

The fair value of outstanding derivative instruments designated as cash flow hedges and recorded on our condensed consolidated balance sheet at September 30, 2019, together with settled derivatives where the hedged item has not yet affected earnings, was a net unrealized gain of $41.7 million, or $37.8 million after taxes, which is deferred in AOCI. A gain of $50.7 million, or $44.3 million after taxes, is expected to be reclassified to earnings in cost of products sold and a loss of $0.6 million, or $0.5 million after taxes, is expected to be reclassified to earnings in interest expense, net over the next twelve months.

The following table presents the effect of fair value, cash flow and net investment hedge accounting on our condensed consolidated statements of earnings (in millions):

	Location and Amount of Gain/(Loss) Recognized in Income on Fair Value, Cash Flow and Net Investment Hedging Relationships for the Period Ended:
	Three Months Ended					Three Months Ended						Nine Months Ended					Nine Months Ended
	September 30, 2019					September 30, 2018						September 30, 2019					September 30, 2018
	Cost of		Interest			Cost of			Interest			Cost of		Interest			Cost of			Interest
	Products		Expense,			Products			Expense,			Products		Expense,			Products			Expense,
	Sold		Net			Sold			Net			Sold		Net			Sold			Net
Total amounts of income and expense line items presented in the statements of earnings in which the effects of fair value or cash flow hedges are recorded	$	535.7	$	(56.8	)	$	529.0		$	(67.5	)	$	1,670.4	$	(174.5	)	$	1,688.5		$	(220.8	)
The effects of fair value, cash flow and net investment hedging:
Gain on fair value hedging relationships
Discontinued interest rate swaps		-		2.0			-			2.1			-		6.2			-			6.3
Gain (loss) on cash flow hedging relationships
Foreign exchange forward contracts		11.3		-			(4.9	)		-			25.8		-			(26.5	)		-
Interest rate swaps		-		-			-			-			-		2.8			-			-
Forward starting interest rate swaps		-		(0.1	)		-			(0.1	)		-		(0.4	)		-			(0.4	)
Gain on net investment hedging relationships
Cross-currency interest rate swaps		-		13.4			-			9.5			-		38.8			-			14.7

The following gains and (losses) from these derivative instruments were recognized on our condensed consolidated statements of earnings (in millions):

These gains/losses do not reflect offsetting losses of $4.2 million and $2.3 million in the three and nine month periods ended September 30, 2019, respectively, and offsetting losses of $10.2 million and $39.2 million in the three and nine month periods ended September 30, 2018, respectively, recognized in other expense, net as a result of foreign currency re-measurement of monetary assets and liabilities denominated in a currency other than an entity’s functional currency.

As of September 30, 2019 and December 31, 2018, all derivatives designated as fair value hedges, cash flow hedges and net investment hedges were recorded at fair value on our condensed consolidated balance sheets. On our condensed consolidated balance sheets, we recognize individual forward contracts and options with the same counterparty on a net asset/liability basis if we have a master netting agreement with the counterparty. Under these master netting agreements, we are able to settle derivative instrument assets and liabilities with the same counterparty in a single transaction, instead of settling each derivative instrument separately. We have master netting agreements with all of our counterparties. The fair value of derivative instruments on a gross basis is as follows (in millions):

	As of September 30, 2019			As of December 31, 2018
	Balance			Balance
	Sheet	Fair		Sheet	Fair
	Location	Value		Location	Value
Asset Derivatives
Foreign exchange forward contracts	Other current assets	$	59.1	Other current assets	$	37.9
Foreign exchange forward contracts	Other assets		18.2	Other assets		20.9
Interest rate swaps	Other assets		-	Other assets		2.8
Cross-currency interest rate swaps	Other assets		107.4	Other assets		15.1
Total asset derivatives		$	184.7		$	76.7
Liability Derivatives
Foreign exchange forward contracts	Other current liabilities	$	10.2	Other current liabilities	$	9.9
Foreign exchange forward contracts	Other long-term liabilities		3.1	Other long-term liabilities		3.7
Cross-currency interest rate swaps	Other long-term liabilities		-	Other long-term liabilities		2.5
Total liability derivatives		$	13.3		$	16.1

The table below presents the effects of our master netting agreements on our condensed consolidated balance sheets (in millions):

		As of September 30, 2019						As of December 31, 2018
Description	Location	Gross Amount		Offset		Net Amount in Balance Sheet		Gross Amount		Offset		Net Amount in Balance Sheet
Asset Derivatives
Cash flow hedges	Other current assets	$	59.1	$	10.1	$	49.0	$	37.9	$	9.6	$	28.3
Cash flow hedges	Other assets		18.2		3.1		15.1		20.9		3.5		17.4
Liability Derivatives
Cash flow hedges	Other current liabilities		10.2		10.1		0.1		9.9		9.6		0.3
Cash flow hedges	Other long-term liabilities		3.1		3.1		-		3.7		3.5		0.2

The following net investment hedge gains (losses) were recognized on our condensed consolidated statements of comprehensive income (in millions):