DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS

9 Months Ended

Sep. 30, 2014

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS

DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS

The Company is exposed to market risk due to changes in foreign currency exchange rates, commodities pricing and interest rates. To manage that risk, the Company enters into certain derivative financial instruments, when available on a cost-effective basis, to hedge its underlying economic exposure. The Company does not enter into derivatives for speculative purposes. These financial instruments were classified as Level 2 in the fair value hierarchy at September 30, 2014 and December 31, 2013, and there were no transfers between levels in the fair value hierarchy during the periods then ended.

The following table summarizes the fair value of the Company's outstanding derivatives:

(In millions)	Hedge Designation	Balance Sheet  Location	September 30, 2014			December 31, 2013
Foreign exchange contracts	Cash Flow	Other assets	$	3.0		$	4.2
Interest rate forward swaps	Cash Flow	Other assets	—			19.9
Commodity contracts	Cash Flow	Other assets	—			—
Foreign exchange contracts	Cash Flow	Accrued expenses	(0.2		)	(0.5		)
Commodity contracts	Cash Flow	Accrued expenses	(0.4		)	—
Interest rate swaps	Fair Value	Other Liabilities	(8.4		)	—
Net asset/(liability) position of derivatives designated as hedging instruments			$	(6.0	)	$	23.6

The Company’s derivative financial instruments present certain market and counterparty risks; however, concentration of counterparty risk is mitigated as the Company deals with a variety of major banks worldwide whose long-term debt is rated A- or higher by Standard & Poor’s Rating Service, Fitch Ratings, or Moody’s Investors Service, Inc. In addition, only conventional derivative financial instruments are used. The Company would not be materially impacted if any of the counterparties to the derivative financial instruments outstanding at September 30, 2014 failed to perform according to the terms of its agreement. Based upon the risk profile of the Company's portfolio, MJN does not require collateral or any other form of security to be furnished by the counterparties to its derivative financial instruments.

Cash Flow Hedges

As of September 30, 2014 and December 31, 2013, all of the Company’s cash flow hedges qualify as hedges of forecasted cash flows and the effective portion of changes in fair value are temporarily reported in accumulated other comprehensive income (loss). During the period that the underlying hedged transaction impacts earnings, the effective portion of the changes in the fair value of the cash flow hedges is recognized within earnings. The Company assesses effectiveness at inception and on a quarterly basis. These assessments determine whether derivatives designated as qualifying hedges continue to be highly effective in offsetting changes in the cash flows of hedged items. Any ineffective portion of the change in fair value is included in current period earnings.

The Company will discontinue cash flow hedge accounting when the forecasted transaction is no longer probable of occurring on the originally forecasted date, or 60 days thereafter, or when the hedge is no longer effective. For the three and nine months ended September 30, 2014 and 2013, the Company did not discontinue any cash flow hedges.

Foreign Exchange Contracts

The Company uses foreign exchange contracts to hedge forecasted transactions, primarily foreign currency denominated intercompany purchases anticipated in the next 18 months and designates these derivative instruments as foreign currency cash flow hedges when appropriate. When the underlying intercompany purchases impact the Company’s consolidated earnings, the effective portion of the hedge is recognized within cost of products sold. The impact of ineffectiveness related to the Company’s foreign exchange hedges on earnings was insignificant for the three months ended September 30, 2014 and 2013. The impact of ineffectiveness related to the Company’s foreign exchange hedges on earnings was $0.8 million for each of the nine months ended September 30, 2014 and 2013.

As of September 30, 2014, the notional value of the Company’s outstanding foreign exchange forward contracts designated as hedging instruments was $252.6 million, with a fair value of $2.8 million in net assets. As of December 31, 2013, the notional value of the Company’s outstanding foreign exchange forward contracts designated as hedging instruments was $201.4 million, with a fair value of $3.7 million in net assets. The fair value of all foreign exchange forward contracts is based on quarter-end forward currency rates. The fair value of foreign exchange forward contracts should be viewed in relation to the fair value of the underlying hedged transactions and the overall reduction in exposure to fluctuations in foreign currency exchange rates.

 The change in accumulated other comprehensive income (loss) and the impact on earnings from foreign exchange contracts that qualified as cash flow hedges were as follows: 

(In millions)	2014			2013
Balance—January 1	$	3.2		$	(4.1	)
Derivatives qualifying as cash flow hedges deferred in other comprehensive income	(0.1		)	5.2
Derivatives qualifying as cash flow hedges reclassified to cost of products sold (effective portion)	(3.3		)	5.7
Change in deferred taxes	0.9			(3.0		)
Balance—September 30	$	0.7		$	3.8

At September 30, 2014, the balance of the effective portion of changes in fair value on foreign exchange forward contracts that qualified for cash flow hedge accounting included in accumulated other comprehensive income was $0.7 million, $0.2 million of which is expected to be reclassified into earnings within the next 12 months.

Interest Rate Forward Swaps

During 2013, the Company entered into interest rate forward starting swaps with a combined notional value of $500.0 million. The forward starting rates of the swaps ranged from 3.79% to 3.94% and had an effective date of October 31, 2014. The interest rate forward starting swaps effectively mitigated the interest rate exposure associated with the Company’s offering of the 2044 Notes, the proceeds of which were used to redeem the 2014 Notes. These derivative instruments were designated as cash flow hedges at inception and were highly effective in offsetting fluctuations in the benchmark interest rate. During the nine months ended September 30, 2014, and around the time of the issuance of the 2044 Notes, the Company paid $45.0 million to settle the outstanding forward swaps. This payment was recognized in accumulated other comprehensive income (loss) and will be amortized over the life of the 2044 Notes. There was $0.5 million of ineffectiveness related to the forward swaps through the date of settlement which was recognized as a loss within other (income)/expenses-net. During the three months and nine months ended September 30, 2014, $0.4 million and $0.5 million of amortization of the settlement amount was recognized within interest expense, respectively.

Commodity Hedges

During the fourth quarter of 2013, the Company began utilizing commodity hedges to minimize the variability in cash flows due to fluctuations in market prices of the Company’s non-fat dry milk purchases for North America. The maturities of the commodity contracts are scheduled to match the pricing terms of the Company’s existing bulk purchase agreements. When the underlying non-fat dry milk purchases impact the Company’s consolidated earnings, the effective portion of the hedge is recognized within cost of products sold.

As of September 30, 2014, there were commodity contracts outstanding which committed the Company to approximately$6 million of forecasted non-fat dry milk purchases, representing approximately 24% of the Company’s total forecasted volume, where pricing is not established through supply agreements, over the next 12 months. The effective portion of the hedges, which was recorded at fair value as a component of accumulated other comprehensive income, and the ineffective portion recognized within other (income)/expenses-net were both insignificant as of September 30, 2014 and for the three and nine month periods then ended.

Fair Value Hedges

Interest Rate Swaps

In November 2009, the Company entered into several interest rate swaps to convert $700.0 million of the Company’s then newly-issued fixed rate debt to be paid in 2014 and 2019 to variable rate debt. In November 2010, the Company settled $200.0 million notional amount of fixed-to-floating interest rate swaps in exchange for cash of $15.6 million. In July 2011, the Company settled the remaining $500.0 million notional amount of fixed-to-floating interest rate swaps in exchange for cash of $23.5 million. The related basis adjustments of the underlying hedged items are being recognized as a reduction of interest expense for the remaining life of the debt instruments. Because the 2014 Notes were redeemed during the three months ended September 30, 2014, the Company recognized an additional $1.6 million reduction in interest expense during the period, which represented the unamortized portion of the settled 2009 swaps related to the 2014 Notes.

In May 2014 the Company entered into eight interest rate swaps with multiple counterparties, which have an aggregate notional amount of $700.0 million of outstanding principal. This series of swaps effectively converts the $700.0 million of 2019 Notes from fixed to floating rate debt for the remainder of their term. These interest rate swaps were outstanding at September 30, 2014.

The following table summarizes the interest rate swaps outstanding as of September 30, 2014, all of which have a hedge inception date of May 2014 and a maturity date of November 2019:

(In millions)	Notional Amount of Underlying		Fixed Rate Received		Variable Rate Paid (U.S. 3 Month LIBOR +)		Fair Value
Swaps associated with the 2019 Notes	$	700.0	4.9	%	3.14	%	$	(8.4	)

See Note 15 for discussion of the Company’s long-term debt.

Other Financial Instruments

The Company does not hedge the interest rate risk associated with money market funds which totaled $346.6 million and $447.8 million as of September 30, 2014 and December 31, 2013, respectively. Money market funds are classified as Level 2 in the fair value hierarchy and are included in cash and cash equivalents on the balance sheet. The money market funds have quoted market prices that are generally equivalent to par.