DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS

3 Months Ended

Mar. 31, 2015

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 are classified as Level 2 in the fair value hierarchy at March 31, 2015 and December 31, 2014, 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	March 31, 2015			December 31, 2014
Foreign exchange contracts	Cash Flow	Prepaid expenses and other assets	$	12.8		$	13.0
Interest rate forward swaps	Fair Value	Other assets	7.5			—
Foreign exchange contracts	Cash Flow	Accrued expenses	(0.2		)	(0.2		)
Commodity contracts	Cash Flow	Accrued expenses	(0.8		)	(0.8		)
Interest rate forward swaps	Fair Value	Other liabilities	—			(0.9		)
Net asset/(liability) of derivatives designated as hedging items			$	19.3		$	11.1

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 March 31, 2015 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 securitization to be furnished by the counterparties to its derivative financial instruments.

Cash Flow Hedges

As of March 31, 2015 and December 31, 2014, 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 months ended March 31,2015 and 2014, 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 inter-company purchases anticipated in the next 18 months and designates these derivative instruments as foreign currency cash flow hedges when appropriate. When the underlying inter-company purchases impact the Company’s consolidated earnings, the effective portion of the hedge is recognized within cost of products sold. Ineffectiveness related to the Company’s foreign exchange hedges on earnings was $0.8 million and $0.7 million for the three months ended March 31,2015 and 2014, respectively.

As of March 31, 2015, the notional value of the Company’s outstanding foreign exchange forward contracts designated as hedging instruments was $173.6 million, with a fair value of $12.6 million in net assets. As of December 31, 2014, the notional value of the Company’s outstanding foreign exchange forward contracts designated as hedging instruments was $247.9 million, with a fair value of $12.8 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)	2015			2014
Balance—January 1	$	10.4		$	3.2
Derivatives qualifying as cash flow hedges deferred in other comprehensive income	8.0			(0.3		)
Derivatives qualifying as cash flow hedges reclassified to cost of products sold (effective portion)	(2.4		)	(1.4		)
Change in deferred taxes	(1.5		)	0.4
Balance—March 31	$	14.5		$	1.9

At March 31, 2015, 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 $14.5 million, all 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 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 all of the Company’s $500.0 million of 3.5% Notes due in 2014 (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 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 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 expenses-net. During the three months ended March 31, 2015, $0.4 million of amortization of the settlement amount was recognized as incremental interest expense within interest expense-net.

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 March 31, 2015, the Company had commodity contracts outstanding which committed the Company to approximately $3.4 million of forecasted non-fat dry milk purchases. The effective portion of the hedges, which was recorded at fair value as a component of accumulated other comprehensive income, was $0.8 million as of March 31, 2015 and $0.8 million as of December 31, 2014. The ineffective portion recognized within other expenses-net was insignificant as of March 31, 2015, and for the period then ended.

Fair Value Hedges

Interest Rate Swaps

In November 2009, the Company executed 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 terminated $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 terminated 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 over the remaining life of the underlying debt. Amortization of the settled swaps resulted in a $0.5 million and $2.3 million reduction in interest expense for the three months ended March 31,2015, and 2014, respectively. Because the Company redeemed the 2014 Notes in the third quarter of 2014 the amortization of the related swaps was completed at that time and there was no amortization related to these swaps in the three months ended March 31, 2015.

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 as of March 31, 2015, and the conversion of fixed to floating rate resulted in a reduction in interest expense of $2.7 million for the three months ended March 31,2015.

The following table summarizes the interest rate swaps outstanding as of March 31, 2015, all of which have a hedge inception date of May 2014 and will mature in November 2019:

(Dollars in millions)	Notional Amount of Underlying		Fixed Rate Received		Variable Rate Paid (U.S. 3 Month LIBOR +)		Fair Value Asset
Swaps associated with the 2019 Notes	$	700.0	4.9	%	3.14	%	$	7.5

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 $310.3 million and $395.4 million as of March 31, 2015 and December 31, 2014, 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.