DERIVATIVES

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 December 31, 2016 and 2015, 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:



			December 31,
(Dollars in millions)	Hedge Designation	Balance Sheet Location	2016			2015
Foreign exchange contracts	Cash Flow	Prepaid expenses and other assets	$	10.9		$	6.4
Interest rate forward swaps	Fair Value	Other assets	1.1			3.9
Foreign exchange contracts	Cash Flow	Accrued expenses	(0.2		)	(0.9		)
Interest rate forward swaps	Fair Value	Other liabilities	(6.3		)	(3.5		)
Commodity contracts	Cash Flow	Accrued expenses	—			(0.2		)
Net asset/(liability) of derivatives designated as hedging items			$	5.5		$	5.7

While certain derivatives are subject to netting arrangements with the Company’s counterparties, the Company does not offset derivative assets and liabilities within the consolidated balance sheets presented herein.

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 at hedge inception 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 December 31, 2016 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 December 31, 2016 and 2015, the Company has cash flow hedges which qualify as hedges of forecasted cash flows, with the effective portion of changes in fair value 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. Cash flow hedges are valued using quoted prices in markets that are not active.

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 year ended December 31, 2016, the Company discontinued cash flow hedge accounting for an insignificant number of hedges with an immaterial net impact to the income statement as the underlying transactions were no longer probable. For the years ended December 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 intercompany purchases anticipated in the next 15 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, and ineffectiveness related to the Company’s foreign exchange hedges on earnings is recognized within other (income)/expenses - net. The ineffective portion of the hedges was $1.2 million and $0.9 million for the years ended December 31, 2016 and 2015, respectively, and insignificant for year ended December 31, 2014.

The table below summarizes the Company’s outstanding foreign exchange forward contracts at December 31, 2016. 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.



(Dollars in millions)	Weighted-average Forward Rate	Notional Amount		Fair Value Asset		Maturity
Foreign exchange contracts:
Cash flow hedges:
Canadian dollar	1.31	$	64.2	$	1.4	2017
Mexican peso	19.40	61.4		5.2		2017
Malaysian ringgit	4.16	29.5		2.4		2017
Philippine peso	48.52	47.0		1.7		2017
Total foreign exchange contracts		$	202.1	$	10.7

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:



(Dollars in millions)	2016			2015
Balance—January 1	$	10.1		$	10.4
Derivatives qualifying as cash flow hedges deferred in other comprehensive income	7.6			21.4
Derivatives qualifying as cash flow hedges reclassified to cost of products sold	(6.9		)	(23.8		)
Change in deferred taxes	(0.7		)	2.1
Balance—December 31	$	10.1		$	10.1

At December 31, 2016, 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 $10.1 million, $8.9 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 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 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 (income)/expenses-net during the year ended December 31, 2014. During the years ended December 31, 2016, 2015 and 2014, $1.4 million, $1.4 million and $0.9 million of amortization of the settlement amount was recognized as incremental interest expense within interest expense-net, respectively.

Commodity Hedges

The Company utilizes 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 December 31, 2016, the Company had no commodity contracts outstanding for forecasted non-fat dry milk purchases. The effective portion of commodity derivatives qualifying as cash flow hedges is deferred in accumulated other comprehensive income (loss), and the ineffective portion is recognized within other (income)/expenses - net. The effective portion of the hedges were insignificant for the each of the years ended December 31, 2016 and 2015, and the ineffective portions of the hedges were insignificant for the each of the years ended December 31, 2016, 2015, and 2014.

Fair Value Hedges

Interest Rate Swaps

During the second quarter of 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 December 31, 2016, and the conversion of fixed to floating rate resulted in a reduction in interest expense of $7.1 million and $10.0 million for the years ended December 31, 2016 and 2015, respectively. See “—Note 15. Debt” for additional information regarding the 2019 Notes.

In the fourth quarter of 2015, the Company entered into six interest rate swaps with multiple counterparties to mitigate interest rate exposure associated with the 2020 Notes. The swaps have an aggregate notional amount of $750.0 million of outstanding principal. This series of swaps effectively converts the $750.0 million of 2020 Notes from fixed to floating rate debt for the remainder of their term. These interest rate swaps were outstanding as of December 31, 2016, and the conversion of fixed to floating rate resulted in a reduction in interest expense of $6.8 million and $1.1 million for the years ended December 31, 2016 and 2015, respectively. See “—Note 15. Debt” for additional information regarding the 2020 Notes.

The following table summarizes the interest rate swaps outstanding as of December 31, 2016. The interest rate swaps for the 2019 Notes have a hedge inception date of May 2014, and the interest rate swaps for the 2020 Notes have an inception date of November 2015. The expiration dates of the interest rate swaps are equal to the stated maturity dates of the underlying debt. Interest rate swaps are valued using third party valuation models.



							Fair Value Asset/(Liability)
(Dollars in millions)	Notional Amount of Underlying		Fixed Rate Received		Variable Rate Paid (U.S. 3 Month LIBOR +)		December 31, 2016			December 31, 2015
Swaps associated with the 2019 Notes	$	700.0	4.9	%	3.14	%	$	1.1		$	3.9
Swaps associated with the 2020 Notes	$	750.0	3.0	%	1.38	%	$	(6.3	)	$	(3.5	)

See “—Note 15. Debt” for additional information regarding the Company’s debt.

Other Financial Instruments

The Company does not hedge the interest rate risk associated with money market funds, which totaled $1,022.0 million and $510.1 million as of December 31, 2016 and 2015, 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.