Derivative Financial Instruments

In the normal course of business, including the purchasing of materials and selling of products, the Company is exposed to certain risks related to fluctuations in foreign currency exchange rates. The Company uses foreign currency forward contracts to manage risks from these market fluctuations. The Company is also exposed to certain risks related to fluctuations in interest rates and uses interest rate swaps to manage risk from these market fluctuations. The counterparties to these financial instruments are financial institutions with strong credit ratings. The Company maintains control over the size of positions entered into with any one counterparty and monitors the credit ratings of these institutions.

Foreign Currency Forward Contracts

The Company currently hedges its risk relative to fluctuations in the Canadian dollar, Euro and Japanese yen for forecasted cash outflows denominated in these currencies. The Company had foreign currency forward contracts denominated in these currencies outstanding with notional amounts totaling $19.0 million at June 30, 2018 and $0.3 million at December 31, 2017. As of June 30, 2018, all of the Company’s outstanding instruments mature within the next six months.

The Company’s derivative instruments discussed above are designated as cash flow hedges and the fair value of these derivative instruments was $0.9 million at June 30, 2018 and are included in other current liabilities in the Company's Condensed Consolidated Balance Sheets and insignificant at December 31, 2017.

The Company also enters into derivative instruments (forwards) to economically hedge the impact of fluctuations in the Indian rupee. During the three and six months ended June 30, 2018, the Company recognized a loss of $0.1 million related to the changes in fair value of these derivative instruments not designated as hedges. During the three months ended June 30, 2017, the Company recognized a loss of $0.1 million related to the changes in fair value of these derivative instruments not designated as hedges. These gains and losses are recognized immediately within the Company's Condensed Consolidated Statements of Operations and are classified within loss (gain) on currency translation. The fair value of these derivative instruments not designated as hedges at June 30, 2018 was insignificant.

Interest Rate Swap Agreements

The Company is exposed to changes in interest rates on its variable rate debt. In order to manage this risk, on February 16, 2017, Milacron LLC, a wholly-owned subsidiary of the Company, entered into two interest rate swap transactions effective for a four-year period beginning January 31, 2018 with a total notional amount of $400.0 million. The interest rate swaps are intended to manage the Company's interest rate risk by fixing the interest rate on a portion of the Company's debt outstanding under the 2017 Term Loan Facility that was previously subject to a floating interest rate equal to 1-month LIBOR plus a credit spread. The swaps provide for the Company to pay a fixed rate of 2.062% per annum on such portion of the outstanding debt in exchange for receiving a variable interest rate based on 1-month LIBOR. The effect is a synthetically fixed rate of 2.062% plus the loan spread for the term and debt hedged.

The Company designated these interest rate swaps as cash flow hedges of floating rate borrowings and expects the hedge to be highly effective in offsetting fluctuations in the designated interest payments resulting from changes in the benchmark interest rate. The gains and losses on the designated interest rate swaps will offset losses and gains on the transactions being hedged. The fair value of the interest rate swaps is calculated by taking into consideration current interest rates and the current creditworthiness of the counterparties or the Company, as applicable. The effective portion of changes in the fair value of the interest rate swaps is reflected as a component of accumulated other comprehensive income (loss) and recognized as interest expense, net as payments are paid or accrued. The remaining gain or loss in excess of the cumulative change in the present value of the future cash flows of the hedge item, if any (i.e. the ineffective portion), is recognized as interest expense, net during the current period. During the six months ended June 30, 2018, the Company recorded $0.1 million of hedge ineffectiveness in earnings. During the three months ended June 30, 2017, the Company recorded $0.1 million of hedge ineffectiveness in earnings.

The following table provides the effect of the Company’s foreign currency forward contracts and interest rate swaps designated as cash flow hedges on the Company’s Condensed Consolidated Financial Statements for the three and six months ended June 30, 2018 and 2017:



Type of instrument:	Gain (Loss) Recognized in OCI on Derivative (Effective Portion)			Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
	(in millions)
Three Months Ended June 30, 2018
Foreign exchange contracts	$	(0.8	)	$	0.2
Interest rate swaps	$	2.6		$	—
Three Months Ended June 30, 2017
Foreign exchange contracts	$	0.6		$	(0.4	)
Interest rate swaps	$	(2.5	)	$	—

Six Months Ended June 30, 2018
Foreign exchange contracts	$	(1.0	)	$	0.2
Interest rate swaps	$	8.4		$	—
Six Months Ended June 30, 2017
Foreign exchange contracts	$	0.7		$	(0.4	)
Interest rate swaps	$	(2.5	)	$	—

All gains (losses) that are reclassified from accumulated other comprehensive income (loss) into income (effective portion) are classified in loss (gain) on currency translation or cost of sales within the Company's Condensed Consolidated Statements of Operations. The gain (loss) recognized related to the ineffective portion of the foreign exchange contracts was immaterial for all periods presented.

Fair Value Measurements

The Company estimates the fair value of its financial instruments utilizing an established three-level hierarchy. The hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date as follows:


•	Level 1–Valuation is based upon unadjusted quoted prices for identical assets or liabilities in active markets.


•	Level 2–Valuation is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial statements.


•	Level 3–Valuation is based upon other unobservable inputs that are significant to the fair value measurements.

The classification of fair value measurements within the established three-level hierarchy is based upon the lowest level of input that is significant to that measurement. The fair values of the Company’s derivative instruments were measured using valuations based upon quoted prices for similar assets and liabilities in active markets (Level 2) and are valued by reference to similar financial instruments, adjusted for terms specific to the contracts. There were no transfers between the three levels of the fair value hierarchy during any period presented. The derivative assets and liabilities measured at fair value on a recurring basis as of June 30, 2018 and December 31, 2017 were as follows:



	Balance Sheet Location	Total		Level 1		Level 2		Level 3
		(in millions)
June 30, 2018
Foreign currency forward contracts (liability position)	Other current liabilities	$	0.9	$	—	$	0.9	$	—
Interest rate swap agreements (asset position)	Prepaid and other current assets	$	1.3	$	—	$	1.3	$	—
Interest rate swap agreements (asset position)	Other noncurrent assets	$	7.6	$	—	$	7.6	$	—
December 31, 2017
Interest rate swap agreements (asset position)	Other noncurrent assets	$	1.7	$	—	$	1.7	$	—
Interest rate swap agreements (liability position)	Other current liabilities	$	1.0	$	—	$	1.0	$	—