Note 11. Hedging Activities and Fair Value Measurements

Hedging Activities

The Company is exposed to certain market risks during the normal course of its business arising from adverse changes in interest rates and foreign currency exchange rates. The Company selectively uses derivative financial instruments (“derivatives”), including foreign currency forward contracts and interest rate swaps, to manage the risks from fluctuations in foreign currency exchange rates and interest rates, respectively. The Company does not purchase or hold derivatives for trading or speculative purposes. Fluctuations in interest rates and foreign currency exchange rates can be volatile, and the Company’s risk management activities do not totally eliminate these risks. Consequently, these fluctuations could have a significant effect on the Company’s financial results.

The Company’s exposure to interest rate risk results primarily from its variable-rate borrowings. The Company manages its debt centrally, considering tax consequences and its overall financing strategies. The Company manages its exposure to interest rate risk by maintaining a mixture of fixed and variable rate debt and, from time to time, using pay-fixed interest rate swaps as cash flow hedges of variable rate debt in order to adjust the relative fixed and variable proportions.

A substantial portion of the Company’s operations is conducted by its subsidiaries outside of the United States in currencies other than the USD. Almost all of the Company’s non-U.S. subsidiaries conduct their business primarily in their local currencies, which are also their functional currencies. Other than the USD, the EUR, GBP, and Chinese Yuan are the principal currencies in which the Company and its subsidiaries enter into transactions. The Company is exposed to the impacts of changes in foreign currency exchange rates on the translation of its non-U.S. subsidiaries’ assets, liabilities and earnings into USD. The Company has certain U.S. subsidiaries borrow in currencies other than the USD.

The Company and its subsidiaries are also subject to the risk that arises when they, from time to time, enter into transactions in currencies other than their functional currency. To mitigate this risk, the Company and its subsidiaries typically settle intercompany trading balances monthly. The Company also selectively uses forward currency contracts to manage this risk. These contracts for the sale or purchase of European and other currencies generally mature within one year.

Derivative Instruments

The following table summarizes the notional amounts, fair values and classification of the Company’s outstanding derivatives by risk category and instrument type within the Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017.

	September 30, 2018
	Derivative Classification	Notional Amount ⁽¹⁾		Fair Value ⁽¹⁾ Other Current Assets		Fair Value ⁽¹⁾ Other Assets		Fair Value ⁽¹⁾ Accrued Liabilities		Fair Value ⁽¹⁾ Other Liabilities
Derivatives Designated as Hedging Instruments
Interest rate swap contracts	Cash Flow	$	1,025.0	$	-	$	-	$	3.4	$	14.2
Derivatives Not Designated as Hedging Instruments
Foreign currency forwards	Fair Value	$	26.5	$	-	$	-	$	0.3	$	-

	December 31, 2017
	Derivative Classification	Notional Amount ⁽¹⁾		Fair Value ⁽¹⁾ Other Current Assets		Fair Value ⁽¹⁾ Other Assets		Fair Value ⁽¹⁾ Accrued Liabilities		Fair Value ⁽¹⁾ Other Liabilities
Derivatives Designated as Hedging Instruments
Interest rate swap contracts	Cash Flow	$	1,125.0	$	-	$	-	$	16.1	$	30.6
Derivatives Not Designated as Hedging Instruments
Foreign currency forwards	Fair Value	$	94.4	$	-	$	-	$	1.2	$	-

⁽¹⁾

Notional amounts represent the gross contract amounts of the outstanding derivatives excluding the total notional amount of positions that have been effectively closed through offsetting positions. The net gains and net losses associated with positions that have been effectively closed through offsetting positions but not yet settled are included in the asset and liability derivatives fair value columns, respectively.

Gains and losses on derivatives designated as cash flow hedges included in the Condensed Consolidated Statements of Comprehensive (Loss) Income for the three and nine month periods ended September 30, 2018 and 2017, are as presented in the table below. See Note 1 “Condensed Consolidated Financial Statements” for a discussion of the adoption of ASU 2017-12.

	For the Three Month Periods Ended September 30,						For the Nine Month Periods Ended September 30,
	2018			2017			2018			2017
Interest rate swap contracts
Gain (loss) recognized in AOCI on derivatives	$	1.8		$	1.4		$	15.2		$	(4.9	)
Loss reclassified from AOCI into income (effective portion)⁽¹⁾		(3.3	)		(4.1	)		(11.2	)		(13.9	)
Loss reclassified from AOCI into income (missed forecast)⁽²⁾		(0.6	)		-			(0.6	)		-

⁽¹⁾

Losses on derivatives reclassified from accumulated other comprehensive income (“AOCI”) into income (effective portion) were included in “Interest expense” in the Condensed Consolidated Statements of Operations, the same income statement line item as the earnings effect of the hedged item.

⁽²⁾

During the three month period ended September 30, 2018, the Company used excess cash to pay down $150.0 million of its Dollar Term Loan Facility. Due to this unforecasted pay down of debt, the Company paid $2.7 million in the amendment of the interest rate swap contracts to reflect the updated forecasted cash flows. The updated forecasts caused certain hedged items to be deemed probable of not occurring in the future and thus, the Company accelerated the release of AOCI related to those hedged items. Losses reclassified from AOCI into income (missed forecast) were included in “Loss on extinguishment of debt” in the Condensed Consolidated Statements of Operations.

As of September 30, 2018, the Company is the fixed rate payor on 11 interest rate swap contracts that effectively fix the LIBOR-based index used to determine the interest rates charged on a total of $1,025.0 million of the Company’s LIBOR-based variable rate borrowings. These contracts carry fixed rates ranging from 3.3% to 4.3% and have expiration dates ranging from 2018 to 2020. These swap agreements qualify as hedging instruments and have been designated as cash flow hedges of forecasted LIBOR-based interest payments. Based on LIBOR-based swap yield curves as of September 30, 2018, the Company expects to reclassify losses of $13.3 million out of AOCI into earnings during the next 12 months. The Company’s LIBOR-based variable rate borrowings outstanding as of September 30, 2018 were $1,025.9 million and €608.9 million.

The Company had two foreign currency forward contracts outstanding as of September 30, 2018 with notional amounts of $9.3 million and $17.2 million. These contracts are used to hedge the change in fair value of recognized foreign currency denominated assets or liabilities caused by changes in currency exchange rates. The changes in the fair value of these contracts generally offset the changes in the fair value of a corresponding amount of the hedged items, both of which are included in the “Other operating expense, net” line on the face of the Condensed Consolidated Statements of Operations. The Company’s foreign currency forward contracts are subject to master netting arrangements or agreements between the Company and each counterparty for the net settlement of all contracts through a single payment in a single currency in the event of default on or termination of any one contract with that certain counterparty. It is the Company’s practice to recognize the gross amounts in the Condensed Consolidated Balance Sheets. The amount available to be netted is not material.

The Company’s (losses) gains on derivative instruments not designated as accounting hedges and total net foreign currency (losses) gains for the three and nine month periods ended September 30, 2018 and 2017 were as follows.

	For the Three Month Periods Ended September 30,						For the Nine Month Periods Ended September 30,
	2018			2017			2018		2017
Foreign currency forward contracts (losses) gains	$	(0.4	)	$	(1.8	)	$	5.8	$	(6.7	)
Total foreign currency transaction gains (losses), net		0.8			(1.7	)		0.6		(6.3	)

The Company has a significant investment in consolidated subsidiaries with functional currencies other than the USD, particularly the EUR. The Company designated its Original Euro Term Loan as a hedge of the Company’s net investment in subsidiaries with EUR functional currencies in 2017 until it was extinguished and replaced on August 17, 2017 by a €615.0 million Euro Term Loan, further described in Note 8 “Debt.” On August 17, 2017, the Company designated the €615.0 million Euro Term Loan as a hedge of the Company’s net investment in subsidiaries with EUR functional currencies. As of September 30, 2018, the Euro Term Loan of €608.9 million remained designated.

For the period from January 1, 2017 to August 16, 2017, the Company designated two cross currency interest rate swaps, each with a USD notional amount of $100.0 million as hedges of its net investment in EUR functional subsidiaries. Both cross currency interest rate swaps were terminated on August 16, 2017. The losses and gains from the change in the fair value of the designated net investment hedges were recorded through other comprehensive income. The recorded Accumulated Other Comprehensive (Loss) Income at the termination of the cross currency interest rate swaps will remain in Accumulated Other Comprehensive (Loss) Income until there is a substantial liquidation of the Company’s net investment in subsidiaries with EUR functional currencies.

The Company’s gains and (losses), net of income tax, associated with changes in the value of debt and designated cross currency interest rate swaps for the three and nine month periods ended September 30, 2018 and 2017 and the net balance of such gains and (losses) included in accumulated other comprehensive (loss) income as of September 30, 2018 and 2017 were as follows.

	For the Three Month Periods Ended September 30,					For the Nine Month Periods Ended September 30,
	2018		2017			2018		2017
Gain (loss), net of income tax, recorded through other comprehensive income	$	3.5	$	(13.6	)	$	18.0	$	(43.2	)
Balance included in accumulated other comprehensive (loss) income as of September 30, 2018 and 2017, respectively						$	50.1	$	39.2

For the periods presented, all cash flows associated with derivatives are classified as operating cash flows in the Condensed Consolidated Statements of Cash Flows.

Fair Value Measurements

A financial instrument is defined as cash or cash equivalents, evidence of an ownership interest in an entity, or a contract that creates a contractual obligation or right to deliver or receive cash or another financial instruments from another party. The Company’s financial instruments consist primarily of cash and cash equivalents, trade accounts receivables, trade accounts payables, deferred compensation assets and obligations, derivatives and debt instruments. The carrying values of cash and cash equivalents, trade accounts receivables, trade accounts payables, and variable rate debt instruments are a reasonable estimate of their respective fair values.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or more advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure the fair value as follows.

Level 1

Quoted prices (unadjusted) in active markets for identical assets or liabilities as of the reporting date.

Level 2

Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities as of the reporting date.

Level 3

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2018.

	Level 1		Level 2		Level 3		Total
Financial Assets
Trading securities held in deferred compensation plan⁽¹⁾	$	6.3	$	-	$	-	$	6.3
Total	$	6.3	$	-	$	-	$	6.3
Financial Liabilities
Foreign currency forwards⁽²⁾	$	-	$	0.3	$	-	$	0.3
Interest rate swaps⁽³⁾		-		17.6		-		17.6
Deferred compensation plan⁽¹⁾		6.3		-		-		6.3
Total	$	6.3	$	17.9	$	-	$	24.2

⁽¹⁾

Based on the quoted price of publicly traded mutual funds which are classified as trading securities and accounted for using the mark-to-market method.

⁽²⁾

Based on calculations that use readily observable market parameters as their basis, such as spot and forward rates.

⁽³⁾

Measured as the present value of all expected future cash flows based on the LIBOR-based swap yield curves as of September 30, 2018. The present value calculation uses discount rates that have been adjusted to reflect the credit quality of the Company and its counterparties.