DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company is exposed to market risks, such as changes in interest rates, currency exchange rates and commodity prices. To manage a portion of the volatility related to these exposures, the Company enters into various financial transactions. The utilization of these financial transactions is governed by policies covering acceptable counterparty exposure, instrument types and other hedging practices. The Company does not hold or issue derivative financial instruments for speculative trading purposes.

Exchange Rate Risk Management

The Company uses currency forward contracts to manage the exchange rate risk associated with intercompany loans with foreign subsidiaries that are denominated in local currencies. At March 31, 2018, the notional amount of outstanding currency forward contracts was $252.9 million, with a negative fair value of $0.7 million. At April 1, 2017, the notional amount of outstanding currency forward contracts was $288.4 million, with a negative fair value of $3.5 million. At September 30, 2017, the notional amount of outstanding currency forward contracts was $268.3 million, with a fair value of $1.8 million. The fair value of currency forward contracts is determined using forward rates in commonly quoted intervals for the full term of the contracts. The outstanding contracts will mature over the next fiscal quarter.

Interest Rate Risk Management

The Company enters into interest rate swap agreements as a means to hedge its variable interest rate risk on debt instruments. Net amounts to be received or paid under the swap agreements are reflected as adjustments to interest expense. Since the interest rate swap agreements have been designated as hedging instruments, unrealized gains or losses resulting from adjusting these swaps to fair value are recorded as elements of accumulated other comprehensive income (loss) (“AOCI”) within the Condensed Consolidated Balance Sheets. The fair value of the swap agreements is determined based on the present value of the estimated future net cash flows using implied rates in the applicable yield curve as of the valuation date.

The Company has outstanding interest rate swap agreements with major financial institutions that effectively convert a portion of the Company’s variable-rate debt to a fixed rate. The swap agreements had a maximum total U.S. dollar equivalent notional amount of $1,300.0 million at March 31, 2018, $1,150.0 million at April 1, 2017 and $1,100.0 million at September 30, 2017. Refer to “NOTE 8. DEBT” for the terms of the swap agreements outstanding at March 31, 2018. Included in the AOCI balance at March 31, 2018 was a gain of $0.9 million related to interest rate swap agreements that is expected to be reclassified to earnings during the next twelve months, consistent with the timing of the underlying hedged transactions.

Commodity Price Risk Management

The Company enters into hedging arrangements designed to fix the price of a portion of its projected future urea requirements. The contracts are designated as hedges of the Company’s exposure to future cash flow fluctuations associated with the cost of urea. The objective of the hedges is to mitigate the earnings and cash flow volatility attributable to the risk of changing prices. Since the contracts have been designated as hedging instruments, unrealized gains or losses resulting from adjusting these contracts to fair value are recorded as elements of AOCI within the Condensed Consolidated Balance Sheets. Realized gains or losses remain as a component of AOCI until the related inventory is sold. Upon sale of the underlying inventory, the gain or loss is reclassified to cost of sales. Included in the AOCI balance at March 31, 2018 was a loss of $0.3 million related to urea derivatives that is expected to be reclassified to earnings during the next twelve months, consistent with the timing of the underlying hedged transactions.

The Company also uses derivatives to partially mitigate the effect of fluctuating diesel costs on operating results. These financial instruments are carried at fair value within the Condensed Consolidated Balance Sheets. Changes in the fair value of derivative contracts that qualify for hedge accounting are recorded in AOCI. The effective portion of the change in fair value remains as a component of AOCI until the related fuel is consumed, at which time the accumulated gain or loss on the derivative contract is reclassified to cost of sales. Changes in the fair value of derivatives that do not qualify for hedge accounting are recorded as an element of cost of sales. At March 31, 2018, there were no amounts included within AOCI.

The Company had the following outstanding commodity contracts that were entered into to hedge forecasted purchases:



COMMODITY	MARCH 31, 2018	APRIL 1, 2017	SEPTEMBER 30, 2017
Urea	42,000 tons	28,500 tons	76,500 tons
Diesel	3,360,000 gallons	5,544,000 gallons	5,586,000 gallons
Heating Oil	1,092,000 gallons	1,680,000 gallons	1,386,000 gallons

Fair Values of Derivative Instruments

The fair values of the Company’s derivative instruments were as follows:



		ASSETS / (LIABILITIES)
DERIVATIVES DESIGNATED AS HEDGING INSTRUMENTS		MARCH 31, 2018			APRIL 1, 2017			SEPTEMBER 30, 2017
DERIVATIVES DESIGNATED AS HEDGING INSTRUMENTS	BALANCE SHEET LOCATION	FAIR VALUE
		(In millions)
Interest rate swap agreements	Prepaid and other current assets	$	1.5		$	0.7		$	1.3
	Other assets	1.9			0.8			—
	Other current liabilities	—			(1.9		)	(0.8		)
	Other liabilities	—			(0.7		)	(0.4		)
Commodity hedging instruments	Prepaid and other current assets	—			—			3.2
	Other current liabilities	(0.5		)	(0.2		)	—
Total derivatives designated as hedging instruments		$	2.9		$	(1.3	)	$	3.3

DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS	BALANCE SHEET LOCATION
Currency forward contracts	Prepaid and other current assets	$	0.3		$	0.5		$	2.0
	Other current liabilities	(1.0		)	(4.0		)	(0.2		)
Commodity hedging instruments	Prepaid and other current assets	1.1			—			0.6
	Other current liabilities	—			(0.1		)	—
Total derivatives not designated as hedging instruments		0.4			(3.6		)	2.4
Total derivatives		$	3.3		$	(4.9	)	$	5.7

The effect of derivative instruments on AOCI and the Condensed Consolidated Statements of Operations was as follows:



DERIVATIVES IN CASH FLOW HEDGING RELATIONSHIPS	AMOUNT OF GAIN / (LOSS) RECOGNIZED IN AOCI
	THREE MONTHS ENDED						SIX MONTHS ENDED
	MARCH 31, 2018			APRIL 1, 2017			MARCH 31, 2018		APRIL 1, 2017
	(In millions)
Interest rate swap agreements	$	2.1		$	0.4		$	2.5	$	2.5
Commodity hedging instruments	(0.1		)	(0.4		)	0.3		0.5
Total	$	2.0		$	—		$	2.8	$	3.0



DERIVATIVES IN CASH FLOW HEDGING RELATIONSHIPS	RECLASSIFIED FROM AOCI INTO STATEMENT OF OPERATIONS	AMOUNT OF GAIN / (LOSS)
		THREE MONTHS ENDED					SIX MONTHS ENDED
		MARCH 31, 2018		APRIL 1, 2017			MARCH 31, 2018		APRIL 1, 2017
		(In millions)
Interest rate swap agreements	Interest expense	$	0.1	$	(0.9	)	$	0.2	$	(1.2	)
Commodity hedging instruments	Cost of sales	1.0		(0.2		)	1.0		(0.3		)
Total		$	1.1	$	(1.1	)	$	1.2	$	(1.5	)



DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS	RECOGNIZED IN STATEMENT OF OPERATIONS	AMOUNT OF GAIN / (LOSS)
		THREE MONTHS ENDED						SIX MONTHS ENDED
		MARCH 31, 2018			APRIL 1, 2017			MARCH 31, 2018			APRIL 1, 2017
		(In millions)
Currency forward contracts	Other income / expense, net	$	(2.6	)	$	(2.2	)	$	(5.2	)	$	7.0
Commodity hedging instruments	Cost of sales	0.2			(0.9		)	1.5			—
Total		$	(2.4	)	$	(3.1	)	$	(3.7	)	$	7.0