Financial Instruments

6 Months Ended

Jul. 01, 2017

Financial Instruments

Financial Instruments

Note 10.  Financial Instruments

We enter into foreign exchange hedge contracts to reduce our risk from exchange rate fluctuations associated with receivables, payables, loans and firm commitments denominated in certain foreign currencies that arise primarily as a result of our operations outside the U.S.  We enter into interest rate contracts to help manage our exposure to certain interest rate fluctuations.  We also enter into futures contracts to hedge certain price fluctuations for a portion of our anticipated domestic purchases of natural gas. The maximum length of time for which we hedge our exposure to the variability in future cash flows for forecasted transactions is 36 months.

As of July 1, 2017, the aggregate U.S. dollar equivalent notional value of our outstanding commodity contracts and foreign exchange contracts was $4.9 million and $2.13 billion, respectively.

We recognize derivative instruments as either assets or liabilities at fair value in the unaudited Condensed Consolidated Balance Sheets. We designate commodity forward contracts on forecasted purchases of commodities and foreign exchange contracts on forecasted transactions as cash flow hedges and designate foreign exchange contracts on existing balance sheet items as fair value hedges.

The following table shows the fair value and balance sheet locations of derivatives as of July 1, 2017:

	Asset			Liability
(In millions)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Foreign exchange contracts	Other current assets	$	5.1	Other current liabilities	$	10.1
Commodity contracts	Other current assets	.1		Other current liabilities	–
		$	5.2		$	10.1

The following table shows the fair value and balance sheet locations of derivatives as of December 31, 2016:

	Asset			Liability
(In millions)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Foreign exchange contracts	Other current assets	$	4.6	Other current liabilities	$	7.8
Commodity contracts	Other current assets	.5		Other current liabilities	–
Commodity contracts	Other assets	.1
		$	5.2		$	7.8

Fair Value Hedges

The following table shows the components of net gains (losses), before taxes, recognized in income related to fair value hedge contracts. The corresponding gains or losses on the underlying hedged items approximated the net gains (losses) on these fair value hedge contracts.

		Three Months Ended					Six Months Ended
(In millions)	Location of Net Gains (Losses) in Income	July 1, 2017			July 2, 2016		July 1, 2017			July 2, 2016
Foreign exchange contracts	Cost of products sold	$	–		$	.7	$	(1.0	)	$	1.7
Foreign exchange contracts	Marketing, general and administrative expense	(23.9		)	6.9		(22.7		)	2.4
		$	(23.9	)	$	7.6	$	(23.7	)	$	4.1

For derivative instruments that are designated and qualify as fair value hedges, the gain or loss on the derivative and the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings, resulting in no material net impact to income.

Cash Flow Hedges

Gains (losses), before taxes, recognized in “Accumulated other comprehensive loss” (effective portion) on derivatives related to cash flow hedge contracts were as follows:

	Three Months Ended						Six Months Ended
(In millions)	July 1, 2017			July 2, 2016			July 1, 2017			July 2, 2016
Foreign exchange contracts	$	(.4	)	$	(.3	)	$	(3.5	)	$	(1.8	)
Commodity contracts	(.2		)	.5			(.4		)	.3
	$	(.6	)	$	.2		$	(3.9	)	$	(1.5	)

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of “Accumulated other comprehensive loss” and reclassified into earnings in the same period(s) during which the hedged transaction impacts earnings.  Gains and losses on the derivative, representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness, are recognized in current earnings.

The amount recognized in income related to the ineffective portion of, and the amount excluded from, effectiveness testing for cash flow hedges and derivatives not designated as hedging instruments was not material for the three and six months ended July 1, 2017 and July 2, 2016, respectively.

As of July 1, 2017, we expected a net loss of approximately $.3 million to be reclassified from “Accumulated other comprehensive loss” to earnings within the next 12 months.

Net Investment Hedge

In March 2017, we designated our €500 million of euro-denominated 1.25% senior notes due 2025 as a net investment hedge of our investment in foreign operations. The net assets from the investment in foreign operations were greater than the senior notes, and as such, the net investment hedge was effective. Refer to Note 5, “Debt,” for further information about our euro-denominated debt.

Gain (loss), before tax, recognized in “Accumulated other comprehensive loss” (effective portion) related to the net investment hedge was as follows:

	Three Months Ended					Six Months Ended
(In millions)	July 1, 2017			July 2, 2016		July 1, 2017			July 2, 2016
Foreign currency denominated debt	$	(26.3	)	$	n/a	$	(37.7	)	$	n/a

We recorded no ineffectiveness from our net investment hedge in earnings during the three or six months ended July 1, 2017.