| DERIVATIVE FINANCIAL INSTRUMENTS |
DERIVATIVE FINANCIAL INSTRUMENTSThe Company addresses certain financial exposures through a controlled program of risk management that includes the use of derivative financial instruments. The Company enters into foreign currency forward contracts, and may enter into option contracts, to reduce the effects of fluctuating foreign currency exchange rates. In addition, the Company enters into interest rate derivatives to manage the effects of interest rate movements on the Company’s aggregate liability portfolio, including potential future debt issuances. The Company enters into the net investment hedges to offset the risk of changes in the U.S. dollar value of the Company’s investment in these foreign operations due to fluctuating foreign exchange rates. Time value is excluded from the effectiveness assessment and is recognized under a systematic and rational method over the life of the hedging instrument in Selling, general and administrative expenses. The net gain or loss on net investment hedges is recorded within translation adjustments, as a component of accumulated OCI (“AOCI”) on the Company’s consolidated balance sheets, until the sale or substantially complete liquidation of the underlying assets of the Company’s investment. The Company also enters into foreign currency forward contracts, and may use option contracts, not designated as hedging instruments, to mitigate the change in fair value of specific assets and liabilities on the consolidated balance sheets. At March 31, 2021, the notional amount of derivatives not designated as hedging instruments was $4,404 million. The Company does not utilize derivative financial instruments for trading or speculative purposes. Costs associated with entering into derivative financial instruments have not been material to the Company’s consolidated financial results. For each derivative contract entered into, where the Company looks to obtain hedge accounting treatment, the Company formally and contemporaneously documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking the hedge transaction, the nature of the risk being hedged, and how the hedging instruments’ effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively. This process includes linking all derivatives to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. At inception, the Company evaluates the effectiveness of hedge relationships quantitatively, and has elected to perform, after initial evaluation, qualitative effectiveness assessments of certain hedge relationships to support an ongoing expectation of high effectiveness, if effectiveness testing is required. If based on the qualitative assessment, it is determined that a derivative has ceased to be a highly effective hedge, the Company will perform a quantitative assessment to determine whether to discontinue hedge accounting with respect to that derivative prospectively. The fair values of the Company’s derivative financial instruments included in the consolidated balance sheets are presented as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Asset Derivatives | | Liability Derivatives | | | | | Fair Value (1) | | | | Fair Value (1) | | (In millions) | | Balance Sheet
Location | | March 31
2021 | | June 30
2020 | | Balance Sheet
Location | | March 31
2021 | | June 30
2020 | | Derivatives Designated as Hedging Instruments | | | | | | | | | | | | | | Foreign currency cash flow hedges | | Prepaid expenses and other current assets | | $ | 16 | | | $ | 26 | | | Other accrued liabilities | | $ | 21 | | | $ | 3 | | | Net investment hedges | | Prepaid expenses and other current assets | | 115 | | | 21 | | | Other accrued liabilities | | — | | | 62 | | | Interest rate-related derivatives | | Prepaid expenses and other current assets | | 7 | | | 15 | | | Other accrued liabilities | | 15 | | | 3 | | | | | | | | | | | | | | | | Total Derivatives Designated as Hedging Instruments | | | | 138 | | | 62 | | | | | 36 | | | 68 | | | | | | | | | | | | | | | | Derivatives Not Designated as Hedging Instruments | | | | | | | | | | | | | | Foreign currency forward contracts | | Prepaid expenses and other current assets | | 5 | | | 40 | | | Other accrued liabilities | | 108 | | | 15 | | | | | | | | | | | | | | | | Total derivatives | | | | $ | 143 | | | $ | 102 | | | | | $ | 144 | | | $ | 83 | | | | | | | | | | | | | | |
(1)See Note 7 – Fair Value Measurements for further information about how the fair value of derivative assets and liabilities are determined. The amounts of the gains and losses related to the Company’s derivative financial instruments designated as hedging instruments that are included in the assessment of effectiveness are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amount of Gain (Loss)
Recognized in OCI on
Derivatives | | Location of Gain (Loss)
Reclassified from AOCI
into Earnings (Loss) | | Amount of Gain (Loss) Reclassified from AOCI into Earnings (Loss)(1) | | | Three Months Ended
March 31 | | | Three Months Ended
March 31 | | (In millions) | | 2021 | | 2020 | | | 2021 | | 2020 | Derivatives in Cash Flow Hedging Relationships: | | | | | | | | | | | | | | | | | | | | | | | | $ | 22 | | | $ | 46 | | | Net sales | | $ | (7) | | | $ | 10 | | Interest rate-related derivatives | | 11 | | | (2) | | | Interest expense | | (1) | | | — | | | | 33 | | | 44 | | | | | (8) | | | 10 | | Derivatives in Net Investment Hedging Relationships(2): | | | | | | | | | | | | | 125 | | | (20) | | | | | — | | | — | | Total derivatives | | $ | 158 | | | $ | 24 | | | | | $ | (8) | | | $ | 10 | | | | | | | | | | | | |
(1)The amount reclassified into earnings (loss) as a result of the discontinuance of cash flow hedges because probable forecasted transactions will no longer occur by the end of the original time period was not material. (2)During the three months ended March 31, 2021 and 2020, the gain recognized in earnings (loss) from net investment hedges related to the amount excluded from effectiveness testing was $5 million and $12 million, respectively. (3)Included within translation adjustments as a component of AOCI on the Company’s consolidated balance sheets.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amount of Gain (Loss)
Recognized in OCI on
Derivatives | | Location of Gain (Loss)
Reclassified from AOCI
into Earnings | | Amount of Gain (Loss) Reclassified from AOCI into Earnings(1) | | | Nine Months Ended
March 31 | | | Nine Months Ended
March 31 | | (In millions) | | 2021 | | 2020 | | | 2021 | | 2020 | | Derivatives in Cash Flow Hedging Relationships: | | | | | | | | | | | | | | | | | | | | | | | Foreign currency forward contracts | | $ | (43) | | | $ | 50 | | | Net sales | | $ | (11) | | | $ | 29 | | | Interest rate-related derivatives | | 14 | | | (11) | | | Interest expense | | (2) | | | — | | | | (29) | | | 39 | | | | | (13) | | | 29 | | Derivatives in Net Investment Hedging Relationships(2): | | | | | | | | | | | | | (17) | | | (54) | | | | | — | | | — | | | Total derivatives | | $ | (46) | | | $ | (15) | | | | | $ | (13) | | | $ | 29 | | | | | | | | | | | | |
(1)The amount reclassified into earnings as a result of the discontinuance of cash flow hedges because probable forecasted transactions will no longer occur by the end of the original time period was not material. (2)During the nine months ended March 31, 2021 and 2020, the gain recognized in earnings from net investment hedges related to the amount excluded from effectiveness testing was $15 million and $37 million, respectively. (3)Included within translation adjustments as a component of AOCI on the Company’s consolidated balance sheets. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amount of Gain (Loss) Recognized in Earnings (Loss) on Derivatives (1) | | | Location of Gain (Loss) Recognized in Earnings (Loss) on Derivatives | | | | | | | | | | | | Three Months Ended
March 31 | | Nine Months Ended
March 31 | | (In millions) | | | 2021 | | 2020 | | 2021 | | 2020 | Derivatives in Fair Value Hedging Relationships: | | | | | | | | | | | | | | | | | | | | | | | | Interest expense | | $ | (18) | | | $ | 12 | | | $ | (23) | | | $ | 13 | | | | | | | | | | | | |
(1)Changes in the fair value of the interest rate swap agreements are exactly offset by the change in the fair value of the underlying long-term debt.
Additional information regarding the cumulative amount of fair value hedging gain (loss) recognized in earnings for items designated and qualifying as hedged items in fair value hedges is as follows:
| | | | | | | | | | | | | | | | (In millions) | | | | | Line Item in the Consolidated Balance Sheets in
Which the Hedged Item is Included | | Carrying Amount of the
Hedged Liabilities | | Cumulative Amount of Fair
Value Hedging Gain (Loss)
Included in the Carrying Amount of the Hedged Liability | | | March 31, 2021 | | March 31, 2021 | | Current debt | | $ | 451 | | | $ | 1 | | | Long-term debt | | 936 | | | (9) | | | Total debt | | $ | 1,387 | | | $ | (8) | |
Additional information regarding the effects of fair value and cash flow hedging relationships for derivatives designated and qualifying as hedging instruments is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended March 31 | | | 2021 | | 2020 | | (In millions) | | Net Sales | | Interest
Expense | | Net Sales | | Interest
Expense | | Total amounts of income and expense line items presented in the consolidated statements of earnings (loss) in which the effects of fair value and cash flow hedges are recorded | | $ | 3,864 | | | $ | 43 | | | $ | 3,345 | | | $ | 42 | | | | | | | | | | | The effects of fair value and cash flow hedging relationships: | | | | | | | | | Gain (loss) on fair value hedge relationships – interest rate contracts: | | | | | | | | | Hedged item | | Not applicable | | 18 | | | Not applicable | | (12) | | Derivatives designated as hedging instruments | | Not applicable | | (18) | | | Not applicable | | 12 | | | | | | | | | | | | Gain (loss) on cash flow hedge relationships – interest rate contracts: | | | | | | | | | | Amount of loss reclassified from AOCI into earnings (loss) | | Not applicable | | (1) | | | Not applicable | | — | | | | | | | | | | | Gain (loss) on cash flow hedge relationships – foreign currency forward contracts: | | | | | | | | | | Amount of gain reclassified from AOCI into earnings (loss) | | (7) | | | Not applicable | | 10 | | | Not applicable |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Nine Months Ended March 31 | | | 2021 | | 2020 | | (In millions) | | Net Sales | | Interest
Expense | | Net Sales | | Interest
Expense | | Total amounts of income and expense line items presented in the consolidated statements of earnings in which the effects of fair value and cash flow hedges are recorded | | $ | 12,279 | | | $ | 131 | | | $ | 11,864 | | | $ | 112 | | | | | | | | | | | The effects of fair value and cash flow hedging relationships: | | | | | | | | | Gain (loss) on fair value hedge relationships – interest rate contracts: | | | | | | | | | Hedged item | | Not applicable | | 23 | | | Not applicable | | (13) | | Derivatives designated as hedging instruments | | Not applicable | | (23) | | | Not applicable | | 13 | | | | | | | | | | | | Gain (loss) on cash flow hedge relationships – interest rate contracts: | | | | | | | | | | Amount of loss reclassified from AOCI into earnings | | Not applicable | | (2) | | | Not applicable | | — | | | | | | | | | | | Gain (loss) on cash flow hedge relationships – foreign currency forward contracts: | | | | | | | | | Amount of gain reclassified from AOCI into earnings | | (11) | | | Not applicable | | 29 | | | Not applicable |
The amount of gains and losses related to the Company’s derivative financial instruments not designated as hedging instruments are presented as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amount of Gain (Loss)
Recognized in Earnings (Loss) on Derivatives | | | Location of Gain (Loss) Recognized in Earnings (Loss) on Derivatives | | Three Months Ended
March 31 | | Nine Months Ended
March 31 | | (In millions) | | | 2021 | | 2020 | | 2021 | | 2020 | Derivatives Not Designated as Hedging Instruments: | | | | | | | | | | | | | | | | | | | | | | | | Selling, general and administrative | | $ | (97) | | | $ | 49 | | | $ | (34) | | | $ | 52 | |
Cash Flow Hedges The Company enters into foreign currency forward contracts, and may enter into foreign currency option contracts, to hedge anticipated transactions and receivables and payables denominated in foreign currencies, for periods consistent with the Company’s identified exposures. The purpose of the hedging activities is to minimize the effect of foreign exchange rate movements on the cash flows that the Company receives from foreign subsidiaries. The foreign currency forward contracts entered into to hedge anticipated transactions have been designated as cash flow hedges and have varying maturities through the end of December 2022. Hedge effectiveness of the foreign currency forward contracts is based on the forward method, which includes time value in the effectiveness assessment. At March 31, 2021, the Company had cash flow hedges outstanding with a notional amount totaling $1,390 million. The Company may enter into interest rate forward contracts to hedge anticipated issuance of debt for periods consistent with the Company’s identified exposures. The purpose of the hedging activities is to minimize the effect of interest rate movements on the cost of debt issuance. For hedge contracts that are no longer deemed highly effective, hedge accounting is discontinued, and gains and losses in AOCI are reclassified to sales when the underlying forecasted transaction occurs. If it is probable that the forecasted transaction will no longer occur, then any gains or losses in AOCI are reclassified to current-period sales. As of March 31, 2021, the Company’s foreign currency cash flow hedges were highly effective. The estimated net loss on the Company’s derivative instruments designated as cash flow hedges as of March 31, 2021 that is expected to be reclassified from AOCI into earnings, net of tax, within the next twelve months is $8 million. The accumulated net gain on derivative instruments in AOCI was $4 million and $20 million as of March 31, 2021 and June 30, 2020, respectively. Fair Value Hedges The Company enters into interest rate derivative contracts to manage the exposure to interest rate fluctuations on its funded indebtedness. The Company has interest rate swap agreements, with notional amounts totaling $450 million, $250 million and $700 million to effectively convert the fixed rate interest on its 2021 Senior Notes, 2022 Senior Notes and 2030 Senior Notes, respectively, to variable interest rates based on three-month LIBOR plus a margin. These interest rate swap agreements are designated as fair value hedges of the related long-term debt, and the changes in the fair value of the interest rate swap agreements are exactly offset by the change in the fair value of the underlying long-term debt. See Note 16 – Subsequent Events for further information relating to the interest rate swap transactions that occurred subsequent to March 31, 2021. Net Investment Hedges The Company enters into foreign currency forward contracts, designated as net investment hedges, to hedge a portion of its net investment in certain foreign operations. The net gain or loss on these contracts is recorded within translation adjustments, as a component of AOCI on the Company’s consolidated balance sheets. The purpose of the hedging activities is to minimize the effect of foreign exchange rate movements on the Company’s net investment in these foreign operations. The net investment hedge contracts have varying maturities through the end of April 2021. Hedge effectiveness of the net investment hedge contracts is based on the spot method. At March 31, 2021, the Company had net investment hedges outstanding with a notional amount totaling $1,920 million. Credit Risk As a matter of policy, the Company enters into derivative contracts only with counterparties that have a long-term credit rating of at least A- or higher by at least two nationally recognized rating agencies. The counterparties to these contracts are major financial institutions. Exposure to credit risk in the event of nonperformance by any of the counterparties is limited to the gross fair value of contracts in asset positions, which totaled $143 million at March 31, 2021. To manage this risk, the Company has strict counterparty credit guidelines that are continually monitored. Accordingly, management believes risk of loss under these hedging contracts is remote.
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