DERIVATIVE FINANCIAL INSTRUMENTS

9 Months Ended

Mar. 31, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

NOTE 7 – DERIVATIVE FINANCIAL INSTRUMENTS

The 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. During the first quarter of fiscal 2020, the Company entered into foreign currency forward contracts to hedge a portion of its net investment in certain foreign operations, which are designated as net investment hedges. The Company entered 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 balance sheet. At March 31, 2020, the notional amount of derivatives not designated as hedging instruments was $3,399 million. The Company does not utilize derivative financial instruments for trading or speculative purposes. Costs associated with entering into derivative financial instruments are not 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 as follows:


	Asset Derivatives								Liability Derivatives
		Fair Value ⁽¹⁾							Fair Value ⁽¹⁾
(In millions)	Balance Sheet Location	March 31 2020		June 30 2019		Balance Sheet Location	March 31 2020		June 30 2019
Derivatives Designated as Hedging Instruments
Foreign currency cash flow hedges	Prepaid expenses and other current assets	$	48	$	23	Other accrued liabilities	$	3	$	4
Net investment hedges	Prepaid expenses and other current assets	—		—		Other accrued liabilities	17		—
Interest rate-related derivatives	Prepaid expenses and other current assets	14		3		Other accrued liabilities	1		26

Total Derivatives Designated as Hedging Instruments		62		26			21		30

Derivatives Not Designated as Hedging Instruments
Foreign currency forward contracts	Prepaid expenses and other current assets	24		4		Other accrued liabilities	24		2

Total derivatives		$	86	$	30		$	45	$	32

______________________________________________

⁽¹⁾See Note 8 – 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 or (Loss) Recognized in OCI on Derivatives					Location of Gain or (Loss) Reclassified from AOCI into Earnings			Amount of Gain or (Loss) Reclassified from AOCI into Earnings⁽¹⁾
	Three Months Ended March 31										Three Months Ended March 31
(In millions)	2020		2019					2020			2019
Derivatives in Cash Flow Hedging Relationships:

Foreign currency forward contracts	$	46	$	2	Net sales	$	10		$	8
Interest rate-related derivatives	(2)		—		Interest expense	—			1
	44		2		Total derivatives	$	10		$	9
Derivatives in Net Investment Hedging Relationships⁽²⁾:
Foreign currency forward contracts⁽³⁾	(20)		—
Total derivatives	$	24	$	2

______________________________________________

⁽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 three months ended March 31, 2020, the gain recognized in earnings from net investment hedges related to the amount excluded from effectiveness testing was $12 million.

⁽³⁾Included within translation adjustments as a component of AOCI on the Company’s consolidated balance sheets.


	Amount of Gain or (Loss) Recognized in OCI on Derivatives					Location of Gain or (Loss) Reclassified from AOCI into Earnings			Amount of Gain or (Loss) Reclassified from AOCI into Earnings⁽¹⁾
	Nine Months Ended March 31										Nine Months Ended March 31
(In millions)	2020		2019					2020			2019
Derivatives in Cash Flow Hedging Relationships:

Foreign currency forward contracts	$	50	$	18	Net sales	$	29		$	15
Interest rate-related derivatives	(11)		—		Interest expense	—			1
	39		18		Total derivatives	$	29		$	16
Derivatives in Net Investment Hedging Relationships⁽²⁾:
Foreign currency forward contracts⁽³⁾	(54)		—
Total derivatives	$	(15)	$	18

______________________________________________

⁽²⁾During the nine months ended March 31, 2020, the gain recognized in earnings from net investment hedges related to the amount excluded from effectiveness testing was $37 million.

⁽³⁾Included within translation adjustments as a component of AOCI on the Company’s consolidated balance sheets.


		Amount of Gain or (Loss) Recognized in Earnings on Derivatives ⁽¹⁾
	Location of Gain or (Loss) Recognized in Earnings on Derivatives
				Three Months Ended March 31									Nine Months Ended March 31
(In millions)				2020			2019			2020			2019
Derivatives in Fair Value Hedging Relationships:

Interest rate swap contracts	Interest expense	$	12		$	8		$	13		$	17

______________________________________________

⁽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, 2020		March 31, 2020
Current debt	$	—	$	—
Long-term debt	713		14
Total debt	$	713	$	14

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
	2020						2019
(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	$	3,345	$	42	$	3,744	$	32

The effects of fair value and cash flow hedging relationships:
Gain (loss) on fair value hedge relationships – interest rate contracts:
Hedged item	Not applicable		(12)		Not applicable		(8)
Derivatives designated as hedging instruments	Not applicable		12		Not applicable		8

Gain (loss) on cash flow hedge relationships – interest rate contracts:
Amount of gain reclassified from AOCI into earnings	Not applicable		—		Not applicable		1

Gain (loss) on cash flow hedge relationships – foreign currency forward contracts:
Amount of gain reclassified from AOCI into earnings	10		Not applicable		8		Not applicable


	Nine Months Ended March 31
	2020						2019
(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	$	11,864	$	112	$	11,273	$	101

The effects of fair value and cash flow hedging relationships:
Gain (loss) on fair value hedge relationships – interest rate contracts:
Hedged item	Not applicable		(13)		Not applicable		(17)
Derivatives designated as hedging instruments	Not applicable		13		Not applicable		17

Gain (loss) on cash flow hedge relationships – interest rate contracts:
Amount of gain reclassified from AOCI into earnings	Not applicable		—		Not applicable		1

Gain (loss) on cash flow hedge relationships – foreign currency forward contracts:
Amount of gain reclassified from AOCI into earnings	29		Not applicable		15		Not applicable

The amounts of the gains and losses related to the Company’s derivative financial instruments not designated as hedging instruments are presented as follows:


		Amount of Gain or (Loss) Recognized in Earnings on Derivatives
	Location of Gain or (Loss) Recognized in Earnings on Derivatives	Three Months Ended March 31									Nine Months Ended March 31
(In millions)				2020			2019			2020			2019
Derivatives Not Designated as Hedging Instruments:

Foreign currency forward contracts	Selling, general and administrative	$	49		$	(12)		$	52		$	(2)

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 March 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, 2020, the Company had cash flow hedges outstanding with a notional amount totaling $1,584 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, 2020, the Company’s foreign currency cash flow hedges were highly effective.

The estimated net gain on the Company’s derivative instruments designated as cash flow hedges as of March 31, 2020 that is expected to be reclassified from AOCI into earnings, net of tax, within the next twelve months is $22 million. The accumulated net gain on derivative instruments in AOCI was $39 million and $29 million as of March 31, 2020 and June 30, 2019, 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 and $250 million to effectively convert the fixed rate interest on its 2021 Senior Notes and 2022 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.

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 2020. Hedge effectiveness of the net investment hedge contracts is based on the spot method. At March 31, 2020, the Company had net investment hedges outstanding with a notional amount totaling $1,759 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 $86 million at March 31, 2020. 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.