DERIVATIVE FINANCIAL INSTRUMENTS

3 Months Ended

Sep. 30, 2011

DERIVATIVE FINANCIAL INSTRUMENTS

DERIVATIVE FINANCIAL INSTRUMENTS

NOTE 4 — 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 and interest rate derivatives to manage the effects of interest rate movements on the Company’s aggregate liability portfolio.  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.  The Company does not utilize derivative financial instruments for trading or speculative purposes.  Costs associated with entering into these 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 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, how the hedging instruments’ effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a description of the method of measuring ineffectiveness.  This process includes linking all derivatives to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions.  The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.  If it is determined that a derivative is not highly effective, or that it has ceased to be a highly effective hedge, the Company will be required 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	September 30 2011		June 30 2011		Balance Sheet Location	September 30 2011		June 30 2011
Derivatives Designated as Hedging Instruments:
Foreign currency forward contracts	Prepaid expenses and other current assets	$	21.4	$	11.9	Other accrued liabilities	$	5.5	$	28.4
Derivatives Not Designated as Hedging Instruments:
Foreign currency forward contracts	Prepaid expenses and other current assets	3.8		3.1		Other accrued liabilities	7.8		2.5
Total Derivatives		$	25.2	$	15.0		$	13.3	$	30.9

(1) See Note 5 — 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 are presented as follows:

	Amount of Gain or (Loss) Recognized in OCI on Derivatives (Effective Portion)					Location of Gain or (Loss) Reclassified	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Earnings (Effective Portion) (2)
	Three Months Ended					from Accumulated	Three Months Ended
	September 30					OCI into Earnings	September 30
(In millions)	2011		2010			(Effective Portion)	2011			2010
Derivatives in Cash Flow Hedging Relationships:
Foreign currency forward contracts	$	33.3	$	(13.9	)	Cost of sales	$	0.6		$	(0.3	)
						Selling, general and administrative	(2.1		)	—
Total derivatives	$	33.3	$	(13.9	)		$	(1.5	)	$	(0.3	)

(2) The amount of gain (loss) recognized in earnings related to the amount excluded from effectiveness testing was $(2.4) million and $0.3 million for the three months ended September 30, 2011 and 2010, respectively.  There was a de minimis gain recognized in earnings related to the ineffective portion of the hedging relationships for the three months ended September 30, 2011.  There was no gain (loss) recognized in earnings related to the ineffective portion of the hedging relationships for the three months ended September 30, 2010.

		Amount of Gain or (Loss) Recognized in Earnings on Derivatives (3)
	Location of Gain or (Loss)	Three Months Ended
	Recognized in Earnings on	September 30
(In millions)	Derivatives	2011		2010
Derivatives in Fair Value Hedging Relationships:
Interest rate swap contracts	Interest expense, net	$	—	$	8.7

(3) Changes in the fair values of the interest rate swap agreements are exactly offset by changes in the fair value of the underlying long-term debt.

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)	Three Months Ended
	Recognized in Earnings on	September 30
(In millions)	Derivatives	2011			2010
Derivatives Not Designated as Hedging Instruments:
Foreign currency forward contracts	Selling, general and administrative	$	(4.5	)	$	0.4

Foreign Currency Cash-Flow Hedges

The Company enters into foreign currency forward contracts to hedge anticipated transactions, as well as 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 costs and on the cash flows that the Company receives from foreign subsidiaries.  The majority of foreign currency forward contracts are denominated in currencies of major industrial countries.  The foreign currency forward contracts entered into to hedge anticipated transactions have been designated as foreign currency cash-flow hedges and have varying maturities through the end of June 2013.  Hedge effectiveness of foreign currency forward contracts is based on a hypothetical derivative methodology and excludes the portion of fair value attributable to the spot-forward difference which is recorded in current-period earnings.

The ineffective portion of foreign currency forward contracts is recorded in current-period earnings.  For hedge contracts that are no longer deemed highly effective, hedge accounting is discontinued and gains and losses accumulated in OCI are reclassified to earnings when the underlying forecasted transaction occurs.  If it is probable that the forecasted transaction will no longer occur, then any gains or losses in accumulated OCI are reclassified to current-period earnings.  As of September 30, 2011, the Company’s foreign currency cash-flow hedges were highly effective in all material respects.  The estimated net loss as of September 30, 2011 that is expected to be reclassified from accumulated OCI into earnings, net of tax, within the next twelve months is $11.0 million.  The accumulated gain (loss) on derivative instruments in accumulated OCI was $21.6 million and $(13.2) million as of September 30, 2011 and June 30, 2011, respectively.

At September 30, 2011, the Company had foreign currency forward contracts in the amount of $1,580.1 million.  The foreign currencies included in foreign currency forward contracts (notional value stated in U.S. dollars) are principally the British pound ($311.0 million), Swiss franc ($264.9 million), Euro ($241.2 million), Canadian dollar ($191.5 million), Australian dollar ($109.3 million), Japanese yen ($75.6 million) and South Korean won ($71.7 million).

Credit Risk

As a matter of policy, the Company only enters into derivative contracts 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 $25.2 million at September 30, 2011.  To manage this risk, the Company has established strict counterparty credit guidelines that are continually monitored and reported to management.  Accordingly, management believes risk of loss under these hedging contracts is remote.

Certain of the Company’s derivative financial instruments contain credit-risk-related contingent features.  At September 30, 2011, the Company was in a net asset position for certain derivative contracts that contain such features with two counterparties.  The fair value of those contracts as of September 30, 2011 was approximately $0.5 million.  As of September 30, 2011, the Company was in compliance with such credit-risk-related contingent features.