Financial Instruments

6 Months Ended

Mar. 31, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Fair values of financial instruments are summarized as follows (in millions):



	March 31, 2020				September 30, 2019
	Carrying Value		Fair Value		Carrying Value		Fair Value
Cash and cash equivalents	$	508	$	508	$	108	$	108
Short-term debt	138		144		41		60
Long-term debt	1,203		1,179		902		953
Foreign exchange forward contracts (other assets)	1		1		—		—
Foreign exchange forward contracts (other liabilities)	3		3		—		—
Cross-currency swaps (other assets)	—		—		10		10
Cross-currency swaps (other liabilities)	—		—		5		5

The following table reflects the offsetting of derivative assets and liabilities (in millions):



	March 31, 2020				September 30, 2019
	Gross Amounts Recognized	Gross Amounts Offset		Net Amounts Reported	Gross Amounts Recognized	Gross Amounts Offset	Net Amounts Reported
Derivative Assets
Foreign exchange forward contracts	2	(1	)	1	—	—	—
Cross-currency swaps	—	—		—	10	—	10
Derivative Liabilities
Foreign exchange forward contracts	4	(1	)	3	—	—	—
Cross-currency swaps	—	—		—	5	—	5

Fair Value

FASB guidance provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical instruments (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:


•	Level 1 inputs use quoted prices in active markets for identical instruments.


•	Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar instruments in active markets and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.


•	Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related instrument.

In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest priority level input that is significant to the valuation. The company's assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.

Fair value of financial instruments by the valuation hierarchy at March 31, 2020 is as follows (in millions):



	Level 1		Level 2		Level 3
Cash and cash equivalents	$	508	$	—	$	—
Short-term debt	—		133		11
Long-term debt	—		709		470
Foreign exchange forward contracts (other assets)	—		1		—
Foreign exchange forward contracts (other liabilities)	—		3		—

Fair value of financial instruments by the valuation hierarchy at September 30, 2019 is as follows (in millions):



	Level 1		Level 2		Level 3
Cash and cash equivalents	$	108	$	—	$	—
Short-term debt	—		49		11
Long-term debt	—		782		171
Cross-currency swaps (other assets)	—		10		—
Cross-currency swaps (other liabilities)	—		5		—

No transfers of assets between any of the Levels occurred during the three and six months ended March 31, 2020 and 2019.

Cash and cash equivalents — All highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents. The carrying value approximates fair value because of the short maturity of these instruments.

Short- and long-term debt — Fair values are based on transaction prices at public exchange for publicly traded debt. For debt instruments that are not publicly traded, fair values are based on interest rates that would be currently available to the company for issuance of similar types of debt instruments with similar terms and remaining maturities.

Foreign exchange forward contracts — The company uses foreign exchange forward purchase and sale contracts with terms of 18 months or less to hedge its exposure to changes in foreign currency exchange rates. As of March 31, 2020 and September 30, 2019, the notional amount of the company's foreign exchange contracts outstanding under its foreign currency cash flow hedging program was $69 million and $110 million, respectively. The fair value of foreign exchange forward contracts is based on a model which incorporates observable inputs including quoted spot rates, forward exchange rates and discounted future expected cash flows utilizing market interest rates with similar quality and maturity characteristics. For derivative instruments that are designated and qualify as cash flow hedges, changes in the fair value of the contracts is recorded in Accumulated Other Comprehensive Income (Loss) in the statement of shareholders’ equity and is recognized in operating income when the underlying forecasted transaction impacts earnings.

Foreign currency option contracts — The company uses option contracts to mitigate foreign exchange exposure on expected future foreign currency-denominated purchases. As of March 31, 2020 and September 30, 2019, the notional amount of the company's foreign exchange contracts outstanding was $68 million and $139 million, respectively. The company did not elect hedge accounting for these derivatives. Changes in fair value associated with these contracts are recorded in cost of sales in the Condensed Consolidated Statement of Operations.

The company uses option contracts to mitigate the risk of volatility in the translation of foreign currency earnings to U.S. dollars. As of March 31, 2020, there were no option contracts outstanding. As of September 30, 2019, the notional amount of the company's option contracts outstanding was $28 million. These option contracts did not qualify for a hedge accounting election. Changes in fair value associated with these contracts are recorded in the Condensed Consolidated Statement of Operations in other income, net.

The fair value of foreign currency option contracts is based on third-party proprietary models, which incorporate inputs at varying unobservable weights of quoted spot rates, market volatility, forward rates and time utilizing market instruments with similar quality and maturity characteristics.

Cross-currency swap contracts — The company uses cross-currency swap contracts to hedge a portion of its net investment in a foreign subsidiary against volatility in foreign exchange rates. These derivative instruments are designated and qualify as hedges of net investments in foreign operations using the spot method to assess effectiveness. Changes in fair values of the instruments are recognized in foreign currency translation adjustments, a component of other comprehensive income (loss) in the

Condensed Consolidated Statement of Comprehensive Income (Loss), to offset the changes in the values of the net investments being hedged.

In the third quarter of fiscal year 2019, the company entered into multiple cross-currency swaps with a combined notional amount of $225 million and maturities in October 2022. As of September 30, 2019, the notional amount of the company's cross-currency swap contracts outstanding was $225 million. These swaps hedged a portion of the net investment in a certain European subsidiary against volatility in the euro/U.S. dollar foreign exchange rate. In the second quarter of fiscal year 2020, the company settled these cross-currency swap contracts and received proceeds of $11 million, $1 million of which related to net accrued interest receivable.

The fair value of cross-currency swap contracts is based on a model which incorporates observable inputs, including quoted spot rates, forward exchange rates and discounted future expected cash flows, utilizing market interest rates with similar quality and maturity characteristics.