Financial Instruments

9 Months Ended

Jun. 30, 2011

Financial Instruments

Financial Instruments

7. FINANCIAL INSTRUMENTS

Currency Price Risk Management

Our earnings, cash flows, and financial position are exposed to foreign currency risk from foreign currency denominated transactions and net investments in foreign operations. It is our policy to minimize the cash flow volatility to changes in currency exchange rates. This is accomplished by identifying and evaluating the risk that our cash flows will change in value due to changes in exchange rates and by determining the appropriate strategies necessary to manage such exposures. Our objective is to maintain economically balanced currency risk management strategies that provide adequate downside protection.

Forward Exchange Contracts

We enter into forward exchange contracts to reduce the cash flow exposure to foreign currency fluctuations associated with highly anticipated cash flows and certain firm commitments such as the purchase of plant and equipment. The maximum remaining term of any forward exchange contract currently outstanding at 30 June 2011 is 1.6 years. Forward exchange contracts are also used to hedge the value of investments in certain foreign subsidiaries and affiliates by creating a liability in a currency in which we have a net equity position. The primary currency pair in this portfolio of forward contracts is the Euro/U.S. Dollar.

In addition to the foreign exchange contracts that are designated as hedges, we also hedge foreign currency exposures utilizing forward exchange contracts that are not designated as hedges. These contracts are used to hedge foreign currency-denominated monetary assets and liabilities, primarily working capital. The primary objective of these forward contracts is to protect the value of foreign currency-denominated monetary assets and liabilities from the effects of volatility in foreign exchange rates that might occur prior to their receipt or settlement. This portfolio of forward exchange contracts is comprised of many different foreign currency pairs with a profile that changes from time to time depending on business activity and sourcing decisions.

The table below summarizes our outstanding currency price risk management instruments:

	30 June 2011				30 September 2010
	US$ Notional		Years Average Maturity		US$ Notional		Years Average Maturity
Forward exchange contracts:
Cash flow hedges	$	1,358.3		.4	$	1,605.5		.5
Net investment hedges		696.4		2.2		648.5		3.0
Hedges not designated		292.6		.1		373.6		.2
Total Forward Exchange Contracts	$	2,347.3		.9	$	2,627.6		1.1

In addition to the above, we use foreign currency denominated debt and qualifying intercompany loans to hedge the foreign currency exposures of our net investment in certain foreign affiliates. The designated foreign currency denominated debt at 30 June 2011 includes €724.7 million and NT$975.0 million, and at 30 September 2010 includes €782.1 million and NT$967.0 million. The designated intercompany loans were €437.0 million at 30 June 2011 and 30 September 2010.

Debt Portfolio Management

It is our policy to identify on a continuing basis the need for debt capital and evaluate the financial risks inherent in funding the Company with debt capital. Reflecting the result of this ongoing review, our debt portfolio and hedging program are managed with the objectives and intent to (1) reduce funding risk with respect to borrowings made by us to preserve our access to debt capital and provide debt capital as required for funding and liquidity purposes, and (2) manage the aggregate interest rate risk and the debt portfolio in accordance with certain debt management parameters.

Interest Rate Swap Contracts

We enter into interest rate swap contracts to change the fixed/variable interest rate mix of our debt portfolio in order to maintain the percentage of fixed- and variable-rate debt within the parameters set by management. In accordance with these parameters, the agreements are used to optimize interest rate risks and costs inherent in our debt portfolio. Our interest rate swap portfolio will generally consist of fixed to floating swaps and pre-issuance interest rate swap agreements to hedge the interest rate on anticipated fixed rate debt issuance. At 30 June 2011, the outstanding interest rate swaps were denominated in U.S. dollars and Euros. The maximum remaining hedged term of any interest rate swap designated as a cash flow hedge is 5.1 years. The notional amount of the interest rate swap agreements are equal to or less than the designated debt instrument being hedged. When interest rate swaps are used, the indices of the swap instruments and the debt to which they are designated are the same. It is our policy not to enter into any interest rate swap contracts which lever a move in interest rates on a greater than one-to-one basis.

Cross Currency Interest Rate Swap Contracts

We enter into cross currency interest rate swap contracts when risk management deems necessary. These contracts may entail both the exchange of fixed- and floating-rate interest payments periodically over the life of the agreement and the exchange of one currency for another currency at inception and at a specified future date. These contracts effectively convert the currency denomination of a debt instrument into another currency in which we have a net equity position while changing the interest rate characteristics of the instrument. The contracts are used to hedge long-term intercompany and third-party borrowing transactions and certain net investments in foreign operations. The current cross currency swap portfolio consists of a single fixed to fixed swap between U.S. dollars and British Pound Sterling.

The following table summarizes our outstanding interest rate swaps and cross currency interest rate swaps:

	30 June 2011										30 September 2010
	US$ Notional		Pay %			Average Receive %			Years Average Maturity		US$ Notional		Pay %			Average Receive %			Years Average Maturity
Interest rate swaps (fair value hedge)	$	595.2		LIBOR			3.40	%		4.7	$	617.0		LIBOR			3.66	%		3.8
Cross currency interest rate swaps (net investment hedge)	$	32.2		5.54	%		5.50	%		2.7	$	32.2		5.54	%		5.48	%		3.5
Interest rate swaps (cash flow hedge)	$	300.0		1.91	%		LIBOR			5.1	$	—		—			—			—

The table below summarizes the fair value and balance sheet location of our outstanding derivatives:

	Balance Sheet	30 June 2011		30 September 2010		Balance Sheet		30 June 2011		30 September 2010
	Location	Fair Value		Fair Value		Location		Fair Value		Fair Value
Derivatives Designated as Hedging Instruments:
Forward exchange contracts	Other receivables	$	22.1	$	29.8		Accrued liabilities	$	45.5	$	22.3
Interest rate swap contracts	Other receivables		10.8		6.6		Accrued liabilities		—		1.3
Forward exchange contracts	Other noncurrent assets		18.7		38.7		Other noncurrent liabilities		.5		19.9
Interest rate swap contracts	Other noncurrent assets		18.3		33.1		Other noncurrent liabilities		3.1		2.4
Total Derivatives Designated as Hedging Instruments		$	69.9	$	108.2			$	49.1	$	45.9
Derivatives Not Designated as Hedging Instruments:
Forward exchange contracts	Other receivables	$	2.3	$	6.2		Accrued liabilities	$	1.5	$	8.3
Total Derivatives		$	72.2	$	114.4			$	50.6	$	54.2

Refer to Note 8, Fair Value Measurements, which defines fair value, describes the method for measuring fair value, and provides additional disclosures regarding fair value measurements.

The table below summarizes the gain or loss related to our cash flow hedges, fair value hedges, net investment hedges, and derivatives not designated as hedging instruments.

	Three Months Ended 30 June
	Forward Exchange Contracts						Foreign Currency Debt					Other (A)						Total
	2011			2010			2011		2010			2011			2010			2011			2010
Cash Flow Hedges:
Net (gain) loss recognized in OCI (effective portion)	$	(6.1	)	$	16.0		$	—	$	—		$	.8		$	—		$	(5.3	)	$	16.0
Net gain (loss) reclassified from OCI to sales/cost of sales (effective portion)		(1.3	)		(.7	)		—		—			—			—			(1.3	)		(.7	)
Net gain (loss) reclassified from OCI to other (income) expense (effective portion)		6.7			(15.1	)		—		—			—			—			6.7			(15.1	)
Net gain (loss) reclassified from OCI to other (income) expense (ineffective portion)		(.5	)		.1			—		—			—			—			(.5	)		.1
Fair Value Hedges:
Net (gain) loss recognized in other (income) expense (B)	$	—		$	—		$	—	$	—		$	(8.4	)	$	(10.8	)	$	(8.4	)	$	(10.8	)
Net Investment Hedges:
Net (gain) loss recognized in OCI	$	8.0		$	(53.7	)	$	30.5	$	(117.0	)	$	.2		$	(.4	)	$	38.7		$	(171.1	)
Derivatives Not Designated as Hedging Instruments:
Net (gain) loss recognized in other (income) expense (C)	$	1.4		$	(.4	)	$	—	$	—		$	—		$	—		$	1.4		$	(.4	)

	Nine Months Ended 30 June
	Forward Exchange Contracts						Foreign Currency Debt					Other (A)					Total
	2011			2010			2011		2010			2011		2010			2011			2010
Cash Flow Hedges:
Net (gain) loss recognized in OCI (effective portion)	$	(8.5	)	$	25.1		$	—	$	—		$	.8	$	.2		$	(7.7	)	$	25.3
Net gain (loss) reclassified from OCI to sales/cost of sales (effective portion)		(7.4	)		(5.6	)		—		—			—		2.0			(7.4	)		(3.6	)
Net gain (loss) reclassified from OCI to other (income) expense (effective portion)		7.5			(19.8	)		—		—			—		—			7.5			(19.8	)
Net (loss) reclassified from OCI to other (income) expense (ineffective portion)		(.6	)		(.1	)		—		—			—		—			(.6	)		(.1	)
Fair Value Hedges:
Net (gain) loss recognized in other (income) expense (B)	$	—		$	—		$	—	$	—		$	12.8	$	(10.9	)	$	12.8		$	(10.9	)
Net Investment Hedges:
Net (gain) loss recognized in OCI	$	22.3		$	(89.3	)	$	84.6	$	(236.0	)	$	.5	$	(1.3	)	$	107.4		$	(326.6	)
Derivatives Not Designated as Hedging Instruments:
Net (gain) loss recognized in other (income) expense (C)	$	2.1		$	(3.9	)	$	—	$	—		$	—	$	—		$	2.1		$	(3.9	)

^(A)  Other includes the impact on other comprehensive income (OCI) and earnings related to interest rate swaps.

^(B)  The impact of the fair value hedges noted above was largely offset by gains and losses resulting from the impact of changes in related interest rates on recognized outstanding debt.

^(C)  The impact of the non-designated hedges noted above was largely offset by gains and losses, respectively, resulting from the impact of changes in exchange rates on recognized assets and liabilities denominated in nonfunctional currencies.

The amount of estimated cash flow hedges' unrealized gains and losses which are expected to be reclassified to earnings in the next twelve months is not material.

Credit Risk-Related Contingent Features

Certain derivative instruments are executed under agreements that require us to maintain a minimum credit rating with both Standard & Poor's and Moody's. If our credit rating falls below this threshold, the counterparty to the derivative instruments has the right to request full collateralization on the derivatives' net liability position. The net liability position of derivatives with credit risk-related contingent features was $21.3 as of 30 June 2011 and $4.2 as of 30 September 2010. Because our current credit rating is above the various pre-established thresholds, no collateral has been posted on these liability positions.

Counterparty Credit Risk Management

We execute all derivative transactions with counterparties that are highly rated financial institutions all of which are investment grade at this time. Some of our underlying derivative agreements give us the right to require the institution to post collateral if its credit rating falls below the pre-established thresholds with Standard & Poor's or Moody's. These are the same agreements referenced in Credit Risk-Related Contingent Features above. The collateral that the counterparties would be required to post was $29.0 as of 30 June 2011 and $52.2 as of 30 September 2010. No financial institution is required to post collateral at this time, as all have credit ratings at or above the threshold.