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DERIVATIVE FINANCIAL INSTRUMENTS | 3 Months Ended
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Sep. 30, 2024
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
DERIVATIVE FINANCIAL INSTRUMENTS | 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 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. At September 30, 2024, the notional amount of derivatives not designated as hedging instruments was $4,026 million. Fair Value Hedges The Company enters into interest rate derivative contracts to manage the exposure to interest rate fluctuations on its funded indebtedness. At September 30, 2024, the Company has interest rate swap agreements, with notional amounts totaling $700 million and $300 million to effectively convert the fixed rate interest on its 2030 Senior Notes and 2031 Senior Notes, respectively, to variable interest rates based on the three-month fallback Secured Overnight Financing Rate ("SOFR") 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. The Company enters into cross-currency swap contracts to manage the exposure of foreign exchange rate fluctuations on its intercompany foreign currency denominated debt. At September 30, 2024, the Company has cross-currency swap contracts with notional amounts totaling $491 million, to hedge the impact of foreign currency changes on certain intercompany foreign currency denominated debt. The cross-currency swap contracts are designated as fair value hedges of the related intercompany debt, and the gains and losses representing hedge components included in the assessment of effectiveness are presented in the same income statement line item as the earnings effect of the hedged transaction. Gains and losses on the derivative representing hedge components excluded from the assessment of effectiveness are recognized over the life of the hedge on a systematic and rational basis. The earnings recognition of excluded components is presented in the same income statement line item as the earnings effect of the hedged transaction. Any difference between the changes in the fair value of the excluded components and amounts recognized in earnings will be recognized in Accumulated Other Comprehensive Loss ("AOCI"). The estimated net gain on the Company’s derivative instruments designated as fair value hedges as of September 30, 2024 that is expected to be reclassified from AOCI into earnings, net of tax, within the next twelve months is $14 million. The accumulated net gain (loss) on derivative instruments designated as fair value hedges in AOCI was $5 million and $(7) million as of September 30, 2024 and June 30, 2024, respectively. 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 June 2026. Hedge effectiveness of the foreign currency forward contracts is based on the forward method, which includes time value in the effectiveness assessment. At September 30, 2024, the Company had cash flow hedges outstanding with a notional amount totaling $1,927 million. For foreign currency hedge contracts that are no longer deemed highly effective, hedge accounting is discontinued and gains and losses in AOCI are reclassified to Net 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 Net sales. As of September 30, 2024, the Company’s foreign currency cash flow hedges were highly effective. 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. The estimated net loss on the Company’s derivative instruments designated as cash flow hedges as of September 30, 2024 that is expected to be reclassified from AOCI into earnings, net of tax, within the next twelve months is $12 million. The accumulated net gain on derivative instruments designated as cash flow hedges in AOCI was $19 million and $75 million as of September 30, 2024 and June 30, 2024, respectively. 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. 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 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 September 2025. Hedge effectiveness of the net investment hedge contracts is based on the spot method. At September 30, 2024, the Company had net investment hedges outstanding with a notional amount totaling $1,351 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 $64 million at September 30, 2024. 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. 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, 2024 |  | June 30, 2024 |  | Balance Sheet Location |  | September 30, 2024 |  | June 30, 2024
Derivatives Designated as Hedging Instruments: |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency cash flow hedges(2) |  | Prepaid expenses and other current assets; Other assets |  | $ | 5 |  |  | $ | 34 |  |  | Other accrued liabilities |  | $ | 31 |  |  | $ | 4 |
Cross-currency swap contracts(3) |  | Prepaid expenses and other current assets; Other assets |  | 39 |  |  | 80 |  |  | Other accrued liabilities |  | — |  |  | — |
Net investment hedges |  | Prepaid expenses and other current assets |  | 1 |  |  | 15 |  |  | Other accrued liabilities |  | 30 |  |  | — |
Interest rate-related derivatives |  | Prepaid expenses and other current assets |  | — |  |  | — |  |  | Other accrued liabilities |  | 104 |  |  | 145 |
Total Derivatives Designated as Hedging Instruments |  |  |  | 45 |  |  | 129 |  |  |  |  | 165 |  |  | 149 |
Derivatives Not Designated as Hedging Instruments: |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency forward contracts |  | Prepaid expenses and other current assets |  | 19 |  |  | 19 |  |  | Other accrued liabilities |  | 23 |  |  | 17 |
Total derivatives |  |  |  | $ | 64 |  |  | $ | 148 |  |  |  |  | $ | 188 |  |  | $ | 166 |
(1)See Note 5 – Fair Value Measurements for further information about how the fair value of derivative assets and liabilities are determined. (2)Included in the asset derivatives for the foreign currency cash flow hedges at September 30, 2024 and June 30, 2024 is less than $1 million and $2 million, respectively, classified within Other assets in the accompanying consolidated balance sheets. (3)Included in the asset derivatives for the cross-currency swap contracts at September 30, 2024 and June 30, 2024 is approximately $26 million and $70 million, respectively, classified within Other assets in the accompanying consolidated balance sheets. 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 |  | Amount of Gain Reclassified from AOCI into Earnings(1)
|  | Three Months Ended September 30 |  |  | Three Months Ended September 30
(In millions) |  | 2024 |  | 2023 |  |  | 2024 |  | 2023
Derivatives in Cash Flow Hedging Relationships: |  |  |  |  |  |  |  |  |  |
Foreign currency forward contracts |  | $ | (47) |  |  | $ | 28 |  |  | Net sales |  | $ | 10 |  |  | $ | 9 |
Interest rate-related derivatives |  | — |  |  | — |  |  | Interest expense |  | — |  |  | — |
|  | (47) |  |  | 28 |  |  |  |  | 10 |  |  | 9 |
Derivatives in Net Investment Hedging Relationships(2): |  |  |  |  |  |  |  |  |  |
Foreign currency forward contracts(3) |  | (64) |  |  | 30 |  |  |  |  | — |  |  | — |
Total derivatives |  | $ | (111) |  |  | $ | 58 |  |  |  |  | $ | 10 |  |  | $ | 9 |
(1)There is no amount reclassified into earnings as a result of the discontinuance of cash flow hedges because it is probable that forecasted transactions will not occur by the end of the original time period. (2)During the three months ended September 30, 2024 and 2023, the gain recognized in earnings from net investment hedges related to the amount excluded from effectiveness testing was $7 million and $5 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 on Derivatives |  |  |  |
|  | Location of Gain (Loss) Recognized in Earnings on Derivatives |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  | Three Months Ended September 30 |  |
(In millions) |  |  |  |  |  |  | 2024 |  | 2023 |  |  |  |
Derivatives in Fair Value Hedging Relationships: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cross-currency swap contracts (1) |  | Selling, general and administrative |  |  |  |  |  | $ | (53) |  |  | $ | 13 |  |  |  |  |
Interest rate swap contracts (2) |  | Interest expense |  |  |  |  |  | $ | 41 |  |  | $ | (29) |  |  |  |  |
(1)Changes in the fair value representing hedge components included in the assessment of effectiveness of the cross-currency swap contracts are exactly offset by the change in the fair value of the underlying intercompany foreign currency denominated debt. The gain recognized in earnings from cross-currency swap contracts related to the amount excluded from effectiveness testing during the three months ended September 30, 2024 and 2023 was $4 million and $5 million, respectively. (2)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
|  | September 30, 2024 |  | September 30, 2024
Long-term debt |  | $ | 890 |  |  | $ | (104) |
Intercompany debt |  | $ | — |  |  | $ | 34 |
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 September 30
|  | 2024 |  | 2023
(In millions) |  | Net Sales |  | Selling, General and Administrative |  | Interest Expense |  | Net Sales |  | Selling, General and Administrative |  | 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 |  | $ | 3,361 |  |  | $ | 2,298 |  |  | $ | 92 |  |  | $ | 3,518 |  |  | $ | 2,349 |  |  | $ | 95 |
The effects of fair value and cash flow hedging relationships: |  |  |  |  |  |  |  |  |  |  |  |
Gain (loss) on fair value hedge relationships – interest rate contracts: |  |  |  |  |  |  |  |  |  |  |  |
Hedged item |  | N/A |  | N/A |  | (41) |  |  | N/A |  | N/A |  | 29 |
Derivatives designated as hedging instruments |  | N/A |  | N/A |  | 41 |  |  | N/A |  | N/A |  | (29) |
Gain (loss) on fair value hedge relationships – cross-currency swap contracts: |  |  |  |  |  |  |  |  |  |  |  |
Hedged item |  | N/A |  | 53 |  |  | N/A |  | N/A |  | (13) |  |  | N/A
Derivatives designated as hedging instruments |  | N/A |  | (53) |  |  | N/A |  | N/A |  | 13 |  |  | N/A
Loss on cash flow hedge relationships – interest rate contracts: |  |  |  |  |  |  |  |  |  |  |  |
Amount of loss reclassified from AOCI into earnings |  | N/A |  | N/A |  | — |  |  | N/A |  | N/A |  | — |
Gain on cash flow hedge relationships – foreign currency forward contracts: |  |  |  |  |  |  |  |  |  |  |  |
Amount of gain reclassified from AOCI into earnings |  | 10 |  |  | N/A |  | N/A |  | 9 |  |  | N/A |  | N/A
N/A (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 on Derivatives |  |  |  |
|  | Location of Gain (Loss) Recognized in Earnings on Derivatives |  |  |  | Three Months Ended September 30 |  |
(In millions) |  |  |  |  |  |  | 2024 |  | 2023 |  |  |  |
Derivatives Not Designated as Hedging Instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency forward contracts |  | Selling, general and administrative |  |  |  |  |  | $ | (50) |  |  | $ | 5 |  |  |  |  |
The Company's derivative instruments are subject to enforceable master netting agreements. These agreements permit the net settlement of these contracts on a per-institution basis; however, the Company records the fair value on a gross basis on its consolidated balance sheets based on maturity dates, including those subject to master netting arrangements. The following table provides information as if the Company had elected to offset the asset and liability balances of derivative instruments, netted in accordance with various criteria in the event of default or termination as stipulated by the terms of netting arrangements with each of the counterparties:
|  |  | As of September 30, 2024 |  | As of June 30, 2024 |  |
(In millions) |  |  | Gross Amounts of Assets / (Liabilities) Presented in Balance Sheet |  | Contracts Subject to Netting |  | Net Amounts of Assets / (Liabilities) |  | Gross Amounts of Assets / (Liabilities) Presented in Balance Sheet |  | Contracts Subject to Netting |  | Net Amounts of Assets / (Liabilities) |  |  |  |
Derivative Financial Contracts |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivative assets |  |  | $ | 64 |  |  | $ | (40) |  |  | $ | 24 |  |  | $ | 148 |  |  | $ | (49) |  |  | $ | 99 |  |  |  |  |
Derivative liabilities |  |  | (188) |  |  | 40 |  |  | (148) |  |  | (166) |  |  | 49 |  |  | (117) |  |  |  |  |
Total |  |  | $ | (124) |  |  | $ | — |  |  | $ | (124) |  |  | $ | (18) |  |  | $ | — |  |  | $ | (18) |  |  |  |  |

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