|FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
Financial Risk Management and Derivative Instruments
The Company is exposed to certain commodity, foreign currency and interest rate risks related to its ongoing business operations and uses derivative instruments to mitigate its exposure to these risks.
Commodity Price Risk Management
The Company may use commodity exchange traded futures and over-the-counter swap contracts, which are generally no longer than 2 years, to fix the price of a portion of its forecasted raw material requirements. Commodity purchase contracts are measured at fair value using market quotations obtained from the Chicago Board of Trade commodity futures exchange and commodity derivative dealers.
As of September 30, 2020, the notional amount of commodity derivatives was $22, of which $11 related to soybean oil futures used for the Food products business and $11 related to jet fuel swaps used for the Grilling business. As of June 30, 2020, the notional amount of commodity derivatives was $27, of which $14 related to soybean oil futures and $13 related to jet fuel swaps.
Foreign Currency Risk Management
The Company may also enter into certain over-the-counter derivative contracts to manage a portion of the Company’s forecasted foreign currency exposure associated with the purchase of inventory. These foreign currency contracts generally have durations of no longer than 2 years. The foreign exchange contracts are measured at fair value using information quoted by foreign exchange dealers.
The notional amounts of outstanding foreign currency forward contracts used by the Company’s subsidiaries to hedge forecasted purchases of inventory were $58 and $70, respectively, as of September 30, 2020 and June 30, 2020.
Interest Rate Risk Management
The Company may enter into over-the-counter interest rate forward or swap contracts to fix a portion of the benchmark interest rate prior to the anticipated issuance of fixed rate debt or to manage the Company’s level of fixed and floating rate debt. These interest rate forward or swap contracts historically have had durations of less than 3 years. The interest rate contracts are measured at fair value using information quoted by U.S. government bond and interest rate derivative dealers.
The notional amounts of outstanding interest rate contracts used by the Company were $300 and $225, respectively, as of September 30, 2020 and June 30, 2020. These contracts represent forward starting interest rate swap contracts with a maturity date of September 2022 to manage the exposure to interest rate volatility associated with future interest payments on a forecasted debt issuance.
Commodity, Foreign Exchange and Interest Rate Derivatives
The Company designates its commodity forward and futures contracts for forecasted purchases of raw materials, foreign currency forward contracts for forecasted purchases of inventory and interest rate forward contracts for forecasted interest payments as cash flow hedges.
The effects of derivative instruments designated as hedging instruments on Other comprehensive (loss) income and Net earnings were as follows:
|Gains (losses) recognized in Other comprehensive (loss) income|
|Three Months Ended|
|Commodity purchase derivative contracts||$||1 ||$||— |
|Foreign exchange derivative contracts||(1)||1 |
|Interest rate derivative contracts||3 ||— |
|Total||$||3 ||$||1 |
|Location of Gains (losses) reclassified from Accumulated other comprehensive net (loss) income into Net earnings||Gains (losses) reclassified from Accumulated other comprehensive net (loss) income and recognized in Net earnings|
|Three Months Ended|
|Commodity purchase derivative contracts||Cost of products sold||$||(1)||$||— |
|Foreign exchange derivative contracts||Cost of products sold||— ||— |
|Interest rate derivative contracts||Interest expense||(2)||(2)|
The estimated amount of the existing net gain (loss) in Accumulated other comprehensive net (loss) income as of September 30, 2020, that is expected to be reclassified into Net earnings within the next twelve months is $(10).
Counterparty Risk Management and Derivative Contract Requirements
The Company utilizes a variety of financial institutions as counterparties for over-the-counter derivative instruments. The Company enters into agreements governing the use of over-the-counter derivative instruments and sets internal limits on the aggregate over-the-counter derivative instrument positions held with each counterparty. Certain terms of these agreements require the Company or the counterparty to post collateral when the fair value of the derivative instruments exceeds contractually-defined counterparty liability position limits. Of the over-the-counter derivative instruments in liability positions held as of September 30, 2020 and June 30, 2020, $2 and $3, respectively, contained such terms. As of September 30, 2020 and June 30, 2020, neither the Company nor any counterparty was required to post any collateral, as no counterparty liability position limits were exceeded.
Certain terms of the agreements governing the Company’s over-the-counter derivative instruments require the credit ratings, as assigned by Standard & Poor’s and Moody’s to the Company and its counterparties, to remain at a level equal to or better than the minimum of an investment grade credit rating. If the Company’s credit ratings were to fall below investment grade, the counterparties to the derivative instruments could request full collateralization on derivative instruments in net liability positions. As of both September 30, 2020 and June 30, 2020, the Company and each of its counterparties had been assigned investment grade ratings by both Standard & Poor’s and Moody’s.
Certain of the Company’s exchange-traded futures contracts used for commodity price risk management include requirements for the Company to post collateral in the form of a cash margin account held by the Company’s broker for trades conducted on that exchange. As of September 30, 2020 and June 30, 2020, the Company maintained cash margin balances related to exchange-traded futures contracts of $1 and $2, respectively, which are classified as Prepaid expenses and other current assets on the condensed consolidated balance sheets.
The Company has held interests in mutual funds and cash equivalents as part of the trust assets related to its nonqualified deferred compensation plans. The participants in the nonqualified deferred compensation plans, who are the Company’s current and former employees, may select among certain mutual funds in which to invest their compensation deferrals in accordance with the terms of the plans and within the confines of the trusts, which hold the marketable securities. The trusts represent variable interest entities for which the Company is considered the primary beneficiary, and, therefore, trust assets are consolidated and included in Other assets in the condensed consolidated balance sheets. The interests in mutual funds are measured at fair value using quoted market prices. The Company has designated these marketable securities as trading investments.
Fair Value Measurements
Financial assets and liabilities measured at fair value on a recurring basis in the condensed consolidated balance sheets are required to be classified and disclosed in one of the following three categories of the fair value hierarchy:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs reflecting the reporting entity’s own assumptions.
As of September 30, 2020 and June 30, 2020, the Company’s financial assets and liabilities that were measured at fair value on a recurring basis included derivative financial instruments, which were classified as either Level 1 or Level 2, and trust assets to fund the Company’s nonqualified deferred compensation plans, which were classified as Level 1.
All of the Company’s derivative instruments qualify for hedge accounting. The following table provides information about the balance sheet classification and the fair values of the Company’s derivative instruments:
|Commodity purchase futures contracts||Other current assets||1||$||1 ||$||1 ||$||— ||$||— |
|Interest rate forward contracts||Other assets||2||4 ||4 ||1 ||1 |
| ||$||5 ||$||5 ||$||1 ||$||1 |
|Commodity purchase futures contracts||Accounts payable and accrued liabilities||1||$||— ||$||— ||$||1 ||$||1 |
|Commodity purchase swaps contracts||Accounts payable and accrued liabilities||2||3 ||3 ||3 ||3 |
|Foreign exchange forward contract||Accounts payable and accrued liabilities||2||1 ||1 ||1 ||1 |
|$||4 ||$||4 ||$||5 ||$||5 |
The following table provides information about the balance sheet classification and the fair values of the Company’s other assets and liabilities for which disclosure of fair value is required:
|Investments, including money market funds|
Cash and cash
|1||$||379 ||$||379 ||$||584 ||$||584 |
Cash and cash
|2||318 ||318 ||165 ||165 |
|Trust assets for nonqualified deferred compensation plans||Other assets||1||114 ||114 ||100 ||100 |
| ||$||811 ||$||811 ||$||849 ||$||849 |
|Current maturities of long-term debt and Long-term debt|
Current maturities of long-
term debt and Long-term
|2||2,781 ||3,049 ||2,780 ||3,051 |
|$||2,781 ||$||3,049 ||$||2,780 ||$||3,051 |
(a)Cash and cash equivalents are composed of time deposits and other interest bearing investments, including money market funds with original maturity dates of 90 days or less. Cash and cash equivalents are recorded at cost, which approximates fair value.
(b)Current maturities of long-term debt and Long-term debt are recorded at cost. The fair value of Long-term debt, including current maturities, was determined using secondary market prices quoted by corporate bond dealers, and is classified as Level 2.