Derivative Instruments and Hedging Activities

The Company uses derivative instruments to mitigate certain exposures. The effects these derivative instruments and hedged items have on financial position, financial performance, and cash flows are provided below.

Foreign Currency Risks and Related Strategies

The Company has foreign currency exposures throughout Europe, Greater Asia, Canada and Latin America. Transactional currency exposures that arise from entering into transactions, generally on an intercompany basis, in non-hyperinflationary countries that are denominated in currencies other than the functional currency are mitigated primarily through the use of forward contracts and currency options. Hedges of the transactional foreign exchange exposures resulting primarily from intercompany payables and receivables are undesignated hedges. As such, the gains or losses on these instruments are recognized immediately in income. The offset of these gains or losses against the gains and losses on the underlying hedged items, as well as the hedging costs associated with the derivative instruments, is recognized in Other income (expense), net. The total notional amounts of the Company’s outstanding foreign exchange contracts as of June 30, 2017 and September 30, 2016 were $1.3 billion and $2.3 billion, respectively.

In order to mitigate foreign currency exposure relating to its investments in certain foreign subsidiaries, the Company has designated $1.9 billion of euro-denominated debt, issued during the first and third quarters of fiscal year 2017, as net investment hedges. Accordingly, net gains or losses relating to this debt, which are attributable to changes in the euro to U.S. dollar spot exchange rate, are recorded as accumulated foreign currency translation in Other comprehensive income (loss). Recognition of hedge ineffectiveness into earnings will occur if the notional amount of the euro-denominated debt no longer matches the portion of the net investments in foreign subsidiaries which underlie the hedges. The Company's balance of Accumulated other comprehensive income (loss) as of June 30, 2017 included net losses relating to these net investment hedges of $57 million. Additional disclosures regarding the Company's issuances of the euro-denominated debt in fiscal year 2017 are provided in Note 15.

Interest Rate Risks and Related Strategies

The Company’s primary interest rate exposure results from changes in U.S. dollar interest rates. The Company’s policy is to manage interest cost using a mix of fixed and variable rate debt. The Company periodically uses interest rate swaps to manage such exposures. Under these interest rate swaps, the Company exchanges, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount. These swaps are designated as either fair value or cash flow hedges.

For interest rate swaps designated as fair value hedges (i.e., hedges against the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk), changes in the fair value of the interest rate swaps offset changes in the fair value of the fixed rate debt due to changes in market interest rates.

Changes in the fair value of the interest rate swaps designated as cash flow hedges (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk) are offset by amounts recorded in Other comprehensive income (loss). If interest rate derivatives designated as cash flow hedges are terminated, the balance in Accumulated other comprehensive income (loss) attributable to those derivatives is reclassified into earnings over the remaining life of the hedged debt. The net realized loss related to terminated interest rate swaps expected to be reclassified and recorded in Interest expense within the next 12 months is $5 million, net of tax.

At September 30, 2016, the total notional value of the Company's outstanding forward starting interest rate swaps, which were entered into to mitigate the Company's exposure to interest rate risk and were designated as cash flow hedges was $500 million. These interest rate swaps, as well as additional forward starting interest rate swaps the Company entered into during the third quarter of fiscal year 2017 with a notional amount of $1.75 billion, were terminated at a net loss, concurrent with the issuance of senior unsecured U.S. notes in the third quarter. This net loss will be amortized over the lives of the notes issued with an offset to Interest expense. Additional disclosures regarding the Company's issuance of senior unsecured U.S. notes are provided in Note 15.

The total notional amount of the Company’s outstanding interest rate swaps designated as fair value hedges was $375 million at June 30, 2017 and September 30, 2016. The outstanding swaps represent fixed-to-floating interest rate swap agreements the Company entered into to convert the interest payments on $375 million of the Company’s 3.125% notes due 2021 from the fixed rate to a floating interest rate based on LIBOR. Changes in the fair value of the interest rate swaps offset changes in the fair value of the fixed rate debt. The gains (losses) recorded on these fair value hedges, which were offset by losses (gains) recorded to the underlying debt instruments, are provided below.



	Three Months Ended June 30,				Nine Months Ended June 30,
(Millions of dollars)	2017		2016		2017			2016
Gains (losses) on fair value hedges	$	1	$	3	$	(14	)	$	9

Other Risk Exposures

The Company purchases resins, which are oil-based components used in the manufacture of certain products. Significant increases in world oil prices that lead to increases in resin purchase costs could impact future operating results. From time to time, the Company has managed price risks associated with these commodity purchases.

Effects on Consolidated Balance Sheets

The location and amounts of derivative instrument fair values in the consolidated balance sheet are segregated below between designated, qualifying hedging instruments and ones that are not designated for hedge accounting.



(Millions of dollars)	June 30, 2017		September 30, 2016
Asset derivatives-designated for hedge accounting
Interest rate swaps	$	8	$	23
Asset derivatives-undesignated for hedge accounting
Forward exchange contracts	4		3
Total asset derivatives (A)	$	13	$	25
Liability derivatives-designated for hedge accounting
Interest rate swaps	—		18
Liability derivatives-undesignated for hedge accounting
Forward exchange contracts	1		13
Total liability derivatives (B)	$	1	$	31


(A)	All asset derivatives are included in Prepaid expenses and other.


(B)	All liability derivatives are included in Payables and accrued expenses.

Effects on Consolidated Statements of Income

Cash flow hedges

The amounts recognized in other comprehensive income during the three and nine months ended June 30, 2017 and 2016 related to the previously discussed forward starting interest rate swaps.



	Three Months Ended June 30,						Nine Months Ended June 30,
(Millions of dollars)	2017			2016			2017		2016
After-tax (losses) gains relating to cash flow hedges recognized in other comprehensive income (loss)	$	(17	)	$	(10	)	$	8	$	(12	)

The Company’s derivative instruments designated as cash flow hedges are highly effective. As such, there are no gains or losses, related to hedge ineffectiveness or amounts excluded from hedge effectiveness testing, recognized immediately in income relative to cash flow hedges outstanding in the periods presented.

Undesignated hedges

The location and amount of gains and losses recognized in income on derivatives not designated for hedge accounting were as follows:



	Location of (Loss) Gain Recognized in Income on Derivatives	Amount of Gain (Loss) Recognized in Income on Derivatives					Amount of Gain Recognized in Income on Derivatives
Derivatives Not Designated as Hedging Instruments	Location of (Loss) Gain Recognized in Income on Derivatives	Three Months Ended June 30,					Nine Months Ended June 30,
(Millions of dollars)		2017		2016			2017		2016
Forward exchange contracts (A)	Other income (expense), net	$	13	$	(13	)	$	6	$	13


(A)	The gains and losses on forward contracts and currency options utilized to hedge the intercompany transactional foreign exchange exposures are largely offset by gains and losses on the underlying hedged items in Other income (expense), net.