Financial Instruments

6 Months Ended

Mar. 31, 2015

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Financial Instruments

Financial Instruments

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

	March 31, 2015				September 30, 2014
	Carrying Value		Fair Value		Carrying Value		Fair Value
Cash and cash equivalents	$	207	$	207	$	247	$	247
Short-term debt	5		5		7		7
Long-term debt	945		1,131		965		1,143
Foreign exchange forward contracts (asset)	5		5		2		2
Short-term foreign currency option contracts (asset)	2		2		2		2
Long-term foreign currency option contracts (asset)	2		2		1		1

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

	March 31, 2015				September 30, 2014
	Gross Amounts Recognized	Gross Amounts Offset		Net Amounts Reported	Gross Amounts Recognized	Gross Amounts Offset	Net Amounts Reported
Derivative Asset
Foreign exchange forward contract	6	(1	)	5	2	—	2
Derivative Liabilities
Foreign exchange forward contract	1	(1	)	—	—	—	—

Fair Value

The current 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, 2015 is as follows (in millions):

	Level 1		Level 2		Level 3
Cash and cash equivalents	$	207	$	—	$	—
Short-term debt	—		—		5
Long-term debt	—		1,093		38
Foreign exchange forward contracts (asset)	—		5		—
Short-term foreign currency option contracts (asset)	—		—		2
Long-term foreign currency option contracts (asset)	—		—		2

The table below provides a reconciliation of changes in fair value of the Level 3 financial assets and liabilities measured at fair value in the condensed consolidated balance sheet from September 30, 2014 to March 31, 2015. No transfers of assets between any of the Levels occurred during this period.

	Short-term foreign currency option contracts (asset)			Long-term foreign currency option contracts (asset)			Total
Fair Value as of September 30, 2014	$	2		$	1		$	3
Total unrealized gains (losses):
Included in other income	—			—			—
Included in cost of sales	—			—			—
Total realized gains (losses):
Included in other income	3			—			3
Included in cost of sales	3			—			3
Purchases, issuances, sales and settlements:
Purchases	5			—			5
Settlements	(10		)	(1		)	(11		)
Transfer in and / or out of Level 3 (1)	—			—			—
Reclass between short-term and long-term	(1		)	2			1
Fair Value as of March 31, 2015	$	2		$	2		$	4

⁽¹⁾ Transfers as of the last day of the reporting period

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. The company did not have any cash equivalents at March 31, 2015 or September 30, 2014.

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 one year or less to hedge its exposure to changes in foreign currency exchange rates. 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 a cash flow hedge, the effective portion of changes in the fair value of the contracts is recorded in Accumulated Other Comprehensive Loss (AOCL) in the statement of shareowners’ 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 currency exposure on expected future Indian Rupee denominated purchases. The contracts were entered into during April 2014 with effective dates from the start of fiscal year 2015 through the end of fiscal year 2016. In February 2015, the company monetized its outstanding foreign currency option contracts and entered into a new series of foreign currency option contracts with effective dates from the start of the third quarter of fiscal year 2015 through the end of fiscal year 2017. In the second quarter of fiscal year 2015, the company recognized a net gain of $3 million associated with the settlement and repurchase of the foreign currency option contracts. The fair value of the foreign currency option contracts is based on a third-party proprietary model, which incorporates inputs at varying unobservable weights of quoted spot rates, market volatility, forward rates, and time utilizing market instruments with similar quality and maturity characteristics. 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 consolidated statement of operations.

The company generally does not hedge against its foreign currency exposure related to translations to U.S. dollars of financial results denominated in foreign currencies. In November 2014, the company entered into a series of foreign currency option contracts with a total notional amount of $48 million to reduce volatility in the translation of Brazilian Real earnings to U.S. dollars. These foreign currency option contracts do not qualify for a hedge accounting election but are expected to mitigate foreign currency translation exposure of Brazilian Real earnings to U.S. dollars. In the second quarter of fiscal year 2015, the company monetized these outstanding foreign currency option contracts and entered into a new series of foreign currency option contracts with effective dates from the start of the third quarter of fiscal year 2015 through the end of fiscal year 2015. In the second quarter of fiscal year 2015, the company recognized a net gain of $3 million associated with the settlement and repurchase of these foreign currency option contracts. The fair value of the foreign currency option contracts is based on a third-party proprietary model, which incorporates inputs at varying unobservable weights of quoted spot rates, market volatility, forward rates, and time utilizing market instruments with similar quality and maturity characteristics. Changes in fair value associated with these contracts are recorded in other income (expense), net, in the consolidated statement of operations.