Financial Instruments

9 Months Ended

Jun. 30, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Financial Instruments

Financial Instruments

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

	June 30, 2019				September 30, 2018
	Carrying Value		Fair Value		Carrying Value		Fair Value
Cash and cash equivalents	$	111	$	111	$	115	$	115
Short-term debt	24		51		94		116
Long-term debt	734		806		730		776
Foreign exchange forward contracts (other assets)	1		1		2		2
Foreign exchange forward contracts (other liabilities)	1		1		—		—
Foreign currency option contracts (other assets)	—		—		—		—
Cross-currency swaps (other assets)	—		—		6		6
Cross-currency swaps (other liabilities)	5		5		—		—

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

	June 30, 2019			September 30, 2018
	Gross Amounts Recognized	Gross Amounts Offset	Net Amounts Reported	Gross Amounts Recognized	Gross Amounts Offset	Net Amounts Reported
Derivative Assets
Foreign exchange forward contracts	1	—	1	2	—	2
Cross-currency swaps	—	—	—	6	—	6
Derivative Liabilities
Foreign exchange forward contracts	1	—	1	—	—	—
Cross-currency swaps	5	—	5	—	—	—

Fair Value

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 June 30, 2019 is as follows (in millions):

	Level 1		Level 2		Level 3
Cash and cash equivalents	$	111	$	—	$	—
Short-term debt	—		49		2
Long-term debt	—		801		5
Foreign exchange forward contracts (other assets)	—		1		—
Foreign exchange forward contracts (other liabilities)	—		—		1
Foreign currency option contracts (other assets)	—		—		—
Cross-currency Swap (other assets)	—		—		—
Cross-currency swaps (other liabilities)	—		5		—

Fair value of financial instruments by the valuation hierarchy at September 30, 2018 is as follows (in millions):

	Level 1		Level 2		Level 3
Cash and cash equivalents	$	115	$	—	$	—
Short-term debt	—		114		2
Long-term debt	—		771		5
Foreign exchange forward contracts (other assets)	—		2		—
Foreign exchange forward contracts (other liabilities)	—		—		—
Foreign currency option contracts (other assets)	—		—		—
Cross-currency swap (other assets)	—		6		—

No transfers of assets between any of the Levels occurred during the three and nine months ended June 30, 2019 and 2018.

Cash and cash equivalents — The carrying value approximates fair value because of the short maturity of these instruments. The company did not have any cash equivalents as of June 30, 2019 or September 30, 2018.

     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 18 months or less to hedge its exposure to changes in foreign currency exchange rates. As of June 30, 2019 and September 30, 2018, the notional amount of the company's foreign exchange contracts outstanding under its foreign currency cash flow hedging program was $118 million and $154 million, respectively. 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 cash flow hedges, changes in the fair value of the contracts is recorded in Accumulated Other Comprehensive Loss in the statement of shareholders’ 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 exchange exposure on expected future Indian Rupee-denominated purchases. As of June 30, 2019 and September 30, 2018, the notional amount of the company's Indian rupee foreign exchange contracts outstanding was $114 million and $180 million, respectively. 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 Condensed Consolidated Statement of Operations.

The company uses option contracts to mitigate the risk of volatility in the translation of euro earnings to U.S. dollars. As of June 30, 2019, the notional amount of the company's euro option contracts outstanding was $12 million. As of September 30, 2018, there were no euro option contracts outstanding. These option contracts did not qualify for a hedge accounting election. Changes in fair value associated with these contracts are recorded in the Condensed Consolidated Statement of Operations in other income, net.

The company uses option contracts to mitigate the risk of volatility in the translation of Swedish krona to U.S. dollars. As of June 30, 2019, the notional amount of the company's Swedish krona option contracts outstanding was $18 million. As of September 30, 2018, there were no Swedish krona option contracts outstanding. These option contracts did not qualify for a hedge accounting election. Changes in fair value associated with these contracts are recorded in the Condensed Consolidated Statement of Operations in other income, net.

The company uses option contracts to mitigate foreign exchange exposure on expected future South Korean won-denominated purchases. As of June 30, 2019 and September 30, 2018, the notional amount of the company's South Korean won option contracts outstanding was $48 million and $41 million, respectively. 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 Condensed Consolidated Statement of Operations.

The company uses foreign currency option contracts to mitigate foreign currency exposure on expected future Brazilian real-denominated purchases. As of June 30, 2019, there were no Brazilian real option contracts outstanding. As of September 30, 2018, the notional amount of the company's Brazilian real option contracts outstanding was $16 million. 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 Condensed Consolidated Statement of Operations.

The fair value of foreign currency option contracts is based on third-party proprietary models, which incorporate inputs at varying unobservable weights of quoted spot rates, market volatility, forward rates and time utilizing market instruments with similar quality and maturity characteristics.

Cross-currency swap contracts — The company uses cross-currency swap contracts to hedge a portion of its net investment in a foreign subsidiary against volatility in foreign exchange rates. These derivative instruments are designated and qualify as hedges of net investments in foreign operations using the spot method to assess effectiveness. Changes in fair values of the instruments are recognized in foreign currency translation adjustments, a component of other comprehensive income (loss) in the Condensed Consolidated Statement of Comprehensive Income (Loss), to offset the changes in the values of the net investments being hedged.

In the third quarter of fiscal year 2018, the company entered into multiple cross-currency swaps with a combined notional amount of $225 million, with maturities in May 2021. These swaps hedged a portion of the net investment in a certain European subsidiary against volatility in the euro/U.S. dollar foreign exchange rate.

In the third quarter of fiscal year 2019, the company unwound these cross-currency swaps and received proceeds of $19 million, $2 million of which related to net accrued interest receivable. The company also entered into multiple new cross-currency swaps with a combined notional amount of $225 million, with maturities in October 2022. As of both June 30, 2019 and September 30, 2018, the notional amount of the company's cross-currency swap contracts outstanding was $225 million. These swaps hedge a portion of the net investment in a certain European subsidiary against volatility in the euro/U.S. dollar foreign exchange rate.

The fair value of cross-currency swap 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.