FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS | 3 Months Ended |
Sep. 30, 2013 |
FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS [Abstract] | ' |
FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS | ' |
NOTE 11. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS |
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Financial assets and liabilities carried at fair value in the consolidated balance sheets are required to be classified and disclosed in one of the following three categories: |
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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. |
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As of September 30, 2013 and June 30, 2013, the Company's financial assets and liabilities that were measured at fair value on a recurring basis during the period included derivative financial instruments, which were all Level 2. |
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Financial Risk Management and Derivative Instruments |
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The Company is exposed to certain commodity, interest rate and foreign currency risks related to its ongoing business operations and uses derivative instruments to mitigate its exposure to these risks. |
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Commodity Price Risk Management |
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The Company may use commodity exchange traded futures and over-the-counter swap contracts to fix the price of a portion of its forecasted raw material requirements. Contract maturities, which are generally no longer than 18 months, are matched to the length of the raw material purchase contracts. Commodity purchase contracts are measured at fair value using market quotations obtained from commodity derivative dealers. |
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As of September 30, 2013, the notional amount of commodity derivatives was $64, of which $36 related to jet fuel and $28 related to soybean oil. As of June 30, 2013, the notional amount of commodity derivatives was $51, of which $32 related to jet fuel and $19 related to soybean oil. |
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Interest Rate Risk Management |
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The Company may enter into over-the-counter interest rate forward contracts to fix a portion of the benchmark interest rate prior to the anticipated issuance of fixed rate debt. These interest rate forward contracts generally have durations of less than 12 months. The interest rate contracts are measured at fair value using information quoted by U.S. government bond dealers. |
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As of both September 30, 2013 and June 30, 2013, there were no outstanding interest rate forward contracts. |
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Foreign Currency Risk Management |
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The Company may also enter into certain over-the-counter foreign currency-related derivative contracts to manage a portion of the Company's foreign exchange risk associated with the purchase of inventory and certain intercompany transactions. These foreign currency contracts generally have durations of no longer than 20 months. The foreign exchange contracts are measured at fair value using information quoted by foreign exchange dealers. |
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The notional amount of outstanding foreign currency forward contracts used by the Company's subsidiaries in Canada, Australia and New Zealand to hedge forecasted purchases of inventory were $12, $27 and $3, respectively, as of September 30, 2013, and $18, $22 and $4, respectively, as of June 30, 2013. The notional amount of outstanding foreign currency forward contracts used by the Company to economically hedge foreign exchange risk associated with certain intercompany transactions was $0 as of both September 30, 2013 and June 30, 2013. |
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Counterparty Risk Management |
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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. The $4 and $3 of derivative instruments reflected in liabilities as of September 30, 2013 and June 30, 2013, respectively, contained such terms. As of both September 30, 2013 and June 30, 2013, the Company was not required to post any collateral. |
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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, 2013 and June 30, 2013, the Company and each of its counterparties had been assigned investment grade ratings with both Standard & Poor's and Moody's. |
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Fair Value of Derivative Instruments |
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The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as an accounting hedge, and, if so, on the type of hedging relationship. For those derivative instruments designated and qualifying as hedging instruments, the Company must designate the hedging instrument as a fair value hedge or a cash flow hedge. The Company designates its commodity forward and future contracts for forecasted purchases of raw materials, interest rate forward contracts for forecasted interest payments, and foreign currency forward contracts for forecasted purchases of inventory as cash flow hedges. The Company does not designate its foreign currency forward contracts for intercompany transactions as accounting hedges. During the three months ended September 30, 2013 and 2012, the Company had no hedging instruments designated as fair value hedges. |
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The Company's derivative instruments designated as hedging instruments were recorded at fair value in the condensed consolidated balance sheets as follows: |
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| | Balance sheet classification | | 9/30/13 | | 6/30/13 | | | | | | | | |
Assets | | | | | | | | | | | | | | | | |
Foreign exchange contracts | | Other current assets | | $ | 2 | | $ | 4 | | | | | | | | |
| | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | |
Commodity purchase contracts | | Accrued liabilities | | $ | 3 | | $ | 3 | | | | | | | | |
Commodity purchase contracts | | Other liabilities | | | 1 | | | - | | | | | | | | |
| | | | $ | 4 | | $ | 3 | | | | | | | | |
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For derivative instruments designated and qualifying as cash flow hedges, the effective portion of gains or losses is reported as a component of other comprehensive income (OCI) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The estimated amount of the existing net loss in OCI as of September 30, 2013, expected to be reclassified into earnings within the next 12 months is $5. Gains and losses on derivative instruments representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. During the three months ended September 30, 2013 and 2012, respectively, hedge ineffectiveness was not significant. The Company de-designates cash flow hedge relationships whenever it determines that the hedge relationships are no longer highly effective or that the forecasted transaction is no longer probable. The portion of gains or losses on the derivative instrument previously accumulated in OCI for de-designated hedges remains in accumulated OCI until the forecasted transaction is recognized in earnings, or is recognized in earnings immediately if the forecasted transaction is no longer probable. Changes in the value of derivative instruments not designated as accounting hedges are recorded in other expense, net. |
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The effects of derivative instruments designated as hedging instruments on OCI and the condensed consolidated statements of earnings and comprehensive income were as follows: |
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| | Three Months Ended |
| | (Loss) gain recognized in OCI | | (Loss) gain reclassified from OCI and |
recognized in earnings |
| | 9/30/13 | | 9/30/12 | | 9/30/13 | | 9/30/12 |
Commodity purchase contracts | | $ | (2 | ) | | $ | 2 | | | $ | - | | | $ | - | |
Interest rate contracts | | | - | | | | (1 | ) | | | (1 | ) | | | (1 | ) |
Foreign exchange contracts | | | - | | | | (2 | ) | | | 1 | | | | - | |
Total | | $ | (2 | ) | | $ | (1 | ) | | $ | - | | | $ | (1 | ) |
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The gains and losses reclassified from OCI and recognized in earnings during the three months ended September 30, 2013 for commodity purchase contracts and foreign exchange contracts were included in cost of products sold. The losses reclassified from OCI and recognized in earnings during the three months ended September 30, 2013 and 2012 for interest rate contracts were included in interest expense. |
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The gain from derivatives not designated as accounting hedges was $0 and $1 for the three months ended September 30, 2013 and 2012, respectively, and was reflected in other expense, net. |
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Other |
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The carrying values of cash and cash equivalents, accounts receivable, notes and loans payable and accounts payable approximated their fair values as of September 30, 2013 and June 30, 2013, due to their short maturity and nature. The estimated fair value of long-term debt, including current maturities, was $2,252 and $2,263 as of September 30, 2013 and June 30, 2013, respectively. The fair value of long-term debt was determined using secondary market prices quoted by corporate bond dealers, and was classified as Level 2. The Company accounts for its long-term debt at face value, net of any unamortized discounts or premiums. |
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