Johnson Controls 2013 Annual Report Download - page 49

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Foreign Exchange
The Company has manufacturing, sales and distribution facilities around the world and thus makes investments and enters into
transactions denominated in various foreign currencies. In order to maintain strict control and achieve the benefits of the Company’s
global diversification, foreign exchange exposures for each currency are netted internally so that only its net foreign exchange
exposures are, as appropriate, hedged with financial instruments.
The Company hedges 70% to 90% of the nominal amount of each of its known foreign exchange transactional exposures. The
Company primarily enters into foreign currency exchange contracts to reduce the earnings and cash flow impact of the variation
of non-functional currency denominated receivables and payables. Gains and losses resulting from hedging instruments offset the
foreign exchange gains or losses on the underlying assets and liabilities being hedged. The maturities of the forward exchange
contracts generally coincide with the settlement dates of the related transactions. Realized and unrealized gains and losses on these
contracts are recognized in the same period as gains and losses on the hedged items. The Company also selectively hedges anticipated
transactions that are subject to foreign exchange exposure, primarily with foreign currency exchange contracts, which are designated
as cash flow hedges in accordance with ASC 815. At September 30, 2013 and 2012, the Company estimates that an unfavorable
10% change in the exchange rates would have decreased net unrealized gains by approximately $104 million and $23 million,
respectively.
The Company has entered into cross-currency interest rate swaps to selectively hedge portions of its net investment in Japan. The
currency effects of the cross-currency interest rate swaps are reflected in the accumulated other comprehensive income (AOCI)
account within shareholders’ equity attributable to Johnson Controls, Inc. where they offset gains and losses recorded on the
Company’s net investment in Japan.
Interest Rates
The Company uses interest rate swaps to offset its exposure to interest rate movements. In accordance with ASC 815, these
outstanding swaps qualify and are designated as fair value hedges. The Company had ten interest rate swaps totaling $1.4 billion
outstanding at September 30, 2013 and eight interest rates swaps totaling $850 million outstanding at September 30, 2012. A 10%
increase in the average cost of the Company’s variable rate debt would have resulted in an unfavorable change in pre-tax interest
expense of approximately $6 million and $3 million at September 30, 2013 and 2012, respectively.
Commodities
The Company uses commodity contracts in the financial derivatives market in cases where commodity price risk cannot be naturally
offset or hedged through supply base fixed price contracts. Commodity risks are systematically managed pursuant to policy
guidelines. As a cash flow hedge, gains and losses resulting from the hedging instruments offset the gains or losses on purchases
of the underlying commodities that will be used in the business. The maturities of the commodity contracts coincide with the
expected purchase of the commodities.
ENVIRONMENTAL, HEALTH AND SAFETY AND OTHER MATTERS
The Company’s global operations are governed by environmental laws and worker safety laws. Under various circumstances, these
laws impose civil and criminal penalties and fines, as well as injunctive and remedial relief, for noncompliance and require
remediation at sites where Company-related substances have been released into the environment.
The Company has expended substantial resources globally, both financial and managerial, to comply with applicable environmental
laws and worker safety laws and to protect the environment and workers. The Company believes it is in substantial compliance
with such laws and maintains procedures designed to foster and ensure compliance. However, the Company has been, and in the
future may become, the subject of formal or informal enforcement actions or proceedings regarding noncompliance with such
laws or the remediation of Company-related substances released into the environment. Such matters typically are resolved by
negotiation with regulatory authorities resulting in commitments to compliance, abatement or remediation programs and in some
cases payment of penalties. Historically, neither such commitments nor penalties imposed on the Company have been material.
Environmental considerations are a part of all significant capital expenditure decisions; however, expenditures in fiscal 2013 related
solely to environmental compliance were not material. At both September 30, 2013 and 2012, the Company recorded environmental
liabilities of $25 million. A charge to income is recorded when it is probable that a liability has been incurred and the amount of
the liability is reasonably estimable. The Company’s environmental liabilities do not take into consideration any possible recoveries
of future insurance proceeds. Because of the uncertainties associated with environmental remediation activities at sites where the
Company may be potentially liable, future expenses to remediate identified sites could be considerably higher than the accrued