Johnson Controls 2013 Annual Report Download - page 77

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10. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company selectively uses derivative instruments to reduce market risk associated with changes in foreign currency,
commodities, stock-based compensation liabilities and interest rates. Under Company policy, the use of derivatives is restricted
to those intended for hedging purposes; the use of any derivative instrument for speculative purposes is strictly prohibited. A
description of each type of derivative utilized by the Company to manage risk is included in the following paragraphs. In addition,
refer to Note 11, “Fair Value Measurements,” of the notes to consolidated financial statements for information related to the fair
value measurements and valuation methods utilized by the Company for each derivative type.
The Company has global operations and participates in the foreign exchange markets to minimize its risk of loss from fluctuations
in foreign currency exchange rates. The Company primarily uses foreign currency exchange contracts to hedge certain of its foreign
exchange rate exposures. The Company hedges 70% to 90% of the nominal amount of each of its known foreign exchange
transactional exposures.
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. At September 30, 2013 the Company had five cross-currency interest rate swaps outstanding
totaling 25 billion yen. At September 30, 2012, the Company had three cross-currency interest rate swaps outstanding totaling 20
billion yen.
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 cash flow hedges, the effective portion of the hedge gains or losses due to changes in fair value are initially recorded
as a component of AOCI and are subsequently reclassified into earnings when the hedged transactions, typically sales or costs
related to sales, occur and affect earnings. Any ineffective portion of the hedge is reflected in the consolidated statements of income.
The maturities of the commodity contracts coincide with the expected purchase of the commodities. The Company had the following
outstanding commodity hedge contracts that hedge forecasted purchases:
Volume Outstanding as of
Commodity Units September 30, 2013 September 30, 2012
Copper Pounds 14,705,000 13,135,000
Lead Metric Tons 23,900 21,200
Aluminum Metric Tons 2,709 2,868
Tin Metric Tons 2,052 1,344
The Company selectively uses equity swaps to reduce market risk associated with certain of its stock-based compensation plans,
such as its deferred compensation plans. These equity compensation liabilities increase as the Company’s stock price increases
and decrease as the Company’s stock price decreases. In contrast, the value of the swap agreement moves in the opposite direction
of these liabilities, allowing the Company to fix a portion of the liabilities at a stated amount. As of September 30, 2013 and 2012,
the Company had hedged approximately 4.4 million and 4.5 million shares of its common stock, respectively.
The Company selectively uses interest rate swaps to reduce market risk associated with changes in interest rates for its fixed-rate
notes. As fair value hedges, the interest rate swaps and related debt balances are valued under a market approach using publicized
swap curves. Changes in the fair value of the swap and hedged portion of the debt are recorded in the consolidated statements of
income. In the second quarter of fiscal 2011, the Company entered into a fixed to floating interest rate swap totaling $100 million
to hedge the coupon of its 5.8% notes which matured on November 15, 2012, two fixed to floating interest rate swaps totaling
$300 million to hedge the coupon of its 4.875% notes which matured on September 15, 2013 and five fixed to floating interest
rate swaps totaling $450 million to hedge the coupon of its 1.75% notes maturing March 1, 2014. In the fourth quarter of fiscal
2013, the Company entered into a fixed to floating interest rate swap totaling approximately $125 million to hedge the coupon of
its 7.70% notes maturing March 1, 2015. Additionally, in the fourth quarter of fiscal 2013, the Company entered into four fixed
to floating interest rate swaps totaling $800 million to hedge the coupon of its 5.50% notes maturing January 15, 2016. There were
ten interest rate swaps outstanding as of September 30, 2013 and eight interest rate swaps outstanding as of September 30, 2012.
In September 2005, the Company entered into three forward treasury lock agreements to reduce the market risk associated with
changes in interest rates associated with the Company’s anticipated fixed-rate note issuance to finance the acquisition of York
International Corp. (cash flow hedge). The three forward treasury lock agreements, which had a combined notional amount of
$1.3 billion, fixed a portion of the future interest cost for 5-year, 10-year and 30-year notes. The fair value of each treasury lock