Johnson Controls 2011 Annual Report Download - page 48

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48
disclosure relating to derivatives and hedging activities is included in Note 9, ―Derivative Instruments and Hedging
Activities,‖ and Note 10, ―Fair Value Measurements,‖ of the notes to consolidated financial statements.
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, 2011 and 2010, the Company
estimates that an unfavorable 10% change in the exchange rates would have decreased net unrealized gains by
approximately $54 million and $107 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. As of September 30, 2011, the
Company had eight interest rate swaps totaling $850 million outstanding. A 10% increase in the average cost of the
Company’s variable rate debt would result in an unfavorable change in pre-tax interest expense of approximately $5
million and $1 million at September 30, 2011 and 2010, 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 2011 related solely to environmental compliance were not material. At September 30, 2011 and 2010, the