Johnson Controls 2014 Annual Report Download - page 51

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A discussion of the Company’s accounting policies for derivative financial instruments is included in Note 1, "Summary of
Significant Accounting Policies," of the notes to consolidated financial statements, and further disclosure relating to derivatives
and hedging activities is included in Note 10, "Derivative Instruments and Hedging Activities," and Note 11, "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 contacts, which are designated
as cash flow hedges in accordance with ASC 815.
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, 2014 and 2013, the Company estimates that an unfavorable 10% change in the exchange rates would have
decreased net unrealized gains by approximately $210 million and $104 million, respectively.
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 thirteen interest rate swaps totaling $1.8
billion outstanding at September 30, 2014 and ten interest rates swaps totaling $1.4 billion outstanding at September 30, 2013. 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 $7 million and $6 million for the year ended September 30, 2014 and 2013, 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 with
regulatory authorities through 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.