Derivative Instruments and Hedging Activities

9 Months Ended

Jun. 30, 2011

Derivative Instruments and Hedging Activities [Abstract]

Derivative Instruments and Hedging Activities

14. 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 15, “Fair Value Measurements,” to the 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. In the second quarter of fiscal 2010, the Company entered into three cross-currency interest rate swaps totaling 20 billion yen. In the fourth quarter of fiscal 2010, a 5 billion yen cross-currency swap matured. In the first quarter of fiscal 2011, another 5 billion yen cross-currency swap matured. In the second quarter of fiscal 2011, a 10 billion yen cross-currency swap matured. All three of these cross-currency interest rate swaps were renewed for one year in their respective periods. These swaps are designated as hedges of the Company’s net investment in Japan.

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 statement 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	June 30, 2011		September 30, 2010		June 30, 2010
Copper	Pounds		13,150,000		24,550,000		16,735,000
Lead	Metric Tons		26,517		18,450		25,961
Aluminum	Metric Tons		1,134		8,276		—

In addition, 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 June 30, 2011, September 30, 2010 and June 30, 2010, the Company had hedged approximately 4.3 million, 3.4 million and 3.4 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 statement of income. During the second quarter of fiscal 2010, the Company entered into a fixed to floating interest rate swap totaling $100 million to hedge the coupon of its 5.80% notes maturing November 15, 2012 and two fixed to floating swaps totaling $300 million to hedge the coupon of its 4.875% notes maturing September 15, 2013. In the fourth quarter of fiscal 2010, the Company terminated all of its interest rate swaps. 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 5.80% notes maturing November 15, 2012, two fixed to floating interest rate swaps totaling $300 million to hedge the coupon of its 4.875% notes maturing 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 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 agreement, or the difference between the treasury lock reference rate and the fixed rate at time of note issuance, is amortized to interest expense over the life of the respective note issuance. In January 2006, in connection with the Company’s debt refinancing, the three forward lock treasury agreements were terminated.

The following table presents the location and fair values of derivative instruments and hedging activities included in the Company’s condensed consolidated statements of financial position (in millions):

	Derivatives and Hedging Activities Designated as						Derivatives and Hedging Activities Not Designated
	Hedging Instruments under ASC 815						as Hedging Instruments under ASC 815
	June 30,		September 30,		June 30,		June 30,		September 30,		June 30,
	2011		2010		2010		2011		2010		2010
Other current assets
Foreign currency exchange derivatives	$	8	$	19	$	14	$	—	$	8	$	9
Commodity derivatives		8		14		2		—		—		—
Other noncurrent assets
Interest rate swaps		15		—		9		—		—		—
Equity swap		—		—		—		177		104		91
Foreign currency exchange derivatives		1		1		1		1		1		1
Total assets	$	32	$	34	$	26	$	178	$	113	$	101
Current portion of long-term debt
Fixed rate debt swapped to floating	$	—	$	—	$	594	$	—	$	—	$	—
Other current liabilities
Foreign currency exchange derivatives		7		19		15		1		8		8
Net investment hedges		8		17		7		—		—		—
Commodity derivatives		1		—		8		—		—		—
Long-term debt
Fixed rate debt swapped to floating		865		—		404		—		—		—
Other noncurrent liabilities
Foreign currency exchange derivatives		1		1		2		—		1		1
Total liabilities	$	882	$	37	$	1,030	$	1	$	9	$	9

The following table presents the location and amount of gains and losses gross of tax on derivative instruments and related hedge items included in the Company’s consolidated statements of income for the three and nine months ended June 30, 2011 and 2010 and amounts recorded in AOCI net of tax or cumulative translation adjustment (CTA) net of tax in the condensed consolidated statements of financial position (in millions):

	As of		Three Months Ended			Three Months Ended
	June 30, 2011		June 30, 2011			June 30, 2011
				Amount of Gain
	Amount of Gain		Location of Gain (Loss)	(Loss) Reclassified		Location of Gain (Loss)	Amount of Gain
	(Loss) Recognized in		Reclassified from AOCI	from AOCI into		Recognized in Income on	(Loss) Recognized in
Derivatives in ASC 815 Cash Flow	AOCI on Derivative		into Income (Effective	Income (Effective		Derivative (Ineffective	Income on Derivative
Hedging Relationships	(Effective Portion)		Portion)	Portion)		Portion)	(Ineffective Portion)
Foreign currency exchange derivatives	$	1	Cost of sales	$	2	Cost of sales	$	—
Commodity derivatives		5	Cost of sales		7	Cost of sales		—
Forward treasury locks		9	Net financing charges		—	Net financing charges		—
Total	$	15		$	9		$	—

	Nine Months Ended			Nine Months Ended
	June 30, 2011			June 30, 2011
		Amount of Gain
	Location of Gain (Loss)	(Loss) Reclassified		Location of Gain (Loss)	Amount of Gain
	Reclassified from AOCI	from AOCI into		Recognized in Income on	(Loss) Recognized in
Derivatives in ASC 815 Cash Flow	into Income (Effective	Income (Effective		Derivative (Ineffective	Income on Derivative
Hedging Relationships	Portion)	Portion)		Portion)	(Ineffective Portion)
Foreign currency exchange derivatives	Cost of sales	$	6	Cost of sales	$	—
Commodity derivatives	Cost of sales		26	Cost of sales		—
Forward treasury locks	Net financing charges		1	Net financing charges		—
Total		$	33		$	—

	As of			Three Months Ended				Three Months Ended
	June 30, 2010			June 30, 2010				June 30, 2010
					Amount of Gain
	Amount of Gain			Location of Gain (Loss)	(Loss) Reclassified			Location of Gain (Loss)	Amount of Gain
	(Loss) Recognized in			Reclassified from AOCI	from AOCI into			Recognized in Income on	(Loss) Recognized in
Derivatives in ASC 815 Cash Flow	AOCI on Derivative			into Income (Effective	Income (Effective			Derivative (Ineffective	Income on Derivative
Hedging Relationships	(Effective Portion)			Portion)	Portion)			Portion)	(Ineffective Portion)
Foreign currency exchange derivatives	$	(1	)	Cost of sales	$	1		Cost of sales	$	—
Commodity derivatives		(5	)	Cost of sales		(1	)	Cost of sales		—
Forward treasury locks		11		Net financing charges		1		Net financing charges		—
Total	$	5			$	1			$	—

	Nine Months Ended				Nine Months Ended
	June 30, 2010				June 30, 2010
		Amount of Gain
	Location of Gain (Loss)	(Loss) Reclassified			Location of Gain (Loss)	Amount of Gain
	Reclassified from AOCI	from AOCI into			Recognized in Income on	(Loss) Recognized in
Derivatives in ASC 815 Cash Flow	into Income (Effective	Income (Effective			Derivative (Ineffective	Income on Derivative
Hedging Relationships	Portion)	Portion)			Portion)	(Ineffective Portion)
Foreign currency exchange derivatives	Cost of sales	$	(3	)	Cost of sales	$	—
Commodity derivatives	Cost of sales		1		Cost of sales		—
Forward treasury locks	Net financing charges		2		Net financing charges		—
Total		$	—			$	—

	As of			As of
	June 30, 2011			June 30, 2010
	Amount of Gain			Amount of Gain
	(Loss) Recognized in			(Loss) Recognized in
	CTA on Outstanding			CTA on Outstanding
Hedging Activities in ASC 815 Net	Derivatives (Effective			Derivatives (Effective
Investment Hedging Relationships	Portion)			Portion)
Net investment hedges	$	(5	)	$	(4	)
Total	$	(5	)	$	(4	)

For the three and nine months ended June 30, 2011 and 2010, no gains or losses were reclassified from CTA into income for the Company’s outstanding net investment hedges.

		Three Months Ended			Nine Months Ended
		June 30, 2011			June 30, 2011
		Amount of Gain (Loss)			Amount of Gain (Loss)
Derivatives in ASC 815 Fair Value Hedging	Location of Gain (Loss) Recognized in Income on	Recognized in Income on			Recognized in Income on
Relationships	Derivative	Derivative			Derivative
Interest rate swap	Net financing charges	$	12		$	14
Fixed rate debt swapped to floating	Net financing charges		(11	)		(14	)
Total		$	1		$	—

		Three Months Ended			Nine Months Ended
		June 30, 2010			June 30, 2010
		Amount of Gain (Loss)			Amount of Gain (Loss)
Derivatives in ASC 815 Fair Value Hedging	Location of Gain (Loss) Recognized in Income on	Recognized in Income on			Recognized in Income on
Relationships	Derivative	Derivative			Derivative
Interest rate swap	Net financing charges	$	4		$	4
Fixed rate debt swapped to floating	Net financing charges		(1	)		5
Total		$	3		$	9

		Three Months Ended			Nine Months Ended
		June 30, 2011			June 30, 2011
		Amount of Gain (Loss)			Amount of Gain (Loss)
Derivatives Not Designated as Hedging	Location of Gain (Loss) Recognized in Income on	Recognized in Income on			Recognized in Income on
Instruments under ASC 815	Derivative	Derivative			Derivative
Foreign currency exchange derivatives	Cost of sales	$	8		$	18
Foreign currency exchange derivatives	Net financing charges		(7	)		(9	)
Equity swap	Selling, general and administrative expenses		—			42
Total		$	1		$	51

		Three Months Ended			Nine Months Ended
		June 30, 2010			June 30, 2010
		Amount of Gain (Loss)			Amount of Gain (Loss)
Derivatives Not Designated as Hedging	Location of Gain (Loss) Recognized in Income on	Recognized in Income on			Recognized in Income on
Instruments under ASC 815	Derivative	Derivative			Derivative
Foreign currency exchange derivatives	Cost of sales	$	110		$	198
Foreign currency exchange derivatives	Net financing charges		(103	)		(160	)
Equity swap	Selling, general and administrative expenses		(21	)		2
Commodity derivatives	Cost of sales		1			1
Total		$	(13	)	$	41