Derivative Instruments and Hedging Activities

12 Months Ended

Sep. 30, 2011

Derivative Instruments and Hedging Activities [Abstract]

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

9. 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 10, “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. 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	September 30, 2011		September 30, 2010
Copper	Pounds		18,760,000		24,550,000
Lead	Metric Tons		25,600		18,450
Aluminum	Metric Tons		5,398		8,276
Tin	Metric Tons		260		—

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 September 30, 2011 and 2010, the Company had hedged approximately 4.3 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 5.8% 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 5.8% 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 (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 bonds. 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 consolidated statements of financial position (in millions):

	Derivatives and Hedging Activities				Derivatives and Hedging Activities Not
	Designated as Hedging Instruments				Designated as Hedging Instruments
	under ASC 815				under ASC 815
	September 30,		September 30,		September 30,		September 30,
	2011		2010		2011		2010
Other current assets
Foreign currency exchange derivatives	$	28	$	19	$	18	$	8
Commodity derivatives		—		14		—		—
Other noncurrent assets
Interest rate swaps		15		—		—		—
Equity swap		—		—		112		104
Foreign currency exchange derivatives		11		1		16		1
Total assets	$	54	$	34	$	146	$	113
Other current liabilities
Foreign currency exchange derivatives	$	49	$	19	$	21	$	8
Commodity derivatives		32		—		—		—
Cross-currency interest rate swaps		20		17		—		—
Long-term debt
Fixed rate debt swapped to floating		865		—		—		—
Other noncurrent liabilities
Foreign currency exchange derivatives		19		1		11		1
Total liabilities	$	985	$	37	$	32	$	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 fiscal year ended September 30, 2011 and 2010 and amounts recorded in AOCI net of tax or cumulative translation adjustment (CTA) net of tax in the consolidated statements of financial position (in millions):

	As of			Year Ended			Year Ended
	September 30, 2011			September 30, 2011			September 30, 2011
					Amount of Gain			Amount of Gain
	Amount of Gain			Location of Gain (Loss)	(Loss) Reclassified		Location of Gain (Loss)	(Loss) Recognized in
	(Loss) Recognized in			Reclassified from AOCI	from AOCI into		Recognized in Income on	Income on
Derivatives in ASC 815 Cash Flow	AOCI on Derivative			into Income (Effective	Income (Effective		Derivative (Ineffective	Derivative
Hedging Relationships	(Effective Portion)			Portion)	Portion)		Portion)	(Ineffective Portion)
Foreign currency exchange derivatives	$	(16	)	Cost of sales	$	3	Cost of sales	$	—
Commodity derivatives		(20	)	Cost of sales		28	Cost of sales		—
Forward treasury locks		9		Net financing charges		1	Net financing charges		—
Total	$	(27	)		$	32		$	—

	As of		Year Ended				Year Ended
	September 30, 2010		September 30, 2010				September 30, 2010
				Amount of Gain				Amount of Gain
	Amount of Gain		Location of Gain (Loss)	(Loss) Reclassified			Location of Gain (Loss)	(Loss) Recognized in
	(Loss) Recognized in		Reclassified from AOCI	from AOCI into			Recognized in Income on	Income on
Derivatives in ASC 815 Cash Flow	AOCI on Derivative		into Income (Effective	Income (Effective			Derivative (Ineffective	Derivative
Hedging Relationships	(Effective Portion)		Portion)	Portion)			Portion)	(Ineffective Portion)
Foreign currency exchange derivatives	$	—	Cost of sales	$	(3	)	Cost of sales	$	—
Commodity derivatives		10	Cost of sales		(1	)	Cost of sales		—
Forward treasury locks		10	Net financing charges		2		Net financing charges		—
Total	$	20		$	(2	)		$	—

	As of			As of
	September 30, 2011			September 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	$	(12	)	$	(10	)
Total	$	(12	)	$	(10	)

For the fiscal year ended September 30, 2011 and 2010, no gains or losses were reclassified from CTA into income for the Company’s outstanding net investment hedges.

		Year Ended			Year Ended
		September 30, 2011			September 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	$	15		$	10
Fixed rate debt swapped to floating	Net financing charges		(15	)		(7	)
Total		$	—		$	3

		Year Ended			Year Ended
		September 30, 2011			September 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	$	5		$	219
Foreign currency exchange derivatives	Net financing charges		3			(185	)
Equity swap	Selling, general and administrative expenses		(23	)		14
Commodity derivatives	Cost of sales		—			1
Total		$	(15	)	$	49