XML 31 R21.htm IDEA: XBRL DOCUMENT
v3.10.0.1

Derivative Instruments and Hedging Activities | 9 Months Ended
--- | ---
Jun. 30, 2018
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Instruments and Hedging Activities | 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 16, "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. Cash Flow Hedges 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 selectively hedges anticipated transactions that are subject to foreign exchange rate risk primarily using foreign currency exchange hedge contracts. The Company hedges 70% to 90% of the nominal amount of each of its known foreign exchange transactional exposures. As cash flow hedges under ASC 815, "Derivatives and Hedging," 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 occur and affect earnings. These contracts were highly effective in hedging the variability in future cash flows attributable to changes in currency exchange rates during the three and nine months ended June 30, 2018 and 2017. The Company selectively hedges anticipated transactions that are subject to commodity price risk, primarily using commodity hedge contracts, to minimize overall price risk associated with the Company’s purchases of lead, copper, tin, aluminum and polypropylene 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 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, occur and affect earnings. The maturities of the commodity hedge contracts coincide with the expected purchase of the commodities. These contracts were highly effective in hedging the variability in future cash flows attributable to changes in commodity prices during the three and nine months ended June 30, 2018 and 2017. The Company had the following outstanding contracts to hedge forecasted commodity purchases (in metric tons):
|  | Volume Outstanding as of
Commodity |  | June 30, 2018 |  | September 30, 2017
Copper |  | 2,948 |  |  | 1,962 |
Polypropylene |  | 8,540 |  |  | 19,563 |
Lead |  | 31,009 |  |  | 24,705 |
Aluminum |  | 3,885 |  |  | 2,169 |
Tin |  | 2,276 |  |  | 1,715 |
Fair Value Hedges The Company selectively uses interest rate swaps to reduce market risk associated with changes in interest rates for its fixed-rate bonds. 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. As of September 30, 2016, the Company had four fixed to floating interest rate swaps totaling $400 million to hedge the coupon of its 2.6% notes that matured in December 2016, three fixed to floating interest rate swaps totaling $300 million to hedge the coupon of its 1.4% notes maturing November 2017 and one fixed to floating interest rate swap totaling $150 million to hedge the coupon of its 7.125% notes maturing July 2017. In December 2016, the four remaining outstanding interest rate swaps were terminated. The Company had no interest rate swaps outstanding at June 30, 2018 and September 30, 2017, respectively. Net Investment Hedges The Company enters into foreign currency denominated debt obligations to selectively hedge portions of its net investment in non-U.S. subsidiaries. The currency effects of the debt obligations are reflected in the AOCI account within shareholders’ equity attributable to Johnson Controls ordinary shareholders where they offset currency gains and losses recorded on the Company’s net investments globally. At June 30, 2018, the Company had one billion euro, 750 million euro, 423 million euro and 58 million euro bonds designated as net investment hedges in the Company's net investment in Europe and 35 billion yen of foreign denominated debt designated as net investment hedge in the Company's net investment in Japan. At September 30, 2017, the Company had one billion euro, 423 million euro and 58 million euro bonds designated as net investment hedges in the Company's net investment in Europe and 35 billion yen of foreign denominated debt designated as net investment hedge in the Company's net investment in Japan. Derivatives Not Designated as Hedging Instruments 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, 2018, the Company hedged approximately 1.8 million shares of its ordinary shares, which have a cost basis of $73 million. As of September 30, 2017, the Company hedged approximately 1.4 million shares of its ordinary shares, which have a cost basis of $58 million. The Company also holds certain foreign currency forward contracts which do not qualify for hedge accounting treatment. The change in fair value of foreign currency exchange derivatives not designated as hedging instruments under ASC 815 are recorded in the consolidated statements of income. Fair Value of Derivative Instruments 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 Designated as Hedging Instruments under ASC 815 |  | Derivatives and Hedging Activities Not Designated as Hedging Instruments under ASC 815
| June 30, |  | September 30, |  | June 30, |  | September 30,
| 2018 |  | 2017 |  | 2018 |  | 2017
Other current assets |  |  |  |  |  |  |
Foreign currency exchange derivatives | $ | 8 |  |  | $ | 27 |  |  | $ | 11 |  |  | $ | — |
Commodity derivatives | 2 |  |  | 9 |  |  | — |  |  | — |
Other noncurrent assets |  |  |  |  |  |  |
Equity swap | — |  |  | — |  |  | 60 |  |  | 55 |
Total assets | $ | 10 |  |  | $ | 36 |  |  | $ | 71 |  |  | $ | 55 |
Other current liabilities |  |  |  |  |  |  |
Foreign currency exchange derivatives | $ | 7 |  |  | $ | 21 |  |  | $ | 22 |  |  | $ | 25 |
Commodity derivatives | 3 |  |  | 1 |  |  | — |  |  | — |
Long-term debt |  |  |  |  |  |  |
Foreign currency denominated debt | 2,916 |  |  | 2,058 |  |  | — |  |  | — |
Total liabilities | $ | 2,926 |  |  | $ | 2,080 |  |  | $ | 22 |  |  | $ | 25 |
Counterparty Credit Risk The use of derivative financial instruments exposes the Company to counterparty credit risk. The Company has established policies and procedures to limit the potential for counterparty credit risk, including establishing limits for credit exposure and continually assessing the creditworthiness of counterparties. As a matter of practice, the Company deals with major banks worldwide having strong investment grade long-term credit ratings. To further reduce the risk of loss, the Company generally enters into International Swaps and Derivatives Association ("ISDA") master netting agreements with substantially all of its counterparties. The Company's derivative contracts do not contain any credit risk related contingent features and do not require collateral or other security to be furnished by the Company or the counterparties. The Company's exposure to credit risk associated with its derivative instruments is measured on an individual counterparty basis, as well as by groups of counterparties that share similar attributes. The Company does not anticipate any non-performance by any of its counterparties, and the concentration of risk with financial institutions does not present significant credit risk to the Company. The Company enters into ISDA master netting agreements with counterparties that permit the net settlement of amounts owed under the derivative contracts. The master netting agreements generally provide for net settlement of all outstanding contracts with a counterparty in the case of an event of default or a termination event. The Company has not elected to offset the fair value positions of the derivative contracts recorded in the consolidated statements of financial position. Collateral is generally not required of the Company or the counterparties under the master netting agreements. As of June 30, 2018 and September 30, 2017, no cash collateral was received or pledged under the master netting agreements. The gross and net amounts of derivative assets and liabilities were as follows (in millions):
|  | Fair Value of Assets |  | Fair Value of Liabilities
|  | June 30, |  | September 30, |  | June 30, |  | September 30,
|  | 2018 |  | 2017 |  | 2018 |  | 2017
Gross amount recognized |  | $ | 81 |  |  | $ | 91 |  |  | $ | 2,948 |  |  | $ | 2,105 |
Gross amount eligible for offsetting |  | (18 | ) |  | (16 | ) |  | (18 | ) |  | (16 | )
Net amount |  | $ | 63 |  |  | $ | 75 |  |  | $ | 2,930 |  |  | $ | 2,089 |
Derivatives Impact on the Statements of Income and Statements of Comprehensive Income The following table presents the pre-tax gains (losses) recorded in other comprehensive income (loss) related to cash flow hedges for the three and nine months ended June 30, 2018 and 2017 (in millions):
Derivatives in ASC 815 Cash Flow Hedging Relationships |  | Three Months Ended June 30, |  | Nine Months Ended June 30,
| 2018 |  | 2017 |  | 2018 |  | 2017
Foreign currency exchange derivatives |  | $ | 6 |  |  | $ | (3 | ) |  | $ | 7 |  |  | $ | 3 |
Commodity derivatives |  | — |  |  | 1 |  |  | 2 |  |  | 6 |
Total |  | $ | 6 |  |  | $ | (2 | ) |  | $ | 9 |  |  | $ | 9 |
The following tables present the location and amount of the pre-tax gains (losses) on cash flow hedges reclassified from AOCI into the Company’s consolidated statements of income for the three and nine months ended June 30, 2018 and 2017 (in millions):
Derivatives in ASC 815 Cash Flow Hedging Relationships |  | Location of Gain (Loss) Reclassified from AOCI into Income |  | Three Months Ended June 30, |  | Nine Months Ended June 30,
| 2018 |  | 2017 |  | 2018 |  | 2017
Foreign currency exchange derivatives |  | Cost of sales |  | $ | 2 |  |  | $ | 8 |  |  | $ | 2 |  |  | $ | 24 |
Commodity derivatives |  | Cost of sales |  | 2 |  |  | 3 |  |  | 11 |  |  | 7 |
Total |  |  |  | $ | 4 |  |  | $ | 11 |  |  | $ | 13 |  |  | $ | 31 |
The following table presents the location and amount of pre-tax gains (losses) on fair value hedges recognized in the Company’s consolidated statements of income for the three and nine months ended June 30, 2018 and 2017 (in millions):
Derivatives in ASC 815 Fair Value Hedging Relationships |  | Location of Gain (Loss) Recognized in Income on Derivative |  | Three Months Ended June 30, |  | Nine Months Ended June 30,
| 2018 |  | 2017 |  | 2018 |  | 2017
Interest rate swap |  | Net financing charges |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | (1 | )
Fixed rate debt swapped to floating |  | Net financing charges |  | — |  |  | — |  |  | — |  |  | 2 |
Total |  |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 1 |
The following table presents the location and amount of pre-tax gains (losses) on derivatives not designated as hedging instruments recognized in the Company’s consolidated statements of income for the three and nine months ended June 30, 2018 and 2017 (in millions):
|  |  |  | Amount of Gain (Loss) Recognized in Income on Derivative
Derivatives Not Designated as Hedging Instruments under ASC 815 |  | Location of Gain (Loss) Recognized in Income on Derivative |  | Three Months Ended June 30, |  | Nine Months Ended June 30,
| 2018 |  | 2017 |  | 2018 |  | 2017
Foreign currency exchange derivatives |  | Cost of sales |  | $ | (4 | ) |  | $ | (4 | ) |  | $ | (6 | ) |  | $ | (1 | )
Foreign currency exchange derivatives |  | Net financing charges |  | (27 | ) |  | 51 |  |  | (26 | ) |  | 60 |
Foreign currency exchange derivatives |  | Income tax provision |  | — |  |  | 1 |  |  | 2 |  |  | (2 | )
Foreign currency exchange derivatives |  | Income (loss) from discontinued operations |  | — |  |  | — |  |  | — |  |  | 5 |
Equity swap |  | Selling, general and administrative |  | (3 | ) |  | 2 |  |  | (10 | ) |  | 2 |
Total |  |  |  | $ | (34 | ) |  | $ | 50 |  |  | $ | (40 | ) |  | $ | 64 |
The pre-tax gains (losses) recorded in CTA within other comprehensive income (loss) related to net investment hedges were $165 million and $(105) million for the three months ended June 30, 2018 and 2017, respectively. The pre-tax gains (losses) recorded in CTA within other comprehensive income (loss) related to net investment hedges were $29 million and $(77) million for the nine months ended June 30, 2018 and 2017, respectively. For the three and nine months ended June 30, 2018 and 2017, no gains or losses were reclassified from CTA into income for the Company’s outstanding net investment hedges.

X
- References No definition available. + Details
Name: | us-gaap_DerivativeInstrumentsAndHedgingActivitiesDisclosureAbstract
Namespace Prefix: | us-gaap_
Data Type: | xbrli:stringItemType
Balance Type: | na
Period Type: | duration

X
- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
Name: | us-gaap_DerivativeInstrumentsAndHedgingActivitiesDisclosureTextBlock
Namespace Prefix: | us-gaap_
Data Type: | nonnum:textBlockItemType
Balance Type: | na
Period Type: | duration