Derivative Instruments and Hedging Activities

3 Months Ended

Dec. 31, 2023

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 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 12, "Fair Value Measurements," of the notes to the 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 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 forward contracts. The Company hedges 70% to 90% of the notional amount of each of its known foreign exchange transactional exposures.

The Company enters into forward-starting interest-rate swaps in conjunction with anticipated note issuances. Forward-starting interest swaps are terminated when the anticipated notes are issued. As of December 31, 2023 and September 30, 2023, $600 million of forward-starting interest swaps were outstanding on an $800 million anticipated note issuance. Accumulated amounts recorded in accumulated other comprehensive income (loss) ("AOCI") as of the date of the note issuance are amortized to interest expense over the life of the related note to reflect the difference between the swap's reference rate and the fixed rate of the note.

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 copper and aluminum 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. The maturities of the commodity hedge contracts coincide with the expected purchase of the commodities.

The Company had the following outstanding contracts to hedge forecasted commodity purchases (in metric tons):


	Volume Outstanding as of
Commodity	December 31, 2023	September 30, 2023

Copper	3,062	2,812
Aluminum	5,973	5,976

Cash flow hedges under ASC 815, "Derivatives and Hedging," that 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 and commodity prices during the three months ended December 31, 2023 and 2022.

Net Investment Hedges

The Company enters into cross-currency interest rate swaps and foreign currency denominated debt obligations to selectively hedge portions of its net investment in non-U.S. subsidiaries. The currency effects of the cross-currency interest rate swaps and debt obligations are reflected in the AOCI account within shareholders’equity attributable to Johnson Controls ordinary shareholders where they offset gains and losses recorded on the Company’s net investments globally.

The following table summarizes net investment hedges (in billions):


	December 31,		September 30,
	2023		2023
Euro-denominated bonds designated as net investment hedges in Europe	€	2.9	€	2.9
Yen-denominated debt designated as a net investment hedge in Japan	¥	30	¥	30
US dollar vs. Yen cross-currency interest rate swap designated as a net investment hedge in Japan	¥	14	¥	14

Derivatives Not Designated as Hedging Instruments

The Company holds certain foreign currency forward contracts not designated as hedging instruments under ASC 815 to hedge foreign currency exposure resulting from monetary assets and liabilities denominated in nonfunctional currencies. The changes in fair value of these foreign currency forward exchange derivatives are recorded in the consolidated statements of income where they offset foreign currency transactional gains and losses on the nonfunctional currency denominated assets and liabilities being hedged.

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				Derivatives and Hedging Activities Not Designated as Hedging Instruments
	December 31,		September 30,		December 31,		September 30,
	2023		2023		2023		2023
Other current assets
Foreign currency exchange derivatives	$	14	$	16	$	—	$	13
Interest rate swaps	—		22		—		—
Commodity derivatives	1		—		—		—
Other noncurrent assets
Cross-currency interest rate swap	—		5		—		—
Total assets	$	15	$	43	$	—	$	13

Other current liabilities
Foreign currency exchange derivatives	$	31	$	20	$	30	$	5


Interest rate swaps	14		—		—		—
Commodity derivatives	—		2		—		—
Long-term debt
Foreign currency denominated debt	3,394		3,253		—		—
Total liabilities	$	3,439	$	3,275	$	30	$	5

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 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.

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 gross and net amounts of derivative assets and liabilities were as follows (in millions):


	Fair Value of Assets				Fair Value of Liabilities
	December 31,		September 30,		December 31,		September 30,
	2023		2023		2023		2023
Gross amount recognized	$	15	$	56	$	3,469	$	3,280
Gross amount eligible for offsetting	(14)		(19)		(14)		(19)
Net amount	$	1	$	37	$	3,455	$	3,261

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 (in millions):


Derivatives in Cash Flow Hedging Relationships	Three Months Ended December 31,
	2023		2022
Foreign currency exchange derivatives	$	(13)	$	(21)
Commodity derivatives	1		4
Interest rate swaps	(35)		—

Total	$	(47)	$	(17)

The following table presents 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 (in millions):


Derivatives in Cash Flow Hedging Relationships	Location of Gain (Loss) Reclassified from AOCI into Income	Three Months Ended December 31,
		2023		2022
Foreign currency exchange derivatives	Cost of sales	$	(1)	$	9
Commodity derivatives	Cost of sales	(3)		(6)

Total		$	(4)	$	3

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 (in millions):



Derivatives Not Designated as Hedging Instruments	Location of Gain (Loss) Recognized in Income on Derivative	Three Months Ended December 31,
		2023		2022
Foreign currency exchange derivatives	Cost of sales	$	(5)	$	2

Foreign currency exchange derivatives	Net financing charges	(43)		79





Total		$	(48)	$	81

Pre-tax losses on net investment hedges recorded as foreign currency translation adjustments ("CTA") within other comprehensive income (loss) were $145 million and $269 million for the three months ended December 31, 2023 and 2022, respectively. No gains or losses were reclassified from CTA into income during the three months ended December 31, 2023 and 2022.