Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to            

Commission File Number: 1-5097

 

 

JOHNSON CONTROLS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Wisconsin   39-0380010
(State or Other Jurisdiction of   (I.R.S. Employer
Incorporation or Organization)   Identification No.)
5757 North Green Bay Avenue  
Milwaukee, Wisconsin   53209
(Address of principal executive offices)   (Zip Code)

(414) 524-1200

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

   Shares Outstanding at March 31, 2012  

Common Stock: $0.01 7/18 par value per share

     680,200,626   

 

 

 


Table of Contents

JOHNSON CONTROLS, INC.

FORM 10-Q

Report Index

 

Part I.

  Financial Information      Page   
  Item 1.   Financial Statements (unaudited)   
    Condensed Consolidated Statements of Financial Position at March 31, 2012, September 30, 2011 and March 31, 2011      3   
    Consolidated Statements of Income for the Three and Six Month Periods Ended March 31, 2012 and 2011      4   
    Consolidated Statements of Cash Flows for the Three and Six Month Periods Ended March 31, 2012 and 2011      5   
    Notes to Condensed Consolidated Financial Statements      6   
    Report of Independent Registered Public Accounting Firm      30   
  Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations      31   
  Item 3.   Quantitative and Qualitative Disclosures About Market Risk      45   
  Item 4.   Controls and Procedures      45   

Part II.

  Other Information   
  Item 1.   Legal Proceedings      45   
  Item 1A.   Risk Factors      46   
  Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      46   
  Item 6.   Exhibits      47   

Signatures

       48   

 

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Johnson Controls, Inc.

Condensed Consolidated Statements of Financial Position

(in millions; unaudited)

 

     March 31,
2012
     September 30,
2011
     March 31,
2011
 

Assets

        

Cash and cash equivalents

   $ 240      $ 257      $ 401  

Accounts receivable—net

     7,402        7,151        6,946  

Inventories

     2,374        2,316        2,239  

Other current assets

     2,346        2,291        2,620  
  

 

 

    

 

 

    

 

 

 

Current assets

     12,362        12,015        12,206  
  

 

 

    

 

 

    

 

 

 

Property, plant and equipment—net

     6,086        5,616        4,761  

Goodwill

     7,040        7,016        6,807  

Other intangible assets—net

     966        945        832  

Investments in partially-owned affiliates

     961        811        864  

Other noncurrent assets

     3,558        3,273        3,198  
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 30,973      $ 29,676      $ 28,668  
  

 

 

    

 

 

    

 

 

 

Liabilities and Equity

        

Short-term debt

   $ 530      $ 596      $ 106  

Current portion of long-term debt

     148        17        53  

Accounts payable

     6,313        6,159        6,082  

Accrued compensation and benefits

     956        1,315        1,070  

Other current liabilities

     2,608        2,695        2,861  
  

 

 

    

 

 

    

 

 

 

Current liabilities

     10,555        10,782        10,172  
  

 

 

    

 

 

    

 

 

 

Long-term debt

     5,645        4,533        4,382  

Pension, postretirement health and other benefits

     782        1,102        803  

Other noncurrent liabilities

     1,928        1,819        1,982  
  

 

 

    

 

 

    

 

 

 

Long-term liabilities

     8,355        7,454        7,167  
  

 

 

    

 

 

    

 

 

 

Commitments and contingencies (Note 17)

        

Redeemable noncontrolling interests

     318        260        223  

Shareholders’ equity attributable to Johnson Controls, Inc.

     11,595        11,042        10,976  

Noncontrolling interests

     150        138        130  
  

 

 

    

 

 

    

 

 

 

Total equity

     11,745        11,180        11,106  
  

 

 

    

 

 

    

 

 

 

Total liabilities and equity

   $ 30,973      $ 29,676      $ 28,668  
  

 

 

    

 

 

    

 

 

 

The accompanying notes are an integral part of the financial statements.

 

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Johnson Controls, Inc.

Consolidated Statements of Income

(in millions, except per share data; unaudited)

 

     Three Months Ended     Six Months Ended  
     March 31,     March 31,  
     2012     2011     2012     2011  

Net sales

        

Products and systems*

   $ 8,495     $ 8,107     $ 16,829     $ 15,702  

Services*

     2,070       2,037       4,153       3,979  
  

 

 

   

 

 

   

 

 

   

 

 

 
     10,565       10,144       20,982       19,681  

Cost of sales

        

Products and systems*

     7,302       6,973       14,464       13,501  

Services*

     1,714       1,697       3,437       3,292  
  

 

 

   

 

 

   

 

 

   

 

 

 
     9,016       8,670       17,901       16,793  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     1,549       1,474       3,081       2,888  

Selling, general and administrative expenses

     (1,069     (1,014     (2,123     (1,961

Net financing charges

     (63     (46     (112     (81

Equity income

     79       61       199       127  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     496       475       1,045       973  

Provision for income taxes

     94       90       198       185  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     402       385       847       788  

Income attributable to noncontrolling interests

     38       31       73       59  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Johnson Controls, Inc.

   $ 364     $ 354     $ 774     $ 729  
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share

        

Basic

   $ 0.54     $ 0.52     $ 1.14     $ 1.08  

Diluted

   $ 0.53     $ 0.51     $ 1.12     $ 1.06  

 

* Products and systems consist of automotive experience and power solutions products and systems and building efficiency installed systems. Services are building efficiency technical and global workplace solutions.

The accompanying notes are an integral part of the financial statements.

 

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Johnson Controls, Inc.

Consolidated Statements of Cash Flows

(in millions; unaudited)

 

     Three Months Ended
March 31,
    Six Months Ended
March 31,
 
     2012     2011     2012     2011  

Operating Activities

        

Net income attributable to Johnson Controls, Inc.

   $ 364     $ 354     $ 774     $ 729  

Income attributable to noncontrolling interests

     38       31       73       59  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     402       385       847       788  

Adjustments to reconcile net income to cash provided by operating activities:

        

Depreciation

     189       173       371       331  

Amortization of intangibles

     11       12       25       23  

Equity in earnings of partially-owned affiliates, net of dividends received

     (59     (51     (161     (73

Deferred income taxes

     (34     —          26       —     

Impairment charges

     14       —          14       —     

Gain on divestitures—net

     (35     —          (35     —     

Fair value adjustment of equity investment

     (12     —          (12     —     

Equity-based compensation

     16       14       35       36  

Other

     23       4       41       —     

Changes in assets and liabilities, excluding acquisitions and divestitures

        

Receivables

     (277     (562     (71     (515

Inventories

     (74     (200     (69     (299

Other assets

     (9     (87     (195     (137

Accounts payable and accrued liabilities

     167       366       (479     56  

Accrued income taxes

     (79     (18     (191     (81
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash provided by operating activities

     243       36       146       129  
  

 

 

   

 

 

   

 

 

   

 

 

 

Investing Activities

        

Capital expenditures

     (448     (275     (986     (535

Sale of property, plant and equipment

     3       7       6       18  

Acquisition of businesses, net of cash acquired

     (19     (534     (30     (629

Business divestitures

     91       —          91       —     

Settlement of cross-currency interest rate swaps

     (9     —          (19     —     

Changes in long-term investments

     2       (38     (98     (50

Warrant redemption

     —          —          25       —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash used by investing activities

     (380     (840     (1,011     (1,196
  

 

 

   

 

 

   

 

 

   

 

 

 

Financing Activities

        

Increase (decrease) in short-term debt—net

     186       (89     (98     13  

Increase in long-term debt

     136       1,732       1,235       1,735  

Repayment of long-term debt

     (9     (667     (16     (759

Stock repurchases

     (33     —          (33     —     

Payment of cash dividends

     (123     (109     (232     (196

Proceeds from the exercise of stock options

     16       24       21       85  

Settlement of interest rate swaps

     —          —          —          24  

Cash paid to acquire a noncontrolling interest

     (9     —          (19     —     

Other

     (8     (3     (21     (8
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash provided by financing activities

     156       888       837       894  
  

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (20     (4     11       14  
  

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     (1     80       (17     (159

Cash and cash equivalents at beginning of period

     241       321       257       560  
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 240     $ 401     $ 240     $ 401  
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of the financial statements.

 

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Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2012

(unaudited)

 

1. Financial Statements

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (which include normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) have been condensed or omitted pursuant to the rules and regulations of the United States Securities and Exchange Commission (SEC). These condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Johnson Controls, Inc. (the “Company”) Annual Report on Form 10-K for the year ended September 30, 2011. The results of operations for the three and six month periods ended March 31, 2012 are not necessarily indicative of results for the Company’s 2012 fiscal year because of seasonal and other factors.

Certain amounts as of March 31, 2011 have been revised to conform to the current year’s presentation. Recoverable customer engineering expenditures are included in the changes in other assets line within the operating activities section of the consolidated statements of cash flows. In prior years, these cash flows were included in the investing activities section. Also, the long-term portion of pension liabilities is now reclassified into the pension, postretirement health and other benefits line within the long-term liabilities section of the condensed consolidated statements of financial position. In prior years, these liabilities were included in the other noncurrent liabilities line.

The consolidated financial statements include the accounts of Johnson Controls, Inc. and its domestic and non-U.S. subsidiaries that are consolidated in conformity with U.S. GAAP. All significant intercompany transactions have been eliminated. Investments in partially-owned affiliates are accounted for by the equity method when the Company’s interest exceeds 20% and the Company does not have a controlling interest.

Under certain criteria as provided for in Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 810, “Consolidation,” the Company may consolidate a partially-owned affiliate. To determine whether to consolidate a partially-owned affiliate, the Company first determines if the entity is a variable interest entity (“VIE”). An entity is considered to be a VIE if it has one of the following characteristics: 1) the entity is thinly capitalized; 2) residual equity holders do not control the entity; 3) equity holders are shielded from economic losses or do not participate fully in the entity’s residual economics; or 4) the entity was established with non-substantive voting. If the entity meets one of these characteristics, the Company then determines if it is the primary beneficiary of the VIE. The party with the power to direct activities of the VIE that most significantly impact the VIE’s economic performance and the potential to absorb benefits or losses that could be significant to the VIE is considered the primary beneficiary and consolidates the VIE. If the entity is not considered a VIE, then the Company applies the voting interest model to determine whether or not the Company shall consolidate the partially-owned affiliate.

Consolidated VIEs

Based upon the criteria set forth in ASC 810, the Company has determined that it was the primary beneficiary in three VIEs for the reporting period ended March 31, 2012 and two VIEs for the reporting periods ended September 30, 2011 and March 31, 2011, as the Company absorbs significant economics of the entities and has the power to direct the activities that are considered most significant to the entities.

Two of the VIEs manufacture products in North America for the automotive industry. The Company funds the entities’ short term liquidity needs through revolving credit facilities and has the power to direct the activities that are considered most significant to the entities through its key customer supply relationships.

During the three month period ended December 31, 2011, a pre-existing VIE accounted for under the equity method was reorganized into three separate investments as a result of the counterparty exercising its option to put its interest to the Company. The Company acquired additional interests in two of the reorganized group entities. The reorganized group entities are considered to be VIEs as the other owner party has been provided decision making rights but does not have equity at risk. The Company is considered the primary beneficiary of one of the entities due

 

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Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2012

(unaudited)

 

to the Company’s power pertaining to decisions over significant activities of the entity. As such, the VIE has been consolidated within the Company’s condensed consolidated statement of financial position. The impact of the consolidation of the entity on the Company’s consolidated statements of income for the three and six month periods ended March 31, 2012 was not material. The VIE is named as a co-obligor under a third party debt agreement of $135 million, maturing in fiscal 2019, in which it could become subject to paying more than its allocated share of the third party debt in the event of bankruptcy of one or more of the other co-obligors. The other co-obligors, all related parties in which the Company is an equity investor, consist of the remaining group entities involved in the reorganization. As part of the overall reorganization transaction, the Company has also provided financial support to the group entities in the form of loans totaling $101 million, which are subordinate to the third party debt agreement. The Company is a significant customer of certain co-obligors, resulting in a remote possibility of loss. Additionally, the Company is subject to a floor guaranty expiring in fiscal 2022; in the event that the other owner party no longer owns any part of the group entities due to sale or transfer, the Company has guaranteed that the proceeds received from the sale or transfer will not be less than $25 million. The Company has partnered with the group entities to design and manufacture battery components for the power solutions business.

The carrying amounts and classification of assets (none of which are restricted) and liabilities included in the Company’s condensed consolidated statements of financial position for the consolidated VIEs are as follows (in millions):

 

     March 31,
2012
     September 30,
2011
     March 31,
2011
 

Current assets

   $ 218      $ 207      $ 227  

Noncurrent assets

     168        55        62  
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 386      $ 262      $ 289  
  

 

 

    

 

 

    

 

 

 

Current liabilities

   $ 151      $ 144      $ 175  

Noncurrent liabilities

     41        —           —     
  

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 192      $ 144      $ 175  
  

 

 

    

 

 

    

 

 

 

Nonconsolidated VIEs

During the three month period ended June 30, 2011, the Company acquired a 40% interest in an equity method investee. The investee produces and sells lead-acid batteries of which the Company will both purchase and supply certain batteries to complement each investment partners’ portfolio. Commencing on the third anniversary of the closing date, the Company has a contractual right to purchase the remaining 60% equity interest in the investee (the “call option”). If the Company does not exercise the call option on or before the fifth anniversary of the closing date, for a period of six months thereafter the Company is subject to a contractual obligation at the counterparty’s option to sell the Company’s equity investment in the investee to the counterparty (the “repurchase option”). The purchase price is fixed under both the call option and the repurchase option. Based upon the criteria set forth in ASC 810, the Company has determined that the investee is a VIE as the equity holders, through their equity investments, may not participate fully in the entity’s residual economics. The Company is not the primary beneficiary as the Company does not have the power to make key operating decisions considered to be most significant to the VIE. Therefore, the investee is accounted for under the equity method of accounting as the Company’s interest exceeds 20% and the Company does not have a controlling interest. The investment balance included within investments in partially-owned affiliates in the condensed consolidated statements of financial position at March 31, 2012 and September 30, 2011 was $52 million and $49 million, respectively, which represents the Company’s maximum exposure to loss. Current assets and liabilities related to the VIE are immaterial and represent normal course of business trade receivables and payables for all presented periods.

As mentioned previously within the “Consolidated VIEs” section above, during the three month period ended December 31, 2011, a pre-existing VIE was reorganized into three separate investments as a result of the counterparty exercising its option to put its interest to the Company. The reorganized group entities are considered to be VIEs as the other owner party has been provided decision making rights but does not have equity at risk. The

 

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Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2012

(unaudited)

 

Company is not considered to be the primary beneficiary of two of the entities as the Company cannot make key operating decisions considered to be most significant to the VIEs. Therefore, the entities are accounted for under the equity method of accounting as the Company’s interest exceeds 20% and the Company does not have a controlling interest. The Company’s maximum exposure to loss, which included the partially-owned affiliate investment balance and a note receivable, approximated $43 million and $42 million at September 30, 2011 and March 31, 2011, respectively. The Company’s maximum exposure to loss at March 31, 2012 includes the partially-owned affiliate investment balance of $39 million as well as the subordinated loan from the Company, third party debt agreement and floor guaranty mentioned previously within the “Consolidated VIEs” section above. Current liabilities due to the VIEs are not material and represent normal course of business trade payables for all presented periods.

The Company did not have a significant variable interest in any other unconsolidated VIEs for the presented reporting periods.

 

2. New Accounting Standards

In December 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.” ASU No. 2011-11 requires additional quantitative and qualitative disclosures of gross and net information regarding financial instruments and derivative instruments that are offset or eligible for offset in the consolidated statement of financial position. ASU No. 2011-11 will be effective for the Company for the quarter ending December 31, 2013. The adoption of this guidance will have no impact on the Company’s consolidated financial condition and results of operations.

In September 2011, the FASB issued ASU No. 2011-09, “Compensation – Retirement Benefits – Multiemployer Plans (Subtopic 715-80): Disclosures about an Employer’s Participation in a Multiemployer Plan.” ASU No. 2011-09 requires additional quantitative and qualitative disclosures about an employer’s participation in multiemployer pension plans, including disclosure of the name and identifying number of the significant multiemployer plans in which the employer participates, the level of the employer’s participation in the plans, the financial health of the plans and the nature of the employer commitments to the plans. ASU No. 2011-09 will be effective for the Company for the fiscal year ending September 30, 2012. The adoption of this guidance will have no impact on the Company’s consolidated financial condition and results of operations.

In September 2011, the FASB issued ASU No. 2011-08, “Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment.” ASU No. 2011-08 provides companies an option to perform a qualitative assessment to determine whether further goodwill impairment testing is necessary. If, as a result of the qualitative assessment, it is determined that it is more likely than not that a reporting unit’s fair value is less than its carrying amount, the two-step quantitative impairment test is required. Otherwise, no further testing is required. ASU No. 2011-08 will be effective for the Company for goodwill impairment tests performed in the fiscal year ending September 30, 2013, with early adoption permitted. The adoption of this guidance will have no impact on the Company’s consolidated financial condition and results of operations.

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” ASU No. 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of shareholders’ equity. All non-owner changes in shareholders’ equity instead must be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU No. 2011-05 will be effective for the Company for the quarter ending December 31, 2012. The adoption of this guidance will have no impact on the Company’s consolidated financial condition and results of operations.

In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU No. 2011-04 clarifies and changes the application of various fair value measurement principles and disclosure requirements, and was effective for the Company beginning in the second quarter of fiscal 2012 (January 1, 2012). The adoption of this guidance had no impact on the Company’s consolidated financial condition and results of operations. Refer to Note

 

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Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2012

(unaudited)

 

14, “Fair Value Measurements,” of the notes to condensed consolidated financial statements for disclosures surrounding the Company’s fair value measurements.

 

3. Acquisitions and Divestitures

In the first six months of fiscal 2012, the Company completed three acquisitions for a combined purchase price, net of cash acquired, of $38 million, all of which was paid in the six months ended March 31, 2012. The acquisitions in the aggregate were not material to the Company’s consolidated financial statements. In connection with the acquisitions, the Company recorded goodwill of $71 million. The purchase price allocation may be subsequently adjusted to reflect final valuation studies. As a result of two of the acquisitions, which increased the Company’s ownership from a noncontrolling to controlling interest, the Company recorded a non-cash gain of $12 million, of which $9 million was recorded within power solutions equity income and $3 million was recorded in automotive experience Europe equity income, to adjust the Company’s existing equity investments in the partially-owned affiliates to fair value.

In the first six months of fiscal 2012, the Company adjusted the purchase price allocation of certain fiscal 2011 acquisitions. The adjustments were as a result of a true-up to the purchase price in the amount of $8 million, for which the cash was received in the first quarter of fiscal 2012. Also, in connection with these acquisitions, the Company recorded a reduction in goodwill of $1 million in fiscal 2012 related to the purchase price allocations. The purchase price allocations may be subsequently adjusted to reflect final valuation studies.

In the second quarter of fiscal 2012, the Company completed two divestitures for a combined sales price of $91 million, all of which was received in the three months ended March 31, 2012. The divestitures in the aggregate were not material to the Company’s consolidated financial statements. In connection with the divestitures, the Company recorded a gain, net of transaction costs, of $35 million and reduced goodwill by $29 million in the building efficiency business.

During the second quarter of fiscal 2011, the Company completed its acquisition of the C. Rob. Hammerstein Group (Hammerstein), a leading global supplier of high-quality metal seat structures, components and mechanisms based in Solingen, Germany. The total purchase price, net of cash acquired, was approximately $529 million, of which $521 million was paid during the three months ended March 31, 2011. In connection with the Hammerstein acquisition, the Company recorded goodwill of $200 million primarily in the automotive experience Europe segment.

In the first six months of fiscal 2011, the Company completed three additional acquisitions for a combined purchase price, net of cash acquired, of $80 million, of which $108 million was paid in the six months ended March 31, 2011 prior to purchase price true-ups from the seller. The acquisitions in the aggregate were not material to the Company’s consolidated financial statements. In connection with the acquisitions, the Company recorded goodwill of $73 million, of which $14 million was recorded in fiscal 2012.

There were no business divestitures for the six months ended March 31, 2011.

 

4. Percentage-of-Completion Contracts

The building efficiency business records certain long-term contracts under the percentage-of-completion method of accounting. Under this method, sales and gross profit are recognized as work is performed based on the relationship between actual costs incurred and total estimated costs at completion. The Company records costs and earnings in excess of billings on uncompleted contracts within accounts receivable – net and billings in excess of costs and earnings on uncompleted contracts within other current liabilities in the condensed consolidated statements of financial position. Amounts included within accounts receivable – net related to these contracts were $848 million, $773 million and $738 million at March 31, 2012, September 30, 2011 and March 31, 2011, respectively. Amounts included within other current liabilities were $736 million, $730 million and $747 million at March 31, 2012, September 30, 2011 and March 31, 2011, respectively.

 

9


Table of Contents

Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2012

(unaudited)

 

5. Inventories

Inventories consisted of the following (in millions):

 

     March 31,     September 30,     March 31,  
     2012     2011     2011  

Raw materials and supplies

   $ 1,175     $ 1,136     $ 1,100  

Work-in-process

     457       434       332  

Finished goods

     863       867       941  
  

 

 

   

 

 

   

 

 

 

FIFO inventories

     2,495       2,437       2,373  

LIFO reserve

     (121     (121     (134
  

 

 

   

 

 

   

 

 

 

Inventories

   $ 2,374     $ 2,316     $ 2,239  
  

 

 

   

 

 

   

 

 

 

 

6. Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill in each of the Company’s reporting segments for the six month period ended September 30, 2011 and the six month period ended March 31, 2012 were as follows (in millions):

 

                         Currency        
     March 31,      Business      Business     Translation     September 30,  
     2011      Acquisitions      Divestitures     and Other     2011  

Building efficiency

            

North America systems

   $ 519      $ —         $ —        $ —        $ 519  

North America service

     676        33        —          1       710  

Global workplace solutions

     184        —           —          —          184  

Asia

     385        —           —          6       391  

Other

     1,108        —           —          (43     1,065  

Automotive experience

            

North America

     1,382        —           —          (3     1,379  

Europe

     1,388        166        —          (51     1,503  

Asia

     236        16        —          9       261  

Power solutions

     929        93        —          (18     1,004  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 6,807      $ 308      $ —        $ (99   $ 7,016  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
                         Currency        
     September 30,      Business      Business     Translation     March 31,  
     2011      Acquisitions      Divestitures     and Other     2012  

Building efficiency

            

North America systems

   $ 519      $ —         $ —        $ 1     $ 520  

North America service

     710        —           (2     —          708  

Global workplace solutions

     184        —           —          2       186  

Asia

     391        —           —          —          391  

Other

     1,065        —           (27     (4     1,034  

Automotive experience

            

North America

     1,379        2        —          —          1,381  

Europe

     1,503        9        —          (28     1,484  

Asia

     261        2        —          (2     261  

Power solutions

     1,004        71        —          —          1,075  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 7,016      $ 84      $ (29   $ (31   $ 7,040  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

10


Table of Contents

Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2012

(unaudited)

 

The Company’s other intangible assets, primarily from business acquisitions, were valued based on independent appraisals and consisted of (in millions):

 

     March 31, 2012      September 30, 2011      March 31, 2011  
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net      Gross
Carrying
Amount
     Accumulated
Amortization
    Net      Gross
Carrying
Amount
     Accumulated
Amortization
    Net  

Amortized intangible assets

                       

Patented technology

   $ 193      $ (107   $ 86      $ 298      $ (209   $ 89      $ 285      $ (208   $ 77  

Customer relationships

     511        (101     410        487        (91     396        446        (79     367  

Miscellaneous

     194        (39     155        184        (38     146        106        (35     71  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total amortized intangible assets

     898        (247     651        969        (338     631        837        (322     515  

Unamortized intangible assets

                       

Trademarks

     315        —          315        314        —          314        317        —          317  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total intangible assets

   $ 1,213      $ (247   $ 966      $ 1,283      $ (338   $ 945      $ 1,154      $ (322   $ 832  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Amortization of other intangible assets for the three month periods ended March 31, 2012 and 2011 was $11 million and $12 million, respectively. Amortization of other intangible assets for the six month periods ended March 31, 2012 and 2011 was $25 million and $23 million, respectively. Excluding the impact of any future acquisitions, the Company anticipates amortization for fiscal 2013, 2014, 2015, 2016 and 2017 will be approximately $59 million, $57 million, $54 million, $48 million and $47 million per year, respectively.

 

7. Product Warranties

The Company offers warranties to its customers depending upon the specific product and terms of the customer purchase agreement. A typical warranty program requires that the Company replace defective products within a specified time period from the date of sale. The Company records an estimate for future warranty-related costs based on actual historical return rates and other known factors. Based on analysis of return rates and other factors, the adequacy of the Company’s warranty provisions are adjusted as necessary. The Company monitors its warranty activity and adjusts its reserve estimates when it is probable that future warranty costs will be different than those estimates.

The Company’s product warranty liability is recorded in the condensed consolidated statements of financial position in other current liabilities if the warranty is less than one year and in other noncurrent liabilities if the warranty extends longer than one year.

The changes in the carrying amount of the Company’s total product warranty liability for the six months ended March 31, 2012 and 2011 were as follows (in millions):

 

     Six Months Ended  
     March 31,  
     2012     2011  

Balance at beginning of period

   $ 301     $ 337  

Accruals for warranties issued during the period

     97       107  

Accruals from acquisitions and divestitures

     (1     —     

Accruals related to pre-existing warranties (including changes in estimates)

     (17     (6

Settlements made (in cash or in kind) during the period

     (84     (110

Currency translation

     (1     1  
  

 

 

   

 

 

 

Balance at end of period

   $ 295     $ 329  
  

 

 

   

 

 

 

 

11


Table of Contents

Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2012

(unaudited)

 

8. Income Taxes

The Company’s income tax provision for the three and six months ended March 31, 2012 and 2011 is as follows (in millions):

 

000000 000000 000000 000000
     Three Months Ended      Six Months Ended  
     March 31,      March 31,  
     2012      2011      2012      2011  

Federal, state and foreign income tax expense at annual effective rate

   $ 94      $ 90      $ 198      $ 185  
  

 

 

    

 

 

    

 

 

    

 

 

 

Effective Tax Rate

In calculating the provision for income taxes, the Company uses an estimate of the annual effective tax rate based upon the facts and circumstances known at each interim period. On a quarterly basis, the actual effective tax rate is adjusted, as appropriate, based upon changed facts and circumstances, if any, as compared to those forecasted at the beginning of the fiscal year and each interim period thereafter. For the three and six months ended March 31, 2012, the Company’s estimated annual effective income tax rate from continuing operations is 19%, consistent with the prior year rate of 19%.

Valuation Allowance

The Company reviews the realizability of its deferred tax assets on a quarterly basis, or whenever events or changes in circumstances indicate that a review is required. In determining the requirement for a valuation allowance, the historical and projected financial results of the legal entity or consolidated group recording the net deferred tax asset are considered, along with any other positive or negative evidence. Since future financial results may differ from previous estimates, periodic adjustments to the Company’s valuation allowances may be necessary.

It is reasonably possible that over the next twelve months, valuation allowances against deferred tax assets in certain jurisdictions may result in a net adjustment to tax expense of up to $50 million.

Uncertain Tax Positions

At September 30, 2011, the Company had gross tax effected unrecognized tax benefits of $1,357 million of which $1,164 million, if recognized, would impact the effective tax rate. Total net accrued interest at September 30, 2011 was approximately $77 million (net of tax benefit). The net change in interest and penalties during the six months ended March 31, 2012 was $9 million, and for the same period in fiscal 2011 was $17 million. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense.

 

12


Table of Contents

Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2012

(unaudited)

 

The Company is subject to income taxes in the U.S. and numerous foreign jurisdictions. Judgment is required in determining its worldwide provision for income taxes and recording the related assets and liabilities. In the ordinary course of the Company’s business, there are many transactions and calculations where the ultimate tax determination is uncertain. The Company is regularly under audit by tax authorities, including major jurisdictions noted below:

 

Tax    Statute of

Jurisdiction

   Limitations

Austria

   5 years

Belgium

   3 years

Brazil

   5 years

Canada

   5 years

China

   3 to 5 years

Czech Republic

   3 years

France

   3 years

Germany

   4 to 5 years

Italy

   4 years

Japan

   5 to 7 years

Mexico

   5 years

Poland

   5 years

Spain

   4 years

United Kingdom

   4 years

United States—Federal

   3 years

United States—State

   3 to 5 years

In the U.S., the fiscal years 2007 through 2009 are currently under exam by the Internal Revenue Service (IRS) and 2004 through 2006 are currently under IRS Appeals. Additionally, the Company is currently under exam in the following major foreign jurisdictions:

 

Tax Jurisdiction

   Tax Years
Covered

Austria

   2005 - 2008

Brazil

   2004 - 2008

Canada

   2007 - 2008

Czech Republic

   2007 - 2009

France

   2002 - 2010

Germany

   2001 - 2010

Italy

   2005 - 2009

Mexico

   2003 - 2004

Spain

   2006 - 2008

It is reasonably possible that certain tax examinations, appellate proceedings and/or tax litigation will conclude within the next twelve months, the impact of which could be up to a $50 million adjustment to tax expense.

Impacts of Tax Legislation

During the six month period ended March 31, 2012, tax legislation was adopted in Japan which reduces its income tax rate by 5%, the effect of which is not material to the Company’s consolidated financial statements. Also, tax legislation was adopted in various jurisdictions to limit the annual utilization of tax losses that are carried forward.

 

13


Table of Contents

Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2012

(unaudited)

 

These law changes will not have a material impact on the Company’s consolidated financial statements. Other tax legislation was adopted in various jurisdictions during the six months ended March 31, 2012. These changes will not have a material impact on the Company’s consolidated financial statements.

 

9. Retirement Plans

The components of the Company’s net periodic benefit costs associated with its defined benefit pension plans and other postretirement health and other benefits are shown in the tables below in accordance with ASC 715, “Compensation – Retirement Benefits” (in millions):

 

000000 000000 000000 000000
     U.S. Pension Plans  
     Three Months Ended     Six Months Ended  
     March 31,     March 31,  
     2012     2011     2012     2011  

Service cost

   $ 17     $ 17     $ 34     $ 33  

Interest cost

     37       36       75       72  

Expected return on plan assets

     (56     (52     (112     (104

Amortization of net actuarial loss

     21       14       42       28  

Amortization of prior service cost

     1       —          1       —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 20     $ 15     $ 40     $ 29  
  

 

 

   

 

 

   

 

 

   

 

 

 
     Non-U.S. Pension Plans  
     Three Months Ended     Six Months Ended  
     March 31,     March 31,  
     2012     2011     2012     2011  

Service cost

   $ 8     $ 8     $ 17     $ 17  

Interest cost

     18       17       36       34  

Expected return on plan assets

     (18     (20     (37     (38

Amortization of net actuarial loss

     4       2       9       6  

Amortization of prior service cost (credit)

     (1     1       (1     1  

Curtailment gain

     —          (6     —          (19
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 11     $ 2     $ 24     $ 1  
  

 

 

   

 

 

   

 

 

   

 

 

 
     Postretirement Health and Other Benefits  
     Three Months Ended     Six Months Ended  
     March 31,     March 31,  
     2012     2011     2012     2011  

Service cost

   $ 1     $ 1     $ 2     $ 2  

Interest cost

     4       4       7       7  

Expected return on plan assets

     (3     —          (6     —     

Amortization of net actuarial loss

     1       —          1       1  

Amortization of prior service credit

     (5     (5     (9     (9
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost (credit)

   $ (2   $ —        $ (5   $ 1  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

14


Table of Contents

Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2012

(unaudited)

 

10. Debt and Financing Arrangements

During the quarter ended March 31, 2012, the Company remarketed $46 million aggregate principal amount of 11.5% subordinated notes due in fiscal 2042, on behalf of holders of Corporate Units and holders of separate notes, by issuing $46 million aggregate principal amount of 2.355% senior notes due on March 31, 2017.

During the quarter ended December 31, 2011, the Company issued $400 million aggregate principal amount of 2.6% senior unsecured fixed rate notes due in fiscal 2017, $450 million aggregate principal amount of 3.75% senior unsecured fixed rate notes due in fiscal 2022 and $250 million aggregate principal amount of 5.25% senior unsecured fixed rate notes due in fiscal 2042. Aggregate net proceeds of $1.1 billion from the issuances were used for general corporate purposes, including the retirement of short-term debt and contributions to the Company’s pension and postretirement health plans.

During the quarter ended December 31, 2011, the Company entered into two committed, one-year revolving credit facilities totaling $135 million in aggregate. There have been no draws on either facility during fiscal 2012.

During the quarter ended December 31, 2011, the Company entered into a five-year, 75 million euro, floating rate credit facility scheduled to mature in fiscal 2017. The Company drew on the credit facility during the quarter ended March 31, 2012. Proceeds from the facility were used for general corporate purposes.

During the quarter ended March 31, 2011, the Company replaced its $2.05 billion committed five-year credit facility, scheduled to mature in December 2011, with a $2.5 billion committed four-year credit facility scheduled to mature in February 2015. The facility is used to support the Company’s outstanding commercial paper. There were no draws on the facility in fiscal 2012 or 2011.

During the quarter ended March 31, 2011, the Company issued $350 million aggregate principal amount of floating rate senior unsecured notes due in fiscal 2014, $450 million aggregate principal amount of 1.75% senior unsecured fixed rate notes due in fiscal 2014, $500 million aggregate principal amount of 4.25% senior unsecured fixed rate notes due in fiscal 2021 and $300 million aggregate principal amount of 5.70% senior unsecured fixed rate notes due in fiscal 2041. Aggregate net proceeds of $1.6 billion from the issues were used for general corporate purposes including the retirement of short-term debt.

During the quarter ended March 31, 2011, the Company entered into a six-year, 100 million euro, floating rate loan scheduled to mature in February 2017. Proceeds from the facility were used for general corporate purposes.

During the quarter ended March 31, 2011, the Company retired $654 million in principal amount, plus accrued interest, of its 5.25% fixed rate notes that matured on January 15, 2011. The Company used cash to fund the payment.

During the quarter ended March 31, 2011, the Company retired its $100 million committed revolving facility prior to its scheduled maturity date of December 2011. There were no draws on the facility.

During the quarter ended December 31, 2010, the Company repaid debt of $82 million which was acquired as part of an acquisition in the same quarter. The Company used cash to repay the debt.

 

15


Table of Contents

Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2012

(unaudited)

 

11. Earnings Per Share

The Company presents both basic and diluted earnings per share (EPS) amounts. Basic EPS is calculated by dividing net income attributable to Johnson Controls, Inc. by the weighted average number of common shares outstanding during the reporting period. Diluted EPS is calculated by dividing net income attributable to Johnson Controls, Inc. by the weighted average number of common shares and common equivalent shares outstanding during the reporting period that are calculated using the treasury stock method for stock options. The treasury stock method assumes that the Company uses the proceeds from the exercise of awards to repurchase common stock at the average market price during the period. The assumed proceeds under the treasury stock method include the purchase price that the grantee will pay in the future, compensation cost for future service that the Company has not yet recognized and any windfall tax benefits that would be credited to capital in excess of par value when the award generates a tax deduction. If there would be a shortfall resulting in a charge to capital in excess of par value, such an amount would be a reduction of the proceeds.

The Company’s outstanding Equity Units due 2042 and 6.5% convertible senior notes due 2012 are reflected in diluted earnings per share using the “if-converted” method. Under this method, if dilutive, the common stock is assumed issued as of the beginning of the reporting period and included in calculating diluted earnings per share. In addition, if dilutive, interest expense, net of tax, related to the outstanding Equity Units and convertible senior notes is added back to the numerator in calculating diluted earnings per share.

The following table reconciles the numerators and denominators used to calculate basic and diluted earnings per share (in millions):

 

000000 000000 000000 000000
     Three Months Ended      Six Months Ended  
     March 31,      March 31,  
     2012      2011      2012      2011  

Income Available to Common Shareholders

           

Basic income available to common shareholders

   $ 364      $ 354      $ 774      $ 729  

Interest expense, net of tax

     —           1        1        2  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted income available to common shareholders

   $ 364      $ 355      $ 775      $ 731  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted Average Shares Outstanding

           

Basic weighted average shares outstanding

     680.0        677.3        679.9        676.3  

Effect of dilutive securities:

           

Stock options

     6.2        9.2        5.9        8.6  

Equity units

     3.7        4.5        3.7        4.5  

Convertible senior notes

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted weighted average shares outstanding

     689.9        691.0        689.5        689.4  
  

 

 

    

 

 

    

 

 

    

 

 

 

Antidilutive Securities

           

Options to purchase common shares

     0.6        —           0.6        —     

During the three months ended March 31, 2012 and 2011, the Company declared a dividend of $0.18 and $0.16, respectively, per common share. During the six months ended March 31, 2012 and 2011, the Company declared two quarterly dividends totaling $0.36 and $0.32, respectively, per common share. The Company paid all dividends in the month subsequent to the end of each fiscal quarter.

 

16


Table of Contents

Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2012

(unaudited)

 

12. Equity and Noncontrolling Interests

The following schedules present changes in consolidated equity attributable to Johnson Controls, Inc. and noncontrolling interests (in millions):

 

     Three Months Ended March 31, 2012     Three Months Ended March 31, 2011  
     Equity
Attributable to
Johnson
Controls, Inc.
    Equity
Attributable to
Noncontrolling
Interests
    Total Equity     Equity
Attributable to
Johnson
Controls, Inc.
    Equity
Attributable to
Noncontrolling
Interests
    Total Equity  

Beginning balance, December 31

   $ 11,137     $ 141     $ 11,278     $ 10,431     $ 117     $ 10,548  

Total comprehensive income:

            

Net income

     364       13       377       354       16       370  

Foreign currency translation adjustments

     175       (2     173       199       —          199  

Realized and unrealized gains (losses) on derivatives

     19       —          19       (3     —          (3

Unrealized gains on marketable common stock

     11       —          11       2       —          2  

Employee retirement plans

     12       —          12       63       —          63  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     217       (2     215       261       —          261  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     581       11       592       615       16       631  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other changes in equity:

            

Cash dividends—common stock

     (123     —          (123     (109     —          (109

Dividends attributable to noncontrolling interests

     —          (6     (6     —          (3     (3

Redemption value adjustment attributable to redeemable noncontrolling interests

     6       —          6       1       —          1  

Repurchases of common stock

     (33     —          (33     —          —          —     

Other, including options exercised

     27       4       31       38       —          38  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance, March 31

   $ 11,595     $ 150     $ 11,745     $ 10,976     $ 130     $ 11,106  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

17


Table of Contents

Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2012

(unaudited)

 

     Six Months Ended March 31, 2012     Six Months Ended March 31, 2011  
     Equity
Attributable to
Johnson
Controls, Inc.
    Equity
Attributable to
Noncontrolling
Interests
    Total Equity     Equity
Attributable to
Johnson
Controls, Inc.
    Equity
Attributable to
Noncontrolling
Interests
    Total Equity  

Beginning balance, September 30

   $ 11,042     $ 138     $ 11,180     $ 10,071     $ 106     $ 10,177  

Total comprehensive income:

            

Net income

     774       28       802       729       31       760  

Foreign currency translation adjustments

     (53     (1     (54     170       1       171  

Realized and unrealized gains on derivatives

     29       —          29       2       —          2  

Unrealized gains on marketable common stock

     8       —          8       7       —          7  

Employee retirement plans

     29       —          29       71       —          71  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     13       (1     12       250       1       251  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     787       27       814       979       32       1,011  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other changes in equity:

            

Cash dividends—common stock

     (246     —          (246     (217     —          (217

Dividends attributable to noncontrolling interests

     —          (15     (15     —          (8     (8

Redemption value adjustment attributable to redeemable noncontrolling interests

     1       —          1       5       —          5  

Repurchases of common stock

     (33     —          (33     —          —          —     

Other, including options exercised

     44       —          44       138       —          138  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance, March 31

   $ 11,595     $ 150     $ 11,745     $ 10,976     $ 130     $ 11,106  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The Company consolidates certain subsidiaries in which the noncontrolling interest party has within their control the right to require the Company to redeem all or a portion of its interest in the subsidiary. The redeemable noncontrolling interests are reported at their estimated redemption value. Any adjustment to the redemption value impacts retained earnings but does not impact net income. Redeemable noncontrolling interests which are redeemable only upon future events, the occurrence of which is not currently probable, are recorded at carrying value.

The following schedules present changes in the redeemable noncontrolling interests (in millions):

 

     Three Months Ended     Three Months Ended  
     March 31, 2012     March 31, 2011  

Beginning balance, December 31

   $ 282     $ 204  

Net income

     25       15  

Foreign currency translation adjustments

     1       5  

Dividends

     (1     —     

Redemption value adjustment

     (6     (1

Change in noncontrolling interest share

     17       —     
  

 

 

   

 

 

 

Ending balance, March 31

   $ 318     $ 223  
  

 

 

   

 

 

 

 

18


Table of Contents

Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2012

(unaudited)

 

     Six Months Ended     Six Months Ended  
     March 31, 2012     March 31, 2011  

Beginning balance, September 30

   $ 260     $ 196  

Net income

     45       28  

Foreign currency translation adjustments

     —          4  

Dividends

     (9     —     

Redemption value adjustment

     (1     (5

Change in noncontrolling interest share

     23       —     
  

 

 

   

 

 

 

Ending balance, March 31

   $ 318     $ 223  
  

 

 

   

 

 

 

 

13. 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 14, “Fair Value Measurements,” of the notes to condensed 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. At March 31, 2012, September 30, 2011 and March 31, 2011, the Company had three cross currency interest rate swaps outstanding totaling 20 billion yen.

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 statements 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

   March 31, 2012      September 30, 2011      March 31, 2011  

Copper

   Pounds      10,413,000        18,760,000        13,150,000  

Lead

   Metric Tons      23,775        25,600        20,829  

Aluminum

   Metric Tons      2,265        5,398        2,347  

Tin

   Metric Tons      —           260        —     

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

 

19


Table of Contents

Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2012

(unaudited)

 

swap agreement moves in the opposite direction of these liabilities, allowing the Company to fix a portion of the liabilities at a stated amount. The Company had hedged approximately 4.3 million shares of its common stock as of March 31, 2012, September 30, 2011 and March 31, 2011.

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. 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% bond maturing November 15, 2012, two fixed to floating interest rate swaps totaling $300 million to hedge the coupon of its 4.875% bond maturing September 15, 2013 and five fixed to floating interest rate swaps totaling $450 million to hedge the coupon of its 1.75% bond maturing March 1, 2014. These eight interest rate swaps were outstanding as of March 31, 2012, September 30, 2011 and March 31, 2011.

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
Hedging Instruments under ASC 815
     Derivatives and Hedging Activities Not Designated
as Hedging Instruments under ASC 815
 
     March 31,      September 30,      March 31,      March 31,      September 30,      March 31,  
     2012      2011      2011      2012      2011      2011  

Other current assets

                 

Foreign currency exchange derivatives

   $ 13      $ 28      $ 14      $ 12      $ 18      $ 1  

Commodity derivatives

     1        —           14        —           —           —     

Cross-currency interest rate swaps

     16        —           —           —           —           —     

Other noncurrent assets

                 

Interest rate swaps

     9        15        4        —           —           —     

Equity swap

     —           —           —           138        112        177  

Foreign currency exchange derivatives

     —           11        1        —           16        1  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 39      $ 54      $ 33      $ 150      $ 146      $ 179  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other current liabilities

                 

Foreign currency exchange derivatives

   $ 21      $ 49      $ 10      $ 10      $ 21      $ 2  

Cross-currency interest rate swaps

     —           20        1        —           —           —     

Commodity derivatives

     4        32        —           —           —           —     

Current portion of long-term debt

                 

Fixed rate debt swapped to floating

     100        —           —           —           —           —     

Long-term debt

                 

Fixed rate debt swapped to floating

     759        865        853        —           —           —     

Other noncurrent liabilities

                 

Foreign currency exchange derivatives

     —           19        1        —           11        1  

Interest rate swaps

     —           —           1        —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 884      $ 985      $ 866      $ 10      $ 32      $ 3  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

20


Table of Contents

Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2012

(unaudited)

 

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 six months ended March 31, 2012 and 2011 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  
     March 31, 2012     March 31, 2012     March 31, 2012  

Derivatives in ASC 815 Cash Flow
Hedging Relationships

   Amount of Gain
(Loss) Recognized in
AOCI on Derivative
(Effective Portion)
    Location of Gain (Loss)
Reclassified from AOCI
into Income (Effective
Portion)
   Amount of Gain
(Loss)  Reclassified
from AOCI into
Income (Effective
Portion)
    Location of Gain (Loss)
Recognized in Income on
Derivative (Ineffective
Portion)
   Amount of Gain
(Loss) Recognized in
Income on Derivative
(Ineffective Portion)
 

Foreign currency exchange derivatives

   $ (4   Cost of sales    $ (4   Cost of sales    $ —     

Commodity derivatives

     (2   Cost of sales      (3   Cost of sales      —     

Forward treasury locks

     8     Net financing charges      1     Net financing charges      —     
  

 

 

      

 

 

      

 

 

 

Total

   $ 2        $ (6      $ —     
  

 

 

      

 

 

      

 

 

 
           Six Months Ended     Six Months Ended  
           March 31, 2012     March 31, 2012  

Derivatives in ASC 815 Cash Flow
Hedging Relationships

         Location of Gain (Loss)
Reclassified from AOCI
into Income (Effective
Portion)
   Amount of Gain
(Loss) Reclassified
from AOCI into
Income (Effective
Portion)
    Location of Gain (Loss)
Recognized in Income on
Derivative (Ineffective
Portion)
   Amount of Gain
(Loss) Recognized in
Income on Derivative
(Ineffective Portion)
 

Foreign currency exchange derivatives

     Cost of sales    $ (10   Cost of sales    $ —     

Commodity derivatives

     Cost of sales      (16   Cost of sales      —     

Forward treasury locks

     Net financing charges      1     Net financing charges      —     
       

 

 

      

 

 

 

Total

        $ (25      $ —     
       

 

 

      

 

 

 

 

     As of  
     September 30, 2011  

Derivatives in ASC 815 Cash Flow

Hedging Relationships

   Amount of Gain
(Loss) Recognized in
AOCI on Derivative
(Effective Portion)
 

Foreign currency exchange derivatives

   $ (16

Commodity derivatives

     (20

Forward treasury locks

     9  
  

 

 

 

Total

   $ (27
  

 

 

 

 

     As of      Three Months Ended      Three Months Ended  
     March 31, 2011      March 31, 2011      March 31, 2011  

Derivatives in ASC 815 Cash Flow
Hedging Relationships

   Amount of Gain
(Loss) Recognized in
AOCI on Derivative
(Effective Portion)
     Location of Gain (Loss)
Reclassified from AOCI
into Income (Effective
Portion)
   Amount of Gain
(Loss) Reclassified
from AOCI into
Income (Effective
Portion)
     Location of Gain (Loss)
Recognized in Income on
Derivative (Ineffective
Portion)
   Amount of Gain
(Loss) Recognized in
Income on Derivative
(Ineffective Portion)
 

Foreign currency exchange derivatives

   $ 2      Cost of sales    $ 3      Cost of sales    $ —     

Commodity derivatives

     11      Cost of sales      7      Cost of sales      —     

Forward treasury locks

     9      Net financing charges      —         Net financing charges      —     
  

 

 

       

 

 

       

 

 

 

Total

   $ 22         $ 10         $ —     
  

 

 

       

 

 

       

 

 

 
            Six Months Ended      Six Months Ended  
            March 31, 2011      March 31, 2011  

Derivatives in ASC 815 Cash Flow
Hedging Relationships

          Location of Gain (Loss)
Reclassified from AOCI
into Income (Effective
Portion)
   Amount of Gain
(Loss) Reclassified
from AOCI into
Income (Effective
Portion)
     Location of Gain (Loss)
Recognized in Income on
Derivative (Ineffective
Portion)
   Amount of Gain
(Loss) Recognized in
Income on Derivative
(Ineffective Portion)
 

Foreign currency exchange derivatives

      Cost of sales    $ 4      Cost of sales    $ —     

Commodity derivatives

      Cost of sales      19      Cost of sales      —     

Forward treasury locks

      Net financing charges      1      Net financing charges      —     
        

 

 

       

 

 

 

Total

         $ 24         $ —     
        

 

 

       

 

 

 

 

21


Table of Contents

Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2012

(unaudited)

 

     As of      As of      As of  
     March 31, 2012      September 30, 2011      March 31, 2011  

Hedging Activities in ASC 815 Net
Investment Hedging Relationships

   Amount of Gain
(Loss) Recognized in
CTA on Outstanding
Derivatives (Effective
Portion)
     Amount of Gain
(Loss) Recognized in
CTA on Outstanding
Derivatives (Effective
Portion)
     Amount of Gain
(Loss) Recognized in
CTA on Outstanding
Derivatives (Effective
Portion)
 

Net investment hedges

   $ 10      $ (12    $ (1
  

 

 

    

 

 

    

 

 

 

Total

   $ 10      $ (12    $ (1
  

 

 

    

 

 

    

 

 

 

For the three and six months ended March 31, 2012 and 2011, no gains or losses were reclassified from CTA into income for the Company’s outstanding net investment hedges.

 

          Three Months Ended     Six Months Ended  
          March 31, 2012     March 31, 2012  

Derivatives in ASC 815 Fair Value Hedging
Relationships

   Location of Gain (Loss) Recognized in Income on
Derivative
   Amount of Gain (Loss)
Recognized in Income on
Derivative
    Amount of Gain (Loss)
Recognized in Income
on Derivative
 

Interest rate swap

   Net financing charges    $ 2     $ (6

Fixed rate debt swapped to floating

   Net financing charges      (2     6  
     

 

 

   

 

 

 

Total

      $ —        $ —     
     

 

 

   

 

 

 
          Three Months Ended     Six Months Ended  
          March 31, 2011     March 31, 2011  

Derivatives in ASC 815 Fair Value Hedging
Relationships

   Location of Gain (Loss) Recognized in Income on
Derivative
   Amount of Gain (Loss)
Recognized in Income on
Derivative
    Amount of Gain (Loss)
Recognized in Income
on Derivative
 

Interest rate swap

   Net financing charges    $ 2     $ 2  

Fixed rate debt swapped to floating

   Net financing charges      (3     (3
     

 

 

   

 

 

 

Total

      $ (1   $ (1
     

 

 

   

 

 

 
          Three Months Ended     Six Months Ended  
          March 31, 2012     March 31, 2012  

Derivatives Not Designated as Hedging
Instruments under ASC 815

   Location of Gain (Loss) Recognized in Income on
Derivative
   Amount of Gain (Loss)
Recognized in Income on
Derivative
    Amount of Gain (Loss)
Recognized in Income
on Derivative
 

Foreign currency exchange derivatives

   Cost of sales    $ —        $ 23  

Foreign currency exchange derivatives

   Net financing charges      (1     (30

Foreign currency exchange derivatives

   Provision for income tax      (4     —     

Equity swap

   Selling, general and administrative expenses      5       26  
     

 

 

   

 

 

 

Total

      $ —        $ 19  
     

 

 

   

 

 

 
          Three Months Ended     Six Months Ended  
          March 31, 2011     March 31, 2011  

Derivatives Not Designated as Hedging
Instruments under ASC 815

   Location of Gain (Loss) Recognized in Income on
Derivative
   Amount of Gain (Loss)
Recognized in Income on
Derivative
    Amount of Gain (Loss)
Recognized in Income
on Derivative
 

Foreign currency exchange derivatives

   Cost of sales    $ 47     $ 10  

Foreign currency exchange derivatives

   Net financing charges      (35     (2

Equity swap

   Selling, general and administrative expenses      15       42  
     

 

 

   

 

 

 

Total

      $ 27     $ 50  
     

 

 

   

 

 

 

 

22


Table of Contents

Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2012

(unaudited)

 

14. Fair Value Measurements

ASC 820, “Fair Value Measurements and Disclosures,” defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a three-level fair value hierarchy that prioritizes information used in developing assumptions when pricing an asset or liability as follows:

Level 1: Observable inputs such as quoted prices in active markets;

Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and

Level 3: Unobservable inputs where there is little or no market data, which requires the reporting entity to develop its own assumptions.

ASC 820 requires the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.

Recurring Fair Value Measurements

The following tables present the Company’s fair value hierarchy for those assets and liabilities measured at fair value as of March 31, 2012, September 30, 2011 and March 31, 2011 (in millions):

 

     Fair Value Measurements Using:  
     Total as of      Quoted Prices
in Active
Markets
     Significant
Other
Observable
Inputs
     Significant
Unobservable
Inputs
 
     March 31, 2012      (Level 1)      (Level 2)      (Level 3)  

Other current assets

           

Foreign currency exchange derivatives

   $ 25      $ 25      $ —         $ —     

Commodity derivatives

     1        —           1        —     

Cross-currency interest rate swaps

     16        —           16        —     

Other noncurrent assets

           

Interest rate swaps

     9        —           9        —     

Investments in marketable common stock

     37        37        —           —     

Equity swap

     138        138        —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 226      $ 200      $ 26      $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Other current liabilities

           

Foreign currency exchange derivatives

   $ 31      $ 31      $ —         $ —     

Commodity derivatives

     4        —           4        —     

Current portion of long-term debt

           

Fixed rate debt swapped to floating

     100        —           100        —     

Long-term debt

           

Fixed rate debt swapped to floating

     759        —           759        —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 894      $ 31      $ 863      $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

23


Table of Contents

Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2012

(unaudited)

 

     Fair Value Measurements Using:  
     Total as of      Quoted Prices
in Active
Markets
     Significant
Other
Observable
Inputs
     Significant
Unobservable
Inputs
 
     September 30, 2011      (Level 1)      (Level 2)      (Level 3)  

Other current assets

           

Foreign currency exchange derivatives

   $ 46      $ 46      $ —         $ —     

Other noncurrent assets

           

Interest rate swaps

     15        —           15        —     

Investments in marketable common stock

     34        34        —           —     

Equity swap

     112        112        —           —     

Foreign currency exchange derivatives

     27        27        —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 234      $ 219      $ 15      $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Other current liabilities

           

Foreign currency exchange derivatives

   $ 70      $ 70      $ —         $ —     

Cross-currency interest rate swaps

     20        —           20        —     

Commodity derivatives

     32        —           32        —     

Long-term debt

           

Fixed rate swapped to floating

     865        —           865        —     

Other noncurrent liabilities

           

Foreign currency exchange derivatives

     30        30        —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 1,017      $ 100      $ 917      $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

24


Table of Contents

Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2012

(unaudited)

 

     Fair Value Measurements Using:  
     Total as of      Quoted Prices
in Active
Markets
     Significant
Other
Observable
Inputs
     Significant
Unobservable
Inputs
 
     March 31, 2011      (Level 1)      (Level 2)      (Level 3)  

Other current assets

           

Foreign currency exchange derivatives

   $ 15      $ 15      $ —         $ —     

Commodity derivatives

     14        —           14        —     

Other noncurrent assets

           

Interest rate swaps

     4        —           4        —     

Investments in marketable common stock

     38        38        —           —     

Equity swap

     177        177        —           —     

Foreign currency exchange derivatives

     2        2        —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 250      $ 232      $ 18      $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Other current liabilities

           

Foreign currency exchange derivatives

     12        12        —           —     

Cross-currency interest rate swaps

     1        —           1        —     

Long-term debt

           

Fixed rate debt swapped to floating

     853        —           853        —     

Other noncurrent liabilities

           

Interest rate swaps

     1        —           1        —     

Foreign currency exchange derivatives

     2        2        —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 869      $ 14      $ 855      $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Valuation Methods

Foreign currency exchange derivatives – The Company selectively hedges anticipated transactions that are subject to foreign exchange rate risk primarily using foreign currency exchange hedge contracts. The foreign currency exchange derivatives are valued under a market approach using publicized spot and forward prices. As cash flow hedges under ASC 815, the effective portion of the hedge gains or losses due to changes in fair value are initially recorded as a component of accumulated other comprehensive income and are subsequently reclassified into earnings when the hedged transactions occur and affect earnings. Any ineffective portion of the hedge is reflected in the consolidated statements of income. These contracts were highly effective in hedging the variability in future cash flows attributable to changes in currency exchange rates at March 31, 2012, September 30, 2011 and March 31, 2011. The fair value of foreign currency exchange derivatives that are designated as fair value hedges under ASC 815, as well as those not designated as hedging instruments under ASC 815 are recorded in the consolidated statements of income.

Commodity derivatives – 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 and aluminum. The commodity derivatives are valued under a market approach using publicized prices, where available, or dealer quotes. 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 accumulated other comprehensive income and are subsequently reclassified into earnings when the hedged transactions, typically sales or cost related to sales, occur and affect earnings. Any ineffective portion of the hedge is reflected in the consolidated statements of income. These contracts were highly effective in hedging the variability in future cash flows attributable to commodity price changes at March 31, 2012, September 30, 2011 and March 31, 2011.

Interest rate swaps and related debt – 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

 

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Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2012

(unaudited)

 

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. 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% bond maturing November 15, 2012, two fixed to floating interest rate swaps totaling $300 million to hedge the coupon of its 4.875% bond maturing September 15, 2013 and five fixed to floating interest rate swaps totaling $450 million to hedge the coupon of its 1.75% bond maturing March 1, 2014. These eight interest rates swaps were outstanding as of March 31, 2012, September 30, 2011 and March 31, 2011.

Investments in marketable common stock – The Company invests in certain marketable common stock, which is valued under a market approach using publicized share prices. As of March 31, 2012, September 30, 2011 and March 31, 2011, the Company recorded unrealized gains of $14 million, $9 million and $12 million, respectively, in accumulated other comprehensive income. The Company also recorded unrealized losses of $3 million in accumulated other comprehensive income on these investments as of September 30, 2011 and no unrealized losses as of March 31, 2012 and 2011. For the quarter ended March 31, 2012, the Company recorded an impairment charge related to an investment in marketable common stock due to the investee’s bankruptcy announcement in March 2012. As a result, the Company recorded a $14 million impairment charge within selling, general, and administrative expenses in the power solutions segment. The impairment reduced the investment to zero and was measured under a market approach using the publicized share price. The inputs utilized in the analysis are classified as Level 1 inputs within the fair value hierarchy as defined in ASC 820.

Equity swaps – 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. The equity swaps are valued under a market approach as the fair value of the swaps is equal to the Company’s stock price at the reporting period date. Changes in fair value on the equity swaps are reflected in the consolidated statements of income within selling, general and administrative expenses.

Cross-currency interest rate swaps – The Company selectively uses cross-currency interest rate swaps to hedge the foreign currency rate risk associated with certain of its investments in Japan. The cross-currency interest rate swaps are valued using observable market data. Changes in the market value of the swaps are reflected in the foreign currency translation adjustments component of accumulated other comprehensive income where they offset gains and losses recorded on the Company’s net investment in Japan. At March 31, 2012, September 30, 2011 and March 31, 2011, the Company had three cross currency interest rate swaps outstanding, totaling 20 billion yen.

The fair values of cash and cash equivalents, accounts receivable, short-term debt and accounts payable approximate their carrying values. The fair value of long-term debt, which was $6.2 billion, $4.9 billion and $4.7 billion at March 31, 2012, September 30, 2011 and March 31, 2011, respectively, was determined using market quotes classified as Level 1 inputs within the ASC 820 fair value hierarchy.

 

15. Impairment of Long-Lived Assets

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the asset’s carrying amount may not be recoverable. The Company conducts its long-lived asset impairment analyses in accordance with ASC 360-10-15, “Impairment or Disposal of Long-Lived Assets.” ASC 360-10-15 requires the Company to group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows. If the undiscounted cash flows do not indicate the carrying amount of the asset group is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals.

At March 31, 2012, the Company recorded an impairment charge related to an equity investment. Refer to Note 14, “Fair Value Measurements,” of the notes to condensed consolidated financial statements for additional information. The Company concluded it did not have any other triggering events requiring assessment of impairment of its long-lived assets at March 31, 2012 and 2011.

 

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Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2012

(unaudited)

 

16. Segment Information

ASC 280, “Segment Reporting,” establishes the standards for reporting information about segments in financial statements. In applying the criteria set forth in ASC 280, the Company has determined that it has nine reportable segments for financial reporting purposes. The Company’s nine reportable segments are presented in the context of its three primary businesses – building efficiency, automotive experience and power solutions.

Building Efficiency

Building efficiency designs, produces, markets and installs heating, ventilating and air conditioning (HVAC) and control systems that monitor, automate and integrate critical building segment equipment and conditions including HVAC, fire-safety and security in commercial buildings and in various industrial applications.

 

   

North America systems designs, produces, markets and installs mechanical equipment that provides heating and cooling in North American non-residential buildings and industrial applications as well as control systems that integrate the operation of this equipment with other critical building systems.

 

   

North America service provides technical services including inspection, scheduled maintenance, repair and replacement of mechanical and control systems in North America, as well as the retrofit and service components of performance contracts and other solutions.

 

   

Global workplace solutions provides on-site staff for complete real estate services, facility operation and management to improve the comfort, productivity, energy efficiency and cost effectiveness of building systems around the globe.

 

   

Asia provides HVAC and refrigeration systems and technical services to the Asian marketplace.

 

   

Other provides HVAC and refrigeration systems and technical services to markets in Europe, the Middle East and Latin America. Other also designs and produces heating and air conditioning solutions for residential and light commercial applications and markets products to the replacement and new construction markets.

Automotive Experience

Automotive experience designs and manufactures interior systems and products for passenger cars and light trucks, including vans, pick-up trucks and sport utility/crossover vehicles in North America, Europe and Asia. Automotive experience systems and products include complete seating systems and components; cockpit systems, including instrument panels and clusters, information displays and body controllers; overhead systems, including headliners and electronic convenience features; floor consoles; and door systems.

Power Solutions

Power solutions services both automotive original equipment manufacturers and the battery aftermarket by providing advanced battery technology, coupled with systems engineering, marketing and service expertise.

 

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Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2012

(unaudited)

 

Management evaluates the performance of the segments based primarily on segment income, which represents income from continuing operations before income taxes and noncontrolling interests excluding net financing charges. General corporate and other overhead expenses are allocated to business segments in determining segment income. Financial information relating to the Company’s reportable segments is as follows (in millions):

 

     Net Sales  
     Three Months Ended
March 31,
    Six Months Ended
March 31,
 
     2012     2011     2012     2011  

Building efficiency

        

North America systems

   $ 580     $ 546     $ 1,132     $ 1,078  

North America service

     504       525       1,018       1,038  

Global workplace solutions

     1,076       1,017       2,162       2,007  

Asia

     458       417       931       836  

Other

     938       1,010       1,855       1,953  
  

 

 

   

 

 

   

 

 

   

 

 

 
     3,556       3,515       7,098       6,912  
  

 

 

   

 

 

   

 

 

   

 

 

 

Automotive experience

        

North America

     2,247       2,011       4,234       3,745  

Europe

     2,724       2,626       5,325       4,893  

Asia

     625       587       1,298       1,171  
  

 

 

   

 

 

   

 

 

   

 

 

 
     5,596       5,224       10,857       9,809  
  

 

 

   

 

 

   

 

 

   

 

 

 

Power solutions

     1,413       1,405       3,027       2,960  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

   $ 10,565     $ 10,144     $ 20,982     $ 19,681  
  

 

 

   

 

 

   

 

 

   

 

 

 
    

 

Segment Income

 
      Three Months Ended
March 31,
    Six Months Ended
March 31,
 
     2012     2011     2012     2011  

Building efficiency

        

North America systems

   $ 59     $ 54     $ 109     $ 103  

North America service

     12       16       27       34  

Global workplace solutions

     3       1       10       10  

Asia

     51       42       112       109  

Other

     26       19       26       15  
  

 

 

   

 

 

   

 

 

   

 

 

 
     151       132       284       271  
  

 

 

   

 

 

   

 

 

   

 

 

 

Automotive experience

        

North America

     116       145       186       261  

Europe

     30       16       51       16  

Asia

     81       50       184       111  
  

 

 

   

 

 

   

 

 

   

 

 

 
     227       211       421       388  
  

 

 

   

 

 

   

 

 

   

 

 

 

Power solutions

     181       178       452       395  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total segment income

   $ 559     $ 521     $ 1,157     $ 1,054  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net financing charges

     (63     (46     (112     (81
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

   $ 496     $ 475     $ 1,045     $ 973  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2012

(unaudited)

 

17. Commitments and Contingencies

The Company accrues for potential environmental liabilities in a manner consistent with accounting principles generally accepted in the United States; that is, when it is probable a liability has been incurred and the amount of the liability is reasonably estimable. Reserves for environmental liabilities totaled $26 million, $30 million and $45 million at March 31, 2012, September 30, 2011 and March 31, 2011, respectively. The Company reviews the status of its environmental sites on a quarterly basis and adjusts its reserves accordingly. Such potential liabilities accrued by the Company do not take into consideration possible recoveries of future insurance proceeds. They do, however, take into account the likely share other parties will bear at remediation sites. It is difficult to estimate the Company’s ultimate level of liability at many remediation sites due to the large number of other parties that may be involved, the complexity of determining the relative liability among those parties, the uncertainty as to the nature and scope of the investigations and remediation to be conducted, the uncertainty in the application of law and risk assessment, the various choices and costs associated with diverse technologies that may be used in corrective actions at the sites, and the often quite lengthy periods over which eventual remediation may occur. Nevertheless, the Company does not currently believe that any claims, penalties or costs in connection with known environmental matters will have a material adverse effect on the Company’s financial position, results of operations or cash flows. In addition, the Company has identified asset retirement obligations for environmental matters that are expected to be addressed at the retirement, disposal, removal or abandonment of existing owned facilities, primarily in the power solutions business. At March 31, 2012, September 30, 2011 and March 31, 2011, the Company recorded conditional asset retirement obligations of $84 million, $91 million and $90 million, respectively.

The Company is involved in a number of product liability and various other casualty lawsuits incident to the operation of its businesses. Insurance coverages are maintained and estimated costs are recorded for claims and suits of this nature. It is management’s opinion that none of these will have a material adverse effect on the Company’s financial position, results of operations or cash flows. Costs related to such matters were not material to the periods presented.

 

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LOGO

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders

of Johnson Controls, Inc.

We have reviewed the accompanying condensed consolidated statements of financial position of Johnson Controls, Inc. and its subsidiaries (the “Company”) as of March 31, 2012 and 2011, and the related consolidated statements of income and the consolidated statements of cash flows for the three-month and six-month periods ended March 31, 2012 and 2011. These interim financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of financial position as of September 30, 2011, and the related consolidated statements of income, shareholders’ equity, and cash flows for the year then ended (not presented herein), and in our report dated November 22, 2011 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated statement of financial position as of September 30, 2011 is fairly stated in all material respects in relation to the consolidated statement of financial position from which it has been derived.

/s/ PricewaterhouseCoopers LLP

Milwaukee, Wisconsin

May 3, 2012

PricewaterhouseCoopers LLP, 100 East Wisconsin Avenue, Milwaukee, WI 53202

T: (414) 212- 1600, F: (414) 212- 1880, www.pwc.com/us

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statements for Forward-Looking Information

Unless otherwise indicated, references to “Johnson Controls,” the “Company,” “we,” “our” and “us” in this Quarterly Report on Form 10-Q refer to Johnson Controls, Inc. and its consolidated subsidiaries.

Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “forecast,” “outlook,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” “guidance” or the negative thereof or variations thereon or similar terminology generally intended to identify forward-looking statements. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section entitled “Risk Factors” of our Annual Report on Form 10-K for the year ended September 30, 2011, as updated in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended December 31, 2011. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

Johnson Controls is a global diversified technology and industrial leader serving customers in more than 150 countries. The Company creates quality products, services and solutions to optimize energy and operational efficiencies of buildings; lead-acid automotive batteries and advanced batteries for hybrid and electric vehicles; and interior systems for automobiles.

Johnson Controls was originally incorporated in the state of Wisconsin in 1885 as Johnson Electric Service Company to manufacture, install and service automatic temperature regulation systems for buildings. The Company was renamed to Johnson Controls, Inc. in 1974. In 1978, we acquired Globe-Union, Inc., a Wisconsin-based manufacturer of automotive batteries for both the replacement and original equipment markets. We entered the automotive seating industry in 1985 with the acquisition of Michigan-based Hoover Universal, Inc. In 2005, we acquired York International, a global supplier of heating, ventilating, air-conditioning, and refrigeration equipment and services.

Our building efficiency business is a global market leader in designing, producing, marketing and installing integrated heating, ventilating and air conditioning (HVAC) systems, building management systems, controls, security and mechanical equipment. In addition, the building efficiency business provides technical services, energy management consulting and operations of entire real estate portfolios for the non-residential buildings market. We also provide residential air conditioning and heating systems and industrial refrigeration products.

Our automotive experience business is one of the world’s largest automotive suppliers, providing innovative interior systems through our design and engineering expertise. Our technologies extend into virtually every area of the interior including seating and overhead systems, door systems, floor consoles, instrument panels, cockpits and integrated electronics. Customers include most of the world’s major automakers.

Our power solutions business is a leading global supplier of lead-acid automotive batteries for virtually every type of passenger car, light truck and utility vehicle. We serve both automotive original equipment manufacturers (OEMs) and the general vehicle battery aftermarket. We supply batteries to power Start-Stop vehicles, as well as lithium-ion battery technologies to power certain hybrid and electric vehicles.

 

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The following information should be read in conjunction with the September 30, 2011 consolidated financial statements and notes thereto, along with management’s discussion and analysis of financial condition and results of operations included in the Company’s 2011 Annual Report on Form 10-K. References in the following discussion and analysis to “Three Months” refer to the three months ended March 31, 2012 compared to the three months ended March 31, 2011, while references to “Year-to-Date” refer to the six months ended March 31, 2012 compared to the six months ended March 31, 2011.

Outlook

On April 20, 2012, the Company stated that it expects its fiscal 2012 third quarter earnings per diluted share to increase approximately 20% from the prior year third quarter and its fiscal 2012 fourth quarter earnings per diluted share to increase approximately 25% from the prior year fourth quarter, thereby resulting in full year earnings per diluted share within the previously provided full year guidance of $2.70—$2.85 per diluted share.

Liquidity and Capital Resources

The Company believes its capital resources and liquidity position at March 31, 2012 are adequate to meet projected needs. The Company believes requirements for working capital, capital expenditures, dividends, minimum pension contributions, debt maturities and any potential acquisitions in fiscal 2012 will continue to be funded from operations, supplemented by short- and long-term borrowings, if required. The Company currently manages its short-term debt position in the U.S. and euro commercial paper markets and bank loan markets. The Company continues to adjust its commercial paper maturities and issuance levels given market reactions to industry events and changes in the Company’s credit rating. In the event the Company is unable to issue commercial paper, it would have the ability to draw on its $2.5 billion revolving credit facility, which matures in February 2015. There were no draws on the revolving credit facility as of March 31, 2012. As such, the Company believes it has sufficient financial resources to fund operations and meet its obligations for the foreseeable future.

The Company’s debt financial covenants require a minimum consolidated shareholders’ equity attributable to Johnson Controls, Inc. of at least $3.5 billion at all times and allow a maximum aggregated amount of 10% of consolidated shareholders’ equity attributable to Johnson Controls, Inc. for liens and pledges. For purposes of calculating the Company’s covenants, consolidated shareholders’ equity attributable to Johnson Controls, Inc. is calculated without giving effect to (i) the application of Accounting Standards Codification (ASC) 715-60, “Defined Benefit Plans—Other Postretirement,” or (ii) the cumulative foreign currency translation adjustment. As of March 31, 2012, consolidated shareholders’ equity attributable to Johnson Controls, Inc. as defined per the Company’s debt financial covenants was $11.1 billion and there were no outstanding amounts for liens and pledges. The Company expects to remain in compliance with all covenants and other requirements set forth in its credit agreements and indentures for the foreseeable future. None of the Company’s significant debt agreements limit access to stated borrowing levels or require accelerated repayment in the event of a decrease in the Company’s credit rating.

The key financial assumptions used in calculating the pension liability are determined annually, or whenever plan assets and liabilities are re-measured as required under accounting principles generally accepted in the U.S., including the expected rate of return on our plan assets. In fiscal 2012, the Company believes the long-term rate of return will approximate 8.50%, 5.25% and 6.30% for U.S. pension, non-U.S. pension, and postretirement health and other benefit plans, respectively. Any differences between actual results and the expected long-term asset returns will be reflected in other comprehensive income and amortized to expense in future years. During the first six months of fiscal 2012, the Company has made approximately $304 million and $60 million in total defined benefit pension and postretirement health contributions, respectively. In total, the Company expects to contribute approximately $350 million and $60 million in cash to its defined benefit pension and postretirement health plans, respectively, in fiscal 2012.

Segment Analysis

Management evaluates the performance of its business units based primarily on segment income, which is defined as income from continuing operations before income taxes and noncontrolling interests excluding net financing charges.

 

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Summary

 

     Three Months Ended
March 31,
           Six Months Ended
March 31,
        
(in millions)    2012      2011      Change     2012      2011      Change  

Net sales

   $ 10,565      $ 10,144        4   $ 20,982      $ 19,681        7

Segment income

     559        521        7     1,157        1,054        10

Three Months:

 

   

The $421 million increase in consolidated net sales was primarily due to higher sales in the automotive experience business ($481 million) as a result of increased industry production levels by our major OEM customers and incremental sales due to prior year business acquisitions; higher sales in the building efficiency business ($70 million) as a result of increased sales volumes primarily in the global workplace solutions, North America systems and Asia segments; and higher sales in the power solutions business ($36 million) as a result of favorable price/product mix and increased sales volumes; partially offset by the unfavorable impact of foreign currency translation ($166 million).

 

   

The $38 million increase in segment income was primarily due to higher volumes in the automotive experience, building efficiency and power solutions businesses; favorable pricing and product mix including lead and other purchasing costs in the power solutions segment; lower purchasing costs in the automotive experience business; a gain on business divestiture net of transaction costs in the building efficiency other segment; prior year costs related to business acquisitions in the automotive experience Europe segment; prior year negative impact of the earthquake in Japan and related events; and incremental operating income of prior year acquisitions in the automotive experience business; partially offset by higher overall selling, general and administrative expenses including a prior year legal settlement award; net unfavorable commercial settlements and pricing in the automotive experience business; higher operating costs in the automotive experience and power solutions businesses; restructuring costs in the building efficiency and automotive experience businesses; an impairment of an equity investment in the power solutions business; and the unfavorable impact of foreign currency translation ($4 million).

Year-to-Date:

 

   

The $1.3 billion increase in consolidated net sales was primarily due to higher sales in the automotive experience business ($1.2 billion) as a result of increased industry production levels by our major OEM customers and incremental sales due to prior year business acquisitions; higher sales in the building efficiency business ($215 million) as a result of increased sales volumes primarily in the global workplace solutions, Asia and North America systems segments; and higher sales in the power solutions business ($112 million) as a result of the favorable price/product mix and increased sales volumes; partially offset by the unfavorable impact of foreign currency translation ($216 million).

 

   

The $103 million increase in segment income was primarily due to higher volumes in the automotive experience, building efficiency and power solutions businesses; favorable pricing and product mix including lead and other purchasing costs in the power solutions business; lower purchasing costs in the automotive experience business; a gain on business divestiture net of transaction costs in the building efficiency other segment; prior year costs related to business acquisitions in the automotive experience Europe segment; a gain on redemption of a warrant for an existing partially-owned affiliate in the power solutions business; prior year negative impact of the earthquake in Japan and related events; incremental operating income of prior year acquisitions in the automotive experience business; and higher equity income including an equity interest gain in the automotive experience Asia segment; partially offset by higher overall selling, general and administrative expenses including a prior year legal settlement award; net unfavorable commercial settlements and pricing in the automotive experience business; higher operating costs in the automotive experience and power solutions businesses; restructuring costs in the building efficiency and automotive experience businesses; an impairment of an equity investment in the power solutions business; and the unfavorable impact of foreign currency translation ($4 million).

 

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Building Efficiency - Net Sales

 

     Net Sales
Three Months Ended
March 31,
           Net Sales
Six Months Ended
March 31,
        
(in millions)    2012      2011      Change     2012      2011      Change  

North America systems

   $ 580      $ 546        6   $ 1,132      $ 1,078        5

North America service

     504        525        -4     1,018        1,038        -2

Global workplace solutions

     1,076        1,017        6     2,162        2,007        8

Asia

     458        417        10     931        836        11

Other

     938        1,010        -7     1,855        1,953        -5
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
   $ 3,556      $ 3,515        1   $ 7,098      $ 6,912        3
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Three Months:

 

   

The increase in North America systems was primarily due to higher volumes of equipment and controls systems in the commercial construction and replacement markets ($35 million), partially offset by the unfavorable impact of foreign currency translation ($1 million).

 

   

The decrease in North America service was primarily due to a reduction in truck-based volumes ($20 million) and energy solutions volumes ($7 million), and the unfavorable impact of foreign currency translation ($1 million), partially offset by the incremental sales from a prior year business acquisition ($7 million).

 

   

The increase in global workplace solutions was primarily due to an increase in services to existing customers ($61 million) and new customers ($13 million), partially offset by the unfavorable impact of foreign currency translation ($15 million).

 

   

The increase in Asia was primarily due to higher volumes of equipment and controls systems ($18 million), higher service volumes ($12 million) and the favorable impact of foreign currency translation ($11 million).

 

   

The decrease in other was primarily due to lower volumes in unitary products in Latin America ($42 million) and North America ($32 million), and the unfavorable impact of foreign currency translation ($23 million), partially offset by higher volumes in Middle East ($14 million) and other business areas ($11 million).

Year-to-Date:

 

   

The increase in North America systems was primarily due to higher volumes of equipment and controls systems in the commercial construction and replacement markets ($55 million), partially offset by the unfavorable impact of foreign currency translation ($1 million).

 

   

The decrease in North America service was primarily due to a reduction in truck-based volumes ($43 million) and the unfavorable impact of foreign currency translation ($2 million), partially offset by incremental sales from a prior year business acquisition ($14 million) and higher volumes in energy solutions ($11 million).

 

   

The increase in global workplace solutions was primarily due to an increase in services to existing customers ($99 million) and new customers ($73 million), partially offset by the unfavorable impact of foreign currency translation ($17 million).

 

   

The increase in Asia was primarily due to higher volumes of equipment and controls systems ($41 million), higher service volumes ($29 million) and the favorable impact of foreign currency translation ($25 million).

 

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The decrease in other was primarily due to lower volumes in unitary products in Latin America ($70 million) and North America ($66 million), and the unfavorable impact of foreign currency translation ($34 million), partially offset by higher volumes in Middle East ($42 million) and other business areas ($30 million).

Building Efficiency - Segment Income

 

     Segment Income
Three Months Ended
March 31,
           Segment Income
Six Months Ended
March 31,
        
(in millions)    2012      2011      Change     2012      2011      Change  

North America systems

   $ 59      $ 54        9   $ 109      $ 103        6

North America service

     12        16        -25     27        34        -21

Global workplace solutions

     3        1        *        10        10        0

Asia

     51        42        21     112        109        3

Other

     26        19        37     26        15        73
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
   $ 151      $ 132        14   $ 284      $ 271        5
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

* Measure not meaningful

Three Months:

 

   

The increase in North America systems was primarily due to higher volumes ($10 million) partially offset by unfavorable margin rates ($4 million) and restructuring costs ($1 million).

 

   

The decrease in North America service was primarily due to restructuring costs ($5 million), a loss on business divestiture ($3 million), lower volumes ($3 million) and unfavorable margin rates ($2 million), partially offset by lower selling, general and administrative costs ($9 million).

 

   

The increase in global workplace solutions was primarily due to higher volumes ($4 million) partially offset by higher selling, general and administrative expenses ($1 million) and restructuring costs ($1 million).

 

   

The increase in Asia was primarily due to higher volumes ($8 million) and the favorable impact of foreign currency translation ($2 million), partially offset by unfavorable margin rates ($1 million).

 

   

The increase in other was primarily due to a gain on business divestiture net of transaction costs ($38 million) and higher equity income ($3 million), partially offset by unfavorable margin rates ($11 million), lower volumes ($10 million), higher selling, general and administrative expenses ($8 million), restructuring costs ($4 million) and the unfavorable impact of foreign currency translation ($1 million).

Year-to-Date:

 

   

The increase in North America systems was primarily due to higher volumes ($15 million) partially offset by unfavorable margin rates ($8 million) and restructuring costs ($1 million).

 

   

The decrease in North America service was primarily due to restructuring costs ($5 million), a loss on business divestiture ($3 million) and lower volumes ($3 million), partially offset by favorable margin rates ($4 million).

 

   

Global workplace solutions was flat primarily due to higher volumes ($9 million) offset by unfavorable margin rates ($5 million), higher selling, general and administrative expenses ($3 million) and restructuring costs ($1 million).

 

   

The increase in Asia was primarily due to higher volumes ($17 million) and the favorable impact of foreign currency translation ($4 million), partially offset by higher selling, general and administrative expenses ($17 million) and unfavorable margin rates ($1 million).

 

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The increase in other was primarily due to a gain on business divestiture net of transaction costs ($38 million) and higher equity income ($7 million), partially offset by unfavorable margin rates ($16 million), lower volumes ($13 million), restructuring costs ($4 million) and the unfavorable impact of foreign currency translation ($1 million).

Automotive Experience - Net Sales

 

     Net Sales
Three Months Ended
March 31,
           Net Sales
Six Months Ended
March 31,
        
(in millions)    2012      2011      Change     2012      2011      Change  

North America

   $ 2,247      $ 2,011        12   $ 4,234      $ 3,745        13

Europe

     2,724        2,626        4     5,325        4,893        9

Asia

     625        587        6     1,298        1,171        11
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
   $ 5,596      $ 5,224        7   $ 10,857      $ 9,809        11
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Three Months:

 

   

The increase in North America was primarily due to higher volumes to the Company’s major OEM customers ($217 million) and incremental sales due to prior year business acquisitions ($38 million), partially offset by net unfavorable pricing and commercial settlements ($19 million).

 

   

The increase in Europe was primarily due to incremental sales due to prior year business acquisitions ($183 million) and higher volumes ($70 million), partially offset by the unfavorable impact of foreign currency translation ($121 million), and net unfavorable pricing and commercial settlements ($34 million).

 

   

The increase in Asia was primarily due to the prior year negative impact of the Japan earthquake and related events ($48 million), incremental sales due to prior year business acquisitions ($27 million) and the favorable impact of foreign currency translation ($12 million), partially offset by lower volumes in China ($35 million), net unfavorable pricing ($8 million), and the negative impact of the flooding in Thailand and related events ($6 million).

Year-to-Date:

 

   

The increase in North America was primarily due to higher volumes to the Company’s major OEM customers ($423 million) and incremental sales due to prior year business acquisitions ($109 million), partially offset by net unfavorable pricing and commercial items ($43 million).

 

   

The increase in Europe was primarily due to incremental sales due to prior year business acquisitions ($466 million) and higher volumes ($170 million), partially offset by the unfavorable impact of foreign currency translation ($170 million), and net unfavorable pricing and commercial settlements ($34 million).

 

   

The increase in Asia was primarily due to incremental sales due to prior year business acquisitions ($62 million), the prior year negative impact of the Japan earthquake and related events ($48 million), the favorable impact of foreign currency translation ($28 million) and higher volumes ($27 million), partially offset by the negative impact of the flooding in Thailand and related events ($25 million), and net unfavorable pricing ($13 million).

 

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Automotive Experience - Segment Income

 

     Segment Income
Three Months
Ended March
31,
           Segment Income
Six Months
Ended March
31,
        
(in millions)    2012      2011      Change     2012      2011      Change  

North America

   $ 116      $ 145        -20   $ 186      $ 261        -29

Europe

     30        16        88     51        16        *   

Asia

     81        50        62     184        111        66
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
   $ 227      $ 211        8   $ 421      $ 388        9
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

* Measure not meaningful

Three Months:

 

   

The decrease in North America was primarily due to higher selling, general and administrative expenses including a prior year legal settlement award ($32 million), higher operating and metals launch costs ($22 million), net unfavorable commercial settlements and pricing ($20 million), restructuring costs ($5 million), higher engineering expenses ($3 million) and lower equity income ($2 million), partially offset by higher volumes ($36 million), lower purchasing costs ($18 million) and incremental operating income of prior year acquisitions ($1 million).

 

   

The increase in Europe was primarily due to prior year costs related to business acquisitions ($36 million), lower purchasing costs ($16 million), lower engineering expenses ($13 million), incremental operating income of prior year acquisitions ($7 million) and higher equity income ($4 million), partially offset by higher operating costs ($23 million), net unfavorable commercial settlements and pricing ($19 million), higher selling, general and administrative costs ($12 million), restructuring costs ($4 million) and the unfavorable impact of foreign currency translation ($4 million).

 

   

The increase in Asia was primarily due to the prior year negative impact of the earthquake in Japan and related events ($15 million), lower purchasing costs ($14 million), lower operating costs ($4 million), incremental operating income of prior year acquisitions ($4 million), lower selling, general and administrative expenses ($3 million) and the favorable impact of foreign currency translation ($2 million), partially offset by net unfavorable pricing and commercial settlements ($7 million), lower volumes in China ($2 million) and lower equity income ($2 million).

Year-to-Date:

 

   

The decrease in North America was primarily due to higher selling, general and administrative expenses ($60 million), higher operating and metals launch costs ($54 million), net unfavorable commercial settlements and pricing ($49 million), higher engineering expenses ($9 million), restructuring costs ($5 million) and lower equity income ($4 million), partially offset by higher volumes ($80 million), lower purchasing costs ($24 million) and incremental operating income of prior year acquisitions ($2 million).

 

   

The increase in Europe was primarily due to incremental operating income of prior year acquisitions ($42 million), prior year costs related to business acquisitions ($36 million), lower purchasing costs ($24 million), lower engineering expenses ($13 million) and higher equity income ($3 million), partially offset by higher operating costs ($32 million), net unfavorable commercial settlements and pricing ($21 million), higher selling, general and administrative costs ($20 million), the unfavorable impact of foreign currency translation ($6 million) and restructuring costs ($4 million).

 

   

The increase in Asia was primarily due to higher volumes ($21 million), lower purchasing costs ($19 million), higher equity income ($17 million) including an equity interest gain, the prior year negative impact of the earthquake in Japan and related events ($15 million), incremental operating income of prior year acquisitions ($10 million), the favorable impact of foreign currency translation ($4 million), lower operating costs ($2 million) and lower selling, general and administrative expenses ($1 million), partially

 

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offset by net unfavorable commercial settlements and pricing ($10 million), the negative impact of the flooding in Thailand and related events ($5 million) and higher engineering expenses ($1 million).

 

Power Solutions

     Three Months Ended            Six Months Ended         
     March 31,            March 31,         
(in millions)    2012      2011      Change     2012      2011      Change  

Net sales

   $ 1,413      $ 1,405        1   $ 3,027      $ 2,960        2

Segment income

     181        178        2     452        395        14

Three Months:

 

   

Net sales increased primarily due to favorable price/product mix ($45 million), higher sales volumes ($27 million) and incremental sales due to business acquisitions ($6 million), partially offset by the impact of lower lead costs on pricing ($42 million) and the unfavorable impact of foreign currency translation ($28 million).

 

   

Segment income increased primarily due to favorable pricing and product mix including lead and other purchasing costs ($54 million), a gain on acquisition of a partially-owned affiliate ($9 million), higher sales volumes ($5 million) and the favorable impact of business acquisitions ($5 million), partially offset by higher operating and transportation costs ($33 million), higher selling, general and administrative expenses ($17 million), an impairment of an equity investment ($14 million), lower equity income ($3 million) and the unfavorable impact of foreign currency translation ($3 million).

Year-to-Date:

 

   

Net sales increased primarily due to favorable price/product mix ($95 million), incremental sales due to business acquisitions ($21 million) and higher sales volumes ($16 million), partially offset by the unfavorable impact of foreign currency translation ($45 million) and the impact of lower lead costs on pricing ($20 million).

 

   

Segment income increased primarily due to favorable pricing and product mix including lead and other purchasing costs ($111 million), a gain on redemption of a warrant for an existing partially-owned affiliate ($25 million), business interruption insurance recovery net of related costs and lost profit on sales due to a continued plant shutdown in Asia ($13 million), a gain on acquisition of a partially-owned affiliate ($9 million) and higher sales volumes ($5 million), partially offset by higher operating and transportation costs ($39 million), higher selling, general and administrative costs ($36 million), an impairment of an equity investment ($14 million), the unfavorable impact of business acquisitions ($9 million), the unfavorable impact of foreign currency translation ($5 million) and lower equity income ($3 million).

Net Financing Charges

     Three Months Ended            Six Months Ended         
     March 31,            March 31,         
(in millions)    2012      2011      Change     2012      2011      Change  

Net financing charges

   $ 63      $ 46        37   $ 112      $ 81        38

 

   

The increase in net financing charges for the three and six month periods ended March 31, 2012 was primarily due to higher debt levels in the current periods.

 

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Provision for Income Taxes

 

     Three Months Ended
March 31,
    Six Months Ended
March 31,
 
(in millions)    2012     2011     2012     2011  

Tax provision

   $ 94     $ 90     $ 198     $