UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10–K
R | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended September 30, 2013
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 of Incorporation) | (I.R.S. Employer Identification No.) | |
5757 North Green Bay Avenue Milwaukee, Wisconsin | 53209 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code:
(414) 524-1200
Securities Registered Pursuant to Section 12(b) of the Exchange Act:
Title of Each Class | Name of Each Exchange on Which Registered | |
Common Stock | New York Stock Exchange | |
Corporate Units | New York Stock Exchange | |
Securities Registered Pursuant to Section 12(g) of the Exchange Act: None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes R No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No R
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 R 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 R No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | R | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ | Smaller reporting company | ¨ | |||
(Do not check if a 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 R
As of March 31, 2013, the aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant was approximately $24.0 billion based on the closing sales price as reported on the New York Stock Exchange. As of October 31, 2013, 685,160,911 shares of the registrant’s Common Stock, par value $1.00 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held on January 29, 2014 are incorporated by reference into Part III.
JOHNSON CONTROLS, INC.
Index to Annual Report on Form 10-K
Year Ended September 30, 2013
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CAUTIONARY STATEMENTS FOR FORWARD-LOOKING INFORMATION
Unless otherwise indicated, references to “Johnson Controls,” the “Company,” “we,” “our” and “us” in this Annual Report on Form 10-K refer to Johnson Controls, Inc. and its consolidated subsidiaries.
The Company has made statements in this document that are forward-looking and, therefore, are subject to risks and uncertainties. All statements in this document other than statements of historical fact are statements that are, or could be, deemed "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. In this document, statements regarding future financial position, sales, costs, earnings, cash flows, other measures of results of operations, capital expenditures or debt levels and plans, objectives, outlook, targets, guidance or goals are forward-looking statements. Words such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “should,” “forecast,” “project” or “plan” or terms of similar meaning are also generally intended to identify forward-looking statements. Johnson Controls cautions that these statements are subject to numerous important risks, uncertainties, assumptions and other factors, some of which are beyond Johnson Controls' control, that could cause Johnson Controls' actual results to differ materially from those expressed or implied by such forward-looking statements. A detailed discussion of risks is included in the section entitled "Risk Factors" (refer to Part I, Item IA, of this Annual Report on Form 10-K). The forward-looking statements included in this document are only made as of the date of this document, unless otherwise specified, and Johnson Controls assumes no obligation, and disclaims any obligation, to update forward-looking statements to reflect events or circumstances occurring after the date of this document.
PART I
ITEM 1 BUSINESS
General
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, the Company acquired Globe-Union, Inc., a Wisconsin-based manufacturer of automotive batteries for both the replacement and original equipment markets. The Company entered the automotive seating industry in 1985 with the acquisition of Michigan-based Hoover Universal, Inc. In 2005, the Company acquired York International, a global supplier of heating, ventilating, air-conditioning and refrigeration equipment and services.
The 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. The Company also provides residential air conditioning and heating systems and industrial refrigeration products.
The Automotive Experience business is one of the world’s largest automotive suppliers, providing innovative interior systems through our design and engineering expertise. The Company’s 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.
The 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. The Company serves both automotive original equipment manufacturers (OEMs) and the general vehicle battery aftermarket. The Company also supplies advanced battery technologies to power certain Start-Stop vehicles, hybrid and electric vehicles.
Financial Information About Business Segments
Accounting Standards Codification (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.
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Refer to Note 19, “Segment Information,” of the notes to consolidated financial statements for financial information about business segments.
For the purpose of the following discussion of the Company’s businesses, the five Building Efficiency reportable segments and the three Automotive Experience reportable segments are presented together due to their similar customers and the similar nature of their products, production processes and distribution channels.
Products/Systems and Services
Building Efficiency
Building Efficiency is a global leader in delivering integrated control systems, mechanical equipment, services and solutions designed to improve the comfort, safety and energy efficiency of non-residential buildings and residential properties with operations in 59 countries. Revenues come from facilities management, technical services, and the replacement and upgrade of HVAC controls and mechanical equipment in the existing buildings market, where the Company’s large base of current customers leads to repeat business, as well as with installing controls and equipment during the construction of new buildings. Customer relationships often span entire building lifecycles.
Building Efficiency sells its control systems, mechanical equipment and services primarily through the Company’s extensive global network of sales and service offices. Some building controls and mechanical systems are sold to distributors of air-conditioning, refrigeration and commercial heating systems throughout the world. Approximately 43% of Building Efficiency’s sales are derived from HVAC products and installed control systems for construction and retrofit markets, including 14% of total sales related to new commercial construction. Approximately 57% of its sales originate from its service offerings. In fiscal 2013, Building Efficiency accounted for 34% of the Company’s consolidated net sales.
The Company’s systems include York® chillers, industrial refrigeration products, air handlers and other HVAC mechanical equipment that provide heating and cooling in non-residential buildings. The Metasys® control system monitors and integrates HVAC equipment with other critical building systems to maximize comfort while reducing energy and operating costs. As the largest global supplier of HVAC technical services, Building Efficiency staffs, optimizes and repairs building systems made by the Company and its competitors. The Company offers a wide range of solutions such as performance contracting under which guaranteed energy savings are used by the customer to fund project costs over a number of years. In addition, the Global Workplace Solutions segment provides full-time on-site operations staff and real estate and energy consulting services to help customers, especially multi-national companies, reduce costs and improve the performance of their facility portfolios. The Company’s on-site staff typically performs tasks related to the comfort and reliability of the facility, and manages subcontractors for functions such as food service, cleaning, maintenance and landscaping. The Company also produces air conditioning and heating equipment for the residential market.
Automotive Experience
Automotive Experience designs and manufactures interior products and systems for passenger cars and light trucks, including vans, pick-up trucks and sport/crossover utility vehicles. The business produces automotive interior systems for original equipment manufacturers (OEMs) and operates approximately 220 wholly- and majority-owned manufacturing or assembly plants, with operations in 35 countries worldwide. Additionally, the business has partially-owned affiliates in Asia, Europe, North America and South America.
Automotive Experience products and systems 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. In fiscal 2013, Automotive Experience accounted for 51% of the Company’s consolidated net sales.
The business operates assembly plants that supply automotive OEMs with complete seats on a “just-in-time/in-sequence” basis. Seats are assembled to specific order and delivered on a predetermined schedule directly to an automotive assembly line. Certain of the business’s other automotive interior systems are also supplied on a “just-in-time/in-sequence” basis. Foam, metal and plastic seating components, seat covers, seat mechanisms and other components are shipped to these plants from the business’s production facilities or outside suppliers.
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Power Solutions
Power Solutions services both automotive OEMs and the battery aftermarket by providing energy storage technology, coupled with systems engineering, marketing and service expertise. The Company is the largest producer of lead-acid automotive batteries in the world, producing and distributing approximately 135 million lead-acid batteries annually in approximately 55 wholly- and majority-owned manufacturing or assembly plants, distribution centers and sales offices in 20 countries worldwide. Investments in new product and process technology have expanded product offerings to absorbent glass mat (AGM) and enhanced flooded battery (EFB) technologies that power Start-Stop vehicles, as well as lithium-ion battery technology for certain hybrid and electric vehicles. The business has also invested to develop sustainable lead and poly recycling operations in the North American and European markets. Approximately 75% of unit sales worldwide in fiscal 2013 were to the automotive replacement market, with the remaining sales to the OEM market.
Power Solutions accounted for 15% of the Company’s fiscal 2013 consolidated net sales. Batteries and key components are manufactured at wholly- and majority-owned plants in North America, South America, Asia and Europe.
Competition
Building Efficiency
The Building Efficiency business conducts its operations through thousands of individual contracts that are either negotiated or awarded on a competitive basis. Key factors in the award of contracts include system and service performance, quality, price, design, reputation, technology, application engineering capability and construction or project management expertise. Competitors for HVAC contracts in the residential and non-residential marketplace include many regional, national and international providers; larger competitors include Honeywell International, Inc.; Siemens Building Technologies, an operating group of Siemens AG; Schneider Electric SA; Carrier Corporation, a subsidiary of United Technologies Corporation; Trane Incorporated, a subsidiary of Ingersoll-Rand Company Limited; Daikin Industries, Ltd.; Lennox International, Inc.; Goodman Global, Inc.; GC Midea Holding Co, Ltd. and Gree Electric Appliances, Inc. In addition to HVAC equipment, Building Efficiency competes in a highly fragmented HVAC services market, which is dominated by local providers. The facilities management market, including Global Workplace Solutions, is also fragmented at the local level with many regional companies servicing specific geographies. The largest competition comes from ISS A/S; Sodexo SA and Jones Lang LaSalle, Inc. Sales of services are largely dependent upon numerous individual contracts with commercial businesses worldwide. The loss of any individual contract would not have a material adverse effect on the Company.
Automotive Experience
The Automotive Experience business faces competition from other automotive suppliers and, with respect to certain products, from the automobile OEMs who produce or have the capability to produce certain products the business supplies. The automotive supply industry competes on the basis of technology, quality, reliability of supply and price. Design, engineering and product planning are increasingly important factors. Independent suppliers that represent the principal Automotive Experience competitors include Lear Corporation, Faurecia SA and Magna International Inc.
Power Solutions
Power Solutions is the principal supplier of batteries to many of the largest merchants in the battery aftermarket, including Advance Auto Parts, AutoZone, Robert Bosch GmbH, DAISA S.A., Costco, NAPA, O’Reilly/CSK, Interstate Battery System of America, Sears, Roebuck & Co. and Wal-Mart stores. Automotive batteries are sold throughout the world under private labels and under the Company’s brand names (Optima®, Varta®, LTH® and Heliar®) to automotive replacement battery retailers and distributors and to automobile manufacturers as original equipment. The Power Solutions business competes with a number of major domestic and international manufacturers and distributors of lead-acid batteries, as well as a large number of smaller, regional competitors. The Power Solutions business primarily competes in the battery market with Exide Technologies, GS Yuasa Corporation, Camel Group Company Limited, East Penn Manufacturing Company and Banner Batteries GB Limited. The North American, European and Asian lead-acid battery markets are highly competitive. The manufacturers in these markets compete on price, quality, technical innovation, service and warranty.
Backlog
The Company’s backlog relating to the Building Efficiency business is applicable to its sales of systems and services. At September 30, 2013, the backlog was $4.8 billion, the majority of which relates to fiscal 2014. The backlog as of September 30, 2012 was $5.2 billion. The decrease in backlog was primarily due to the divestiture impacts in Europe and decline in the North
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America Service, Other and Asia segments, partially offset by an increase in the North America Systems segment. The backlog does not include amounts associated with contracts in the Global Workplace Solutions business because such contracts are typically multi-year service awards, nor does it include unitary products within the Other segment. The backlog amount outstanding at any given time is not necessarily indicative of the amount of revenue to be earned in the upcoming fiscal year.
Raw Materials
Raw materials used by the businesses in connection with their operations, including lead, steel, tin, aluminum, urethane chemicals, copper, sulfuric acid and polypropylene, were readily available during the year, and the Company expects such availability to continue. In fiscal 2014, commodity prices could fluctuate throughout the year and could significantly affect the results of operations.
Intellectual Property
Generally, the Company seeks statutory protection for strategic or financially important intellectual property developed in connection with its business. Certain intellectual property, where appropriate, is protected by contracts, licenses, confidentiality or other agreements.
The Company owns numerous U.S. and non-U.S. patents (and their respective counterparts), the more important of which cover those technologies and inventions embodied in current products or which are used in the manufacture of those products. While the Company believes patents are important to its business operations and in the aggregate constitute a valuable asset, no single patent, or group of patents, is critical to the success of the business. The Company, from time to time, grants licenses under its patents and technology and receives licenses under patents and technology of others.
The Company’s trademarks, certain of which are material to its business, are registered or otherwise legally protected in the U.S. and many non-U.S. countries where products and services of the Company are sold. The Company, from time to time, becomes involved in trademark licensing transactions.
Most works of authorship produced for the Company, such as computer programs, catalogs and sales literature, carry appropriate notices indicating the Company’s claim to copyright protection under U.S. law and appropriate international treaties.
Environmental, Health and Safety Matters
Laws addressing the protection of the environment (environmental laws) and workers’ safety and health (worker safety laws) govern the Company’s ongoing global operations. They generally provide for civil and criminal penalties, as well as injunctive and remedial relief, for noncompliance or require remediation of sites where Company-related materials have been released into the environment.
The Company has expended substantial resources globally, both financial and managerial, to comply with environmental laws and worker safety laws and maintains procedures designed to foster and ensure compliance. Certain of the Company’s businesses are, or have been, engaged in the handling or use of substances that may impact workplace health and safety or the environment. The Company is committed to protecting its workers and the environment against the risks associated with these substances.
The Company’s operations and facilities have been, and in the future may become, the subject of formal or informal enforcement actions or proceedings for noncompliance with environmental laws and worker safety laws or for the remediation of Company-related substances released into the environment. Such matters typically are resolved by negotiation with regulatory authorities that result in commitments to compliance, abatement or remediation programs and, in some cases, payment of penalties. Historically, neither such commitments nor such penalties have been material. (See Item 3, “Legal Proceedings,” of this report for a discussion of the Company’s potential environmental liabilities.)
Environmental Capital Expenditures
The Company’s ongoing environmental compliance program often results in capital expenditures. Environmental considerations are a part of all significant capital expenditure decisions; however, expenditures in fiscal 2013 related solely to environmental compliance were not material. It is management’s opinion that the amount of any future capital expenditures related solely to environmental compliance will not have a material adverse effect on the Company’s financial results or competitive position in any one year.
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Employees
As of September 30, 2013, the Company employed approximately 170,000 employees, of whom approximately 107,000 were hourly and 63,000 were salaried.
Seasonal Factors
Certain of Building Efficiency’s sales are seasonal as the demand for residential air conditioning equipment generally increases in the summer months. This seasonality is mitigated by the other products and services provided by the Building Efficiency business that have no material seasonal effect.
Sales of automotive seating and interior systems and of batteries to automobile OEMs for use as original equipment are dependent upon the demand for new automobiles. Management believes that demand for new automobiles generally reflects sensitivity to overall economic conditions with no material seasonal effect.
The automotive replacement battery market is affected by weather patterns because batteries are more likely to fail when extremely low temperatures place substantial additional power requirements upon a vehicle’s electrical system. Also, battery life is shortened by extremely high temperatures, which accelerate corrosion rates. Therefore, either mild winter or moderate summer temperatures may adversely affect automotive replacement battery sales.
Financial Information About Geographic Areas
Refer to Note 19, “Segment Information,” of the notes to consolidated financial statements for financial information about geographic areas.
Research and Development Expenditures
Refer to Note 1, “Summary of Significant Accounting Policies,” of the notes to consolidated financial statements for research and development expenditures.
Available Information
The Company’s filings with the U.S. Securities and Exchange Commission (SEC), including annual reports on Form 10-K, quarterly reports on Form 10-Q, definitive proxy statements on Schedule 14A, current reports on Form 8-K, and any amendments to those reports filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, are made available free of charge through the Investor Relations section of the Company’s Internet website at http://www.johnsoncontrols.com as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC. Copies of any materials the Company files with the SEC can also be obtained free of charge through the SEC’s website at http://www.sec.gov, at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549, or by calling the SEC’s Office of Investor Education and Advocacy at 1-800-732-0330. The Company also makes available, free of charge, its Ethics Policy, Corporate Governance Guidelines, Board of Directors committee charters and other information related to the Company on the Company’s Internet website or in printed form upon request. The Company is not including the information contained on the Company’s website as a part of, or incorporating it by reference into, this Annual Report on Form 10-K.
ITEM 1A RISK FACTORS
General Risks
General economic, credit and capital market conditions could adversely affect our financial performance, may affect our ability to grow or sustain our businesses and could negatively affect our ability to access the capital markets.
We compete around the world in various geographic regions and product markets. Global economic conditions affect each of our three primary businesses. As we discuss in greater detail in the specific risk factors for each of our businesses that appear below, any future financial distress in the automotive industry or residential and commercial construction markets could negatively affect our revenues and financial performance in future periods, result in future restructuring charges, and adversely impact our ability to grow or sustain our businesses.
The capital and credit markets provide us with liquidity to operate and grow our businesses beyond the liquidity that operating cash flows provide. A worldwide economic downturn and disruption of the credit markets could reduce our access to capital
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necessary for our operations and executing our strategic plan. If our access to capital were to become significantly constrained or costs of capital increased significantly due to lowered credit ratings, prevailing industry conditions, the volatility of the capital markets or other factors, then our financial condition, results of operations and cash flows could be adversely affected.
We are subject to risks associated with our non-U.S. operations that could adversely affect our results of operations.
We have significant operations in a number of countries outside the U.S., some of which are located in emerging markets. Long-term economic uncertainty in some of the regions of the world in which we operate, such as Asia, South America, the Middle East, Central Europe and other emerging markets, could result in the disruption of markets and negatively affect cash flows from our operations to cover our capital needs and debt service.
In addition, as a result of our global presence, a significant portion of our revenues and expenses is denominated in currencies other than the U.S. dollar. We are therefore subject to foreign currency risks and foreign exchange exposure. Our primary exposures are to the euro, British pound, Japanese yen, Czech koruna, Mexican peso, Romanian lei, Hungarian forint, Polish zloty, Canadian dollar and Chinese renminbi. While we employ financial instruments to hedge some of our transactional foreign exchange exposure, these activities do not insulate us completely from those exposures. Exchange rates can be volatile and could adversely impact our financial results and comparability of results from period to period.
There are other risks that are inherent in our non-U.S. operations, including the potential for changes in socio-economic conditions, laws and regulations, including import, export, labor and environmental laws, and monetary and fiscal policies; protectionist measures that may prohibit acquisitions or joint ventures, or impact trade volumes; unsettled political conditions; government-imposed plant or other operational shutdowns; backlash from foreign labor organizations related to our restructuring actions; corruption; natural and man-made disasters, hazards and losses; violence, civil and labor unrest, and possible terrorist attacks.
These and other factors may have a material adverse effect on our non-U.S. operations and therefore on our business and results of operations.
We are subject to regulation of our international operations that could adversely affect our business and results of operations.
Due to our global operations, we are subject to many laws governing international relations, including those that prohibit improper payments to government officials and commercial customers, and restrict where we can do business, what information or products we can supply to certain countries and what information we can provide to a non-U.S. government, including but not limited to the Foreign Corrupt Practices Act, U.K. Bribery Act and the U.S. Export Administration Act. Violations of these laws, which are complex, may result in criminal penalties or sanctions that could have a material adverse effect on our business, financial condition and results of operations.
Global climate change could negatively affect our business.
Increased public awareness and concern regarding global climate change may result in more regional and/or federal requirements to reduce or mitigate the effects of greenhouse gas emissions. There continues to be a lack of consistent climate legislation, which creates economic and regulatory uncertainty. Such regulatory uncertainty extends to future incentives for energy efficient buildings and vehicles and costs of compliance, which may impact the demand for our products, obsolescence of our products and our results of operations.
There is a growing consensus that greenhouse gas emissions are linked to global climate changes. Climate changes, such as extreme weather conditions, create financial risk to our business. For example, the demand for our products and services, such as residential air conditioning equipment and automotive replacement batteries, may be affected by unseasonable weather conditions. Climate changes could also disrupt our operations by impacting the availability and cost of materials needed for manufacturing and could increase insurance and other operating costs. These factors may impact our decisions to construct new facilities or maintain existing facilities in areas most prone to physical climate risks. The Company could also face indirect financial risks passed through the supply chain, and process disruptions due to physical climate changes could result in price modifications for our products and the resources needed to produce them.
New regulations related to conflict minerals could adversely impact our business.
The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions to improve transparency and accountability concerning the supply of certain minerals, known as conflict minerals, originating from the Democratic Republic of Congo (DRC) and adjoining countries. As a result, in August 2012 the SEC adopted annual disclosure and reporting requirements for those companies who use conflict minerals in their products. Accordingly, we began our reasonable country of origin inquiries in fiscal
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2013, with initial disclosure requirements beginning in May 2014. There are costs associated with complying with these disclosure requirements, including for diligence to determine the sources of conflict minerals used in our products and other potential changes to products, processes or sources of supply as a consequence of such verification activities. The implementation of these rules could adversely affect the sourcing, supply and pricing of materials used in our products. As there may be only a limited number of suppliers offering “conflict free” conflict minerals, we cannot be sure that we will be able to obtain necessary conflict minerals from such suppliers in sufficient quantities or at competitive prices. Also, we may face reputational challenges if we determine that certain of our products contain minerals not determined to be conflict free or if we are unable to sufficiently verify the origins for all conflict minerals used in our products through the procedures we may implement.
We are subject to requirements relating to environmental regulation and environmental remediation matters, which could adversely affect our business and results of operations.
Because of uncertainties associated with environmental regulation and environmental remediation activities at sites where we may be liable, future expenses that we may incur to remediate identified sites could be considerably higher than the current accrued liability on our consolidated statement of financial position, which could have a material adverse effect on our business and results of operations.
Risks related to our defined benefit retirement plans may adversely impact our results of operations and cash flow.
Significant changes in actual investment return on defined benefit plan assets, discount rates, and other factors could adversely affect our results of operations and the amounts of contributions we must make to our defined benefit plans in future periods. As we mark-to-market our defined benefit plan assets and liabilities on an annual basis, large non-cash gains or losses could be recorded in the fourth quarter of each fiscal year. U.S. generally accepted accounting principles require that we calculate income or expense for the plans using actuarial valuations. These valuations reflect assumptions about financial markets and interest rates, which may change based on economic conditions. Funding requirements for our defined benefit plans are dependent upon, among other things, interest rates, underlying asset returns and the impact of legislative or regulatory changes related to defined benefit funding obligations. For a discussion regarding the significant assumptions used to determine net periodic benefit cost, refer to “Critical Accounting Estimates and Policies” included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
We may be unable to realize the expected benefits of our restructuring actions, which could adversely affect our profitability and operations.
In order to align our resources with our growth strategies, operate more efficiently and control costs, we periodically announce restructuring plans, which include workforce reductions, global plant closures and consolidations, long-lived asset impairments and other cost reduction initiatives. We may undertake additional restructuring actions and workforce reductions in the future. As these plans and actions are complex, unforeseen factors could result in expected savings and benefits to be delayed or not realized to the full extent planned, and our operations and business may be disrupted.
Negative or unexpected tax consequences could adversely affect our results of operations.
Adverse changes in the underlying profitability and financial outlook of our operations in several jurisdictions could lead to changes in our valuation allowances against deferred tax assets and other tax reserves on our statement of financial position, and the future sale of certain businesses could potentially result in the repatriation of accumulated foreign earnings that could materially and adversely affect our results of operations. Additionally, changes in tax laws in the U.S. or in other countries where we have significant operations could materially affect deferred tax assets and liabilities on our consolidated statement of financial position and provision for income taxes.
We are also subject to tax audits by governmental authorities in the U.S. and in non-U.S. jurisdictions. Negative unexpected results from one or more such tax audits could adversely affect our results of operations.
Legal proceedings in which we are, or may be, a party may adversely affect us.
We are currently and may in the future become subject to legal proceedings and commercial or contractual disputes. These are typically claims that arise in the normal course of business including, without limitation, commercial or contractual disputes with our suppliers, intellectual property matters, third party liability, including product liability claims and employment claims. There exists the possibility that such claims may have an adverse impact on our results of operations that is greater than we anticipate.
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An investigation by the European Commission (EC) related to European lead recyclers’ procurement practices is currently underway, with the Company one of several named companies subject to review. The Company cannot predict the ultimate financial impact, as the investigation is at a preliminary stage. We will continue to cooperate with the EC in their investigation and monitor related commercial and financial implications, if any. The Company’s policy is to comply with antitrust and competition laws and, if a violation of any such laws is found, to take appropriate remedial action and to cooperate fully with any related governmental inquiry. Competition and antitrust law investigations may continue for several years and can result in substantial fines depending on the gravity and duration of the violations.
A downgrade in the ratings of our debt could restrict our ability to access the debt capital markets and increase our interest costs.
Changes in the ratings that rating agencies assign to our debt may ultimately impact our access to the debt capital markets and the costs we incur to borrow funds. If ratings for our debt fall below investment grade, our access to the debt capital markets would become restricted. Tightening in the credit markets and the reduced level of liquidity in many financial markets due to turmoil in the financial and banking industries could affect our access to the debt capital markets or the price we pay to issue debt. Historically, we have relied on our ability to issue commercial paper rather than to draw on our credit facility to support our daily operations, which means that a downgrade in our ratings or continued volatility in the financial markets causing limitations to the debt capital markets could have an adverse effect on our business or our ability to meet our liquidity needs.
Additionally, several of our credit agreements generally include an increase in interest rates if the ratings for our debt are downgraded. Further, an increase in the level of our indebtedness may increase our vulnerability to adverse general economic and industry conditions and may affect our ability to obtain additional financing.
We are subject to potential insolvency or financial distress of third parties.
We are exposed to the risk that third parties to various arrangements who owe us money or goods and services, or who purchase goods and services from us, will not be able to perform their obligations or continue to place orders due to insolvency or financial distress. If third parties fail to perform their obligations under arrangements with us, we may be forced to replace the underlying commitment at current or above market prices or on other terms that are less favorable to us. In such events, we may incur losses, or our results of operations, financial position or liquidity could otherwise be adversely affected.
We may be unable to complete or integrate acquisitions effectively, which may adversely affect our growth, profitability and results of operations.
We expect acquisitions of businesses and assets to play a role in our future growth. We cannot be certain that we will be able to identify attractive acquisition targets, obtain financing for acquisitions on satisfactory terms, successfully acquire identified targets or manage timing of acquisitions with capital obligations across our businesses. Additionally, we may not be successful in integrating acquired businesses into our existing operations and achieving projected synergies. Competition for acquisition opportunities in the various industries in which we operate may rise, thereby increasing our costs of making acquisitions or causing us to refrain from making further acquisitions. We are also subject to applicable antitrust laws and must avoid anticompetitive behavior. These and other acquisition-related factors may negatively and adversely impact our growth, profitability and results of operations.
We are subject to business continuity risks associated with centralization of certain administrative functions.
We have been and are in the process of regionally centralizing certain administrative functions, primarily in North America, Europe and Asia, to improve efficiency and reduce costs. To the extent that these central locations are disrupted or disabled, key business processes, such as invoicing, payments and general management operations, could be interrupted.
A failure of our information technology (IT) infrastructure could adversely impact our business and operations.
We rely upon the capacity, reliability and security of our information technology infrastructure and our ability to expand and continually update this infrastructure in response to the changing needs of our business. For example, we are implementing new enterprise resource planning and other IT systems in certain of our businesses over a period of several years. As we implement the new systems, they may not perform as expected. We also face the challenge of supporting our older systems and implementing necessary upgrades. If we experience a problem with the functioning of an important IT system or a security breach of our IT systems, the resulting disruptions could have an adverse effect on our business.
We and certain of our third-party vendors receive and store personal information in connection with our human resources operations and other aspects of our business. Despite our implementation of security measures, our IT systems are vulnerable to damages
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from computer viruses, natural disasters, unauthorized access, cyber attack and other similar disruptions. Any system failure, accident or security breach could result in disruptions to our operations. A material network breach in the security of our IT systems could include the theft of our intellectual property, trade secrets or customer information. To the extent that any disruptions or security breach results in a loss or damage to our data, or an inappropriate disclosure of confidential or customer information, it could cause significant damage to our reputation, affect our relationships with our customers, lead to claims against the Company and ultimately harm our business. In addition, we may be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future.
Our business success depends on attracting and retaining qualified personnel.
Our ability to sustain and grow our business requires us to hire, retain and develop a highly skilled and diverse management team and workforce. Failure to ensure that we have the leadership capacity with the necessary skill set and experience could impede our ability to deliver our growth objectives and execute our strategic plan. Organizational and reporting changes as a result of our leadership transition could result in increased turnover. Additionally, any unplanned turnover or inability to attract and retain key employees could have a negative effect on our results of operations.
Building Efficiency Risks
Failure to comply with regulations due to our contracts with U.S. government entities could adversely affect our business and results of operations.
Our Building Efficiency business contracts with government entities and is subject to specific rules, regulations and approvals applicable to government contractors. We are subject to routine audits by the Defense Contract Audit Agency to assure our compliance with these requirements. Our failure to comply with these or other laws and regulations could result in contract terminations, suspension or debarment from contracting with the U.S. federal government, civil fines and damages and criminal prosecution. In addition, changes in procurement policies, budget considerations, unexpected U.S. developments, such as terrorist attacks, or similar political developments or events abroad that may change the U.S. federal government’s national security defense posture may affect sales to government entities.
Volatility in commodity prices may adversely affect our results of operations.
Increases in commodity costs negatively impact the profitability of orders in backlog as prices on those orders are fixed; therefore, in the short-term we cannot adjust for changes in commodity prices. If we are not able to recover commodity cost increases through price increases to our customers on new orders, then such increases will have an adverse effect on our results of operations. Additionally, unfavorability in our hedging programs during a period of declining commodity prices could result in lower margins as we reduce prices to match the market on a fixed commodity cost level.
Conditions in the residential and commercial new construction markets may adversely affect our results of operations.
HVAC equipment sales in the residential and commercial new construction markets correlate to the number of new homes and buildings that are built. The strength of the residential and commercial markets depends in part on the availability of consumer and commercial financing for our customers, along with inventory and pricing of existing homes and buildings. If economic and credit market conditions decline, it may result in a decline in the residential housing construction market and construction of new commercial buildings. Such conditions could have an adverse effect on our results of operations and result in potential liabilities or additional costs, including impairment charges.
A variety of other factors could adversely affect the results of operations of our Building Efficiency business.
Any of the following could materially and adversely impact the results of operations of our Building Efficiency business: loss of, changes in, or failure to perform under facility management supply contracts or other guaranteed performance contracts with our major customers; cancellation of, or significant delays in, projects in our backlog; delays or difficulties in new product development; the potential introduction of similar or superior technologies; financial instability or market declines of our major component suppliers; the unavailability of raw materials (primarily steel, copper and electronic components) necessary for production of HVAC equipment; price increases of limited-source components, products and services that we are unable to pass on to the market; unseasonable weather conditions in various parts of the world; changes in energy costs or governmental regulations that would decrease the incentive for customers to update or improve their building control systems; revisions to energy efficiency legislation; a decline in the outsourcing of facility management services; availability of labor to support growth of our service businesses; and natural or man-made disasters or losses that impact our ability to deliver facility management and other products and services to our customers.
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Automotive Experience Risks
Conditions in the automotive industry may adversely affect our results of operations.
Our financial performance depends, in part, on conditions in the automotive industry. In fiscal 2013, our largest customers globally were automobile manufacturers Ford Motor Company (Ford), Daimler AG and General Motors Corporation (GM). If automakers experience a decline in the number of new vehicle sales, we may experience reductions in orders from these customers, incur write-offs of accounts receivable, incur impairment charges or require additional restructuring actions beyond our current restructuring plans, particularly if any of the automakers cannot adequately fund their operations or experience financial distress.
Uncertainty related to the economic conditions in Europe may adversely affect our results of operations.
Automakers across Europe are experiencing difficulties from a weakened economy and tightening credit markets. As a result, we have experienced and may continue to experience reductions in orders from these OEM customers. A prolonged downturn in the European automotive industry or a significant change in product mix due to consumer demand could require us to shut down additional plants or result in additional impairment charges, restructuring actions or changes in our valuation allowances against deferred tax assets, which could be material to our consolidated financial statements. Continued uncertainty relating to the economic conditions in Europe may continue to have an adverse impact on our business.
We are subject to pricing pressure from our automotive customers.
We face significant competitive pressures in all of our business segments. Because of their purchasing size, our automotive customers can influence market participants to compete on price terms. If we are not able to offset pricing reductions resulting from these pressures by improved operating efficiencies and reduced expenditures, those pricing reductions may have an adverse impact on our business.
Financial distress of the automotive supply chain could harm our results of operations.
Automotive industry conditions could adversely affect the original equipment supplier base. Lower production levels for key customers, increases in certain raw material, commodity and energy costs and global credit market conditions could result in financial distress among many companies within the automotive supply base. Financial distress within the supplier base may lead to commercial disputes and possible supply chain interruptions, which in turn could disrupt our production. In addition, an adverse industry environment may require us to provide financial support to distressed suppliers or take other measures to ensure uninterrupted production, which could involve additional costs or risks. If any of these risks materialize, we are likely to incur losses, or our results of operations, financial position or liquidity could otherwise be adversely affected.
Change in consumer demand may adversely affect our results of operations.
Increases in energy costs or other factors (e.g., climate change concerns) may shift consumer demand away from motor vehicles that typically have higher interior content that we supply, such as light trucks, cross-over vehicles, minivans and SUVs, to smaller vehicles having less interior content. The loss of business with respect to, or a lack of commercial success of, one or more particular vehicle models for which we are a significant supplier could reduce our sales and harm our profitability, thereby adversely affecting our results of operations.
We may not be able to successfully negotiate pricing terms with our customers in the Automotive Experience business, which may adversely affect our results of operations.
We negotiate sales prices annually with our automotive customers. Cost-cutting initiatives that our customers have adopted generally result in increased downward pressure on pricing. In some cases our customer supply agreements require reductions in component pricing over the period of production. If we are unable to generate sufficient production cost savings in the future to offset price reductions, our results of operations may be adversely affected. In particular, large commercial settlements with our customers may adversely affect our results of operations or cause our financial results to vary on a quarterly basis.
Volatility in commodity prices may adversely affect our results of operations.
Commodity prices can be volatile from year to year. If commodity prices rise, and if we are not able to recover these cost increases from our customers, these increases will have an adverse effect on our results of operations.
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The cyclicality of original equipment automobile production rates may adversely affect the results of operations in our Automotive Experience business.
Our Automotive Experience business is directly related to automotive production by our customers. Automotive production and sales are highly cyclical and depend on general economic conditions and other factors, including consumer spending and preferences. An economic decline that results in a reduction in automotive production by our Automotive Experience customers could have a material adverse impact on our results of operations.
A variety of other factors could adversely affect the results of operations of our Automotive Experience business.
Any of the following could materially and adversely impact the results of operations of our Automotive Experience business: the loss of, or changes in, automobile supply contracts, sourcing strategies or customer claims with our major customers or suppliers; start-up expenses associated with new vehicle programs or delays or cancellations of such programs; underutilization of our manufacturing facilities, which are generally located near, and devoted to, a particular customer’s facility; inability to recover engineering and tooling costs; market and financial consequences of any recalls that may be required on products that we have supplied; delays or difficulties in new product development and integration; quantity and complexity of new program launches, which are subject to our customers’ timing, performance, design and quality standards; interruption of supply of certain single-source components; the potential introduction of similar or superior technologies; changing nature of our joint ventures and relationships with our strategic business partners; global overcapacity and vehicle platform proliferation; divestiture of the businesses held for sale could result in a gain or loss on sale to the extent the ultimate selling price differs from the current carrying value of the net assets; and potential complications and complexities encountered during the intended divestiture of our Electronics business.
Power Solutions Risks
We face competition and pricing pressure from other companies in the Power Solutions business.
Our Power Solutions business competes with a number of major domestic and international manufacturers and distributors of lead-acid batteries, as well as a large number of smaller, regional competitors. The North American, European and Asian lead-acid battery markets are highly competitive. The manufacturers in these markets compete on price, quality, technical innovation, service and warranty. If we are unable to remain competitive and maintain market share in the regions and markets we serve, our results of operations may be adversely affected.
Volatility in commodity prices may adversely affect our results of operations.
Lead is a major component of our lead-acid batteries, and the price of lead may be highly volatile. We attempt to manage the impact of changing lead prices through the recycling of used batteries returned to us by our aftermarket customers, commercial terms and commodity hedging programs. Our ability to mitigate the impact of lead price changes can be impacted by many factors, including customer negotiations, inventory level fluctuations and sales volume/mix changes, any of which could have an adverse effect on our results of operations.
Additionally, the prices of other commodities, primarily fuel, acid, resin and tin, may be volatile. If other commodity prices rise, and if we are not able to recover these cost increases through price increases to our customers, such increases will have an adverse effect on our results of operations. Moreover, the implementation of any price increases to our customers could negatively impact demand for our products.
Decreased demand from our customers in the automotive industry may adversely affect our results of operations.
Our financial performance in the Power Solutions business depends, in part, on conditions in the automotive industry. Sales to OEMs accounted for approximately 25% of the total sales of the Power Solutions business in fiscal 2013. Declines in the North American, European and Asian automotive production levels could reduce our sales and adversely affect our results of operations. In addition, if any OEMs reach a point where they cannot fund their operations, we may incur write-offs of accounts receivable, incur impairment charges or require additional restructuring actions beyond our current restructuring plans.
A variety of other factors could adversely affect the results of operations of our Power Solutions business.
Any of the following could materially and adversely impact the results of operations of our Power Solutions business: loss of, or changes in, automobile battery supply contracts with our large original equipment and aftermarket customers; the increasing quality and useful life of batteries or use of alternative battery technologies, both of which may adversely impact the lead-acid battery
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market; delays or cancellations of new vehicle programs; market and financial consequences of any recalls that may be required on our products; delays or difficulties in new product development, including lithium-ion technology; impact of potential increases in lithium-ion battery volumes on established lead-acid battery volumes as lithium-ion battery technology grows and costs become more competitive; financial instability or market declines of our customers or suppliers; slower than projected market development in emerging markets; interruption of supply of certain single-source components; changing nature of our joint ventures and relationships with our strategic business partners; unseasonable weather conditions in various parts of the world; increasing global environmental and safety regulations related to the manufacturing and recycling of lead-acid batteries, and transportation of battery materials; our ability to secure sufficient tolling capacity to recycle batteries; price and availability of battery cores used in recycling; and the lack of the development of a market for hybrid and electric vehicles.
ITEM 1B UNRESOLVED STAFF COMMENTS
The Company has no unresolved written comments regarding its periodic or current reports from the staff of the SEC.
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ITEM 2 PROPERTIES
At September 30, 2013, the Company conducted its operations in 66 countries throughout the world, with its world headquarters located in Milwaukee, Wisconsin. The Company’s wholly- and majority-owned facilities, which are listed in the table on the following pages by business and location, totaled approximately 87 million square feet of floor space and are owned by the Company except as noted. The facilities primarily consisted of manufacturing, assembly and/or warehouse space. The Company considers its facilities to be suitable and adequate for their current uses. The majority of the facilities are operating at normal levels based on capacity.
Building Efficiency | ||||
Arizona | Phoenix (1),(4) | Austria | Vienna (4) | |
California | Fremont (1),(4) | Belgium | Diegem (1),(4) | |
Roseville (1),(4) | Brazil | Curitiba (4) | ||
Simi Valley (1),(4) | Canada | Ajax (1),(3) | ||
Delaware | Newark (1),(4) | Markham (2),(4) | ||
Florida | Largo (1),(3) | Oakville (1),(4) | ||
Medley (1),(4) | China | Guangzhou (1),(4) | ||
Georgia | Atlanta (1),(4) | Qingyuan (2),(3) | ||
Illinois | Arlington Heights (4) | Wuxi (2),(3) | ||
Elmhurst (1),(4) | Denmark | Hojbjerg (3) | ||
Wheeling (1),(4) | Hornslet (1),(3) | |||
Kansas | Lenexa (1),(4) | Viby (2),(3) | ||
Wichita (2),(3) | France | Carquefou Cedex (2),(3) | ||
Kentucky | Louisville (1),(4) | Colombes (1),(3) | ||
Maryland | Baltimore (1),(4) | Germany | Essen (1),(3) | |
Capitol Heights (1),(4) | Flensburg (1) | |||
Rossville (1) | Hamburg (1),(3) | |||
Sparks (1),(4) | Kempen (1) | |||
Massachusetts | Lynnfield (4) | Mannheim (1),(3) | ||
Michigan | Sterling Heights (1),(4) | Hong Kong | Hong Kong (1),(4) | |
Minnesota | Plymouth (1),(4) | India | Pune (1) | |
Mississippi | Hattiesburg (1) | Italy | Milan (1),(3) | |
Missouri | Albany | Japan | Tokyo (1),(4) | |
St. Louis (1),(4) | Mexico | Apodaca (1) | ||
New Jersey | Hainesport (1),(4) | Durango (1) | ||
North Carolina | Charlotte (1),(4) | Juarez (3) | ||
Oklahoma | Norman (3) | Reynosa (3) | ||
Oregon | Portland (1),(4) | Netherlands | Dordrecht (3) | |
Pennsylvania | Audubon (1),(4) | Gorinchem (1),(3) | ||
Waynesboro (3) | Russia | Moscow (1),(3) | ||
York (1) | South Africa | Isando (1),(4) | ||
Texas | Houston (1),(4) | Spain | Sabadell (1),(3) | |
Irving (4) | Thailand | Samutsakorn (1),(4) | ||
San Antonio | Turkey | Manisa (1) | ||
Washington | Fife (1),(4) | United Arab Emirates | Dubai (1),(3) | |
Wisconsin | Milwaukee (2),(4) | |||
Waukesha (1),(4) | ||||
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Automotive Experience | ||||
Alabama | Bessemer (1) | Argentina | Buenos Aires (1) | |
Clanton | Cordoba (1) | |||
Cottondale | Rosario | |||
Eastaboga | Australia | Adelaide (1) | ||
McCalla (1) | Austria | Graz (1) | ||
Georgia | West Point (1) | Mandling | ||
Illinois | Sycamore | Belgium | Assenede (1) | |
Indiana | Kendallville | Brazil | Gravatai | |
Kentucky | Cadiz | Pouso Alegre | ||
Georgetown (2) | Quatro Barras (2) | |||
Louisville (1) | Sao Bernardo do Campo | |||
Shelbyville (1) | Santo Andre | |||
Winchester (1) | Sao Jose dos Campos | |||
Louisiana | Shreveport | Sao Jose dos Pinhais (1) | ||
Michigan | Auburn Hills (1) | Bulgaria | Sofia (1),(4) | |
Battle Creek | Canada | Milton | ||
Cascade (1) | Mississauga (1) | |||
Detroit | Tillsonburg | |||
Highland Park (1) | Whitby (2) | |||
Holland (2),(3) | China | Beijing (3) | ||
Lansing (2) | Changchun (1) | |||
Monroe (1) | Shanghai (1),(3) | |||
Port Huron (1) | Wuhu (1) | |||
Plymouth (2),(3) | Czech Republic | Bezdecin (1) | ||
Romulus (1) | Ceska Lipa (4) | |||
Taylor (1) | Mlada Boleslav (1) | |||
Warren (1) | Roudnice | |||
Missouri | Eldon (2) | Rychnov (1) | ||
Riverside (1) | Strakonice (4) | |||
Ohio | Bryan | Straz pod Ralskem | ||
Greenfield | Zatec | |||
Northwood | France | Cergy (1),(4) | ||
Wauseon | Conflans-sur-Lanterne | |||
Tennessee | Murfreesboro (2) | Creutzwald | ||
Pulaski (1) | Fesches-le-Chatel (1) | |||
Texas | El Paso (1) | La Ferte Bernard | ||
San Antonio (1) | Rosny | |||
Strasbourg | ||||
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Automotive Experience (continued) | ||||
Germany | Boblingen (1) | Poland | Bierun | |
Bochum (2) | Siemianowice | |||
Burscheid (2),(4) | Skarbimierz (1) | |||
Dautphe (2) | Swiebodzin | |||
Espelkamp | Zory | |||
Grefrath | Portugal | Palmela | ||
Hannover (1) | Romania | Bradu | ||
Hilchenbach (2) | Craiova (1) | |||
Holzgerlingen (1) | Jimbolia (1) | |||
Karlsruhe (1),(4) | Mioveni (1) | |||
Luneburg | Pitesti (1) | |||
Markgroningen (1) | Ploesti | |||
Neustadt | Timisoara (1) | |||
Rastatt (1) | Russia | St. Petersburg (1) | ||
Remchingen | Togliatti (1) | |||
Rockenhausen | Slovak Republic | Kostany nad Turcom (2) | ||
Saarlouis (1) | Lozorno (1) | |||
Solingen | Lucenec (2) | |||
Uberherrn | Namestovo (1) | |||
Waghausel (3) | Trencin (1) | |||
Zwickau | Zilina (2) | |||
India | Pune (1),(3) | Slovenia | Novo Mesto (1) | |
Italy | Grugliasco (1) | Slovenj Gradec (3) | ||
Melfi | South Africa | Chloorkop (1) | ||
Ogliastro Cilento | East London (1) | |||
Rocca D'Evandro | Korsten | |||
Japan | Hamamatsu | Pretoria | ||
Higashiomi | Swartkops (1) | |||
Yokohama (1),(4) | Uitenhage (1) | |||
Yokosuka (2) | Spain | Abrera | ||
Korea | Ansan (1),(4) | Alagon | ||
Asan | Almussafes (2) | |||
Macedonia | Skopje | Calatorao (1) | ||
Malaysia | Melaka (1) | Pedrola | ||
Pekan (1) | Redondela (1) | |||
Selangor Darul Ehsan | Valladolid | |||
Mexico | Coahuila (1) | Sweden | Goteburg (1) | |
Juarez (2) | Thailand | Rayong | ||
Lerma (1) | Chonburi (1) | |||
Matamaros (1) | Tunesia | Bi'r al Bay (1) | ||
Monclova | Turkey | Bursa (2) | ||
Puebla (2) | Kocaeli | |||
Ramos Arizpe | United Kingdom | Birmingham | ||
Reynosa (1) | Burton-Upon-Trent | |||
Saltillo (2) | Ellesmere (1) | |||
Tlaxcala | Garston (1) | |||
Toluca (1) | Liverpool (1) | |||
Sunderland | ||||
Telford (1) | ||||
Wednesbury | ||||
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Power Solutions | ||||
Arizona | Yuma (3) | Austria | Graz (1),(3) | |
Delaware | Middletown (3) | Vienna (1),(3) | ||
Florida | Tampa (3) | Brazil | Sorocaba (3) | |
Illinois | Geneva (3) | China | Changxing (3) | |
Indiana | Ft. Wayne (3) | Chongqing (3) | ||
Iowa | Red Oak (3) | Shanghai (2) | ||
Kentucky | Florence (1),(3) | Czech Republic | Ceska Lipa (2),(3) | |
Michigan | Holland (3) | France | Rouen | |
Missouri | St. Joseph (2),(3) | Sarreguemines (3) | ||
North Carolina | Kernersville (3) | Germany | Hannover (3) | |
Ohio | Toledo (3) | Krautscheid (3) | ||
Oregon | Canby (2),(3) | Zwickau (2),(3) | ||
Portland (2),(3) | Korea | Gumi (2),(3) | ||
South Carolina | Florence (3) | Mexico | Celaya | |
Oconee (3) | Cienega de Flores (1) | |||
Texas | San Antonio (3) | Escobedo | ||
Wisconsin | Milwaukee (4) | Flores | ||
Garcia | ||||
San Pedro (1),(4) | ||||
Tlalnepantla (1),(4) | ||||
Torreon | ||||
Spain | Burgos | |||
Guadamar del Segura | ||||
Guadalajara (1) | ||||
Ibi (3) | ||||
Sweden | Hultsfred | |||
Corporate | ||||
Wisconsin | Milwaukee (4) | China | Dalian (1),(4) | |
Mexico | Monterrey (1),(4) | |||
Singapore | Singapore (1),(4) | |||
Slovak Republic | Bratislava (1),(4) | |||
(1)Leased facility
(2)Includes both leased and owned facilities
(3)Includes both administrative and manufacturing facilities
(4)Administrative facility only
In addition to the above listing, which identifies large properties (greater than 25,000 square feet), there are approximately 560 Building Efficiency branch offices and other administrative offices located in major cities throughout the world. These offices are primarily leased facilities and vary in size in proportion to the volume of business in the particular locality.
ITEM 3 LEGAL PROCEEDINGS
As noted in Item 1, liabilities potentially arise globally under various environmental laws and worker safety laws for activities that are not in compliance with such laws and for the cleanup of sites where Company-related substances have been released into the environment.
Currently, the Company is responding to allegations that it is responsible for performing environmental remediation, or for the repayment of costs spent by governmental entities or others performing remediation, at approximately 35 sites in the United States. Many of these sites are landfills used by the Company in the past for the disposal of waste materials; others are secondary lead smelters and lead recycling sites where the Company returned lead-containing materials for recycling; a few involve the cleanup of Company manufacturing facilities; and the remaining fall into miscellaneous categories. The Company may face similar claims
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of liability at additional sites in the future. Where potential liabilities are alleged, the Company pursues a course of action intended to mitigate them.
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 $25 million at September 30, 2013 and 2012. 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 September 30, 2013 and 2012, the Company recorded conditional asset retirement obligations of $56 million and $76 million, respectively.
The Company is involved in a number of product liability and various other casualty lawsuits incident to the operation of its businesses. The Company maintains insurance coverages and records estimated costs 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.
ITEM 4 MINE SAFETY DISCLOSURES
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3) of Form 10-K, the following list of executive officers of the Company as of November 20, 2013 is included as an unnumbered Item in Part I of this report in lieu of being included in the Company’s Proxy Statement relating to the Annual Meeting of Shareholders to be held on January 29, 2014.
Beda Bolzenius, 57, was elected a Corporate Vice President in November 2005 and has served as President - Automotive Seating since October 2012. He previously served as President of the Automotive Experience business from November 2006 to October 2012 and as Executive Vice President and General Manager Europe, Africa and South America for Automotive Experience from November 2004 to November 2006. Dr. Bolzenius joined the Company in November 2004 from Robert Bosch GmbH, a global manufacturer of automotive and industrial technology, consumer goods and building technology, where he most recently served as the president of Bosch’s Body Electronics division.
Colin Boyd, 54, was elected Vice President, Information Technology and Chief Information Officer in October 2008. Mr. Boyd previously served as Chief Information Officer and Corporate Vice President of Sony Ericsson from 2002 to 2008.
Susan F. Davis, 60, was elected Executive Vice President of Human Resources in September 2006. She previously served as Vice President of Human Resources from May 1994 to September 2006 and as Vice President of Organizational Development for the Automotive Experience business from August 1993 to April 1994. Ms. Davis joined the Company in 1983. Ms. Davis is a Director of Quanex Building Products Corporation, where she is the Chairwoman of the Compensation and Management Development Committee and serves on the Nominating and Corporate Governance Committee.
Charles A. Harvey, 61, was elected Corporate Vice President of Diversity and Public Affairs in November 2005. He previously served as Vice President of Human Resources for the Automotive Experience business and in other human resources leadership positions. Mr. Harvey joined the Company in 1991.
William C. Jackson, 53, was named Executive Vice President, Corporate Development, in September 2013 and has served as President - Automotive Electronics & Interiors since March 2012. Mr. Jackson also served as Executive Vice President - Operations and Innovation, from May 2011 to September 2013. Prior to joining Johnson Controls, Mr. Jackson was Vice President and President of Automotive at Sears Holdings Corporation from 2009 to 2010. Prior to that, he served as Senior
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Vice President and board member of Booz, Allen & Hamilton and Booz & Company, a strategy and consulting firm, where he led the firm’s Global Automotive, Transportation and Industrials Practice.
Brian Kesseler, 47, was elected a Corporate Vice President and President of the Power Solutions business in January 2013. He previously served as the Chief Operating Officer of the Power Solutions business from May 2012 to January 2013. He served as Vice President and General Manager, Europe Systems & Service, North America Service & Unitary Products Group for the Building Efficiency business from 2009 to April 2012, as Vice President and General Manager, Americas for the Power Solutions business from 2006 to 2009 and as Vice President and General Manager, North America for the Automotive business from 2003 to 2006. Mr. Kesseler joined the Company in 1994.
R. Bruce McDonald, 53, was elected Executive Vice President in September 2006 and Chief Financial Officer in May 2005. He previously served as Corporate Vice President from January 2002 to September 2006, Assistant Chief Financial Officer from October 2004 to May 2005 and Corporate Controller from November 2001 to October 2004. Mr. McDonald joined the Company in 2001.
Kim Metcalf-Kupres, 52, was elected a Corporate Vice President and Chief Marketing Officer in May 2013. She served as Vice President, Strategy, Marketing and Sales in the Power Solutions business from 2007 to May 2013. Previously, she served as Vice President, Sales and Marketing for Building Efficiency Systems in North America and has held positions of increasing responsibility since joining the Company in 1994.
Alex A. Molinaroli, 54, was elected Chief Executive Officer and President effective October 2013. He was also elected to the Board of Directors in October 2013. He previously served as Vice Chairman from January 2013 to October 2013, as a Corporate Vice President from May 2004 to January 2013 and as President of the Company’s Power Solutions business from January 2007 to January 2013. Mr. Molinaroli served as Vice President and General Manager for North America Systems & the Middle East for the Company’s Building Efficiency business and has held increasing levels of responsibility for controls systems and services sales and operations. Mr. Molinaroli joined the Company in 1983.
John Murphy, 50, was elected a Corporate Vice President and President of the Global Workplace Solutions business in July 2013. He previously served as the Vice President and General Manager of North America-Systems, Latin America, Middle East and Global Security for the Building Efficiency business from October 2009 to July 2013. He has held several global management roles within the Building Efficiency business since joining the Company in 1999.
C. David Myers, 50, was elected a Corporate Vice President and President of the Building Efficiency business in December 2005, when he joined the Company in connection with the acquisition of York International Corporation (York). At York, Mr. Myers served as Chief Executive Officer from February 2004 to December 2005, President from June 2003 to December 2005, Executive Vice President and Chief Financial Officer from January 2003 to June 2003 and Vice President and Chief Financial Officer from February 2000 to January 2003.
Jerome D. Okarma, 61, was elected Vice President, Secretary and General Counsel in November 2004 and was named a Corporate Vice President in September 2003. He previously served as Assistant Secretary from 1990 to November 2004 and as Deputy General Counsel from June 2000 to November 2004. Mr. Okarma joined the Company in 1989.
Stephen A. Roell, 63, was elected Chairman effective in January 2008 and was first elected to the Board of Directors in October 2004. He served as Chief Executive Officer from October 2007 through September 2013 and as President from May 2009 through September 2013. Mr. Roell previously served as Executive Vice President from October 2004 through September 2007, Chief Financial Officer between 1991 and May 2005, Senior Vice President from September 1998 to October 2004 and Vice President from 1991 to September 1998. Mr. Roell joined the Company in 1982. Mr. Roell has announced his intention to retire December 31, 2013.
Brian J. Stief, 57, was elected Vice President and Corporate Controller in July 2010 and serves as the Company’s Principal Accounting Officer. Prior to joining the Company, Mr. Stief was a partner with PricewaterhouseCoopers LLP, which he joined in 1979 and in which he became partner in 1989. He served several of the firm’s largest clients and also held various office managing partner roles.
Frank A. Voltolina, 53, was elected a Corporate Vice President and Corporate Treasurer in July 2003 when he joined the Company. Prior to joining the Company, Mr. Voltolina was Vice President and Treasurer at ArvinMeritor, Inc.
There are no family relationships, as defined by the instructions to this item, among the Company’s executive officers.
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All officers are elected for terms that expire on the date of the meeting of the Board of Directors following the Annual Meeting of Shareholders or until their successors are duly-elected and qualified.
PART II
ITEM 5 | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
The shares of the Company’s common stock are traded on the New York Stock Exchange under the symbol “JCI.”
Title of Class | Number of Record Holders as of September 30, 2013 |
Common Stock, $1.00 par value | 38,067 |
Common Stock Price Range | Dividends | ||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||
First Quarter | $ 24.75 - 30.74 | $ 24.29 - 33.90 | $ | 0.19 | $ | 0.18 | |||||
Second Quarter | 30.30 - 35.17 | 30.81 - 35.95 | 0.19 | 0.18 | |||||||
Third Quarter | 31.95 - 38.33 | 26.15 - 33.26 | 0.19 | 0.18 | |||||||
Fourth Quarter | 35.43 - 43.49 | 23.37 - 29.59 | 0.19 | 0.18 | |||||||
Year | $ 24.75 - 43.49 | $ 23.37 - 35.95 | $ | 0.76 | $ | 0.72 | |||||
In November 2012, the Company’s Board of Directors authorized a stock repurchase program to acquire up to $500 million of the Company’s outstanding common stock, which supersedes any prior programs. In September 2013, the Company’s Board of Directors authorized up to an additional $500 million in stock repurchases of the Company’s outstanding common stock, and in November 2013, the Company's Board of Directors authorized an additional $3.0 billion under the stock repurchase program, both incremental to prior authorizations. Stock repurchases under the stock repurchase program may be made through open market, privately negotiated, or structured transactions or otherwise at times and in such amounts as Company management deems appropriate. The stock repurchase program does not have an expiration date and may be amended or terminated by the Board of Directors at any time without prior notice. As of November 21, 2013, the Company has spent approximately $400 million on repurchases under the stock repurchase program in fiscal 2014. In addition, in November 2013 the Company announced an $800 million accelerated stock repurchase agreement with Goldman Sachs that will be funded in November 2013.
The Company entered into an Equity Swap Agreement, dated March 13, 2009, with Citibank, N.A. (Citibank). The Company selectively uses equity swaps to reduce market risk associated with 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 Equity Swap Agreement moves in the opposite direction of these liabilities, allowing the Company to fix a portion of the liabilities at a stated amount.
In connection with the Equity Swap Agreement, Citibank may purchase unlimited shares of the Company’s stock in the market or in privately negotiated transactions. The Company disclaims that Citibank is an “affiliated purchaser” of the Company as such term is defined in Rule 10b-18(a)(3) under the Securities Exchange Act or that Citibank is purchasing any shares for the Company. The Equity Swap Agreement has no stated expiration date. The net effect of the change in fair value of the Equity Swap Agreement and the change in equity compensation liabilities was not material to the Company’s earnings for the three months ended September 30, 2013.
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The following table presents information regarding the repurchase of the Company’s common stock by the Company as part of the publicly announced program and purchases of the Company’s common stock by Citibank in connection with the Equity Swap Agreement during the three months ended September 30, 2013.
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of the Publicly Announced Program | Approximate Dollar Value of Shares that May Yet be Purchased under the Programs | ||||||
7/1/13 - 7/31/13 | ||||||||||
Purchases by Company (1) | 1,827,045 | $41.05 | 1,827,045 | $200,006,026 | ||||||
8/1/13 - 8/31/13 | ||||||||||
Purchases by Company (1) | 1,216,976 | $41.09 | 1,216,976 | $150,006,536 | ||||||
9/1/13 - 9/30/13 | ||||||||||
Purchases by Company (1) | — | — | — | $650,006,536 | ||||||
7/1/13 - 7/31/13 | ||||||||||
Purchases by Citibank | — | — | — | NA | ||||||
8/1/13 - 8/31/13 | ||||||||||
Purchases by Citibank | — | — | — | NA | ||||||
9/1/13 - 9/30/13 | ||||||||||
Purchases by Citibank | — | — | — | NA | ||||||
(1) | Repurchases of the Company’s common stock by the Company pursuant to its publicly announced program may be intended to partially offset dilution related to the Company’s stock option and restricted stock equity compensation plans. |
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The following information in Item 5 is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934 (Exchange Act) or to the liabilities of Section 18 of the Exchange Act, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except to the extent the Company specifically incorporates it by reference into such a filing.
The line graph below compares the cumulative total shareholder return on our Common Stock with the cumulative total return of companies on the Standard & Poor’s (S&P’s) 500 Stock Index and companies in our Diversified Industrials Peer Group.* This graph assumes the investment of $100 on September 30, 2008 and the reinvestment of all dividends since that date.
The Company’s transfer agent’s contact information is as follows:
Wells Fargo Bank, N.A.
Shareowner Services Department
P.O. Box 64874
St. Paul, MN 55164-0874
(877) 602-7397
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ITEM 6 SELECTED FINANCIAL DATA
The following selected financial data reflects the results of operations, financial position data and common share information for the fiscal years ended September 30, 2009 through September 30, 2013 (in millions, except per share data, percentages, and number of employees and shareholders). Certain amounts have been revised to reflect the retrospective application of the Company’s change in inventory costing method for certain inventory in its Power Solutions business to the first-in first-out (FIFO) method from the last-in first-out (LIFO). Refer to Note 1, “Summary of Significant Accounting Policies,” of the notes to consolidated financial statements for further details surrounding this accounting policy change.
Year ended September 30, | |||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||
OPERATING RESULTS | |||||||||||||||||||
Net sales | $ | 42,730 | $ | 41,955 | $ | 40,833 | $ | 34,305 | $ | 28,497 | |||||||||
Segment income (1) | 3,293 | 2,497 | 2,348 | 2,025 | 277 | ||||||||||||||
Net income (loss) attributable to Johnson Controls, Inc. (6) | 1,178 | 1,184 | 1,415 | 1,354 | (661 | ) | |||||||||||||
Earnings (loss) per share (6) | |||||||||||||||||||
Basic | $ | 1.72 | $ | 1.74 | $ | 2.09 | $ | 2.01 | $ | (1.11 | ) | ||||||||
Diluted | 1.71 | 1.72 | 2.06 | 1.99 | (1.11 | ) | |||||||||||||
Return on average shareholders’ equity attributable to Johnson Controls, Inc. (2) (6) | 10 | % | 10 | % | 13 | % | 14 | % | (7 | )% | |||||||||
Capital expenditures | $ | 1,377 | $ | 1,831 | $ | 1,325 | $ | 777 | $ | 647 | |||||||||
Depreciation and amortization | 952 | 824 | 731 | 691 | 745 | ||||||||||||||
Number of employees | 170,000 | 170,000 | 162,000 | 137,000 | 130,000 | ||||||||||||||
FINANCIAL POSITION | |||||||||||||||||||
Working capital (3) | $ | 1,062 | $ | 2,370 | $ | 1,701 | $ | 1,031 | $ | 1,212 | |||||||||
Total assets | 31,518 | 30,954 | 29,788 | 25,855 | 24,153 | ||||||||||||||
Long-term debt | 4,560 | 5,321 | 4,533 | 2,652 | 3,168 | ||||||||||||||
Total debt | 5,498 | 6,068 | 5,146 | 3,389 | 3,966 | ||||||||||||||
Shareholders' equity attributable to Johnson Controls, Inc. | 12,314 | 11,625 | 11,154 | 10,183 | 9,165 | ||||||||||||||
Total debt to capitalization (4) | 31 | % | 34 | % | 32 | % | 25 | % | 30 | % | |||||||||
Net book value per share (5) | $ | 17.99 | $ | 17.04 | $ | 16.40 | $ | 15.11 | $ | 13.66 | |||||||||
COMMON SHARE INFORMATION | |||||||||||||||||||
Dividends per share | $ | 0.76 | $ | 0.72 | $ | 0.64 | $ | 0.52 | $ | 0.52 | |||||||||
Market prices | |||||||||||||||||||
High | $ | 43.49 | $ | 35.95 | $ | 42.92 | $ | 35.77 | $ | 30.01 | |||||||||
Low | 24.75 | 23.37 | 25.91 | 23.62 | 8.35 | ||||||||||||||
Weighted average shares (in millions) | |||||||||||||||||||
Basic | 683.7 | 681.5 | 677.7 | 672.0 | 595.3 | ||||||||||||||
Diluted | 689.2 | 688.6 | 689.9 | 682.5 | 595.3 | ||||||||||||||
Number of shareholders | 38,067 | 40,019 | 43,340 | 44,627 | 46,460 | ||||||||||||||
(1) | Segment income is calculated as income from continuing operations before income taxes and noncontrolling interests excluding net financing charges, debt conversion costs, significant restructuring and impairment costs, and net mark-to-market adjustments on pension and postretirement plans. |
(2) | Return on average shareholders’ equity attributable to Johnson Controls, Inc. (ROE) represents net income attributable to Johnson Controls, Inc. divided by average shareholders’ equity attributable to Johnson Controls, Inc. |
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(3) | Working capital is defined as current assets less current liabilities, excluding cash, short-term debt, the current portion of long-term debt, and assets and liabilities held for sale. |
(4) | Total debt to total capitalization represents total debt divided by the sum of total debt and shareholders’ equity attributable to Johnson Controls, Inc. |
(5) | Net book value per share represents shareholders’ equity attributable to Johnson Controls, Inc. divided by the number of common shares outstanding at the end of the period. |
(6) | Net income attributable to Johnson Controls, Inc. includes $985 million, $297 million and $230 million of significant restructuring and impairment costs in fiscal year 2013, 2012, and 2009, respectively. It also includes $(405) million, $447 million, $384 million, $269 million and $532 million of net mark-to-market charges (gains) on pension and postretirement plans in fiscal year 2013, 2012, 2011, 2010 and 2009, respectively. The preceding amounts are stated on a pre-tax basis. |
ITEM 7 | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
General
The Company operates in three primary businesses: Building Efficiency, Automotive Experience and Power Solutions. Building Efficiency provides facility systems, services and workplace solutions including comfort, energy and security management for the residential and non-residential buildings markets. Automotive Experience designs and manufactures interior systems and products for passenger cars and light trucks, including vans, pick-up trucks and sport/crossover utility vehicles. Power Solutions designs and manufactures automotive batteries for the replacement and original equipment markets.
This discussion summarizes the significant factors affecting the consolidated operating results, financial condition and liquidity of the Company for the three-year period ended September 30, 2013. This discussion should be read in conjunction with Item 8, the consolidated financial statements and the notes to consolidated financial statements.
Certain amounts have been revised to reflect the retrospective application of the Company’s change in inventory costing method for certain inventory in its Power Solutions business to the first-in first-out (FIFO) method from the last-in first-out (LIFO). Refer to Note 1, “Summary of Significant Accounting Policies,” of the notes to consolidated financial statements for further details surrounding this accounting policy change.
Effective October 1, 2012, the Company reorganized the reportable segments within its Automotive Experience business to align with its new management reporting structure and business activities. Prior to this reorganization, Automotive Experience was comprised of three reportable segments for financial reporting purposes: North America, Europe and Asia. As a result of this change, Automotive Experience is now comprised of three new reportable segments for financial reporting purposes: Seating, Interiors and Electronics. Historical information has been revised to reflect the new Automotive Experience reportable segment structure.
Outlook
On October 29, 2013, the Company gave a preliminary outlook of its market and financial expectations for fiscal 2014, saying it believes improving end markets will enable the Company to modestly grow revenues in the upcoming year. Additionally, the Company said it expects first quarter fiscal 2014 earnings per diluted share to increase by approximately 30% (35% adjusting for the impact of the HomeLink® product line divestiture). The Company will provide further detailed guidance at an analyst meeting on December 18, 2013, which will be accessible to the public in a manner that the Company will disclose in advance.
An announcement regarding the potential sale of the remaining Automotive Experience Electronics business is expected to be made by the end of the calendar year. Additionally, on October 29, 2013, the Company announced its intention to explore strategic options to enhance the position and financial capacity of its Automotive Experience Interiors business as a part of the Company's previously stated intention to build its multi-industry business portfolio.
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FISCAL YEAR 2013 COMPARED TO FISCAL YEAR 2012
Net Sales
Year Ended September 30, | ||||||||||
(in millions) | 2013 | 2012 | Change | |||||||
Net sales | $ | 42,730 | $ | 41,955 | 2 | % | ||||
The increase in consolidated net sales was due to higher sales in the Automotive Experience business ($596 million) and Power Solutions business ($459 million), partially offset by the unfavorable impact of foreign currency translation ($245 million) and lower sales in the Building Efficiency business ($35 million). Excluding the unfavorable impact of foreign currency translation, consolidated net sales increased 2% as compared to the prior year. The favorable impacts of higher Automotive Experience volumes in North America and Europe, higher global battery shipments and improved pricing in the Power Solutions business, and improved market conditions in the North America residential market were partially offset by softness in global building demand. Refer to the segment analysis below within Item 7 for a discussion of net sales by segment.
Cost of Sales / Gross Profit
Year Ended September 30, | ||||||||||
(in millions) | 2013 | 2012 | Change | |||||||
Cost of sales | $ | 35,952 | $ | 35,807 | 0 | % | ||||
Gross profit | 6,778 | 6,148 | 10 | % | ||||||
% of sales | 15.9 | % | 14.7 | % | ||||||
The increase in total cost of sales year over year corresponds to the sales growth noted above, with gross profit as a percentage of sales increasing by 120 basis points. Gross profit in the Automotive Experience business was favorably impacted by higher volumes and lower purchasing costs, partially offset by higher operating costs, and net unfavorable commercial settlements and pricing. The Power Solutions business experienced favorable pricing and product mix, higher volumes and increased benefits of vertical integration including the incremental contribution of the Company's battery recycling facility. Gross profit in the Building Efficiency business experienced favorable margin rates, and benefited year over year from improved labor utilization and pricing initiatives. Foreign currency translation had a favorable impact on cost of sales of approximately $212 million. Net mark-to-market adjustments on pension and postretirement plans had a net favorable year over year impact on cost of sales of $217 million ($184 million gain in fiscal 2013 compared to a $33 million charge in fiscal 2012) primarily due to an increase in year over year discount rates and favorable asset return experience, partially offset by assumption changes for certain non-U.S. plans. Refer to the segment analysis below within Item 7 for a discussion of segment income by segment.
Selling, General and Administrative Expenses
Year Ended September 30, | ||||||||||
(in millions) | 2013 | 2012 | Change | |||||||
Selling, general and administrative expenses | $ | 3,965 | $ | 4,478 | -11 | % | ||||
% of sales | 9.3 | % | 10.7 | % | ||||||
Selling, general and administrative expenses (SG&A) decreased by $513 million year over year, and SG&A as a percentage of sales decreased by 140 basis points. The favorable impact of net mark-to-market adjustments on pension and postretirement plans in SG&A increased year over year by $635 million ($221 million gain in fiscal 2013 compared to a $414 million charge in fiscal 2012) primarily due to an increase in year over year discount rates and favorable asset return experience, partially offset by assumption changes for certain non-U.S. plans. In addition, a pension settlement gain recorded in the fourth quarter of fiscal 2013 related to a lump-sum buyout of deferred vested participants in the U.S. pension plan had a favorable impact on SG&A of $69 million. Power Solutions business SG&A decreased primarily due to favorable legal settlements and a prior year impairment of an equity investment, partially offset by higher employee related expenses. Automotive Experience business SG&A increased primarily due to higher engineering and employee related expenses. Building Efficiency business SG&A increased primarily due to higher employee related expenses, partially offset by cost reduction programs and a current year pension curtailment gain
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resulting from a lost Global Workplace Solutions contract. Foreign currency translation had a favorable impact on SG&A of $17 million. Refer to the segment analysis below within Item 7 for a discussion of segment income by segment.
Gain on Business Divestitures - Net
Year Ended September 30, | |||||||||
(in millions) | 2013 | 2012 | Change | ||||||
Gain on business divestitures - net | $ | 483 | $ | 40 | * | ||||
* Measure not meaningful
The increase in the gains on business divestitures net of transaction costs was due to a current year gain on divestiture of the HomeLink® product line in the Automotive Experience Electronics segment ($476 million) and a current year gain on divestiture in the Automotive Experience Seating segment ($29 million), partially offset by prior year gains on business divestitures in the Building Efficiency business ($40 million) and a current year loss on divestiture in the Building Efficiency Other segment ($22 million).
Refer to Note 2, “Acquisitions and Divestitures,” of the notes to consolidated financial statements for further disclosure related to the Company’s business divestitures.
Restructuring and Impairment Costs
Year Ended September 30, | |||||||||
(in millions) | 2013 | 2012 | Change | ||||||
Restructuring and impairment costs | $ | 985 | $ | 297 | * | ||||
* Measure not meaningful
To better align its resources with its growth strategies and reduce the cost structure of its global operations to address the softness in certain underlying markets, the Company committed to a significant restructuring plan in fiscal 2012 and recorded $297 million of significant restructuring and impairment costs, of which $52 million was recorded in the third quarter and $245 million in the fourth quarter of fiscal 2012. As a continuation of its restructuring plan announced in fiscal 2012, the Company recorded $985 million of significant restructuring and impairment costs in fiscal 2013, of which $84 million was recorded in the second quarter, $143 million in the third quarter and $758 million in the fourth quarter of fiscal 2013. The restructuring actions related to cost reduction initiatives in the Company’s Automotive Experience, Building Efficiency and Power Solutions businesses and included workforce reductions, plant closures, and asset and goodwill impairments. The restructuring actions are expected to be substantially complete by the end of fiscal 2014.
Refer to Note 16, “Significant Restructuring and Impairment Costs,” of the notes to consolidated financial statements for further disclosure related to the Company’s restructuring plans.
Net Financing Charges
Year Ended September 30, | ||||||||||
(in millions) | 2013 | 2012 | Change | |||||||
Net financing charges | $ | 248 | $ | 233 | 6 | % | ||||
The increase in net financing charges was primarily due to higher interest expense as a result of higher debt levels during fiscal 2013 as compared to the prior year.
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Equity Income
Year Ended September 30, | ||||||||||
(in millions) | 2013 | 2012 | Change | |||||||
Equity income | $ | 402 | $ | 340 | 18 | % | ||||
The increase in equity income was primarily due to gains on acquisitions of partially-owned affiliates in the Automotive Experience business ($106 million), partially offset by a prior year redemption of a warrant for an existing partially-owned affiliate in the Power Solutions business ($25 million), a prior year equity interest gain in the Automotive Experience business ($15 million) and a prior year equity interest gain on acquisition of a partially-owned affiliate in the Power Solutions business ($9 million). Refer to the segment analysis below within Item 7 for a discussion of segment income by segment.
Provision for Income Taxes
Year Ended September 30, | |||||||||
(in millions) | 2013 | 2012 | Change | ||||||
Provision for income taxes | $ | 1,168 | $ | 209 | * | ||||
* Measure not meaningful
The effective rate is above the U.S. statutory rate for fiscal 2013 primarily due to the tax consequences of the sale of the HomeLink® product line, significant restructuring and impairment costs, the change in our assertion over reinvestment of foreign undistributed earnings primarily related to the Electronics business, and valuation allowance and uncertain tax position adjustments, partially offset by favorable tax audit resolutions, the benefits of continuing global tax planning initiatives and income in certain non-U.S. jurisdictions with a tax rate lower than the U.S. statutory tax rate. The effective rate is below the U.S. statutory rate for fiscal 2012 primarily due to continuing global tax planning initiatives and income in certain non-U.S. jurisdictions with a rate of tax lower than the U.S. statutory tax rate. Refer to Note 18, “Income Taxes,” of the notes to consolidated financial statements for further details.
Valuation Allowances
The Company reviews the realizability of its deferred tax asset valuation allowances 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.
In the fourth quarter of fiscal 2013, the Company performed an analysis related to the realizability of its worldwide deferred tax assets. As a result, and after considering tax planning initiatives and other positive and negative evidence, the Company determined that it was more likely than not that deferred tax assets within Germany and Poland would not be realized. The Company also determined that it was more likely than not that the deferred tax assets within two French Power Solutions entities would be realized. Therefore, the Company recorded $145 million of net valuation allowances as income tax expense in the three month period ended September 30, 2013.
In the second quarter of fiscal 2013, the Company determined that it was more likely than not that a portion of the deferred tax assets within Brazil and Germany would not be realized. Therefore, the Company recorded $94 million of valuation allowances as income tax expense.
In fiscal 2012, the Company recorded an overall increase to its valuation allowances of $47 million primarily due to a discrete period income tax adjustment in the fourth quarter. In the fourth quarter of fiscal 2012, the Company performed an analysis related to the realizability of its worldwide deferred tax assets. As a result, and after considering tax planning initiatives and other positive and negative evidence, the Company determined that it was more likely than not that deferred tax assets within Power Solutions in China would not be realized. Therefore, the Company recorded a $35 million valuation allowance as income tax expense in the three month period ended September 30, 2012.
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Uncertain Tax Positions
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.
In the third quarter of fiscal 2013, tax audit resolutions resulted in a net $79 million benefit to income tax expense.
As a result of foreign law changes during the second quarter of fiscal 2013, the Company increased its total reserve for uncertain tax positions, resulting in income tax expense of $17 million.
As a result of certain events related to prior tax planning initiatives, during the third quarter of fiscal 2012, the Company reduced the reserve for uncertain tax positions by $22 million, including $13 million of interest and penalties, resulting in a benefit to income tax expense.
The Company’s federal income tax returns and certain non-U.S. income tax returns for various fiscal years remain under various stages of audit by the Internal Revenue Service and respective non-U.S. tax authorities. Although the outcome of tax audits is always uncertain, management believes that it has appropriate support for the positions taken on its tax returns and that its annual tax provisions included amounts sufficient to pay assessments, if any, which may be proposed by the taxing authorities. At September 30, 2013, the Company had recorded a liability for its best estimate of the probable loss on certain of its tax positions, the majority of which is included in other noncurrent liabilities in the consolidated statements of financial position. Nonetheless, the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year.
The Company expects that certain tax examinations, appellate proceedings and/or tax litigation will conclude within the next twelve months, the net impact of which is not expected to be significant to the Company's consolidated financial statements.
Other Tax Matters
In the fourth quarter of fiscal 2013, the Company disposed of the HomeLink® product line and certain businesses, which resulted in $59 million of incremental tax expense above the statutory rate on the net gain.
In the fourth quarter of fiscal 2013, the Company provided income tax expense on the foreign undistributed earnings of the non-U.S. subsidiaries primarily related to the Electronics business, which resulted in $210 million of incremental tax expense.
During fiscal 2013, the Company incurred significant charges for restructuring and impairment costs. A substantial portion of these charges cannot be benefited for tax purposes due to our current tax position in these jurisdictions and the underlying tax basis in the impaired assets, thus causing a $235 million incremental tax expense.
In the third quarter of fiscal 2013, the Company resolved certain Mexican tax issues, which resulted in a $61 million benefit to income tax expense.
Impacts of Tax Legislation and Change in Statutory Tax Rates
As a result of foreign law changes during the second quarter of fiscal 2013, the Company increased its total reserve for uncertain tax positions, resulting in income tax expense of $17 million.
The "look-through rule," under subpart F of the U.S. Internal Revenue Code, expired for the Company on September 30, 2012. The "look-through rule" had provided an exception to the U.S. taxation of certain income generated by foreign subsidiaries. The rule was extended in January 2013 retroactive to the beginning of the Company's 2013 fiscal year.
During the fiscal year ended September 30, 2012, tax legislation was adopted in Japan which reduced its statutory income tax rate by 5%. Also, tax legislation was adopted in various jurisdictions to limit the annual utilization of tax losses that are carried forward. None of these changes had a material impact on the Company’s consolidated financial condition, results of operations or cash flows.
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Income Attributable to Noncontrolling Interests
Year Ended September 30, | ||||||||||
(in millions) | 2013 | 2012 | Change | |||||||
Income attributable to noncontrolling interests | $ | 119 | $ | 127 | -6 | % | ||||
The decrease in income attributable to noncontrolling interests was primarily due to the effects of an increase in the Company's ownership percentage in an Automotive Experience partially-owned affiliate.
Net Income Attributable to Johnson Controls, Inc.
Year Ended September 30, | ||||||||||
(in millions) | 2013 | 2012 | Change | |||||||
Net income attributable to Johnson Controls, Inc. | $ | 1,178 | $ | 1,184 | -1 | % | ||||
The decrease in net income attributable to Johnson Controls, Inc. was primarily due to higher restructuring and impairment costs, higher net financing charges, an increase in the provision for income taxes and the unfavorable impact of foreign currency translation, partially offset by higher gross profit, lower selling, general and administrative expenses, incremental gains on business divestitures net of transaction costs, higher equity income and lower income attributable to noncontrolling interests. Fiscal 2013 diluted earnings per share was $1.71 compared to prior year’s diluted earnings per share of $1.72.
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, significant restructuring and impairment costs, and net mark-to-market adjustments on pension and postretirement plans.
Building Efficiency
Net Sales for the Year Ended September 30, | Segment Income for the Year Ended September 30, | ||||||||||||||||||||
(in millions) | 2013 | 2012 | Change | 2013 | 2012 | Change | |||||||||||||||
North America Systems | $ | 2,362 | $ | 2,389 | -1 | % | $ | 279 | $ | 286 | -2 | % | |||||||||
North America Service | 2,130 | 2,145 | -1 | % | 228 | 164 | 39 | % | |||||||||||||
Global Workplace Solutions | 4,265 | 4,294 | -1 | % | 114 | 52 | * | ||||||||||||||
Asia | 2,022 | 1,987 | 2 | % | 278 | 267 | 4 | % | |||||||||||||
Other | 3,812 | 3,900 | -2 | % | 89 | 141 | -37 | % | |||||||||||||
$ | 14,591 | $ | 14,715 | -1 | % | $ | 988 | $ | 910 | 9 | % | ||||||||||
* Measure not meaningful
Net Sales:
• | The decrease in North America Systems was due to lower volumes of equipment and controls systems in the commercial construction and replacement markets ($25 million), and the unfavorable impact of foreign currency translation ($2 million). |
• | The decrease in North America Service was due to a reduction in truck-based volumes ($46 million) and the unfavorable impact of foreign currency translation ($1 million), partially offset by higher energy solutions volumes ($32 million). |
• | The decrease in Global Workplace Solutions was due to a net decrease in services to new and existing customers ($109 million) and the unfavorable impact of foreign currency translation ($26 million), partially offset by incremental sales from a business acquisition ($106 million). |
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• | The increase in Asia was due to higher volumes of equipment and controls ($47 million), and higher service volumes ($30 million), partially offset by the unfavorable impact of foreign currency translation ($42 million). |
• | The decrease in Other was due to prior year divestitures ($67 million), lower volumes in the Middle East ($64 million) and Europe ($54 million), and the unfavorable impact of foreign currency translation ($18 million), partially offset by higher volumes in unitary products ($66 million), Latin America ($23 million) and other businesses ($26 million). |
Segment Income:
• | The decrease in North America Systems was due to higher selling, general and administrative expenses ($33 million) and lower volumes ($8 million), partially offset by favorable margin rates ($28 million) and a pension settlement gain ($6 million). |
• | The increase in North America Service was due to favorable mix and margin rates ($59 million), lower selling, general and administrative expenses ($9 million), a pension settlement gain ($6 million) and a prior year loss on business divestitures ($3 million), partially offset by lower volumes ($13 million). |
• | The increase in Global Workplace Solutions was due to favorable margin rates ($47 million), a pension curtailment gain resulting from a lost contract net of other contract costs ($24 million), a pension settlement gain ($14 million), incremental operating income from a business acquisition ($3 million), higher equity income ($1 million) and the favorable impact of foreign currency translation ($1 million), partially offset by lower volumes ($14 million), and higher selling, general and administrative expenses ($14 million). |
• | The increase in Asia was due to favorable margin rates ($32 million) and higher volumes ($19 million), partially offset by higher selling, general and administrative expenses ($34 million), the unfavorable impact of foreign currency translation ($5 million) and lower equity income ($1 million). |
• | The decrease in Other was due to prior year gains on business divestitures net of transaction costs ($43 million), a current year loss on business divestiture including transaction costs ($22 million), higher selling, general and administrative expenses ($21 million), lower operating income due to prior year divestitures ($11 million), contract related charges ($7 million) and the unfavorable impact of foreign currency translation ($2 million), partially offset by favorable margin rates ($49 million), higher equity income ($3 million) and a pension settlement gain ($2 million). |
Automotive Experience
Net Sales for the Year Ended September 30, | Segment Income (Loss) for the Year Ended September 30, | ||||||||||||||||||||
(in millions) | 2013 | 2012 | Change | 2013 | 2012 | Change | |||||||||||||||
Seating | $ | 16,285 | $ | 15,854 | 3 | % | $ | 723 | $ | 694 | 4 | % | |||||||||
Interiors | 4,176 | 4,129 | 1 | % | (9 | ) | (20 | ) | 55 | % | |||||||||||
Electronics | 1,320 | 1,351 | -2 | % | 585 | 129 | * | ||||||||||||||
$ | 21,781 | $ | 21,334 | 2 | % | $ | 1,299 | $ | 803 | 62 | % | ||||||||||
* Measure not meaningful
Net Sales:
• | The increase in Seating was due to higher volumes to the Company's major OEM customers ($407 million), incremental sales due to business acquisitions ($89 million), favorable sales mix ($75 million), and the prior year negative impact of the flooding in Thailand and related events ($25 million), partially offset by the unfavorable impact of foreign currency translation ($147 million) and lower volumes due to a business divestiture ($18 million). |
• | The increase in Interiors was due to higher volumes to the Company's major OEM customers ($38 million) and the favorable impact of foreign currency translation ($9 million). |
• | The decrease in Electronics was due to net unfavorable pricing and commercial settlements ($26 million) and the unfavorable impact of foreign currency translation ($11 million), partially offset by higher volumes to the Company's major OEM customers ($6 million). |
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Segment Income:
• | The increase in Seating was due to gains on acquisitions of partially-owned affiliates ($106 million), higher volumes ($76 million), lower purchasing costs ($54 million), a gain on business divestiture ($29 million), a pension settlement gain ($21 million), the prior year negative impact of the flooding in Thailand and related events ($6 million), and incremental operating income due to a business acquisition ($4 million), partially offset by net unfavorable pricing and commercial settlements ($63 million), higher selling, general and administrative expenses ($59 million), unfavorable mix ($42 million), higher operating costs ($29 million), distressed supplier costs ($21 million), higher engineering and launch costs ($17 million), lower equity income including a prior year equity interest gain ($14 million), litigation charges ($10 million), the unfavorable impact of foreign currency translation ($7 million) and lower operating income due to a business divestiture ($5 million). |
• | The increase in Interiors was due to net favorable pricing and commercial settlements ($49 million), lower operating costs ($16 million), higher volumes ($7 million), favorable mix ($6 million), a pension settlement gain ($4 million) and the favorable impact of foreign currency translation ($2 million), partially offset by higher engineering and launch costs ($28 million), higher selling, general and administrative expenses ($25 million), higher purchasing costs ($17 million), distressed supplier costs ($2 million) and lower equity income ($1 million). |
• | The increase in Electronics was due to a gain on the divestiture of the HomeLink® product line net of transaction costs ($476 million), lower purchasing costs ($32 million), higher volumes ($2 million) and higher equity income ($1 million), partially offset by net unfavorable pricing and commercial settlements ($23 million), higher engineering costs ($17 million), higher selling, general and administrative expenses ($6 million), higher operating costs ($5 million) and the unfavorable impact of foreign currency translation ($4 million). |
Power Solutions
Year Ended September 30, | ||||||||||
(in millions) | 2013 | 2012 | Change | |||||||
Net sales | $ | 6,358 | $ | 5,906 | 8 | % | ||||
Segment income | 1,006 | 784 | 28 | % | ||||||
• | Net sales increased due to favorable pricing and product mix ($223 million), higher sales volumes ($172 million) and the impact of higher lead costs on pricing ($64 million), partially offset by the unfavorable impact of foreign currency translation ($7 million). |
• | Segment income increased due to favorable product mix including lead acquisition costs and battery cores ($187 million), higher volumes ($29 million), favorable legal settlements ($20 million), a pension settlement gain ($16 million), a prior year impairment of an equity investment ($14 million), change in asset retirement obligations ($7 million) and higher equity income ($2 million), partially offset by a prior year gain on redemption of a warrant for an existing partially-owned affiliate ($25 million), higher selling, general and administrative expenses ($14 million), a prior year gain on acquisition of a partially-owned affiliate ($9 million), higher net operating and transportation costs ($4 million), and the unfavorable impact of foreign currency translation ($1 million). |
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FISCAL YEAR 2012 COMPARED TO FISCAL YEAR 2011
Net Sales
Year Ended September 30, | ||||||||||
(in millions) | 2012 | 2011 | Change | |||||||
Net sales | $ | 41,955 | $ | 40,833 | 3 | % | ||||
The increase in consolidated net sales was due to higher sales in the Automotive Experience business ($2.0 billion), Power Solutions business ($224 million) and Building Efficiency business ($95 million), partially offset by the unfavorable impact of foreign currency translation ($1.2 billion). Excluding the unfavorable impact of foreign currency translation, consolidated net sales increased 6% as compared to the prior year. The favorable impacts of increased automotive industry production in North America, strong automotive and buildings demand in China, and incremental sales from acquisitions were partially offset by the negative impacts of lower automotive industry production in Europe, weak Building Efficiency markets and mild weather conditions on automotive battery aftermarket demand. Refer to the segment analysis below within Item 7 for a discussion of net sales by segment.
Cost of Sales / Gross Profit
Year Ended September 30, | ||||||||||
(in millions) | 2012 | 2011 | Change | |||||||
Cost of sales | $ | 35,807 | $ | 34,774 | 3 | % | ||||
Gross profit | 6,148 | 6,059 | 1 | % | ||||||
% of sales | 14.7 | % | 14.8 | % | ||||||
The increase in total cost of sales year over year corresponds to the sales growth noted above, with gross profit percentage decreasing slightly. Gross profit in the Automotive Experience business was favorably impacted by lower purchasing costs offset by higher operating costs associated with performance at metals facilities and net unfavorable commercial settlements and pricing. The Power Solutions business experienced favorable pricing and product mix offset by higher operating, lead, battery core and transportation costs. Gross profit in the Building Efficiency business benefited year over year from improved labor utilization and pricing initiatives, offset by overall unfavorable gross margin rates. Foreign currency translation had a favorable impact on cost of sales of approximately $1.1 billion. Net mark-to-market adjustments on pension and postretirement plans had a net favorable year over year impact on cost of sales of $87 million ($33 million charge in fiscal 2012 compared to $120 million charge in fiscal 2011) primarily due to assumption changes for certain non-U.S. plans partially offset by a decline in year over year discount rates. Refer to the segment analysis below within Item 7 for a discussion of segment income by segment.
Selling, General and Administrative Expenses
Year Ended September 30, | ||||||||||
(in millions) | 2012 | 2011 | Change | |||||||
Selling, general and administrative expenses | $ | 4,478 | $ | 4,393 | 2 | % | ||||
% of sales | 10.7 | % | 10.8 | % | ||||||
Selling, general and administrative expenses (SG&A) increased by $85 million year over year, but decreased slightly as a percentage of sales. Automotive Experience business SG&A increased primarily due to the incremental SG&A of acquired businesses, partially offset by non-recurring fiscal 2011 costs related to business acquisitions. Power Solutions business SG&A increased primarily due to higher employee related costs and incremental SG&A of acquired businesses. Building Efficiency business SG&A decreased primarily due to cost reduction initiatives and fiscal 2011 restructuring costs. The unfavorable impact of net mark-to-market adjustments on pension and postretirement plans in SG&A increased year over year by $150 million ($414 million charge in fiscal 2012 compared to $264 million charge in fiscal 2011) primarily due to a significant decline in year over year discount rates. Foreign currency translation had a favorable impact on SG&A of $101 million. Refer to the segment analysis below within Item 7 for a discussion of segment income by segment.
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Gain on Business Divestitures - Net
Year Ended September 30, | |||||||||
(in millions) | 2012 | 2011 | Change | ||||||
Gain on business divestitures - net | $ | 40 | $ | — | * | ||||
* Measure not meaningful
The increase in the gains on business divestitures net of transaction costs was due to fiscal 2012 divestitures in the Building Efficiency business. There were no business divestitures in fiscal 2011.
Refer to Note 2, “Acquisitions and Divestitures,” of the notes to consolidated financial statements for further disclosure related to the Company’s business divestitures.
Restructuring and Impairment Costs
Year Ended September 30, | |||||||||
(in millions) | 2012 | 2011 | Change | ||||||
Restructuring and impairment costs | $ | 297 | $ | — | * | ||||
* Measure not meaningful
To better align its resources with its growth strategies and reduce the cost structure of its global operations to address the softness in certain underlying markets, the Company committed to a significant restructuring plan in fiscal 2012 and recorded $297 million of significant restructuring and impairment costs, of which $52 million was recorded in the third quarter and $245 million in the fourth quarter of fiscal 2012. The restructuring charge related to cost reduction initiatives in the Company's Automotive Experience, Building Efficiency and Power Solutions businesses and included workforce reductions and plant closures. The restructuring actions are expected to be substantially complete by the end of fiscal 2014.
Refer to Note 16, “Significant Restructuring and Impairment Costs,” of the notes to consolidated financial statements for further disclosure related to the Company's restructuring plans.
Net Financing Charges
Year Ended September 30, | ||||||||||
(in millions) | 2012 | 2011 | Change | |||||||
Net financing charges | $ | 233 | $ | 174 | 34 | % | ||||
The increase in net financing charges was primarily due to higher debt levels in fiscal 2012 as compared to fiscal 2011.
Equity Income
Year Ended September 30, | ||||||||||
(in millions) | 2012 | 2011 | Change | |||||||
Equity income | $ | 340 | $ | 298 | 14 | % | ||||
The increase in equity income was primarily due to a gain on redemption of a warrant for an existing partially-owned affiliate and a gain on a fiscal 2012 acquisition of a partially-owned affiliate in the Power Solutions business, partially offset by a gain on a fiscal 2011 acquisition of a partially-owned affiliate net of acquisition costs and related purchase accounting adjustments and a partially-owned equity affiliate's restatement of prior period income in the Power Solutions business. The remaining increase in equity income was primarily due to higher earnings at certain Building Efficiency partially-owned affiliates. Refer to the segment analysis below within Item 7 for a discussion of segment income by segment.
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Provision for Income Taxes
Year Ended September 30, | ||||||||||
(in millions) | 2012 | 2011 | Change | |||||||
Provision for income taxes | $ | 209 | $ | 258 | -19 | % | ||||
* Measure not meaningful
The effective rate is below the U.S. statutory rate primarily due to continuing global tax planning initiatives and income in certain non-U.S. jurisdictions with a rate of tax lower than the U.S. statutory tax rate. Refer to Note 18, “Income Taxes,” of the notes to consolidated financial statements for further details.
Valuation Allowances
The Company reviews the realizability of its deferred tax asset valuation allowances 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.
In fiscal 2012, the Company recorded an overall increase to its valuation allowances of $47 million primarily due to a discrete period income tax adjustment in the fourth quarter. In the fourth quarter of fiscal 2012, the Company performed an analysis related to the realizability of its worldwide deferred tax assets. As a result, and after considering tax planning initiatives and other positive and negative evidence, the Company determined that it was more likely than not that deferred tax assets within Power Solutions in China would not be realized. Therefore, the Company recorded a $35 million valuation allowance as income tax expense in the three month period ended September 30, 2012.
In fiscal 2011, the Company recorded a decrease to its valuation allowances primarily due to a $30 million discrete period income tax adjustment in the fourth quarter. In the fourth quarter of fiscal 2011, the Company performed an analysis related to the realizability of its worldwide deferred tax assets. As a result, and after considering tax planning initiatives and other positive and negative evidence, the Company determined that it was more likely than not that the deferred tax assets primarily within Denmark, Italy, Automotive Experience in Korea and Automotive Experience in the United Kingdom would be realized. Therefore, the Company released a net $30 million of valuation allowances as a benefit to income tax expense in the three month period ended September 30, 2011.
Uncertain Tax Positions
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.
As a result of certain events related to prior tax planning initiatives, during the third quarter of fiscal 2012, the Company reduced the reserve for uncertain tax positions by $22 million, including $13 million of interest and penalties, resulting in a benefit to income tax expense.
The Company's federal income tax returns and certain non-U.S. income tax returns for various fiscal years remain under various stages of audit by the Internal Revenue Service and respective non-U.S. tax authorities. Although the outcome of tax audits is always uncertain, management believes that it has appropriate support for the positions taken on its tax returns and that its annual tax provisions included amounts sufficient to pay assessments, if any, which may be proposed by the taxing authorities. At September 30, 2012, the Company had recorded a liability for its best estimate of the probable loss on certain of its tax positions, the majority of which is included in other noncurrent liabilities in the consolidated statements of financial position. Nonetheless, the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year.
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Impacts of Tax Legislation and Change in Statutory Tax Rates
The look-through rule, under subpart F of the U.S. Internal Revenue Code, expired for the Company on September 30, 2012. The look-through rule had provided an exception to the U.S. taxation of certain income generated by foreign subsidiaries. The rule was extended in January 2013 retroactive to the beginning of the Company's 2013 fiscal year.
During the fiscal year ended September 30, 2012, tax legislation was adopted in Japan which reduced its statutory income tax rate by 5%. Also, tax legislation was adopted in various jurisdictions to limit the annual utilization of tax losses that are carried forward. None of these changes had a material impact on the Company's consolidated financial condition, results of operations or cash flows.
Income Attributable to Noncontrolling Interests
Year Ended September 30, | ||||||||||
(in millions) | 2012 | 2011 | Change | |||||||
Income attributable to noncontrolling interests | $ | 127 | $ | 117 | 9 | % | ||||
The increase in income attributable to noncontrolling interests was primarily due to higher earnings at certain Power Solutions and Building Efficiency partially-owned affiliates, partially offset by the effects of an increase in the Company's ownership percentage in an Automotive Experience partially-owned affiliate.
Net Income Attributable to Johnson Controls, Inc.
Year Ended September 30, | ||||||||||
(in millions) | 2012 | 2011 | Change | |||||||
Net income attributable to Johnson Controls, Inc. | $ | 1,184 | $ | 1,415 | -16 | % | ||||
The decrease in net income attributable to Johnson Controls, Inc. was primarily due to higher selling, general and administrative expenses, significant restructuring and impairment costs, net financing charges and income attributable to noncontrolling interests, and the unfavorable impact of foreign currency translation, partially offset by higher sales and equity income, and a decrease in the provision for income taxes. Fiscal 2012 diluted earnings per share was $1.72 compared to fiscal 2011 diluted earnings per share of $2.06.
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, significant restructuring and impairment costs, and net mark-to-market adjustments on pension and postretirement plans.
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Building Efficiency
Net Sales for the Year Ended September 30, | Segment Income for the Year Ended September 30, | ||||||||||||||||||||
(in millions) | 2012 | 2011 | Change | 2012 | 2011 | Change | |||||||||||||||
North America Systems | $ | 2,389 | $ | 2,343 | 2 | % | $ | 286 | $ | 247 | 16 | % | |||||||||
North America Service | 2,145 | 2,305 | -7 | % | 164 | 121 | 36 | % | |||||||||||||
Global Workplace Solutions | 4,294 | 4,153 | 3 | % | 52 | 22 | * | ||||||||||||||
Asia | 1,987 | 1,840 | 8 | % | 267 | 251 | 6 | % | |||||||||||||
Other | 3,900 | 4,252 | -8 | % | 141 | 105 | 34 | % | |||||||||||||
$ | 14,715 | $ | 14,893 | -1 | % | $ | 910 | $ | 746 | 22 | % | ||||||||||
* Measure not meaningful
Net Sales:
• | The increase in North America Systems was primarily due to higher volumes of equipment and controls systems in the commercial construction and replacement markets ($50 million), partially offset by the unfavorable impact of foreign currency translation ($4 million). |
• | The decrease in North America Service was primarily due to a reduction in truck-based volumes ($130 million) and energy solutions volumes ($50 million), and the unfavorable impact of foreign currency translation ($4 million), partially offset by the incremental sales from a fiscal 2011 business acquisition ($24 million). |
• | The increase in Global Workplace Solutions was primarily due to a net increase in services to new and existing customers ($264 million), partially offset by the unfavorable impact of foreign currency translation ($123 million). |
• | The increase in Asia was primarily due to higher service volumes including the fiscal 2011 negative impact of the Japan earthquake and related events ($84 million), higher volumes of equipment and controls systems ($39 million), and the favorable impact of foreign currency translation ($24 million). |
• | The decrease in Other was primarily due to the unfavorable impact of foreign currency translation ($166 million), lower volumes in Latin America ($93 million), the Middle East ($41 million) and Europe ($32 million), and lower volumes due to fiscal 2012 divestitures ($55 million), partially offset by higher volumes in other business areas ($33 million) and unitary products ($2 million). |
Segment Income:
• | The increase in North America Systems was primarily due to lower selling, general and administrative expenses ($24 million) and higher volumes ($15 million). |
• | The increase in North America Service was primarily due to lower selling, general and administrative expenses ($40 million) and favorable margin rates ($38 million), partially offset by lower volumes ($31 million), loss on a business divestiture ($3 million) and lower equity income ($1 million). |
• | The increase in Global Workplace Solutions was primarily due to higher volumes ($15 million), lower selling, general and administrative expenses ($14 million) and favorable margin rates ($4 million), partially offset by the unfavorable impact of foreign currency translation ($3 million). |
• | The increase in Asia was primarily due to higher volumes ($30 million) and the favorable impact of foreign currency translation ($6 million), partially offset by higher selling, general and administrative expenses ($18 million) and unfavorable margin rates ($2 million). |
• | The increase in Other was primarily due to gains on business divestitures net of transaction costs ($42 million), fiscal 2011 restructuring costs ($35 million), fiscal 2011 non-recurring charges related to South America indirect taxes ($24 million), lower selling, general and administrative expenses ($14 million), fiscal 2011 business distribution costs ($11 million) and higher equity income ($6 million), partially offset by unfavorable margin rates ($51 million), lower volumes |
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($20 million), net fiscal 2011 warranty accrual adjustment due to favorable experience ($14 million), lower income due to fiscal 2012 divestitures ($10 million) and the unfavorable impact of foreign currency translation ($1 million).
Automotive Experience
Net Sales for the Year Ended September 30, | Segment Income (Loss) for the Year Ended September 30, | ||||||||||||||||||||
(in millions) | 2012 | 2011 | Change | 2012 | 2011 | Change | |||||||||||||||
Seating | $ | 15,854 | $ | 14,656 | 8 | % | $ | 694 | $ | 641 | 8 | % | |||||||||
Interiors | 4,129 | 4,119 | 0 | % | (20 | ) | (5 | ) | * | ||||||||||||
Electronics | 1,351 | 1,290 | 5 | % | 129 | 144 | -10 | % | |||||||||||||
$ | 21,334 | $ | 20,065 | 6 | % | $ | 803 | $ | 780 | 3 | % | ||||||||||
* Measure not meaningful
Net Sales:
• | The increase in Seating was primarily due to higher volumes to major OEM customers including the fiscal 2011 negative impact of the Japan earthquake and related events ($1.2 billion), and incremental sales due to business acquisitions ($802 million), partially offset by the unfavorable impact of foreign currency translation ($584 million), net unfavorable pricing and commercial settlements ($155 million), and the negative impact of the flooding in Thailand and related events ($25 million). |
• | The increase in Interiors was primarily due to higher volumes to major OEM customers including the fiscal 2011 negative impact of the Japan earthquake and related events ($147 million), partially offset by the unfavorable impact of foreign currency translation ($117 million) and net unfavorable pricing and commercial settlements ($20 million). |
• | The increase in Electronics was primarily due to higher volumes to major OEM customers including the fiscal 2011 negative impact of the Japan earthquake and related events ($73 million), and incremental sales due to a fiscal 2011 business acquisition ($66 million), partially offset by the unfavorable impact of foreign currency translation ($63 million) and net unfavorable pricing and commercial settlements ($15 million). |
Segment Income:
• | The increase in Seating was primarily due to higher volumes including the fiscal 2011 negative impact of the earthquake in Japan and related events ($246 million), lower purchasing costs ($78 million), fiscal 2011 costs related to business acquisitions ($64 million), incremental operating income of fiscal 2011 acquisitions ($59 million), lower engineering expenses ($13 million), higher equity income ($3 million) and the favorable impact of foreign currency translation ($2 million), partially offset by higher operating costs ($195 million), net unfavorable commercial settlements and pricing ($167 million), higher selling, general and administrative expenses ($44 million), and the negative impact of the flooding in Thailand and related events ($6 million). |
• | The decrease in Interiors was primarily due to higher operating costs ($35 million), and net unfavorable commercial settlements and pricing ($31 million), partially offset by lower purchasing costs ($32 million), lower selling, general and administrative expenses ($9 million), higher equity income ($9 million) and lower engineering expenses ($1 million). |
• | The decrease in Electronics was primarily due to net unfavorable commercial settlements and pricing ($15 million), higher operating costs ($13 million), higher selling, general and administrative expenses ($11 million), and lower equity income ($11 million), partially offset by higher volumes including the fiscal 2011 negative impact of the earthquake in Japan and related events ($14 million), lower engineering expenses ($9 million), lower purchasing costs ($6 million), incremental operating income of a fiscal 2011 acquisition ($5 million) and the favorable impact of foreign currency translation ($1 million). |
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Power Solutions
Year Ended September 30, | ||||||||||
(in millions) | 2012 | 2011 | Change | |||||||
Net sales | $ | 5,906 | $ | 5,875 | 1 | % | ||||
Segment income | 784 | 822 | -5 | % | ||||||
• | Net sales increased primarily due to favorable pricing and product mix ($156 million), higher volumes including the prior year negative impact of the earthquake in Japan and related events ($144 million), and incremental sales due to business acquisitions ($38 million), partially offset by the unfavorable impact of foreign currency translation ($193 million) and impact of pass through pricing ($114 million). |
• | Segment income decreased primarily due to higher operating and transportation costs ($46 million); higher selling, general and administrative expenses ($43 million); a gain on a fiscal 2011 acquisition of a partially-owned affiliate net of acquisition costs and related purchase accounting adjustments and a partially-owned affiliate's restatement of prior period income ($37 million); the unfavorable impact of foreign currency translation ($21 million); an impairment of an equity investment ($14 million) and the unfavorable impact of business acquisitions ($11 million); partially offset by favorable pricing and product mix net of lead acquisition costs including battery cores ($46 million); a gain on redemption of a warrant for an existing partially-owned affiliate ($25 million); higher volumes including the fiscal 2011 negative impact of the earthquake in Japan and related events ($24 million); change in asset retirement obligations ($14 million); an insurance settlement ($12 million); a gain on a fiscal 2012 acquisition of a partially-owned affiliate ($9 million) and higher equity income ($4 million). |
GOODWILL, LONG-LIVED ASSETS AND OTHER INVESTMENTS
Goodwill at September 30, 2013 was $6.6 billion, $393 million lower than the prior year. The decrease was primarily due to the impairment in the Automotive Experience Interiors segment, as discussed below, and business divestitures in the Automotive Experience Electronics and Seating segments, partially offset by business acquisitions in the Automotive Experience Seating and Building Efficiency Global Workplace Solutions segments.
Goodwill reflects the cost of an acquisition in excess of the fair values assigned to identifiable net assets acquired. The Company reviews goodwill for impairment during the fourth fiscal quarter or more frequently if events or changes in circumstances indicate the asset might be impaired. The Company performs impairment reviews for its reporting units, which have been determined to be the Company’s reportable segments or one level below the reportable segments in certain instances, using a fair value method based on management’s judgments and assumptions or third party valuations. The fair value of a reporting unit refers to the price that would be received to sell the unit as a whole in an orderly transaction between market participants at the measurement date. In estimating the fair value, the Company uses multiples of earnings based on the average of historical, published multiples of earnings of comparable entities with similar operations and economic characteristics. In certain instances, the Company uses discounted cash flow analyses or estimated sales price to further support the fair value estimates. The inputs utilized in the analyses are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, “Fair Value Measurement.” The estimated fair value is then compared with the carrying amount of the reporting unit, including recorded goodwill. The Company is subject to financial statement risk to the extent that the carrying amount exceeds the estimated fair value. The impairment testing performed by the Company in the fourth quarter of fiscal year 2013 indicated that the estimated fair value of the Automotive Experience Interiors reporting unit did not exceed its corresponding carrying amount including recorded goodwill, and an impairment existed. No other reporting unit was determined to be at risk of failing step one of the goodwill impairment test as the impairment testing performed indicated that the estimated fair value of each reporting unit substantially exceeded its corresponding carrying amount including recorded goodwill at September 30, 2013. No impairments existed at September 30, 2012 and 2011.
Based on a combination of factors, including the recent operating results of the Automotive Experience Interiors business, restrictions on future capital and restructuring funding, and the Company's announced intention to explore strategic options related to this business, the Company's forecasted cash flow estimates used in the goodwill assessment were negatively impacted as of September 30, 2013. As a result, the Company concluded that the carrying value of the Interiors reporting unit exceeded its fair value as of September 30, 2013. The Company recorded a goodwill impairment charge of $430 million in the fourth quarter of fiscal 2013, which was determined by comparing the carrying value of the reporting unit's goodwill with the implied fair value of goodwill for the reporting unit. The assumptions included in the impairment test require judgment, and changes to these inputs could impact the results of the calculation. Other than management's internal projections of future cash flows, the primary assumptions used in the impairment test were the weighted-average cost of capital and long-term growth rates. Although the
39
Company's cash flow forecasts are based on assumptions that are considered reasonable by management and consistent with the plans and estimates management is using to operate the underlying business, there is significant judgment in determining the expected future cash flows attributable to the Interiors business. The impairment charge is a non-cash expense that was recorded within restructuring and impairment costs on the consolidated statement of income and did not adversely affect the Company's debt position, cash flow, liquidity or compliance with financial covenants.
Indefinite lived other intangible assets are also subject to at least annual impairment testing. Other intangible assets with definite lives continue to be amortized over their estimated useful lives and are subject to impairment testing if events or changes in circumstances indicate that the asset might be impaired. A considerable amount of management judgment and assumptions are required in performing the impairment tests. While the Company believes the judgments and assumptions used in the impairment tests are reasonable and no impairment existed at September 30, 2013, 2012 and 2011, different assumptions could change the estimated fair values and, therefore, impairment charges could be required, which could be material to the consolidated financial statements.
The Company reviews long-lived assets, including property, plant and equipment and other intangible assets with definite lives, 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 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.
In the second, third and fourth quarters of fiscal 2013, the Company concluded it had a triggering event requiring assessment of impairment for certain of its long-lived assets in conjunction with its restructuring actions announced in fiscal 2013. In addition, in the fourth quarter of fiscal 2013, the Company concluded that it had a triggering event requiring assessment of impairment for the long-lived assets held by the Automotive Experience Interiors segment due to the impairment of goodwill in the quarter. As a result, the Company reviewed the long-lived assets for impairment and recorded a $156 million impairment charge within restructuring and impairment costs on the consolidated statement of income, of which $13 million was recorded in the second quarter, $36 million in the third quarter and $107 million in the fourth quarter of fiscal 2013. Of the total impairment charge, $57 million related to the Automotive Experience Interiors segment, $40 million related to the Building Efficiency Other segment, $22 million related to the Automotive Experience Seating segment, $18 million related to the Power Solutions segment, $12 million related to corporate assets and $7 million related to various segments within the Building Efficiency business. Refer to Note 16, “Significant Restructuring and Impairment Costs,” of the notes to consolidated financial statements for additional information. The impairment was measured, depending on the asset, either under an income approach utilizing forecasted discounted cash flows or a market approach utilizing an appraisal to determine fair values of the impairment assets. These methods are consistent with the methods the Company employed in prior periods to value other long-lived assets. The inputs utilized in the analyses are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, "Fair Value Measurement."
In the third and fourth quarters of fiscal 2012, the Company concluded it had a triggering event requiring assessment of impairment for certain of its long-lived assets in conjunction with its restructuring actions announced in fiscal 2012. In addition, in the fourth quarter of fiscal 2012, the Company concluded it had a triggering event requiring assessment of impairment for certain of its long-lived assets due to volume declines in the European automotive markets. As a result, the Company reviewed the long-lived assets for impairment and recorded a $39 million impairment charge within restructuring and impairment costs on the consolidated statement of income, of which $3 million was recorded in the third quarter and $36 million in the fourth quarter of fiscal 2012. Of the total impairment charge, $14 million related to the Power Solutions segment, $11 million related to the Automotive Experience Interiors segment, $4 million related to the Building Efficiency Other segment and $10 million related to corporate assets. Refer to Note 16, “Significant Restructuring and Impairment Costs,” of the notes to consolidated financial statements for additional information. The impairment was measured, depending on the asset, either under an income approach utilizing forecasted discounted cash flows or a market approach utilizing an appraisal to determine fair values of the impairment assets. These methods are consistent with the methods the Company employed in prior periods to value other long-lived assets. The inputs utilized in the analyses are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, "Fair Value Measurement."
In the second quarter of fiscal 2012, the Company recorded a $14 million impairment charge related to an equity investment. Refer to Note 11, “Fair Value Measurements,” of the notes to consolidated financial statements for additional information.
Investments in partially-owned affiliates (“affiliates”) at September 30, 2013 were $1.0 billion, $76 million higher than the prior year. The increase was primarily due to positive earnings by affiliates in all businesses, primarily in the Automotive Experience
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and Power Solutions businesses, partially offset by dividends paid by affiliates and the acquisitions of the controlling interest in formerly unconsolidated Automotive Experience Seating affiliates.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital
September 30, 2013 | September 30, 2012 | |||||||||
(in millions) | Change | |||||||||
Current assets | $ | 13,698 | $ | 12,743 | ||||||
Current liabilities | (12,117 | ) | (10,855 | ) | ||||||
1,581 | 1,888 | -16 | % | |||||||
Less: Cash | 1,055 | 265 | ||||||||
Add: Short-term debt | 119 | 323 | ||||||||
Add: Current portion of long-term debt | 819 | 424 | ||||||||
Less: Assets held for sale | 804 | — | ||||||||
Add: Liabilities held for sale | 402 | — | ||||||||
Working capital | $ | 1,062 | $ | 2,370 | -55 | % | ||||
Accounts receivable | 7,206 | 7,308 | -1 | % | ||||||
Inventories | 2,325 | 2,343 | -1 | % | ||||||
Accounts payable | 6,318 | 6,114 | 3 | % | ||||||
• | The Company defines working capital as current assets less current liabilities, excluding cash, short-term debt, the current portion of long-term debt, and assets and liabilities held for sale. Management believes that this measure of working capital, which excludes financing-related items, provides a more useful measurement of the Company’s operating performance. |
• | The decrease in working capital at September 30, 2013 as compared to September 30, 2012 was primarily due to a decrease in other current assets related to income taxes, an increase in reserves due to restructuring activities, higher accounts payable due to timing of supplier payments and lower accounts receivable due to improved collections and timing of customer receipts. |
• | The Company’s days sales in accounts receivable at September 30, 2013 were 51, lower than 55 at the comparable period ended September 30, 2012. There has been no significant adverse change in the level of overdue receivables or changes in revenue recognition methods. |
• | The Company’s inventory turns for the year ended September 30, 2013 were slightly lower than the comparable period ended September 30, 2012 primarily due to higher inventory production to meet higher sales levels. |
• | Days in accounts payable at September 30, 2013 were 72, consistent with the comparable period ended September 30, 2012. |
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Cash Flows
Year Ended September 30, | |||||||
(in millions) | 2013 | 2012 | |||||
Cash provided by operating activities | $ | 2,686 | $ | 1,559 | |||
Cash used by investing activities | (580 | ) | (1,792 | ) | |||
Cash provided (used) by financing activities | (1,214 | ) | 207 | ||||
Capital expenditures | (1,377 | ) | (1,831 | ) | |||
• | The increase in cash provided by operating activities was primarily due to favorable changes in accrued liabilities, accrued income taxes, other assets and restructuring reserves; and lower pension and postretirement contributions; partially offset by unfavorable changes in inventories and accounts receivable. |
• | The decrease in cash used by investing activities was primarily due to cash received for business divestitures and lower capital expenditures, partially offset by higher cash paid for acquisitions of businesses. |
• | The increase in cash used by financing activities was primarily due to a prior year $1.1 billion bond issuance, higher repayments of debt and an increase in stock repurchases, partially offset by higher proceeds from the exercise of stock options. Refer to Note 9, “Debt and Financing Arrangements,” of the notes to consolidated financial statements for further discussion on debt issuances and debt levels. |
• | The decrease in capital expenditures in the current year is primarily related to capacity increases and vertical integration efforts in the prior year in the Power Solutions business, and a reduction in program spending for new customer launches in the Automotive Experience business. |
Capitalization
September 30, 2013 | September 30, 2012 | |||||||||
(in millions) | Change | |||||||||
Short-term debt | $ | 119 | $ | 323 | ||||||
Current portion of long-term debt | 819 | 424 | ||||||||
Long-term debt | 4,560 | 5,321 | ||||||||
Total debt | $ | 5,498 | $ | 6,068 | -9 | % | ||||
Shareholders’ equity attributable to Johnson Controls, Inc. | 12,314 | 11,625 | 6 | % | ||||||
Total capitalization | $ | 17,812 | $ | 17,693 | 1 | % | ||||
Total debt as a % of total capitalization | 31 | % | 34 | % | ||||||
• | The Company believes the percentage of total debt to total capitalization is useful to understanding the Company’s financial condition as it provides a review of the extent to which the Company relies on external debt financing for its funding and is a measure of risk to its shareholders. |
• | At September 30, 2013 and 2012, the Company had committed bilateral euro denominated credit facilities totaling 237 million euro. Additionally, at September 30, 2013 and 2012, the Company had committed bilateral U.S. dollar denominated revolving credit facilities totaling $185 million. Each of these facilities is scheduled to expire in fiscal 2014. There were no draws on any of the revolving credit facilities for the respective periods. |
• | In November 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 issues were used for general corporate purposes, including the retirement of short-term debt and contributions to the Company’s pension and postretirement plans. |
• | In December 2011, the Company entered into a five-year, 75 million euro, floating rate credit facility scheduled to mature in February 2017. The Company drew on the credit facility during the second quarter of fiscal 2012. Proceeds from the facility were used for general corporate purposes. |
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• | In March 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. |
• | In November 2012, the Company retired $100 million in principal amount, plus accrued interest of its 5.8% fixed rate notes that matured November 2012. The Company used cash to fund the payment. |
• | In November 2012, the Company entered into a five-year, 70 million euro, floating rate credit facility scheduled to mature in fiscal 2018. The Company drew on the credit facility during the quarter ended December 31, 2012. Proceeds from the facility were used for general corporate purposes. |
• | In August 2013, the Company made a partial repayment of 43 million euro, plus accrued interest, of its 100 million euro floating rate credit facility scheduled to mature in February 2017. The Company used cash to fund the payment. |
• | In August 2013, the Company replaced its $2.5 billion committed four-year credit facility, scheduled to mature in February 2015, with a $2.5 billion committed five-year credit facility scheduled to mature in August 2018. The facility is used to support the Company's outstanding commercial paper. There were no draws on the facility as of September 30, 2013. |
• | In September 2013, the Company retired $300 million in principal amount, plus accrued interest, of its 4.875% fixed rate notes that matured in September 2013. The Company used cash to fund the payment. |
• | The Company also selectively makes use of short-term credit lines. The Company estimates that, as of September 30, 2013, it could borrow up to $2.1 billion on committed credit lines. |
• | The Company believes its capital resources and liquidity position at September 30, 2013 are adequate to meet projected needs. The Company believes requirements for working capital, capital expenditures, dividends, stock repurchases, minimum pension contributions, debt maturities and any potential acquisitions in fiscal 2014 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. 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 August 2018. There were no draws on the revolving credit facility as of September 30, 2013. As such, the Company believes it has sufficient financial resources to fund operations and meet its obligations for the foreseeable future. |
• | The Company earns a significant amount of its operating income outside the U.S., which is deemed to be permanently reinvested in foreign jurisdictions. The Company currently does not intend nor foresee a need to repatriate these funds. The Company’s intent is for such earnings to be reinvested by the subsidiaries or to be repatriated only when it would be tax effective through the utilization of foreign tax credits. The Company expects existing domestic cash and liquidity to continue to be sufficient to fund the Company’s domestic operating activities and cash commitments for investing and financing activities for at least the next twelve months and thereafter for the foreseeable future. In addition, the Company expects existing foreign cash, cash equivalents, short-term investments and cash flows from operations to continue to be sufficient to fund the Company’s foreign operating activities and cash commitments for investing activities, such as material capital expenditures, for at least the next twelve months and thereafter for the foreseeable future. Should the Company require more capital in the U.S. than is generated by operations domestically, the Company will elect to raise capital in the U.S. through debt or equity issuances. This alternative could result in increased interest expense or other dilution of the Company’s earnings. The Company has borrowed funds domestically and continues to have the ability to borrow funds domestically at reasonable interest rates. |
• | 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 ASC 715-60, “Defined Benefit Plans - Other Postretirement,” or (ii) the cumulative foreign currency translation adjustment. As of September 30, 2013, consolidated shareholders’ equity attributable to Johnson Controls, Inc. as defined per the Company’s debt financial covenants was $11.9 billion and there was a maximum of $273 million of liens and pledges outstanding. 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 debt agreements limit access to stated borrowing levels or require accelerated repayment in the event of a decrease in the Company’s credit rating. |
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A summary of the Company’s significant contractual obligations as of September 30, 2013 is as follows (in millions):
Total | 2014 | 2015-2016 | 2017-2018 | 2019 and Beyond | |||||||||||||||
Contractual Obligations | |||||||||||||||||||
Long-term debt (including capital lease obligations)* | $ | 5,379 | $ | 819 | $ | 1,062 | $ | 904 | $ | 2,594 | |||||||||
Interest on long-term debt (including capital lease obligations)* | 2,329 | 211 | 366 | 267 | 1,485 | ||||||||||||||
Operating leases | 908 | 300 | 382 | 155 | 71 | ||||||||||||||
Purchase obligations | 2,289 | 1,795 | 295 | 180 | 19 | ||||||||||||||
Pension and postretirement contributions | 426 | 83 | 56 | 65 | 222 | ||||||||||||||
Total contractual cash obligations | $ | 11,331 | $ | 3,208 | $ | 2,161 | $ | 1,571 | $ | 4,391 | |||||||||
* See "Capitalization" for additional information related to the Company's long-term debt. The Company's interest rate swaps are not included in the table as all outstanding interest rate swaps were in an asset position at September 30, 2013, which indicates the Company was in a net position of receiving cash under such swaps.
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
The Company prepares its consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP). This requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. The following policies are considered by management to be the most critical in understanding the judgments that are involved in the preparation of the Company’s consolidated financial statements and the uncertainties that could impact the Company’s results of operations, financial position and cash flows.
Revenue Recognition
The Company’s Building Efficiency business recognizes revenue from certain long-term contracts over the contractual period under the percentage-of-completion (POC) method of accounting. This method of accounting recognizes sales and gross profit as work is performed based on the relationship between actual costs incurred and total estimated costs at completion. Recognized revenues that will not be billed under the terms of the contract until a later date are recorded primarily in accounts receivable. Likewise, contracts where billings to date have exceeded recognized revenues are recorded primarily in other current liabilities. Changes to the original estimates may be required during the life of the contract and such estimates are reviewed monthly. Sales and gross profit are adjusted using the cumulative catch-up method for revisions in estimated total contract costs and contract values. Estimated losses are recorded when identified. Claims against customers are recognized as revenue upon settlement. The amount of accounts receivable due after one year is not significant. The use of the POC method of accounting involves considerable use of estimates in determining revenues, costs and profits and in assigning the amounts to accounting periods. The periodic reviews have not resulted in adjustments that were significant to the Company’s results of operations. The Company continually evaluates all of the assumptions, risks and uncertainties inherent with the application of the POC method of accounting.
The Building Efficiency business enters into extended warranties and long-term service and maintenance agreements with certain customers. For these arrangements, revenue is recognized on a straight-line basis over the respective contract term.
The Company’s Building Efficiency business also sells certain heating, ventilating and air conditioning (HVAC) and refrigeration products and services in bundled arrangements, where multiple products and/or services are involved. In accordance with ASU No. 2009-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements - A Consensus of the FASB Emerging Issues Task Force,” the Company divides bundled arrangements into separate deliverables and revenue is allocated to each deliverable based on the relative selling price method. Significant deliverables within these arrangements include equipment, commissioning, service labor and extended warranties. In order to estimate relative selling price, market data and transfer price studies are utilized. Approximately four to twelve months separate the timing of the first deliverable until the last piece of equipment is delivered, and there may be extended warranty arrangements with duration of one to five years commencing upon the end of the standard warranty period.
In all other cases, the Company recognizes revenue at the time title passes to the customer or as services are performed.
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Goodwill and Other Intangible Assets
Goodwill reflects the cost of an acquisition in excess of the fair values assigned to identifiable net assets acquired. The Company reviews goodwill for impairment during the fourth fiscal quarter or more frequently if events or changes in circumstances indicate the asset might be impaired. The Company performs impairment reviews for its reporting units, which have been determined to be the Company’s reportable segments or one level below the reportable segments in certain instances, using a fair value method based on management’s judgments and assumptions or third party valuations. The fair value of a reporting unit refers to the price that would be received to sell the unit as a whole in an orderly transaction between market participants at the measurement date. In estimating the fair value, the Company uses multiples of earnings based on the average of historical, published multiples of earnings of comparable entities with similar operations and economic characteristics. In certain instances, the Company uses discounted cash flow analyses or estimated sales price to further support the fair value estimates. The inputs utilized in the analyses are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, “Fair Value Measurement.” The estimated fair value is then compared with the carrying amount of the reporting unit, including recorded goodwill. The Company is subject to financial statement risk to the extent that the carrying amount exceeds the estimated fair value. The impairment testing performed by the Company in the fourth quarter of fiscal year 2013 indicated that the estimated fair value of the Automotive Experience Interiors reporting unit did not exceed its corresponding carrying amount including recorded goodwill, and an impairment existed. No other reporting unit was determined to be at risk of failing step one of the goodwill impairment test as the impairment testing performed indicated that the estimated fair value of each reporting unit substantially exceeded its corresponding carrying amount including recorded goodwill at September 30, 2013. No impairments existed at September 30, 2012 and 2011.
Refer to Note 6, "Goodwill and Other Intangible Assets," of the notes to consolidated financial statements for further information regarding the goodwill impairment charge recorded in the fourth quarter of fiscal 2013.
Indefinite lived other intangible assets are also subject to at least annual impairment testing. Other intangible assets with definite lives continue to be amortized over their estimated useful lives and are subject to impairment testing if events or changes in circumstances indicate that the asset might be impaired. A considerable amount of management judgment and assumptions are required in performing the impairment tests. While the Company believes the judgments and assumptions used in the impairment tests are reasonable and no impairment existed at September 30, 2013, 2012 and 2011, different assumptions could change the estimated fair values and, therefore, impairment charges could be required, which could be material to the consolidated financial statements.
Employee Benefit Plans
The Company provides a range of benefits to its employees and retired employees, including pensions and postretirement benefits. Plan assets and obligations are measured annually, or more frequently if there is a remeasurement event, based on the Company’s measurement date utilizing various actuarial assumptions such as discount rates, assumed rates of return, compensation increases, turnover rates and health care cost trend rates as of that date. The Company reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when appropriate.
The Company utilizes a mark-to-market approach for recognizing pension and postretirement benefit expenses, including measuring the market related value of plan assets at fair value and recognizing actuarial gains and losses in the fourth quarter of each fiscal year or at the date of a remeasurement event. Refer to Note 15, "Retirement Plans," of the notes to consolidated financial statements for disclosure of the Company's pension and postretirement benefit plans.
U.S. GAAP requires that companies recognize in the statement of financial position a liability for defined benefit pension and postretirement plans that are underfunded or unfunded, or an asset for defined benefit pension and postretirement plans that are overfunded. U.S. GAAP also requires that companies measure the benefit obligations and fair value of plan assets that determine a benefit plan’s funded status as of the date of the employer’s fiscal year end.