Q1 FY14 10-Q


 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
 
 
Form 10-Q
 
 
 
 
 
  
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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 or Other Jurisdiction of
 
(I.R.S. Employer
Incorporation or Organization)
 
Identification No.)
 
 
5757 North Green Bay Avenue
 
 
Milwaukee, Wisconsin
 
53209
(Address of principal executive offices)
 
(Zip Code)
(414) 524-1200
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report) 
 
 
 
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    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  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
þ
  
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  þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Shares Outstanding at December 31, 2013
Common Stock: $1.00 par value per share
 
664,028,370
 
 
 
 
 

1

JOHNSON CONTROLS, INC.
FORM 10-Q
Report Index

  
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
Johnson Controls, Inc.
Consolidated Statements of Financial Position
(in millions, except par value; unaudited)
 
 
 
 
 
 
 
December 31, 2013
 
September 30, 2013
 
December 31, 2012
Assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
245

 
$
1,055

 
$
314

Accounts receivable - net
6,743

 
7,206

 
7,090

Inventories
2,452

 
2,325

 
2,384

Assets held for sale
777

 
804

 
—

Other current assets
2,509

 
2,308

 
3,115

Current assets
12,726

 
13,698

 
12,903

 
 
 
 
 
 
Property, plant and equipment - net
6,665

 
6,585

 
6,553

Goodwill
6,717

 
6,589

 
7,016

Other intangible assets - net
1,070

 
999

 
1,031

Investments in partially-owned affiliates
1,043

 
1,024

 
1,015

Other noncurrent assets
2,611

 
2,623

 
2,789

Total assets
$
30,832

 
$
31,518

 
$
31,307

 
 
 
 
 
 
Liabilities and Equity
 
 
 
 
 
 
 
 
 
 
 
Short-term debt
$
986

 
$
119

 
$
715

Current portion of long-term debt
818

 
819

 
320

Accounts payable
5,592

 
6,318

 
5,880

Accrued compensation and benefits
1,017

 
1,215

 
931

Liabilities held for sale
321

 
402

 
—

Other current liabilities
3,069

 
3,244

 
2,922

Current liabilities
11,803

 
12,117

 
10,768

 
 
 
 
 
 
Long-term debt
4,866

 
4,560

 
5,413

Pension and postretirement benefits
736

 
750

 
1,235

Other noncurrent liabilities
1,466

 
1,360

 
1,533

Long-term liabilities
7,068

 
6,670

 
8,181

 
 
 
 
 
 
Commitments and contingencies (Note 18)


 


 


 
 
 
 
 
 
Redeemable noncontrolling interests
169

 
157

 
270

 
 
 
 
 
 
Common stock, $1.00 par value
703

 
700

 
684

Capital in excess of par value
2,431

 
2,399

 
2,092

Retained earnings
9,649

 
9,328

 
8,842

Treasury stock, at cost
(1,652
)
 
(531
)
 
(180
)
Accumulated other comprehensive income
400

 
418

 
495

Shareholders’ equity attributable to Johnson Controls, Inc.
11,531

 
12,314

 
11,933

Noncontrolling interests
261

 
260

 
155

Total equity
11,792

 
12,574

 
12,088

Total liabilities and equity
$
30,832

 
$
31,518

 
$
31,307

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


3


Johnson Controls, Inc.
Consolidated Statements of Income
(in millions, except per share data; unaudited)
 
Three Months Ended
December 31,
 
2013
 
2012
Net sales
 
 
 
Products and systems*
$
8,939

 
$
8,357

Services*
1,969

 
2,065

 
10,908

 
10,422

Cost of sales
 
 
 
Products and systems*
7,630

 
7,207

Services*
1,621

 
1,699

 
9,251

 
8,906

 
 
 
 
Gross profit
1,657

 
1,516

 
 
 
 
Selling, general and administrative expenses
(1,084
)
 
(1,052
)
Net financing charges
(55
)
 
(61
)
Equity income
113

 
85

 
 
 
 
Income before income taxes
631

 
488

 
 
 
 
Provision for income taxes
126

 
99

 
 
 
 
Net income
505

 
389

 
 
 
 
Income attributable to noncontrolling interests
36

 
30

 
 
 
 
Net income attributable to Johnson Controls, Inc.
$
469

 
$
359

 
 
 
 
Earnings per share
 
 
 
Basic
$
0.70

 
$
0.53

Diluted
$
0.69

 
$
0.52

*
Products and systems consist of Automotive Experience and Power Solutions products and systems and Building Efficiency installed systems. Services are Building Efficiency technical and Global Workplace Solutions.

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

4



Johnson Controls, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(in millions; unaudited)
 
 
 
 
 
Three Months Ended
December 31,
 
2013
 
2012
 
 
 
 
Net income
$
505

 
$
389

 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
Foreign currency translation adjustments
(14
)
 
43

Realized and unrealized losses on derivatives
(1
)
 
(1
)
Realized and unrealized gains (losses) on marketable common stock
(2
)
 
3

Pension and postretirement plans
(1
)
 
(9
)
 
 
 
 
Other comprehensive income (loss)
(18
)
 
36

 
 
 
 
Total comprehensive income
487

 
425

 
 
 
 
Comprehensive income attributable to noncontrolling interests
36

 
29

 
 
 
 
Comprehensive income attributable to Johnson Controls, Inc.
$
451

 
$
396



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

5


Johnson Controls, Inc.
Consolidated Statements of Cash Flows
(in millions; unaudited)
 
 
 
 
 
Three Months Ended
December 31,
 
2013
 
2012
Operating Activities
 
 
 
Net income attributable to Johnson Controls, Inc.
$
469

 
$
359

Income attributable to noncontrolling interests
36

 
30

Net income
505

 
389

Adjustments to reconcile net income to cash provided (used) by operating activities:
 
 
 
Depreciation and amortization
244

 
223

Pension and postretirement benefit expense (income)
9

 
(16
)
Pension and postretirement contributions
(25
)
 
(16
)
Equity in earnings of partially-owned affiliates, net of dividends received
(74
)
 
(48
)
Deferred income taxes
14

 
(5
)
Fair value adjustment of equity investment
(19
)
 
—

Equity-based compensation
18

 
16

Other
(8
)
 
(3
)
Changes in assets and liabilities, excluding acquisitions and divestitures:
 
 
 
Receivables
531

 
241

Inventories
(95
)
 
(28
)
Other assets
(41
)
 
(222
)
Restructuring reserves
(62
)
 
(34
)
Accounts payable and accrued liabilities
(932
)
 
(167
)
Accrued income taxes
(346
)
 
(32
)
Cash provided (used) by operating activities
(281
)
 
298

 
 
 
 
Investing Activities
 
 
 
Capital expenditures
(345
)
 
(371
)
Sale of property, plant and equipment
21

 
17

Acquisition of businesses, net of cash acquired
(128
)
 
—

Business divestitures
13

 
—

Changes in long-term investments
3

 
(17
)
Other
5

 
6

Cash used by investing activities
(431
)
 
(365
)
 
 
 
 
Financing Activities
 
 
 
Increase in short-term debt - net
867

 
392

Increase in long-term debt
302

 
90

Repayment of long-term debt
(6
)
 
(109
)
Stock repurchases
(1,199
)
 
—

Payment of cash dividends
(130
)
 
(253
)
Proceeds from the exercise of stock options
84

 
34

Other
4

 
1

Cash provided (used) by financing activities
(78
)
 
155

Effect of exchange rate changes on cash and cash equivalents
(19
)
 
(39
)
Change in cash held for sale
(1
)
 
—

Increase (decrease) in cash and cash equivalents
(810
)
 
49

Cash and cash equivalents at beginning of period
1,055

 
265

Cash and cash equivalents at end of period
$
245

 
$
314

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

6

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
(unaudited)

 
1.
Financial Statements

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (which include normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) have been omitted pursuant to the rules and regulations of the United States Securities and Exchange Commission (SEC). These consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Johnson Controls, Inc. (the “Company”) Annual Report on Form 10-K for the year ended September 30, 2013. The results of operations for the three month period ended December 31, 2013 are not necessarily indicative of results for the Company’s 2014 fiscal year because of seasonal and other factors.

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

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

Consolidated VIEs

Based upon the criteria set forth in ASC 810, the Company has determined that it was the primary beneficiary in three VIEs for the reporting periods ended December 31, 2013, September 30, 2013 and December 31, 2012, as the Company absorbs significant economics of the entities and has the power to direct the activities that are considered most significant to the entities.

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

During the three month period ended December 31, 2011, a pre-existing VIE accounted for under the equity method was reorganized into three separate investments as a result of the counterparty exercising its option to put its interest to the Company. The Company acquired additional interests in two of the reorganized group entities. The reorganized group entities are considered to be VIEs as the other owner party has been provided decision making rights but does not have equity at risk. The Company is considered the primary beneficiary of one of the entities due to the Company’s power pertaining to decisions over significant activities of the entity. As such, this VIE has been consolidated within the Company’s consolidated statements of financial position. The impact of consolidation of the entity on the Company’s consolidated statements of income for the three month periods ended December 31, 2013 and 2012 was not material. The VIE is named as a co-obligor under a third party debt agreement of $175 million, maturing in fiscal 2020, under which it could become subject to paying more than its allocated share of the third party debt in the event of bankruptcy of one or more of the other co-obligors. The other co-obligors, all related parties in which the Company is an equity investor, consist of the remaining group entities involved in the reorganization. As part of the overall reorganization transaction, the Company has also provided financial support to the group entities in the form of loans totaling $55 million, which are subordinate to the third party debt agreement. The Company is a significant customer of certain co-obligors, resulting in a remote possibility of loss. Additionally, the Company is subject to a floor guaranty expiring in fiscal 2022; in the event that the other owner party no longer owns any part of the group entities

7

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
(unaudited)

due to sale or transfer, the Company has guaranteed that the proceeds received from the sale or transfer will not be less than $25 million. The Company has partnered with the group entities to design and manufacture battery components for the Power Solutions business.

The carrying amounts and classification of assets (none of which are restricted) and liabilities included in the Company’s consolidated statements of financial position for the consolidated VIEs are as follows (in millions):
 
December 31,
2013
 
September 30,
2013
 
December 31,
2012
Current assets
$
212

 
$
273

 
$
209

Noncurrent assets
140

 
139

 
148

Total assets
$
352

 
$
412

 
$
357

 
 
 
 
 
 
Current liabilities
$
171

 
$
212

 
$
164

Noncurrent liabilities
39

 
39

 
24

Total liabilities
$
210

 
$
251

 
$
188


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

Nonconsolidated VIEs

As of September 30, 2013 and December 31, 2012, the Company had a 40% interest in an equity method investee whereby the investee is a VIE. The investee produces and sells lead-acid batteries of which the Company both purchases and supplies certain batteries to complement each investment partners’ portfolio. The Company had a contractual right to purchase the remaining 60% equity interest in the investee between May 2014 and May 2016 (the “call option”). If the Company did not exercise the call option prior to its expiration in May 2016, for a period of six months thereafter the Company was subject to a contractual obligation at the counterparty’s option to sell the Company’s equity investment in the investee to the counterparty (the “repurchase option”). The purchase price was fixed under both the call option and the repurchase option. Based upon the criteria set forth in ASC 810, the Company determined that the investee was a VIE as the equity holders, through their equity investments, may not participate fully in the entity’s residual economics. The Company was not the primary beneficiary as the Company did not have the power to make key operating decisions considered to be most significant to the VIE. Therefore, the investee was accounted for under the equity method of accounting as the Company’s interest exceeded 20% and the Company did not have a controlling interest. The investment balance included within investments in partially-owned affiliates in the consolidated statements of financial position at September 30, 2013 and December 31, 2012 was $56 million and $54 million, respectively, which represents the Company’s maximum exposure to loss. Current assets and liabilities related to the VIE were immaterial and represent normal course of business trade receivables and payables for all presented periods. In the first quarter of fiscal 2014, the Company purchased an additional 50% equity interest in the investee to bring the Company's total interest in the investee to 90%. As a result of this transaction, the fixed price call option and repurchase option no longer exist, and the Company consolidates the investee under the voting interest model. Refer to Note 3, "Acquisitions and Divestitures," of the notes to consolidated financial statements for additional information regarding this transaction.

As mentioned previously within the “Consolidated VIEs” section above, during the three month period ended December 31, 2011, a pre-existing VIE was reorganized into three separate investments as a result of the counterparty exercising its option to put its interest to the Company. The reorganized group entities are considered to be VIEs as the other owner party has been provided decision making rights but does not have equity at risk. The Company is not considered to be the primary beneficiary of two of the entities as the Company cannot make key operating decisions considered to be most significant to the VIEs. Therefore, the entities are accounted for under the equity method of accounting as the Company’s interest exceeds 20% and the Company does not have a controlling interest. The Company’s maximum exposure to loss includes the partially-owned affiliate investment balance of $57 million, $57 million and $54 million at December 31, 2013, September 30, 2013 and December 31, 2012, respectively, as well as the subordinated loan from the Company, third party debt agreement and floor guaranty mentioned previously within the “Consolidated VIEs” section above. Current liabilities due to the VIEs are not material and represent normal course of business trade payables for all presented periods.


8

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
(unaudited)

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

Restricted Cash

At December 31, 2013, September 30, 2013 and December 31, 2012, the Company held restricted cash of approximately $24 million, $32 million and $21 million, respectively, within cash and cash equivalents. These amounts were collected from customers for payment of maintenance costs under contract, and withdrawals are restricted for this purpose.

Retrospective Changes

Certain amounts as of September 30, 2013 and December 31, 2012 have been revised to conform to the current year’s presentation.

Effective October 1, 2013, the Company reorganized the reportable segments within its Building Efficiency business to align with its new management reporting structure and business activities. Prior to this reorganization, Building Efficiency was comprised of five reportable segments for financial reporting purposes: North America Systems, North America Service, Global Workplace Solutions, Asia and Other. As a result of this change, Building Efficiency is now comprised of four reportable segments for financial reporting purposes, with the only change being the combination of North America Systems and North America Service into one reportable segment called North America Systems and Service. Historical information has been revised to reflect the new Building Efficiency reportable segment structure.

In the fourth quarter of fiscal 2013, the Company changed its method of inventory costing for certain inventory in its Power Solutions business to the first-in first-out (FIFO) method from the last-in first-out (LIFO) method. The Company's other businesses also determine costs using the FIFO method. Prior to the change, Power Solutions utilized two methods of inventory costing: LIFO for inventories in the U.S. and FIFO for inventories in other countries. The Company believes that the FIFO method is preferable as it better reflects the current value of inventory on the Company’s consolidated statement of financial position, provides better matching of revenues and expenses, results in uniformity across the Company’s global operations with respect to the method of inventory accounting and improves comparability with the Company’s peers. The change has been reported through retrospective application of the new policy to all periods presented and resulted in a $5 million increase in net income attributable to Johnson Controls, Inc., and no impact on diluted earnings per share for the three months ended December 31, 2012.

2.
New Accounting Standards

In July 2013, the FASB issued Accounting Standards Update (ASU) No. 2013-11, "Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a similar Tax Loss, or a Tax Credit Carryforward Exists." ASU No. 2013-11 clarifies that companies should present an unrecognized tax benefit as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward. ASU No. 2013-11 will be effective prospectively for the Company for the quarter ending December 31, 2014, with early adoption permitted. The Company is currently assessing the impact that adoption of this guidance may have on its consolidated statement of financial position. The adoption of this guidance will have no impact on the Company's consolidated results of operations.

In March 2013, the FASB issued ASU No. 2013-05, "Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity." ASU No. 2013-05 clarifies when companies should release the cumulative translation adjustment (CTA) into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets within a foreign entity. Additionally, ASU No. 2013-05 states that CTA should be released into net income upon an acquirer obtaining control of an acquiree in which it held an equity interest immediately before the acquisition date (step acquisition). ASU No. 2013-05 will be effective prospectively for the Company for the quarter ending December 31, 2014, with early adoption permitted. The significance of this guidance for the Company is dependent on any future derecognition events involving the Company's foreign entities.

In February 2013, the FASB issued ASU No. 2013-02, "Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income." ASU No. 2013-02 requires companies to provide information

9

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
(unaudited)

about the amounts reclassified out of accumulated other comprehensive income by component. Additionally, companies are required to disclose these reclassifications by each respective line item on the statements of income. ASU No. 2013-02 was effective for the Company for the quarter ended December 31, 2013. The adoption of this guidance had no impact on the Company's consolidated financial condition or results of operations. Refer to Note 14, "Equity and Noncontrolling Interests," of the notes to consolidated financial statements for disclosures regarding other comprehensive income.

In December 2011, the FASB issued ASU No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities." ASU No. 2011-11 requires additional quantitative and qualitative disclosures of gross and net information regarding derivative instruments that are offset or eligible for offset in the consolidated statement of financial position. ASU No. 2011-11 was effective for the Company for the quarter ending December 31, 2013. The adoption of this guidance had no impact on the Company’s consolidated financial condition or results of operations. Refer to Note 15, "Derivative Instruments and Hedging Activities," of the notes to consolidated financial statements for disclosure of gross and net information regarding the Company's derivative instruments.

3.
Acquisitions and Divestitures

In the first quarter of fiscal 2014, the Company completed two acquisitions for a combined purchase price, net of cash acquired, of $128 million, all of which was paid in the three months ended December 31, 2013. The acquisitions in the aggregate were not material to the Company's consolidated financial statements. In connection with the acquisitions, the Company recorded goodwill of $102 million. The purchase price allocations may be subsequently adjusted to reflect final valuation studies. As a result of one of the acquisitions, which increased the Company's ownership from a noncontrolling to controlling interest, the Company recorded a non-cash gain of $19 million in equity income for the Power Solutions business to adjust the Company's existing equity investment in the partially-owned affiliate to fair value.

In the first quarter of fiscal 2014, the Company completed one divestiture for a sales price of $13 million, all of which was received as of December 31, 2013. The divestiture was not material to the Company’s consolidated financial statements. In connection with the divestiture, the Company recorded a gain, net of transaction costs, of $9 million in the Automotive Experience Interiors segment. There was no change in goodwill as a result of this transaction.

In the first quarter of fiscal 2014, the Company adjusted the purchase price allocation of certain fiscal 2013 acquisitions and recorded an addition to goodwill of $2 million.

On January 13, 2014, the Company announced that it had reached a definitive agreement to sell the Automotive Experience Electronics business to Visteon Corporation, subject to regulatory and other approvals. The business is classified as held for sale in the consolidated statements of financial position as of December 31, 2013 and September 30, 2013. Refer to Note 4, "Assets and Liabilities Held for Sale," of the notes to consolidated financial statements for further disclosure related to the Company's assets and liabilities held for sale.

In the first quarter of fiscal 2013, the Company made no acquisitions and had no divestitures.


10

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
(unaudited)

4.
Assets and Liabilities Held for Sale

At September 30, 2013, the Company determined that certain of its businesses met the criteria to be classified as held for sale. The Automotive Experience Electronics segment and certain product lines of the Automotive Experience Interiors segment were classified as held for sale as of December 31, 2013 and September 30, 2013.

The following table summarizes the carrying value of the assets and liabilities held for sale (in millions):
 
December 31,
2013
 
September 30,
2013
 
 
 
 
Cash and cash equivalents
$
5

 
$
4

Accounts receivable - net
173

 
197

Inventories
134

 
124

Other current assets
62

 
91

Property, plant and equipment - net
167

 
167

Goodwill
74

 
74

Other intangible assets - net
60

 
57

Investments in partially-owned affiliates
31

 
26

Other noncurrent assets
71

 
64

Assets held for sale
$
777

 
$
804

 
 
 
 
Short-term debt
$
7

 
$
5

Accounts payable
227

 
253

Accrued compensation and benefits
32

 
46

Other current liabilities
41

 
84

Pension and postretirement benefits
11

 
13

Other noncurrent liabilities
3

 
1

Liabilities held for sale
$
321

 
$
402


Assets and liabilities classified as held for sale were required to be recorded at the lower of carrying value or fair value less any costs to sell. Accordingly, the Company recorded an impairment charge of $41 million in the fourth quarter of fiscal 2013 to write down the long-lived assets related to certain product lines of the Automotive Experience Interiors segment to zero. In connection with the anticipated sale of those product lines, which is expected to occur in fiscal 2014, the Company expects to make a cash payment to the buyer to fund future operational improvement initiatives, which could result in a loss before income taxes of $75 million to $85 million, subject to final negotiations. In addition, the divestiture of the Automotive Experience Electronics segment could result in a gain or loss to the extent the ultimate selling price differs from the current carrying value of the net assets recorded.

The Automotive Experience Electronics business did not meet the criteria to be classified as a discontinued operation primarily due to the status of transaction negotiations at December 31, 2013. The Automotive Experience Interiors product lines classified as held for sale are immaterial to the Company individually and in the aggregate, and do not constitute a distinguishable business in order to be classified as a discontinued operation.


11

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
(unaudited)

5.
Percentage-of-Completion Contracts

The Building Efficiency business records certain long-term contracts under the percentage-of-completion method of accounting. Under this method, sales and gross profit are recognized as work is performed based on the relationship between actual costs incurred and total estimated costs at completion. The Company records costs and earnings in excess of billings on uncompleted contracts primarily within accounts receivable - net and billings in excess of costs and earnings on uncompleted contracts primarily within other current liabilities in the consolidated statements of financial position. Costs and earnings in excess of billings related to these contracts were $488 million, $489 million and $473 million at December 31, 2013, September 30, 2013 and December 31, 2012, respectively. Billings in excess of costs and earnings related to these contracts were $284 million, $263 million and $296 million at December 31, 2013, September 30, 2013 and December 31, 2012, respectively.

6.
Inventories

Inventories consisted of the following (in millions):
 
December 31,
2013
 
September 30,
2013
 
December 31,
2012
Raw materials and supplies
$
1,112

 
$
1,086

 
$
1,120

Work-in-process
402

 
459

 
435

Finished goods
938

 
780

 
829

Inventories
$
2,452

 
$
2,325

 
$
2,384


In the fourth quarter of fiscal 2013, the Company changed its method of inventory costing for certain inventory in its Power Solutions business to the first-in first-out (FIFO) method from the last-in first-out (LIFO) method. Refer to Note 1, "Financial Statements," of the notes to consolidated financial statements for discussion of the Company's change in accounting method.


12

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
(unaudited)

7.
Goodwill and Other Intangible Assets

Effective October 1, 2013, the Company reorganized the reportable segments within its Building Efficiency business to align with its new management reporting structure and business activities. Historical information has been revised to reflect the new Building Efficiency reportable segment structure. Refer to Note 17, “Segment Information,” of the notes to consolidated financial statements for further information.

The changes in the carrying amount of goodwill in each of the Company’s reportable segments for the nine month period ended September 30, 2013 and the three month period ended December 31, 2013 were as follows (in millions):
 
December 31,
2012
 
Business Acquisitions
 
Business Divestitures
 
Impairments
 
Currency Translation and Other
 
September 30,
2013
Building Efficiency
 
 
 
 
 
 
 
 
 
 
 
North America Systems and Service
$
1,229

 
$
—

 
$
—

 
$
—

 
$
(1
)
 
$
1,228

Global Workplace Solutions
187

 
79

 
—

 
—

 
(9
)
 
257

Asia
390

 
—

 
—

 
—

 
(2
)
 
388

Other
1,007

 
—

 
—

 
—

 
(4
)
 
1,003

Automotive Experience
 
 
 
 
 
 
 
 
 
 

Seating
2,495

 
187

 
(15
)
 
—

 
(8
)
 
2,659

Interiors
409

 
—

 
—

 
(430
)
 
21

 
—

Electronics
251

 
—

 
(251
)
 
—

 
—

 
—

Power Solutions
1,048

 
—

 
—

 
—

 
6

 
1,054

Total
$
7,016

 
$
266

 
$
(266
)
 
$
(430
)
 
$
3

 
$
6,589

 
 
 
 
 
 
 
 
 
 
 
 
 
September 30,
2013
 
Business Acquisitions
 
Business Divestitures
 
Impairments
 
Currency Translation and Other
 
December 31,
 2013
Building Efficiency
 
 
 
 
 
 
 
 
 
 
 
North America Systems and Service
$
1,228

 
$
—

 
$
—

 
$
—

 
$
—

 
$
1,228

Global Workplace Solutions
257

 
—

 
—

 
—

 
(1
)
 
256

Asia
388

 
—

 
—

 
—

 
(1
)
 
387

Other
1,003

 
—

 
—

 
—

 
1

 
1,004

Automotive Experience
 
 
 
 
 
 
 
 
 
 

Seating
2,659

 
2

 
—

 
—

 
17

 
2,678

Interiors
—

 
—

 
—

 
—

 
—

 
—

Electronics
—

 
—

 
—

 
—

 
—

 
—

Power Solutions
1,054

 
102

 
—

 
—

 
8

 
1,164

Total
$
6,589

 
$
104

 
$
—

 
$
—

 
$
24

 
$
6,717


The nine months ended September 30, 2013 Automotive Experience Electronics business divestitures amount includes $74 million of goodwill transferred to assets held for sale on the consolidated statement of financial position. Refer to Note 4, "Assets and Liabilities Held for Sale," of the notes to consolidated financial statements for further information regarding the Company's disposal groups classified as held for sale.

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

13

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
(unaudited)

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 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 Company’s other intangible assets, primarily from business acquisitions valued based on independent appraisals, consisted of (in millions):
 
December 31, 2013
 
September 30, 2013
 
December 31, 2012
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Amortized intangible assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Patented technology
$
91

 
$
(52
)
 
$
39

 
$
92

 
$
(53
)
 
$
39

 
$
168

 
$
(97
)
 
$
71

Customer relationships
609

 
(149
)
 
460

 
537

 
(138
)
 
399

 
520

 
(124
)
 
396

Miscellaneous
353

 
(99
)
 
254

 
336

 
(91
)
 
245

 
325

 
(77
)
 
248

Total amortized intangible assets
1,053

 
(300
)
 
753

 
965

 
(282
)
 
683

 
1,013

 
(298
)
 
715

Unamortized intangible assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trademarks
317

 
—

 
317

 
316

 
—

 
316

 
316

 
—

 
316

Total intangible assets
$
1,370

 
$
(300
)
 
$
1,070

 
$
1,281

 
$
(282
)
 
$
999

 
$
1,329

 
$
(298
)
 
$
1,031


Amortization of other intangible assets for the three month periods ended December 31, 2013 and 2012 was $20 million and $18 million, respectively. Excluding the impact of any future acquisitions, the Company anticipates amortization for fiscal 2015, 2016, 2017, 2018 and 2019 will be approximately $82 million, $76 million, $71 million, $64 million and $55 million per year, respectively.

8.
Product Warranties

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

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

The changes in the carrying amount of the Company’s total product warranty liability, including extended warranties for which deferred revenue is recorded, for the three months ended December 31, 2013 and 2012 were as follows (in millions):
 
Three Months Ended
December 31,
 
2013
 
2012
Balance at beginning of period
$
256

 
$
278

Accruals for warranties issued during the period
70

 
67

Accruals related to pre-existing warranties (including changes in estimates)
1

 
(4
)
Settlements made (in cash or in kind) during the period
(53
)
 
(66
)
Balance at end of period
$
274

 
$
275



14

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
(unaudited)

9.
Significant Restructuring Costs

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 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 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 planned workforce reductions, plant closures, and asset and goodwill impairments. The restructuring actions are expected to be substantially complete by the end of fiscal 2014.

The following table summarizes the changes in the Company’s restructuring reserve, included within other current liabilities in the consolidated statements of financial position (in millions):    
 
Employee Severance and Termination Benefits
 
Other
 
Currency
Translation
 
Total
Balance at September 30, 2013
$
441

 
$
3

 
$
2

 
$
446

Utilized—cash
(62
)
 
—

 
—

 
(62
)
Utilized—noncash
—

 
—

 
5

 
5

Transfers from liabilities held for sale
31

 
—

 
—

 
31

Balance at December 31, 2013
$
410

 
$
3

 
$
7

 
$
420


The $31 million of transfers from liabilities held for sale represent restructuring reserves that were included in liabilities held for sale in the consolidated statement of financial position at September 30, 2013, but are excluded from liabilities held for sale at December 31, 2013 based on recent transaction negotiations. See Note 4, "Assets and Liabilities Held for Sale," of the notes to consolidated financial statements for further information regarding the Company's disposal groups classified as held for sale.

The Company's restructuring plans include workforce reductions of approximately 16,700 employees (9,500 for the Automotive Experience business, 6,200 for the Building Efficiency business and 1,000 for the Power Solutions business). Restructuring charges associated with employee severance and termination benefits are paid over the severance period granted to each employee or on a lump sum basis in accordance with individual severance agreements. As of December 31, 2013, approximately 9,100 of the employees have been separated from the Company pursuant to the restructuring plans. In addition, the restructuring plans include twenty-one plant closures (seventeen for Automotive Experience, two for Power Solutions and two for Building Efficiency). As of December 31, 2013, ten of the twenty-one plants have been closed.

Company management closely monitors its overall cost structure and continually analyzes each of its businesses for opportunities to consolidate current operations, improve operating efficiencies and locate facilities in low cost countries in close proximity to customers. This ongoing analysis includes a review of its manufacturing, engineering and purchasing operations, as well as the overall global footprint for all its businesses. Because of the importance of new vehicle sales by major automotive manufacturers to operations, the Company is affected by the general business conditions in this industry. Future adverse developments in the automotive industry could impact the Company’s liquidity position, lead to impairment charges and/or require additional restructuring of its operations.


15

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
(unaudited)

10.
Income Taxes

In calculating the provision for income taxes, the Company uses an estimate of the annual effective tax rate based upon the facts and circumstances known at each interim period. On a quarterly basis, the actual effective tax rate is adjusted, as appropriate, based upon changed facts and circumstances, if any, as compared to those forecasted at the beginning of the fiscal year and each interim period thereafter. For the three months ended December 31, 2013 and 2012, the Company's effective tax rate was 20%. The effective rate was lower than the U.S. federal statutory rate of 35% primarily due to global tax planning and foreign tax rate differentials.

Valuation Allowance

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

In the first quarter of fiscal 2014, the Company determined that it was more likely than not that the deferred tax asset associated with a capital loss in Mexico would not be utilized. Therefore, the Company recorded a $21 million valuation allowance as income tax expense.

Uncertain Tax Positions

At September 30, 2013, the Company had gross tax effected unrecognized tax benefits of $1,345 million, of which $1,198 million, if recognized, would impact the effective tax rate. Total net accrued interest at September 30, 2013 was approximately $84 million (net of tax benefit). The net change in interest and penalties during the three months ended December 31, 2013 and 2012 was not material. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense.

In the U.S., fiscal years 2010 through 2012 are currently under exam by the Internal Revenue Service (IRS) and 2004 through 2009 are currently under IRS Appeals. Additionally, the Company is currently under exam in the following major foreign jurisdictions:
Tax Jurisdiction
 
Tax Years Covered
 
 
 
Belgium
 
2011 - 2012
Brazil
 
2004 - 2008
Canada
 
2007 - 2010
France
 
2002 - 2012
Germany
 
2001 - 2010
Italy
 
2005 - 2009
Korea
 
2008 - 2012
Mexico
 
2003 - 2004, 2007 - 2012

The Company expects that certain tax examinations, appellate proceedings and/or tax litigation will conclude within the next twelve months, the impact of which is not expected to be significant to the Company's consolidated financial statements.

Impacts of Tax Legislation

As a result of changes to Mexican tax law in the first quarter of fiscal 2014, the Company recorded a benefit to income tax expense of $25 million. Tax legislation was also adopted in various other jurisdictions during the three month period ended December 31, 2013. These law changes did not have a material impact on the Company’s consolidated financial statements.

16

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
(unaudited)


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; however, because the bill was not signed into law until January 2013 it was not in effect as of December 31, 2012. The effect of the “look-through rule” expiration did not have a material impact on the Company’s consolidated financial statements for the quarter ended December 31, 2012.

11.
Pension and Postretirement Plans

The components of the Company’s net periodic benefit costs associated with its defined benefit pension and postretirement plans are shown in the tables below in accordance with ASC 715, "Compensation – Retirement Benefits" (in millions):
 
Pension Benefits
 
U.S. Plans
Three Months Ended
December 31,
 
Non-U.S. Plans
Three Months Ended
December 31,
 
2013
 
2012
 
2013
 
2012
Service cost
$
18

 
$
23

 
$
10

 
$
10

Interest cost
34

 
38

 
18

 
16

Expected return on plan assets
(51
)
 
(58
)
 
(19
)
 
(18
)
Curtailment gain
—

 
—

 
—

 
(24
)
Net periodic benefit cost (credit)
$
1

 
$
3

 
$
9

 
$
(16
)
 
Postretirement Benefits
 
Three Months Ended
December 31,
 
2013
 
2012
Service cost
$
1

 
$
1

Interest cost
3

 
3

Expected return on plan assets
(3
)
 
(3
)
Amortization of prior service credit
(2
)
 
(4
)
Net periodic benefit credit
$
(1
)

$
(3
)

The curtailment gain in the three months ended December 31, 2012 was the result of a lost contract in the Building Efficiency Global Workplace Solutions segment.

12.
Debt and Financing Arrangements

During the quarter ended December 31, 2013, a $35 million and a $100 million committed revolving credit facility expired. The Company entered into a new $35 million committed revolving credit facility scheduled to expire in November 2014 and a new $100 million committed revolving credit facility scheduled to expire in December 2014. As of December 31, 2013, there were no draws on either facility.

During the quarter ended December 31, 2013, the Company entered into a five-year, 220 million euro, floating rate credit facility scheduled to mature in fiscal 2019. The Company drew on the full credit facility during the quarter ended December 31, 2013. Proceeds from the facility were used for general corporate purposes.

During the quarter ended December 31, 2013, the Company entered into a nine-month, $500 million, floating rate term loan scheduled to mature in September 2014. Proceeds from the term loan were used for general corporate purposes.


17

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
(unaudited)

During the quarter ended December 31, 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 full credit facility during the quarter ended December 31, 2012. Proceeds from the facility were used for general corporate purposes.

During the quarter ended December 31, 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.

Net Financing Charges

The Company's net financing charges line item in the consolidated statements of income for the three month periods ended December 31, 2013 and 2012 contained the following components (in millions):
 
Three Months Ended
December 31,
 
2013
 
2012
 
 
 
 
Interest expense, net of capitalized interest costs
$
57

 
$
60

Banking fees and bond cost amortization
4

 
5

Interest income
(3
)
 
(4
)
Net foreign exchange results for financing activities
(3
)
 
—

Net financing charges
$
55

 
$
61



18

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
(unaudited)

13.
Earnings Per Share

The Company presents both basic and diluted earnings per share (EPS) amounts. Basic EPS is calculated by dividing net income attributable to Johnson Controls, Inc. by the weighted average number of common shares outstanding during the reporting period. Diluted EPS is calculated by dividing net income attributable to Johnson Controls, Inc. by the weighted average number of common shares and common equivalent shares outstanding during the reporting period that are calculated using the treasury stock method for stock options and unvested restricted stock. The treasury stock method assumes that the Company uses the proceeds from the exercise of awards to repurchase common stock at the average market price during the period. The assumed proceeds under the treasury stock method include the purchase price that the grantee will pay in the future, compensation cost for future service that the Company has not yet recognized and any windfall tax benefits that would be credited to capital in excess of par value when the award generates a tax deduction. If there would be a shortfall resulting in a charge to capital in excess of par value, such an amount would be a reduction of the proceeds. For unvested restricted stock, assumed proceeds under the treasury stock method would include unamortized compensation cost and windfall tax benefits or shortfalls.
    
The following table reconciles the numerators and denominators used to calculate basic and diluted earnings per share (in millions):
 
Three Months Ended
December 31,
 
2013
 
2012
Income Available to Common Shareholders
 
 
 
Basic and diluted income available to common shareholders
$
469

 
$
359

 
 
 
 
Weighted Average Shares Outstanding
 
 
 
Basic weighted average shares outstanding
674.1

 
683.1

Effect of dilutive securities:
 
 
 
Stock options and unvested restricted stock
8.1

 
3.6

Diluted weighted average shares outstanding
682.2

 
686.7

 
 
 
 
Antidilutive Securities
 
 
 
Options to purchase common shares
0.2

 
2.7


During the three months ended December 31, 2013, the Company declared a dividend of $0.22 per common share, which was paid in the month subsequent to the end of the fiscal quarter. The Company declared and paid a dividend of $0.19 per common share in the three months ended December 31, 2012.


19

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
(unaudited)

14.
Equity and Noncontrolling Interests

The following schedule presents changes in consolidated equity attributable to Johnson Controls, Inc. and noncontrolling interests (in millions):
 
Three Months Ended December 31, 2013
 
Three Months Ended December 31, 2012
 
Equity
Attributable to
Johnson
Controls, Inc.
 
Equity
Attributable to
Noncontrolling
Interests
 
Total Equity
 
Equity
Attributable to
Johnson
Controls, Inc.
 
Equity
Attributable to
Noncontrolling
Interests
 
Total Equity
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance, September 30
$
12,314

 
$
260

 
$
12,574

 
$
11,625

 
$
148

 
$
11,773

Total comprehensive income:

 

 
 
 

 

 
 
Net income
469

 
22

 
491

 
359

 
11

 
370

Foreign currency translation adjustments
(14
)
 
—

 
(14
)
 
44

 
(1
)
 
43

Realized and unrealized losses on derivatives
(1
)
 
—

 
(1
)
 
(1
)
 
—

 
(1
)
Realized and unrealized gains (losses) on marketable common stock
(2
)
 
—

 
(2
)
 
3

 
—

 
3

Pension and postretirement plans
(1
)
 
—

 
(1
)
 
(9
)
 
—

 
(9
)
Other comprehensive income (loss)
(18
)
 
—

 
(18
)
 
37

 
(1
)
 
36

Comprehensive income
451

 
22

 
473

 
396

 
10

 
406

 
 
 
 
 
 
 
 
 
 
 
 
Other changes in equity:
 
 
 
 
 
 
 
 
 
 
 
Cash dividends — common stock
(147
)
 
—

 
(147
)
 
(130
)
 
—

 
(130
)
Dividends attributable to noncontrolling interests
—

 
(21
)
 
(21
)
 
—

 
(3
)
 
(3
)
Redemption value adjustment attributable to redeemable noncontrolling interests
—

 
—

 
—

 
2

 
—

 
2

Repurchases of common stock
(1,199
)
 
—

 
(1,199
)
 
—

 
—

 
—

Other, including options exercised
112

 
—

 
112

 
40

 
—

 
40

Ending balance, December 31
$
11,531

 
$
261

 
$
11,792

 
$
11,933

 
$
155

 
$
12,088


In November 2013, the Company's Board of Directors authorized a $3 billion increase in the Company's share repurchase program, which brought the total authorized amount under the repurchase program to $3.65 billion. The share 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. During the first quarter of fiscal 2014, the Company repurchased approximately $1.2 billion of shares, including $800 million as part of an accelerated share repurchase agreement, under these authorizations.

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


20

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
(unaudited)

The following schedule presents changes in the redeemable noncontrolling interests (in millions):
 
Three Months Ended
December 31,
 
2013
 
2012
 
 
 
 
Beginning balance, September 30
$
157

 
$
253

Net income
14

 
19

Dividends
(2
)
 
—

Redemption value adjustment
—

 
(2
)
Ending balance, December 31
$
169

 
$
270


The following schedule presents changes in accumulated other comprehensive income (AOCI) attributable to Johnson Controls, Inc. (in millions, net of tax):
 
Three Months Ended
December 31,
 
2013
 
2012
 
 
 
 
Foreign currency translation adjustments
 
 
 
Balance at beginning of period
$
392

 
$
413

Aggregate adjustment for the period (net of tax effect of $6 and $6)
(14
)
 
44

Balance at end of period
378

 
457

 
 
 
 
Realized and unrealized gains (losses) on derivatives
 
 
 
Balance at beginning of period
7

 
12

Current period changes in fair value (net of tax effect of $0 and $1)
—

 
3

Reclassification to income (net of tax effect of $0 and $(2)) *
(1
)
 
(4
)
Balance at end of period
6

 
11

 
 
 
 
Realized and unrealized gains (losses) on marketable common stock
 
 
 
Balance at beginning of period
7

 
5

Current period changes in fair value (net of tax effect of $0)
(1
)
 
3

Reclassification to income (net of tax effect of $0) **
(1
)
 
—

Balance at end of period
5

 
8

 
 
 
 
Pension and postretirement plans
 
 
 
Balance at beginning of period
12

 
28

Reclassification to income (net of tax effect of $(1) and $(4)) ***
(1
)
 
(9
)
Balance at end of period
11

 
19

 
 
 
 
Accumulated other comprehensive income, end of period
$
400

 
$
495


* Refer to Note 15, "Derivative Instruments and Hedging Activities," of the notes to consolidated financial statements for disclosure of the line items on the consolidated statements of income affected by reclassifications from AOCI into income related to derivatives.

** Refer to Note 16, "Fair Value Measurements," of the notes to consolidated financial statements for disclosure of the line item on the consolidated statements of income affected by reclassifications from AOCI into income related to marketable common stock.

21

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
(unaudited)


*** Refer to Note 11, "Pension and Postretirement Plans," of the notes to consolidated financial statements for disclosure of the components of the Company's net periodic benefit costs associated with its defined benefit pension and postretirement plans. For the three months ended December 31, 2013, the amount reclassified from AOCI into income for pension and postretirement plans was primarily recorded in cost of sales on the consolidated statement of income. For the three months ended December 31, 2012, the amount reclassified from AOCI into income was split approximately evenly between cost of sales and selling, general and administrative expenses on the consolidated statement of income.

15.
Derivative Instruments and Hedging Activities

The Company selectively uses derivative instruments to reduce market risk associated with changes in foreign currency, commodities, stock-based compensation liabilities and interest rates. Under Company policy, the use of derivatives is restricted to those intended for hedging purposes; the use of any derivative instrument for speculative purposes is strictly prohibited. A description of each type of derivative utilized by the Company to manage risk is included in the following paragraphs. In addition, refer to Note 16, “Fair Value Measurements,” of the notes to consolidated financial statements for information related to the fair value measurements and valuation methods utilized by the Company for each derivative type.

The Company has global operations and participates in the foreign exchange markets to minimize its risk of loss from fluctuations in foreign currency exchange rates. The Company primarily uses foreign currency exchange contracts to hedge certain of its foreign exchange rate exposures. The Company hedges 70% to 90% of the nominal amount of each of its known foreign exchange transactional exposures.

The Company has entered into cross-currency interest rate swaps to selectively hedge portions of its net investment in Japan. The currency effects of the cross-currency interest rate swaps are reflected in the accumulated other comprehensive income (AOCI) account within shareholders’ equity attributable to Johnson Controls, Inc. where they offset gains and losses recorded on the Company’s net investment in Japan. At December 31, 2013, the Company had four cross-currency interest rate swaps outstanding totaling 20 billion yen. At September 30, 2013, the Company had five cross-currency interest rate swaps outstanding totaling 25 billion yen. At December 31, 2012, the Company had three cross-currency interest rate swaps outstanding totaling 20 billion yen.

The Company uses commodity contracts in the financial derivatives market in cases where commodity price risk cannot be naturally offset or hedged through supply base fixed price contracts. Commodity risks are systematically managed pursuant to policy guidelines. As cash flow hedges, the effective portion of the hedge gains or losses due to changes in fair value are initially recorded as a component of AOCI and are subsequently reclassified into earnings when the hedged transactions, typically sales or costs related to sales, occur and affect earnings. Any ineffective portion of the hedge is reflected in the consolidated statements of income. The maturities of the commodity contracts coincide with the expected purchase of the commodities. The Company had the following outstanding commodity hedge contracts that hedge forecasted purchases:
 
 
 
 
Volume Outstanding as of
Commodity
 
Units
 
December 31, 2013
 
September 30, 2013
 
December 31, 2012
Copper
 
Pounds
 
12,070,000

 
14,705,000

 
11,960,000

Lead
 
Metric Tons
 
7,500

 
23,900

 
23,700

Aluminum
 
Metric Tons
 
1,693

 
2,709

 
2,084

Tin
 
Metric Tons
 
1,504

 
2,052

 
1,008


The Company selectively uses equity swaps to reduce market risk associated with certain of its stock-based compensation plans, such as its deferred compensation plans. These equity compensation liabilities increase as the Company’s stock price increases and decrease as the Company’s stock price decreases. In contrast, the value of the swap agreement moves in the opposite direction of these liabilities, allowing the Company to fix a portion of the liabilities at a stated amount. As of December 31, 2013, September 30, 2013 and December 31, 2012, the Company had hedged approximately 4.6 million, 4.4 million and 4.5 million shares of its common stock, respectively.


22

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
(unaudited)

The Company selectively uses interest rate swaps to reduce market risk associated with changes in interest rates for its fixed-rate notes. As fair value hedges, the interest rate swaps and related debt balances are valued under a market approach using publicized swap curves. Changes in the fair value of the swap and hedged portion of the debt are recorded in the consolidated statements of income. In the second quarter of fiscal 2011, the Company entered into a fixed to floating interest rate swap totaling $100 million to hedge the coupon of its 5.8% notes which matured on November 15, 2012, two fixed to floating interest rate swaps totaling $300 million to hedge the coupon of its 4.875% notes which matured on September 15, 2013, and five fixed to floating interest rate swaps totaling $450 million to hedge the coupon of its 1.75% notes maturing March 1, 2014. In the fourth quarter of fiscal 2013, the Company entered into a fixed to floating interest rate swap totaling approximately $125 million to hedge the coupon of its 7.70% notes maturing March 1, 2015. Additionally, in the fourth quarter of fiscal 2013, the Company entered into four fixed to floating interest rate swaps totaling $800 million to hedge the coupon of its 5.50% notes maturing January 15, 2016. There were ten interest rate swaps outstanding as of December 31, 2013 and September 30, 2013, and seven interest rate swaps outstanding as of December 31, 2012.

In September 2005, the Company entered into three forward treasury lock agreements to reduce the market risk associated with changes in interest rates associated with the Company’s anticipated fixed-rate note issuance to finance the acquisition of York International (cash flow hedge). The three forward treasury lock agreements, which had a combined notional amount of $1.3 billion, fixed a portion of the future interest cost for 5-year, 10-year and 30-year notes. The fair value of each treasury lock agreement, or the difference between the treasury lock reference rate and the fixed rate at time of note issuance, is amortized to interest expense over the life of the respective note issuance. In January 2006, in connection with the Company’s debt refinancing, the three forward treasury lock agreements were terminated.

The following table presents the location and fair values of derivative instruments and hedging activities included in the Company’s consolidated statements of financial position (in millions):
 
Derivatives and Hedging Activities Designated as
Hedging Instruments under ASC 815
 
Derivatives and Hedging Activities Not Designated as Hedging Instruments under ASC 815
 
December 31,
2013
 
September 30, 2013
 
December 31,
2012
 
December 31,
2013
 
September 30, 2013
 
December 31,
2012
Other current assets
 
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange derivatives
$
21

 
$
19

 
$
10

 
$
14

 
$
14

 
$
4

Commodity derivatives
5

 
8

 
8

 
—

 
—

 
—

Interest rate swaps
1

 
2

 
2

 
—

 
—

 
—

Cross-currency interest rate swaps
19

 
7

 
21

 
—

 
—

 
—

Other noncurrent assets
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
4

 
3

 
5

 
—

 
—

 
—

Equity swap
—

 
—

 
—

 
236

 
183

 
138

Total assets
$
50

 
$
39

 
$
46

 
$
250

 
$
197

 
$
142

 
 
 
 
 
 
 
 
 
 
 
 
Other current liabilities
 
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange derivatives
$
24

 
$
21

 
$
12

 
$
12

 
$
11

 
$
5

Commodity derivatives
1

 
3

 
—

 
—

 
—

 
—

Current portion of long-term debt
 
 
 
 
 
 
 
 
 
 
 
Fixed rate debt swapped to floating
451

 
452

 
301

 
—

 
—

 
—

Long-term debt
 
 
 
 
 
 
 
 
 
 
 
Fixed rate debt swapped to floating
928

 
927

 
455

 
—

 
—

 
—

Total liabilities
$
1,404

 
$
1,403

 
$
768

 
$
12

 
$
11

 
$
5


The Company enters into International Swaps and Derivatives Associations (ISDA) master netting agreements with counterparties that permit the net settlement of amounts owed under the derivative contracts. The master netting agreements generally provide for net settlement of all outstanding contracts with a counterparty in the case of an event of default or a termination event. The Company has not elected to offset the fair value positions of the derivative contracts recorded in the consolidated statements of financial position. Collateral is generally not required of the Company or the counterparties under the master netting agreements. As of December 31, 2013, September 30, 2013 and December 31, 2012, no cash collateral was received or pledged under the master netting agreements.

23

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
(unaudited)

The gross and net amounts of derivative assets and liabilities were as follows (in millions):
 
Fair Value of Assets
 
Fair Value of Liabilities
 
December 31,
2013
 
September 30, 2013
 
December 31,
2012
 
December 31,
2013
 
September 30, 2013
 
December 31,
2012
Gross amount recognized
$
300

 
$
236

 
$
188

 
$
1,416

 
$
1,414

 
$
773

Gross amount eligible for offsetting
(9
)
 
(9
)
 
(7
)
 
(9
)
 
(9
)
 
(7
)
Net amount
$
291

 
$
227

 
$
181

 
$
1,407

 
$
1,405

 
$
766


The following tables present the location and amount of the effective portion of gains and losses gross of tax on derivative instruments and related hedge items reclassified from AOCI into the Company’s consolidated statements of income for the three months ended December 31, 2013 and 2012 and amounts recorded in AOCI net of tax in the consolidated statements of financial position (in millions):
 
 
 
 
Amount of Gain (Loss) Reclassified from AOCI into Income
Derivatives in ASC 815 Cash Flow Hedging Relationships
 
Location of Gain (Loss) Reclassified from AOCI into Income
 
Three Months Ended December 31,
 
2013
 
2012
Foreign currency exchange derivatives
 
Cost of sales
 
$
2

 
$
1

Commodity derivatives
 
Cost of sales
 
(1
)
 
5

Total
 
 
 
$
1

 
$
6


Derivatives in ASC 815 Cash Flow Hedging Relationships
 
Amount of Gain (Loss) Recognized in AOCI on Derivative
 
December 31, 2013
 
September 30, 2013
 
December 31, 2012
Foreign currency exchange derivatives
 
$
(4
)
 
$
(3
)
 
$
(2
)
Commodity derivatives
 
3

 
3

 
5

Forward treasury locks
 
7

 
7

 
8

Total
 
$
6

 
$
7

 
$
11

 
 
 
 
 
 
Amount of Gain (Loss) Recognized in Income on Derivative
Derivatives in ASC 815 Fair Value Hedging Relationships
 
Location of Gain (Loss) Recognized in Income on Derivative
 
Three Months Ended December 31,
 
2013
 
2012
Interest rate swaps
 
Net financing charges
 
$
—

 
$
(1
)
Fixed rate debt swapped to floating
 
Net financing charges
 
—

 
1

Total
 
 
 
$
—

 
$
—


 
 
 
 
Amount of Gain (Loss) Recognized in Income on Derivative
Derivatives Not Designated as Hedging Instruments under ASC 815
 
Location of Gain (Loss) Recognized in Income on Derivative
 
Three Months Ended December 31,
 
2013
 
2012
Foreign currency exchange derivatives
 
Cost of sales
 
$
(1
)
 
$
—

Foreign currency exchange derivatives
 
Net financing charges
 
3

 
(1
)
Foreign currency exchange derivatives
 
Provision for income taxes
 
—

 
4

Equity swap
 
Selling, general and administrative
 
44

 
15

Total
 
 
 
$
46

 
$
18


The amount of gains recognized in cumulative translation adjustment (CTA) within AOCI on the effective portion of outstanding net investment hedges was $11 million, $4 million and $12 million at December 31, 2013, September 30, 2013 and December 31, 2012, respectively. For the three months ended December 31, 2013 and 2012, no gains or losses were reclassified from CTA into income for the Company’s outstanding net investment hedges, and no gains or losses were recognized in income for the ineffective portion of cash flow hedges.


24

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
(unaudited)

16.
Fair Value Measurements

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

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

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

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

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

The following tables present the Company’s fair value hierarchy for those assets and liabilities measured at fair value as of December 31, 2013, September 30, 2013 and December 31, 2012 (in millions):
 
Fair Value Measurements Using:
 
Total as of
December 31, 2013
 
Quoted Prices
in Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Other current assets
 
 
 
 
 
 
 
Foreign currency exchange derivatives
$
35

 
$
—

 
$
35

 
$
—

Commodity derivatives
5

 
—

 
5

 
—

Interest rate swaps
1

 
—

 
1

 
—

        Cross-currency interest rate swap
19

 
—

 
19

 
—

Other noncurrent assets
 
 
 
 
 
 
 
Interest rate swaps
4

 
—

 
4

 
—

Investments in marketable common stock
25

 
25

 
—

 
—

Equity swap
236

 
236

 
—

 
—

Total assets
$
325

 
$
261

 
$
64

 
$
—

Other current liabilities
 
 
 
 
 
 
 
Foreign currency exchange derivatives
$
36

 
$
—

 
$
36

 
$
—

Commodity derivatives
1

 
—

 
1

 
—

Current portion of long-term debt
 
 
 
 
 
 
 
Fixed rate debt swapped to floating
451

 
—

 
451

 
—

Long-term debt
 
 
 
 
 
 
 
Fixed rate debt swapped to floating
928

 
—

 
928

 
—

Total liabilities
$
1,416

 
$
—

 
$
1,416

 
$
—

 

25

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
December 31, 2013
(unaudited)

 
Fair Value Measurements Using:
 
Total as of
September 30, 2013
 
Quoted Prices
in Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Other current assets
 
 
 
 
 
 
 
Foreign currency exchange derivatives
$
33

 
$
—

 
$
33

 
$
—

Commodity derivatives
8

 
—

 
8

 
—

Interest rate swaps
2

 
—

 
2

 
—

Cross-currency interest rate swaps
7

 
—

 
7

 
—

Other noncurrent assets
 
 
 
 
 
 
 
Interest rate swaps
3

 
—

 
3

 
—

Investments in marketable common stock
30

 
30

 
—

 
—

Equity swap
183

 
183

 
—

 
—

Total assets
$
266

 
$
213

 
$
53

 
$
—

Other current liabilities