Q3 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 June 30, 2014
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 June 30, 2014
Common Stock: $1.00 par value per share
 
666,075,391
 
 
 
 
 

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)
 
 
 
 
 
 
 
June 30,
2014
 
September 30,
2013
 
June 30,
2013
Assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
160

 
$
1,055

 
$
391

Accounts receivable - net
6,710

 
7,206

 
7,259

Inventories
2,591

 
2,325

 
2,470

Assets held for sale
1,575

 
804

 
—

Other current assets
2,411

 
2,308

 
2,619

Current assets
13,447

 
13,698

 
12,739

 
 
 
 
 
 
Property, plant and equipment - net
6,260

 
6,585

 
6,569

Goodwill
7,658

 
6,589

 
7,135

Other intangible assets - net
1,669

 
999

 
1,055

Investments in partially-owned affiliates
966

 
1,024

 
1,022

Noncurrent assets held for sale
628

 
—

 
—

Other noncurrent assets
2,446

 
2,623

 
3,300

Total assets
$
33,074

 
$
31,518

 
$
31,820

 
 
 
 
 
 
Liabilities and Equity
 
 
 
 
 
 
 
 
 
 
 
Short-term debt
$
930

 
$
119

 
$
312

Current portion of long-term debt
141

 
819

 
1,119

Accounts payable
5,567

 
6,318

 
6,217

Accrued compensation and benefits
1,134

 
1,215

 
1,106

Liabilities held for sale
994

 
402

 
—

Other current liabilities
3,377

 
3,244

 
3,030

Current liabilities
12,143

 
12,117

 
11,784

 
 
 
 
 
 
Long-term debt
6,416

 
4,560

 
4,593

Pension and postretirement benefits
717

 
750

 
1,205

Other noncurrent liabilities
1,519

 
1,360

 
1,602

Long-term liabilities
8,652

 
6,670

 
7,400

 
 
 
 
 
 
Commitments and contingencies (Note 19)


 


 


 
 
 
 
 
 
Redeemable noncontrolling interests
184

 
157

 
205

 
 
 
 
 
 
Common stock, $1.00 par value
706

 
700

 
697

Capital in excess of par value
2,644

 
2,399

 
2,294

Retained earnings
9,793

 
9,328

 
9,359

Treasury stock, at cost
(1,734
)
 
(531
)
 
(406
)
Accumulated other comprehensive income
406

 
418

 
244

Shareholders’ equity attributable to Johnson Controls, Inc.
11,815

 
12,314

 
12,188

Noncontrolling interests
280

 
260

 
243

Total equity
12,095

 
12,574

 
12,431

Total liabilities and equity
$
33,074

 
$
31,518

 
$
31,820


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
June 30,
 
Nine Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
Net sales
 
 
 
 
 
 
 
Products and systems*
$
8,903

 
$
8,447

 
$
26,066

 
$
24,570

Services*
1,909

 
2,052

 
5,783

 
6,140

 
10,812

 
10,499

 
31,849

 
30,710

Cost of sales
 
 
 
 
 
 
 
Products and systems*
7,623

 
7,265

 
22,406

 
21,222

Services*
1,526

 
1,670

 
4,658

 
5,048

 
9,149

 
8,935

 
27,064

 
26,270

 
 
 
 
 
 
 
 
Gross profit
1,663

 
1,564

 
4,785

 
4,440

 
 
 
 
 
 
 
 
Selling, general and administrative expenses
(977
)
 
(977
)
 
(3,014
)
 
(3,024
)
Gain (loss) on business divestitures - net
(120
)
 
29

 
(111
)
 
29

Restructuring and impairment costs
(162
)
 
(143
)
 
(162
)
 
(227
)
Net financing charges
(67
)
 
(67
)
 
(178
)
 
(193
)
Equity income
88

 
74

 
273

 
305

 
 
 
 
 
 
 
 
Income from continuing operations before income taxes
425

 
480

 
1,593

 
1,330

 
 
 
 
 
 
 
 
Income tax provision (benefit)
167

 
(72
)
 
388

 
227

 
 
 
 
 
 
 
 
Income from continuing operations
258

 
552

 
1,205

 
1,103

 
 
 
 
 
 
 
 
Income (loss) from discontinued operations, net of tax (Note 4)
(62
)
 
20

 
(216
)
 
50

 
 
 
 
 
 
 
 
Net income
196

 
572

 
989

 
1,153

 
 
 
 
 
 
 
 
Income from continuing operations attributable to noncontrolling interests
20

 
22

 
83

 
80

 
 
 
 
 
 
 
 
Net income attributable to Johnson Controls, Inc.
$
176

 
$
550

 
$
906

 
$
1,073

 
 
 
 
 
 
 
 
Amounts attributable to Johnson Controls, Inc. common shareholders:
 
 
 
 
 
 
 
Income from continuing operations
$
238

 
$
530

 
$
1,122

 
$
1,023

Income (loss) from discontinued operations
(62
)
 
20

 
(216
)
 
50

Net income
$
176

 
$
550

 
$
906

 
$
1,073

 
 
 
 
 
 
 
 
Basic earnings (loss) per share attributable to Johnson Controls, Inc.
 
 
 
 
 
 
 
Continuing operations
$
0.36

 
$
0.77

 
$
1.68

 
$
1.50

Discontinued operations
(0.09
)
 
0.03

 
(0.32
)
 
0.07

Net income **
$
0.26

 
$
0.80

 
$
1.36

 
$
1.57

 
 
 
 
 
 
 
 
Diluted earnings (loss) per share attributable to Johnson Controls, Inc.
 
 
 
 
 
 
 
Continuing operations
$
0.35

 
$
0.77

 
$
1.66

 
$
1.49

Discontinued operations
(0.09
)
 
0.03

 
(0.32
)
 
0.07

Net income
$
0.26

 
$
0.80

 
$
1.34

 
$
1.56

*
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.
**
Certain items do not sum due to rounding.

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
June 30,
 
Nine Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Net income
$
196

 
$
572

 
$
989

 
$
1,153

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
18

 
(52
)
 
—

 
(188
)
Realized and unrealized gains (losses) on derivatives
1

 
(3
)
 
(3
)
 
(11
)
Realized and unrealized losses on marketable common stock
—

 
(7
)
 
(7
)
 
(1
)
Pension and postretirement plans
—

 
(3
)
 
(2
)
 
(15
)
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
19

 
(65
)
 
(12
)
 
(215
)
 
 
 
 
 
 
 
 
Total comprehensive income
215

 
507

 
977

 
938

 
 
 
 
 
 
 
 
Comprehensive income attributable to noncontrolling interests
20

 
21

 
83

 
79

 
 
 
 
 
 
 
 
Comprehensive income attributable to Johnson Controls, Inc.
$
195

 
$
486

 
$
894

 
$
859



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
June 30,
 
Nine Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
Operating Activities
 
 
 
 
 
 
 
Net income attributable to Johnson Controls, Inc.
$
176

 
$
550

 
$
906

 
$
1,073

Income from continuing operations attributable to noncontrolling interests
20

 
22

 
83

 
80

Net income
196

 
572

 
989

 
1,153

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
 
 
 
 
Depreciation and amortization
240

 
239

 
731

 
696

Pension and postretirement benefit expense (income)
9

 
8

 
25

 
(5
)
Pension and postretirement contributions
(12
)
 
(16
)
 
(59
)
 
(61
)
Equity in earnings of partially-owned affiliates, net of dividends received
49

 
50

 
(96
)
 
(49
)
Deferred income taxes
(7
)
 
(144
)
 
(60
)
 
(9
)
Non-cash restructuring and impairment charges
88

 
36

 
88

 
49

Loss (gain) on business divestitures - net
120

 
(29
)
 
111

 
(29
)
Fair value adjustment of equity investment
—

 
—

 
(19
)
 
(82
)
Equity-based compensation
20

 
15

 
61

 
46

Other
3

 
(5
)
 
(4
)
 
(9
)
Changes in assets and liabilities, excluding acquisitions and divestitures:
 
 
 
 
 
 
 
Receivables
10

 
60

 
203

 
6

Inventories
(152
)
 
(32
)
 
(313
)
 
(151
)
Other assets
(45
)
 
7

 
(153
)
 
(285
)
Restructuring reserves
76

 
66

 
(48
)
 
67

Accounts payable and accrued liabilities
194

 
235

 
(181
)
 
317

Accrued income taxes
(75
)
 
(28
)
 
(112
)
 
(105
)
Cash provided by operating activities
714

 
1,034

 
1,163

 
1,549

 
 
 
 
 
 
 
 
Investing Activities
 
 
 
 
 
 
 
Capital expenditures
(274
)
 
(265
)
 
(876
)
 
(929
)
Sale of property, plant and equipment
12

 
7

 
61

 
53

Acquisition of businesses, net of cash acquired
(1,589
)
 
—

 
(1,717
)
 
(113
)
Business divestitures
(54
)
 
—

 
(41
)
 
—

Changes in long-term investments
(3
)
 
(10
)
 
3

 
(27
)
Other
4

 
—

 
13

 
53

Cash used by investing activities
(1,904
)
 
(268
)
 
(2,557
)
 
(963
)
 
 
 
 
 
 
 
 
Financing Activities
 
 
 
 
 
 
 
Increase (decrease) in short-term debt - net
(446
)
 
(642
)
 
813

 
(5
)
Increase in long-term debt
1,696

 
—

 
1,998

 
91

Repayment of long-term debt
(10
)
 
(4
)
 
(826
)
 
(118
)
Stock repurchases
—

 
(175
)
 
(1,199
)
 
(225
)
Payment of cash dividends
(146
)
 
(130
)
 
(422
)
 
(383
)
Proceeds from the exercise of stock options
56

 
88

 
173

 
173

Other
(6
)
 
7

 
3

 
35

Cash provided (used) by financing activities
1,144

 
(856
)
 
540

 
(432
)
Effect of exchange rate changes on cash and cash equivalents
24

 
—

 
(15
)
 
(28
)
Change in cash held for sale
(27
)
 
—

 
(26
)
 
—

Increase (decrease) in cash and cash equivalents
(49
)
 
(90
)
 
(895
)
 
126

Cash and cash equivalents at beginning of period
209

 
481

 
1,055

 
265

Cash and cash equivalents at end of period
$
160

 
$
391

 
$
160

 
$
391

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

6

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
June 30, 2014
(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 and nine month periods ended June 30, 2014 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 June 30, 2014, September 30, 2013 and June 30, 2013, 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 and nine month periods ended June 30, 2014 and 2013 was not material. The VIE is named as a co-obligor under a third party debt agreement of $171 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 $56 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
June 30, 2014
(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):
 
June 30,
2014
 
September 30,
2013
 
June 30,
2013
 
 
 
 
 
 
Current assets
$
260

 
$
273

 
$
242

Noncurrent assets
136

 
139

 
148

Total assets
$
396

 
$
412

 
$
390

 
 
 
 
 
 
Current liabilities
$
191

 
$
212

 
$
202

Noncurrent liabilities
37

 
39

 
23

Total liabilities
$
228

 
$
251

 
$
225


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 June 30, 2013, the Company had a 40% interest in an equity method investee whereby the investee was a VIE. The investee produces and sells lead-acid batteries of which the Company both purchases and supplies certain batteries to complement each investment partner’s 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 June 30, 2013 was $56 million and $58 million, respectively, which represented the Company’s maximum exposure to loss. Current assets and liabilities related to the VIE were immaterial and represented 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 $58 million, $57 million and $56 million at June 30, 2014, September 30, 2013 and June 30, 2013, 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
June 30, 2014
(unaudited)


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

Restricted Cash

At June 30, 2014, September 30, 2013 and June 30, 2013, the Company held restricted cash of approximately $21 million, $32 million and $18 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 June 30, 2013, as described below, 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.

At March 31, 2014, the Company determined that its Automotive Experience Electronics segment met the criteria to be classified as a discontinued operation, which required retrospective application to financial information for all periods presented. Refer to Note 4, "Discontinued Operations," of the notes to consolidated financial statements for further information regarding the Company's discontinued operations.


2. 
New Accounting Standards

In May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." ASU No. 2014-09 clarifies the principles for recognizing revenue when an entity either enters into a contract with customers to transfer goods or services or enters into a contract for the transfer of non-financial assets. ASU No. 2014-09 will be effective for the Company for the quarter ending December 31, 2017, with early adoption not permitted. The Company is currently assessing the impact adoption of this guidance may have on its consolidated financial statements.

In April 2014, the FASB issued ASU No. 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity." ASU No. 2014-08 limits discontinued operations reporting to situations where the disposal represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results, and requires expanded disclosures for discontinued operations. ASU No. 2014-08 will be effective prospectively for the Company for disposals that occur during or after the quarter ending December 31, 2015, with early adoption permitted in certain instances. The significance of this guidance for the Company is dependent on any future dispositions or disposals.


9

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
June 30, 2014
(unaudited)

In July 2013, the FASB issued 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 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 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

On June 16, 2014, the Company completed its purchase of Air Distribution Technologies (ADT) for approximately $1.6 billion, net of cash acquired, all of which was paid in the nine months ended June 30, 2014. ADT is one of the largest independent providers of air distribution and ventilation products in North America. On June 13, 2014, the Company completed a public offering of $1.7 billion aggregate principal amount of fixed rate senior notes to finance the purchase of ADT. In connection with the ADT acquisition, the Company recorded goodwill of $932 million in the Building Efficiency Other segment. The Company also recorded approximately $414 million of intangible assets that are subject to amortization of which approximately $408 million was assigned to customer relationships with useful lives between 16 and 20 years. In addition, the Company recorded approximately $214 million of trade names that are not subject to amortization. The purchase price allocations may be subsequently adjusted to reflect final valuation studies.

In the first six months 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 nine months ended June 30, 2014. 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 $104 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.


10

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
June 30, 2014
(unaudited)

In the three months ended June 30, 2014, the Company completed the divestiture of the Automotive Experience Interiors headliner and sun visor product lines. As part of this divestiture, the Company made a cash payment of $54 million to the buyer to fund future operational improvement initiatives. The Company recorded a pre-tax loss on divestiture, including transaction costs, of $95 million. The tax impact of the divestiture was income tax expense of $38 million due to the jurisdictional mix of gains and losses on the sale, which resulted in non-benefited losses in certain countries and taxable gains in other countries. There was no change in goodwill as a result of this transaction.

In the three months ended June 30, 2014, the Company recorded a $25 million loss in the Building Efficiency Global Workplace Solutions segment related to the indemnification of certain costs associated with a divested business in 2004.

In the first three months of fiscal 2014, the Company completed one divestiture for a sales price of $13 million, all of which was received as of June 30, 2014. 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 nine months of fiscal 2014, the Company adjusted the purchase price allocation of certain fiscal 2013 acquisitions and recorded additional goodwill of $2 million.

In the second quarter of fiscal 2014, the Company announced that it had reached an agreement to sell the remainder of its Automotive Experience Electronics business to Visteon Corporation, subject to regulatory and other approvals. The sale closed on July 1, 2014. At March 31, 2014, the Company determined that the Automotive Experience Electronics segment met the criteria to be classified as a discontinued operation. Refer to Note 4, "Discontinued Operations," of the notes to consolidated financial statements for further disclosure related to the Company's discontinued operations.

In the first nine months of fiscal 2013, the Company completed two acquisitions for a combined purchase price, net of cash acquired, of $113 million, all of which was paid in the nine months ended June 30, 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 $220 million. 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 $82 million in Automotive Experience Seating equity income to adjust the Company's existing equity investment in the partially-owned affiliate in India to fair value.

In the three months ended June 30, 2013, the Company completed one divestiture for a sales price of approximately $80 million, which was received during the fourth quarter of fiscal 2013. The divestiture was not material to the Company's consolidated financial statements. In connection with the divestiture, the Company recorded a gain of $29 million and reduced goodwill by $15 million in the Automotive Experience Seating segment.


4.
Discontinued Operations

In the fourth quarter of fiscal 2013, the Company completed its divestiture of its Automotive Experience Electronics' HomeLink® product line to Gentex Corporation. In the second quarter of fiscal 2014, the Company announced that it had reached a definitive agreement to sell the remainder of the Automotive Experience Electronics business to Visteon Corporation, subject to regulatory and other approvals. The sale closed on July 1, 2014. At March 31, 2014, the Company determined that the Automotive Experience Electronics segment met the criteria to be classified as a discontinued operation, which required retrospective application to financial information for all periods presented. The Company did not allocate any general corporate overhead to discontinued operations. The assets and liabilities of the Automotive Experience Electronics segment were reflected as held for sale in the consolidated statements of financial position at June 30, 2014 and September 30, 2013.

The following table summarizes the results of the Automotive Experience Electronics business, which includes the HomeLink® product line in fiscal 2013 results, reclassified as discontinued operations for the three and nine month periods ended June 30, 2014 and 2013 (in millions):

11

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
June 30, 2014
(unaudited)

 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Net sales
$
336

 
$
332

 
$
1,014

 
$
973

 
 
 
 
 
 
 
 
Income (loss) from discontinued operations before income taxes
(62
)
 
39

 
(8
)
 
99

Provision (benefit) for income taxes on discontinued operations
(3
)
 
18

 
200

 
46

Income from discontinued operations attributable to noncontrolling interests, net of tax
3

 
1

 
8

 
3

Income (loss) from discontinued operations, net of tax
$
(62
)
 
$
20

 
$
(216
)
 
$
50


For the three months ended June 30, 2014, the discontinued operations before income taxes included divestiture-related losses of $80 million comprised of asset and investment impairment charges of $43 million, transaction costs of $27 million and severance obligations of $10 million.

For the three months ended June 30, 2014, the Company's effective tax rate for discontinued operations was different than the U.S. federal statutory rate of 35% primarily due to unbenefited foreign losses. For the nine months ended June 30, 2014, the Company's effective tax rate for discontinued operations was greater than the U.S. federal statutory rate of 35% primarily due to a second quarter discrete non-cash tax charge of $180 million related to the repatriation of foreign cash associated with the divestiture of the Electronics business and unbenefited foreign losses. For the three and nine months ended June 30, 2013, the Company's effective tax rate was greater than the U.S. federal statutory rate of 35% primarily due to unbenefited foreign losses.

Assets and Liabilities Held for Sale

The Company has determined that certain of its businesses met the criteria to be classified as held for sale. The Automotive Experience Electronics segment was classified as held for sale beginning September 30, 2013, and the headliner and sun visor product lines were also classified as held for sale as of September 30, 2013. The headliner and sun visor product lines were sold during the third quarter of fiscal 2014; refer to Note 3, "Acquisitions and Divestitures," of the notes to consolidated financial statements for additional information.





















12

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
June 30, 2014
(unaudited)

The following table summarizes the carrying value of the Electronics and headliner and sun visor assets and liabilities held for sale (in millions):
 
June 30,
 2014
 
September 30,
2013
 
 
 
 
Cash and cash equivalents
$
30

 
$
4

Accounts receivable - net
185

 
197

Inventories
107

 
124

Other current assets
57

 
91

Property, plant and equipment - net
189

 
167

Goodwill
62

 
74

Other intangible assets - net
63

 
57

Investments in partially-owned affiliates
7

 
26

Other noncurrent assets
67

 
64

Assets held for sale
$
767

 
$
804

 
 
 
 
Short-term debt
$
4

 
$
5

Accounts payable
176

 
253

Accrued compensation and benefits
27

 
46

Other current liabilities
29

 
85

Pension and postretirement benefits
6

 
13

Liabilities held for sale
$
242

 
$
402


Assets and liabilities classified as held for sale are required to be recorded at the lower of carrying value or fair value less any costs to sell. Accordingly, the Company recorded asset and investment impairment charges of $43 million in the third quarter of fiscal 2014 to write down the carrying value of the Electronics assets held for sale to fair value less any costs to sell. The Company recorded an impairment charge of $41 million in the fourth quarter of fiscal 2013 to write down the headliner and sun visor long-lived assets to zero. The headliner and sun visor 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.




















13

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
June 30, 2014
(unaudited)

In May 2014, the Company announced the signing of an agreement to form a global automotive interiors joint venture with Yanfeng Automotive Trim Systems. As a result, a majority of the Automotive Experience Interiors business met the criteria to be classified as held for sale; the following table summarizes the carrying value of those assets and liabilities held for sale (in millions):

 
June 30,
 2014

 
 
 
 
 
 
Accounts receivable - net
$
454

 
 
Inventories
181

 
 
Other current assets
173

 
 
Property, plant and equipment - net
498

 
 
Goodwill
12

 
 
Other intangible assets - net
4

 
 
Investments in partially-owned affiliates
83

 
 
Other noncurrent assets
31

 
 
Assets held for sale
$
1,436

 

 
 
 
 
Accounts payable
$
554

 
 
Accrued compensation and benefits
21

 
 
Other current liabilities
177

 
 
Liabilities held for sale
$
752

 


The Automotive Experience Interiors business classified as held for sale does not meet the criteria to be classified as a discontinued operation at June 30, 2014 primarily due to the Company's anticipated continuing involvement in these operations following a divestiture.

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 $517 million, $489 million and $470 million at June 30, 2014, September 30, 2013 and June 30, 2013, respectively. Billings in excess of costs and earnings related to these contracts were $378 million, $263 million and $245 million at June 30, 2014, September 30, 2013 and June 30, 2013, respectively.

6.
Inventories

Inventories consisted of the following (in millions):
 
June 30,
2014
 
September 30,
2013
 
June 30,
2013
 
 
 
 
 
 
Raw materials and supplies
$
1,109

 
$
1,086

 
$
1,084

Work-in-process
441

 
459

 
503

Finished goods
1,041

 
780

 
883

Inventories
$
2,591

 
$
2,325

 
$
2,470



14

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
June 30, 2014
(unaudited)

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.


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 18, "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 three month period ended September 30, 2013 and the nine month period ended June 30, 2014 were as follows (in millions):
 
June 30,
2013
 
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
249

 
4

 
—

 
—

 
4

 
257

Asia
385

 
—

 
—

 
—

 
3

 
388

Other
993

 
—

 
—

 
—

 
10

 
1,003

Automotive Experience
 
 
 
 
 
 
 
 
 
 

Seating
2,569

 
42

 
—

 
—

 
48

 
2,659

Interiors
418

 
—

 
—

 
(430
)
 
12

 
—

Electronics
251

 
—

 
(251
)
 
—

 
—

 
—

Power Solutions
1,041

 
—

 
—

 
—

 
13

 
1,054

Total
$
7,135

 
$
46

 
$
(251
)
 
$
(430
)
 
$
89

 
$
6,589

 
 
 
 
 
 
 
 
 
 
 
 
 
September 30,
2013
 
Business Acquisitions
 
Business Divestitures
 
Impairments
 
Currency Translation and Other
 
June 30,
2014
Building Efficiency
 
 
 
 
 
 
 
 
 
 
 
North America Systems and Service
$
1,228

 
$
—

 
$
—

 
$
—

 
$
(1
)
 
$
1,227

Global Workplace Solutions
257

 
—

 
—

 
—

 
5

 
262

Asia
388

 
—

 
—

 
—

 
(6
)
 
382

Other
1,003

 
932

 
—

 
—

 
7

 
1,942

Automotive Experience
 
 
 
 
 
 
 
 
 
 

Seating
2,659

 
2

 
—

 
—

 
14

 
2,675

Interiors
—

 
—

 
(12
)
 
—

 
12

 
—

Electronics
—

 
—

 
—

 
—

 
—

 
—

Power Solutions
1,054

 
104

 
—

 
—

 
12

 
1,170

Total
$
6,589

 
$
1,038

 
$
(12
)
 
$
—

 
$
43

 
$
7,658


The nine months ended June 30, 2014 Automotive Experience Interiors business divestitures amount includes $12 million of goodwill transferred to noncurrent assets held for sale on the consolidated statement of financial position. Refer to Note 4, "Discontinued Operations," of the notes to consolidated financial statements for further information regarding the Company's assets and liabilities held for sale.


15

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
June 30, 2014
(unaudited)

The three 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, "Discontinued Operations," of the notes to consolidated financial statements for further information regarding the Company's assets and liabilities held for sale.

Based on a combination of factors relating to the Automotive Experience Interiors business, including the operating results of the 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 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):
 
June 30, 2014
 
September 30, 2013
 
June 30, 2013
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Amortized intangible assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Patented technology
$
88

 
$
(56
)
 
$
32

 
$
92

 
$
(53
)
 
$
39

 
$
168

 
$
(104
)
 
$
64

Customer relationships
1,014

 
(163
)
 
851

 
537

 
(138
)
 
399

 
548

 
(133
)
 
415

Miscellaneous
370

 
(116
)
 
254

 
336

 
(91
)
 
245

 
347

 
(86
)
 
261

Total amortized intangible assets
1,472

 
(335
)
 
1,137

 
965

 
(282
)
 
683

 
1,063

 
(323
)
 
740

Unamortized intangible assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trademarks/trade names
532

 
—

 
532

 
316

 
—

 
316

 
315

 
—

 
315

Total intangible assets
$
2,004

 
$
(335
)
 
$
1,669

 
$
1,281

 
$
(282
)
 
$
999

 
$
1,378

 
$
(323
)
 
$
1,055


Amortization of other intangible assets for the three month periods ended June 30, 2014 and 2013 was $20 million and $19 million, respectively. Amortization of other intangible assets for the nine month periods ended June 30, 2014 and 2013 was $60 million and $57 million, respectively. Excluding the impact of any future acquisitions, the Company anticipates amortization for fiscal 2015, 2016, 2017, 2018 and 2019 will be approximately $106 million, $102 million, $97 million, $91 million and $81 million per year, respectively.


16

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
June 30, 2014
(unaudited)

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 nine months ended June 30, 2014 and 2013 were as follows (in millions):
 
Nine Months Ended
June 30,
 
2014
 
2013
 
 
 
 
Balance at beginning of period
$
256

 
$
278

Accruals for warranties issued during the period
215

 
192

Accruals from acquisitions and divestitures
1

 
—

Accruals related to pre-existing warranties (including changes in estimates)
(5
)
 
(9
)
Settlements made (in cash or in kind) during the period
(181
)
 
(197
)
Currency translation
—

 
(3
)
Balance at end of period
$
286

 
$
261



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. 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. In the third quarter of fiscal 2014, the Company recorded $162 million of restructuring and impairment costs within continuing operations for business portfolio changes related primarily to the Automotive Experience Interiors business and $53 million of restructuring and impairment costs within discontinued operations related to the divestiture of the Automotive Experience Electronics business. The restructuring actions included planned workforce reductions, plant closures, and asset impairments which are expected to be substantially complete by the end of fiscal 2015.












17

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
June 30, 2014
(unaudited)

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
 
Asset Impairments
 
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

Utilized—cash
(62
)
 
—

 
—

 
—

 
(62
)
Utilized—noncash
—

 
—

 
—

 
(4
)
 
(4
)
Balance at March 31, 2014
$
348

 
$
—

 
$
3

 
$
3

 
$
354

Additional restructuring costs
127

 
88

 
—

 
—

 
215

Utilized—cash
(48
)
 
—

 
(3
)
 
—

 
(51
)
Utilized—noncash
—

 
(88
)
 
—

 
2

 
(86
)
Balance at June 30, 2014
$
427

 
$
—

 
$
—

 
$
5

 
$
432


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 were excluded from liabilities held for sale at December 31, 2013 based on transaction negotiations. See Note 4, "Discontinued Operations," of the notes to consolidated financial statements for further information regarding the Company's assets and liabilities held for sale.

The Company's restructuring plans include workforce reductions of approximately 19,100 employees (10,700 for the Automotive Experience business, 7,400 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 June 30, 2014, approximately 12,500 of the employees have been separated from the Company pursuant to the restructuring plans. In addition, the restructuring plans include twenty-nine plant closures (twenty-one for Automotive Experience, two for Power Solutions and six for Building Efficiency). As of June 30, 2014, thirteen of the twenty-nine 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 additional impairment charges and/or require additional restructuring of its operations.


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 and nine months ended June 30, 2014, the Company's effective tax rate for continuing operations was 39% and 24%, respectively. This was different than the U.S. federal statutory rate of 35% primarily due to the jurisdictional mix of significant restructuring and impairment costs and losses on divestitures, partially offset by global tax planning and foreign tax rate differentials. For the three and nine months ended June 30, 2013, the

18

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
June 30, 2014
(unaudited)

Company's effective tax rate was (15)% and 17%, respectively. The effective rate was different than the U.S. federal statutory rate of 35% primarily due to tax audit resolutions and other matters, significant restructuring and impairment costs, valuation allowance adjustments, an uncertain tax position charge and foreign tax differentials. The Company resolved certain Mexican tax issues in the third quarter of fiscal 2013, which resulted in a $61 million benefit to income tax expense. Other discrete items and tax matters are detailed below.

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.

In the second quarter of fiscal 2013, the Company performed an analysis 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 a portion of the deferred tax assets would not be utilized in Brazil and Germany. Therefore, the Company recorded $94 million of valuation allowances as income tax expense. To the extent the Company improves its underlying operating results in these jurisdictions, these valuation allowances, or a portion thereof, could be reversed in future periods.

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 nine months ended June 30, 2014 was $9 million, and for the same period in fiscal 2013 was $11 million. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense.

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.

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 - 2013
Germany
 
2001 - 2010
Italy
 
2005 - 2009, 2011
Korea
 
2008 - 2012
Mexico
 
2003 - 2004, 2007 - 2012
Poland
 
2012 - 2013

19

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
June 30, 2014
(unaudited)


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.

Other Tax Matters

In the third quarter of fiscal 2014, the Company disposed of its Automotive Experience Interiors headliner and sun visor product lines. Refer to Note 3, "Acquisitions and Divestitures," of the notes to consolidated financial statements for additional information. As a result, the Company recorded a pre-tax loss on divestiture of $95 million and income tax expense of $38 million. The income tax expense is due to the jurisdictional mix of gains and losses on the sale, which resulted in non-benefited losses in certain countries and taxable gains in other countries.

In the third quarter of fiscal 2014, the Company recorded $80 million of divestiture related losses related to its Automotive Experience Electronics business. Refer to Note 4, "Discontinued Operations," of the notes to consolidated financial statements for additional information. The loss generated an $8 million tax benefit, which was negatively impacted by the jurisdictional mix of gains and losses on the sale.

In the third quarter of fiscal 2014, the Company recorded $162 million million of significant restructuring and impairment costs. Refer to Note 9, "Significant Restructuring Costs," of the notes to consolidated financial statements for additional information. The restructuring costs generated an $11 million tax benefit, which was negatively impacted by the Company's current tax position in these jurisdictions and the underlying tax basis in the impaired assets.
 
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 nine month period ended June 30, 2014. These law changes did not have a material impact on the Company's consolidated financial statements.

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.


20

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
June 30, 2014
(unaudited)

11.
Pension and Postretirement Plans

The components of the Company’s net periodic benefit costs from continuing operations 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):
 
U.S. Pension Plans
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Service cost
$
18

 
$
22

 
$
53

 
$
67

Interest cost
34

 
38

 
103

 
113

Expected return on plan assets
(51
)
 
(57
)
 
(154
)
 
(173
)
Amortization of prior service cost
—

 
—

 
1

 
1

Net periodic benefit cost
$
1

 
$
3

 
$
3

 
$
8

 
Non-U.S. Pension Plans
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Service cost
$
10

 
$
9

 
$
29

 
$
28

Interest cost
18

 
15

 
54

 
47

Expected return on plan assets
(19
)
 
(17
)
 
(57
)
 
(52
)
Amortization of prior service credit
(1
)
 
—

 
(1
)
 
(1
)
Curtailment gain
—

 
—

 
(2
)
 
(26
)
Net periodic benefit cost (credit)
$
8


$
7

 
$
23

 
$
(4
)

 
Postretirement Benefits
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Service cost
$
1

 
$
1

 
$
3

 
$
4

Interest cost
3

 
3

 
9

 
8

Expected return on plan assets
(3
)
 
(3
)
 
(9
)
 
(9
)
Amortization of prior service credit
(2
)
 
(4
)
 
(5
)
 
(13
)
Net periodic benefit credit
$
(1
)
 
$
(3
)
 
$
(2
)
 
$
(10
)

The curtailment gains in the nine months ended June 30, 2014 and 2013 were the result of lost contracts in the Building Efficiency Global Workplace Solutions segment.


21

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
June 30, 2014
(unaudited)

12.
Debt and Financing Arrangements

During the quarter ended June 30, 2014, the Company issued $300 million aggregate principal amount of 1.4% senior unsecured fixed rate notes due in fiscal 2018, $500 million aggregate principal amount of 3.625% senior unsecured fixed rate notes due in fiscal 2024, $450 million aggregate principal amount of 4.625% senior unsecured fixed rate notes due in fiscal 2044 and $450 million aggregate principal amount of 4.95% senior unsecured fixed rate notes due in fiscal 2064. Aggregate net proceeds of $1.7 billion from the issuance was used to finance the acquisition of ADT and for other general corporate purposes. Refer to Note 3, "Acquisitions and Divestitures," of the notes to consolidated financial statements for further information regarding the ADT acquisition.

During the quarter ended March 31, 2014, the Company entered into a one-year, $150 million, floating rate term loan scheduled to mature in January 2015. Proceeds from the term loan were used for general corporate purposes.

During the quarter ended March 31, 2014, the Company entered into a nine-month, $150 million, floating rate term loan scheduled to mature in December 2014. Proceeds from the term loan were used for general corporate purposes. The loan was repaid during the quarter ended June 30, 2014.

During the quarter ended March 31, 2014, the Company retired $350 million in principal amount, plus accrued interest, of its floating rate notes that matured February 2014.

During the quarter ended March 31, 2014, the Company retired $450 million in principal amount, plus accrued interest, of its 1.75% fixed rate notes that matured March 2014.

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 June 30, 2014, 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.

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.














22

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
June 30, 2014
(unaudited)


Net Financing Charges

The Company's net financing charges line item in the consolidated statements of income for the three and nine month periods ended June 30, 2014 and 2013 contained the following components (in millions):
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Interest expense, net of capitalized interest costs
$
63

 
$
67

 
$
176

 
$
195

Banking fees and bond cost amortization
5

 
5

 
14

 
15

Interest income
(3
)
 
(5
)
 
(8
)
 
(12
)
Net foreign exchange results for financing activities
2

 
—

 
(4
)
 
(5
)
Net financing charges
$
67

 
$
67

 
$
178

 
$
193


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 stock option 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
June 30,
 
Nine Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
Income Available to Common Shareholders
 
 
 
 
 
 
 
Income from continuing operations
$
238

 
$
530

 
$
1,122

 
$
1,023

Income (loss) from discontinued operations
(62
)
 
20

 
(216
)
 
50

Basic and diluted income available to common shareholders
$
176

 
$
550

 
$
906

 
$
1,073

 
 
 
 
 
 
 
 
Weighted Average Shares Outstanding
 
 
 
 
 
 
 
Basic weighted average shares outstanding
664.4

 
683.9

 
667.5

 
683.7

Effect of dilutive securities:
 
 
 
 
 
 
 
Stock options and unvested restricted stock
7.9

 
6.2

 
7.9

 
5.0

Diluted weighted average shares outstanding
672.3

 
690.1

 
675.4

 
688.7

 
 
 
 
 
 
 
 
Antidilutive Securities
 
 
 
 
 
 
 
Options to purchase common shares
0.1

 
—

 
0.2

 
1.1


23

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
June 30, 2014
(unaudited)


During the three months ended June 30, 2014 and 2013, the Company declared a dividend of $0.22 and $0.19, respectively, per common share. During the nine months ended June 30, 2014 and 2013, the Company declared three quarterly dividends totaling $0.66 and $0.57, respectively, per common share. With the exception of the quarterly dividend declared and paid in the three months ended December 31, 2012, the Company paid all dividends in the month subsequent to the end of each fiscal quarter.

 
14.
Equity and Noncontrolling Interests

Other comprehensive income includes activity relating to discontinued operations. The following schedules present changes in consolidated equity attributable to Johnson Controls, Inc. and noncontrolling interests (in millions, net of tax):
 
Three Months Ended June 30, 2014
 
Three Months Ended June 30, 2013
 
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, March 31
$
11,686

 
$
273

 
$
11,959

 
$
11,889

 
$
234

 
$
12,123

Total comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Net income
176

 
18

 
194

 
550

 
21

 
571

Foreign currency translation adjustments
18

 
—

 
18

 
(51
)
 
(1
)
 
(52
)
Realized and unrealized gains (losses) on derivatives
1

 
—

 
1