Q1 FY15 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, 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 December 31, 2014
Common Stock: $1.00 par value per share
 
657,293,891
 
 
 
 
 

1

JOHNSON CONTROLS, INC.
FORM 10-Q
Report Index

  
Page
Part I. Financial Information
 
 
 
Item 1. Financial Statements (unaudited)
 
 
 
Consolidated Statements of Financial Position at December 31, 2014, September 30, 2014 and December 31, 2013
 
 
Consolidated Statements of Income for the Three Month Periods Ended December 31, 2014 and 2013
 
 
Consolidated Statements of Comprehensive Income (Loss) for the Three Month Periods Ended December 31, 2014 and 2013
 
 
Consolidated Statements of Cash Flows for the Three Month Periods Ended December 31, 2014 and 2013
 
 
Notes to Consolidated Financial Statements
 
 
Report of Independent Registered Public Accounting Firm
 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
 
Item 4. Controls and Procedures
 
 
Part II. Other Information
 
 
 
Item 1. Legal Proceedings
 
 
Item 1A. Risk Factors
 
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
 
Item 6. Exhibits
 
 
Signatures

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,
2014
 
September 30,
2014
 
December 31,
2013
Assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
168

 
$
409

 
$
245

Accounts receivable - net
5,360

 
5,871

 
6,743

Inventories
2,439

 
2,477

 
2,452

Assets held for sale
2,112

 
2,157

 
777

Other current assets
2,302

 
2,193

 
2,509

Current assets
12,381

 
13,107

 
12,726

 
 
 
 
 
 
Property, plant and equipment - net
6,114

 
6,314

 
6,665

Goodwill
7,010

 
7,127

 
6,717

Other intangible assets - net
1,600

 
1,639

 
1,070

Investments in partially-owned affiliates
1,117

 
1,018

 
1,043

Noncurrent assets held for sale
684

 
630

 
—

Other noncurrent assets
2,801

 
2,969

 
2,611

Total assets
$
31,707

 
$
32,804

 
$
30,832

 
 
 
 
 
 
Liabilities and Equity
 
 
 
 
 
 
 
 
 
 
 
Short-term debt
$
1,075

 
$
183

 
$
986

Current portion of long-term debt
139

 
140

 
818

Accounts payable
4,584

 
5,270

 
5,592

Accrued compensation and benefits
864

 
1,124

 
1,017

Liabilities held for sale
1,706

 
1,801

 
321

Other current liabilities
3,019

 
3,176

 
3,069

Current liabilities
11,387

 
11,694

 
11,803

 
 
 
 
 
 
Long-term debt
6,322

 
6,357

 
4,866

Pension and postretirement benefits
833

 
865

 
736

Other noncurrent liabilities
1,870

 
2,132

 
1,466

Long-term liabilities
9,025

 
9,354

 
7,068

 
 
 
 
 
 
Commitments and contingencies (Note 18)


 


 


 
 
 
 
 
 
Redeemable noncontrolling interests
209

 
194

 
169

 
 
 
 
 
 
Common stock, $1.00 par value
711

 
707

 
703

Capital in excess of par value
2,809

 
2,669

 
2,431

Retained earnings
10,291

 
9,956

 
9,649

Treasury stock, at cost
(2,387
)
 
(1,784
)
 
(1,652
)
Accumulated other comprehensive income (loss)
(601
)
 
(237
)
 
400

Shareholders’ equity attributable to Johnson Controls, Inc.
10,823

 
11,311

 
11,531

Noncontrolling interests
263

 
251

 
261

Total equity
11,086

 
11,562

 
11,792

Total liabilities and equity
$
31,707

 
$
32,804

 
$
30,832


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,
 
 
2014
 
2013
 
Net sales
 
 
 
 
Products and systems*
$
8,723

 
$
8,605

 
Services*
1,943

 
1,969

 
 
10,666

 
10,574

 
Cost of sales
 
 
 
 
Products and systems*
7,406

 
7,377

 
Services*
1,580

 
1,621

 
 
8,986

 
8,998

 
 
 
 
 
 
Gross profit
1,680

 
1,576

 
 
 
 
 
 
Selling, general and administrative expenses
(1,034
)
 
(1,038
)
 
Net financing charges
(71
)
 
(55
)
 
Equity income
102

 
112

 
 
 
 
 
 
Income from continuing operations before income taxes
677

 
595

 
 
 
 
 
 
Income tax provision
131

 
111

 
 
 
 
 
 
Income from continuing operations
546

 
484

 
 
 
 
 
 
Income from discontinued operations, net of tax (Note 4)
—

 
18

 
 
 
 
 
 
Net income
546

 
502

 
 
 
 
 
 
Income from continuing operations attributable to noncontrolling interests
39

 
33

 
 
 
 
 
 
Net income attributable to Johnson Controls, Inc.
$
507

 
$
469

 
 
 
 
 
 
Amounts attributable to Johnson Controls, Inc. common shareholders:
 
 
 
 
Income from continuing operations
$
507

 
$
451

 
Income from discontinued operations
—

 
18

 
Net income
$
507

 
$
469

 
 
 
 
 
 
Basic earnings per share attributable to Johnson Controls, Inc.
 
 
 
 
Continuing operations
$
0.77

 
$
0.67

 
Discontinued operations
—

 
0.03

 
Net income
$
0.77

 
$
0.70

 
 
 
 
 
 
Diluted earnings per share attributable to Johnson Controls, Inc.
 
 
 
 
Continuing operations
$
0.76

 
$
0.66

 
Discontinued operations
—

 
0.03

 
Net income
$
0.76

 
$
0.69

 
*
Products and systems consist of Automotive Experience and Power Solutions products and systems and Building Efficiency installed systems. Services are Building Efficiency technical services 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,
 
2014
 
2013
 
 
 
 
Net income
$
546

 
$
502

 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
Foreign currency translation adjustments
(351
)
 
(14
)
Realized and unrealized losses on derivatives
(10
)
 
(1
)
Realized and unrealized losses on marketable common stock
—

 
(2
)
Pension and postretirement plans
(3
)
 
(1
)
 
 
 
 
Other comprehensive loss
(364
)
 
(18
)
 
 
 
 
Total comprehensive income
182

 
484

 
 
 
 
Comprehensive income attributable to noncontrolling interests
39

 
33

 
 
 
 
Comprehensive income attributable to Johnson Controls, Inc.
$
143

 
$
451



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,
 
2014
 
2013
Operating Activities
 
 
 
Net income attributable to Johnson Controls, Inc.
$
507

 
$
469

Income attributable to noncontrolling interests
39

 
33

Net income
546

 
502

Adjustments to reconcile net income to cash used by operating activities:
 
 
 
Depreciation and amortization
224

 
244

Pension and postretirement benefit expense (income)
(14
)
 
9

Pension and postretirement contributions
(24
)
 
(25
)
Equity in earnings of partially-owned affiliates, net of dividends received
(92
)
 
(74
)
Deferred income taxes
96

 
14

Fair value adjustment of equity investment
—

 
(19
)
Equity-based compensation
21

 
18

Other
(5
)
 
(8
)
Changes in assets and liabilities, excluding acquisitions and divestitures:
 
 
 
Receivables
410

 
531

Inventories
(20
)
 
(95
)
Other assets
(129
)
 
(41
)
Restructuring reserves
(77
)
 
(62
)
Accounts payable and accrued liabilities
(702
)
 
(929
)
Accrued income taxes
(394
)
 
(346
)
Cash used by operating activities
(160
)
 
(281
)
 
 
 
 
Investing Activities
 
 
 
Capital expenditures
(262
)
 
(345
)
Sale of property, plant and equipment
14

 
21

Acquisition of businesses, net of cash acquired
(13
)
 
(128
)
Business divestitures
—

 
13

Changes in long-term investments
2

 
3

Other
5

 
5

Cash used by investing activities
(254
)
 
(431
)
 
 
 
 
Financing Activities
 
 
 
Increase in short-term debt - net
898

 
867

Increase in long-term debt
—

 
302

Repayment of long-term debt
(9
)
 
(6
)
Stock repurchases
(600
)
 
(1,199
)
Payment of cash dividends
(146
)
 
(130
)
Proceeds from the exercise of stock options
105

 
84

Other
(19
)
 
4

Cash provided (used) by financing activities
229

 
(78
)
Effect of exchange rate changes on cash and cash equivalents
(57
)
 
(19
)
Cash held for sale
1

 
(1
)
Decrease in cash and cash equivalents
(241
)
 
(810
)
Cash and cash equivalents at beginning of period
409

 
1,055

Cash and cash equivalents at end of period
$
168

 
$
245

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

6

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
December 31, 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, 2014. The results of operations for the three month period ended December 31, 2014 are not necessarily indicative of results for the Company’s 2015 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, 2014, September 30, 2014 and December 31, 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.

In fiscal 2012, 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, 2014 and 2013 was not material. The VIE is named as a co-obligor under a third party debt agreement of $166 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 $57 million, which are subordinate to the third party debt agreement. The Company is a significant customer of certain co-obligors, resulting in a remote possibility of loss. Additionally, the Company is subject to a floor guaranty expiring in fiscal 2022; in the event that the other owner party no longer owns any part of the group entities due to sale or transfer, the Company has guaranteed

7

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
(unaudited)


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,
2014
 
September 30,
2014
 
December 31,
2013
 
 
 
 
 
 
Current assets
$
184

 
$
218

 
$
212

Noncurrent assets
136

 
138

 
140

Total assets
$
320

 
$
356

 
$
352

 
 
 
 
 
 
Current liabilities
$
155

 
$
189

 
$
171

Noncurrent liabilities
36

 
37

 
39

Total liabilities
$
191

 
$
226

 
$
210


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

Nonconsolidated VIEs

As mentioned previously within the "Consolidated VIEs" section above, in fisca1 2012, 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 $60 million, $59 million and $57 million at December 31, 2014, September 30, 2014 and December 31, 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.

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

Restricted Cash

At December 31, 2014, September 30, 2014 and December 31, 2013, the Company held restricted cash of approximately $8 million, $4 million and $24 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 for the three months ended December 31, 2013 have been revised to conform to the current year’s presentation.
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

8

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
(unaudited)


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 retrospectively 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 will 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.

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 was effective for the Company for the quarter ending December 31, 2014. The adoption of this guidance did not have a significant impact on the Company's consolidated financial statements.

3.
Acquisitions and Divestitures

In the first quarter of fiscal 2015, the Company completed two acquisitions for a combined purchase price, net of cash acquired, of $38 million, $9 million of which was paid in the three months ended December 31, 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 $9 million.

In the first quarter of fiscal 2015, the Company adjusted the purchase price allocation of the fiscal 2014 acquisition of Air Distribution Technologies Inc. (ADT). The adjustment was made as a result of a true-up to the purchase price in the amount of $4 million, all of which was paid in the three months ended December 31, 2014. Also, in connection with this acquisition, the Company recorded additional goodwill of $5 million in fiscal 2015 related to the purchase price allocations. The purchase price allocations may be subsequently adjusted to reflect final valuation studies.

In January 2015, the Company signed a definitive agreement to create a joint venture with Hitachi to expand its Building Efficiency product offerings. The formation of the joint venture is expected to close in the fourth quarter of fiscal 2015, pending regulatory approvals.

In January 2015, the Company signed an agreement to sell its interests in the Brookfield Johnson Controls joint ventures in Australia and Canada to Brookfield Asset Management. Estimated sales proceeds are $200 million and the transaction is expected to close in the second quarter of fiscal 2015, pending regulatory approvals.

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. 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 additional goodwill of $2 million.


9

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
(unaudited)


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 December 31, 2013.

There were no amounts classified as discontinued operations for the three month period ended December 31, 2014. The following table summarizes the results of the Automotive Experience Electronics business, reclassified as discontinued operations for the three month period ended December 31, 2013 (in millions):
 
 
Three Months Ended
December 31,
 
 
2013
 
 
 
Net sales
 
$
334

 
 
 
Income from discontinued operations before income taxes
 
36

Provision for income taxes on discontinued operations
 
15

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

Income from discontinued operations, net of tax
 
$
18


For the three months ended December 31, 2013, the 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 and the headliner and sun visor product lines were classified as held for sale beginning September 30, 2013. The headliner and sun visor product lines and the Automotive Experience Electronics segment were sold during the third and fourth quarters of fiscal 2014, respectively.


10

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
December 31, 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):
 
December 31,
2013
 
 
Cash and cash equivalents
$
5

Accounts receivable - net
173

Inventories
134

Other current assets
62

Property, plant and equipment - net
167

Goodwill
74

Other intangible assets - net
60

Investments in partially-owned affiliates
31

Other noncurrent assets
71

Assets held for sale
$
777

 
 
Short-term debt
$
7

Accounts payable
227

Accrued compensation and benefits
32

Other current liabilities
41

Pension and postretirement benefits
11

Other noncurrent liabilities
3

Liabilities held for sale
$
321


The headliner and sun visor product lines classified as held for sale were immaterial to the Company individually and in the aggregate, and did not constitute a distinguishable business in order to be classified as a discontinued operation.

In May 2014, the Company announced the signing of an agreement to form a global automotive interiors joint venture with Yanfeng Automotive Trim Systems. The formation of the joint venture is expected to close in the fourth quarter of fiscal 2015, pending regulatory approvals. As a result, a majority of the Automotive Experience Interiors business met the criteria to be classified as held for sale. Additionally, in September 2014, the Company announced its intention to divest its Global Workplace Solutions business and has determined that the business meets the criteria to be classified as held for sale.


11

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
(unaudited)


The following table summarizes the carrying value of the Interiors and Global Workplace Solutions asset and liabilities held for sale (in millions):
 
December 31, 2014
 
September 30, 2014
 
Interiors
 
Global Workplace Solutions
 
Total
 
Interiors
 
Global Workplace Solutions
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
—

 
$
19

 
$
19

 
$
—

 
$
20

 
$
20

Accounts receivable - net
509

 
756

 
1,265

 
596

 
723

 
1,319

Inventories
214

 
6

 
220

 
209

 
9

 
218

Other current assets
177

 
57

 
234

 
174

 
57

 
231

Property, plant and equipment - net
555

 
38

 
593

 
496

 
34

 
530

Goodwill
21

 
245

 
266

 
12

 
253

 
265

Other intangible assets - net
4

 
34

 
38

 
4

 
35

 
39

Investments in partially-owned affiliates
71

 
—

 
71

 
83

 
—

 
83

Other noncurrent assets
33

 
57

 
90

 
35

 
47

 
82

Assets held for sale
$
1,584

 
$
1,212

 
$
2,796

 
$
1,609

 
$
1,178

 
$
2,787

 
 
 
 
 
 
 
 
 
 
 
 
Short-term debt
$
—

 
$
6

 
$
6

 
$
—

 
$
3

 
$
3

Accounts payable
555

 
614

 
1,169

 
655

 
591

 
1,246

Accrued compensation and
       benefits
16

 
102

 
118

 
24

 
128

 
152

Other current liabilities
160

 
253

 
413

 
154

 
246

 
400

Liabilities held for sale
$
731

 
$
975

 
$
1,706

 
$
833

 
$
968

 
$
1,801


These divestitures could result in a gain or loss on sale to the extent the ultimate selling price differs from the carrying value of the net assets recorded for each business. The Interiors business classified as held for sale does not meet the criteria to be classified as a discontinued operation at December 31, 2014 primarily due to the Company's anticipated continuing involvement in these operations following a divestiture. The Global Workplace Solutions business classified as held for sale does not meet the criteria to be classified as a discontinued operation at December 31, 2014 primarily due to the uncertainty regarding the Company's potential continuing involvement in these operations following a divestiture and the status of transaction negotiations.

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 $498 million, $507 million and $486 million at December 31, 2014, September 30, 2014 and December 31, 2013, respectively. Billings in excess of costs and earnings related to these contracts were $339 million, $363 million and $302 million at December 31, 2014, September 30, 2014 and December 31, 2013, respectively.


12

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
(unaudited)


6.
Inventories

Inventories consisted of the following (in millions):
 
December 31,
2014
 
September 30,
2014
 
December 31,
2013
 
 
 
 
 
 
Raw materials and supplies
$
1,096

 
$
1,129

 
$
1,112

Work-in-process
382

 
398

 
402

Finished goods
961

 
950

 
938

Inventories
$
2,439

 
$
2,477

 
$
2,452



7.
Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill in each of the Company’s reportable segments for the nine month period ended September 30, 2014 and the three month period ended December 31, 2014 were as follows (in millions):
 
December 31,
2013
 
Business Acquisitions
 
Business Divestitures
 
Impairments
 
Currency Translation and Other
 
September 30,
2014
 
 
 
 
 
 
 
 
 
 
 
 
Building Efficiency
 
 
 
 
 
 
 
 
 
 
 
  North America Systems and
       Service
$
1,228

 
$
—

 
$
—

 
$
—

 
$
(1
)
 
$
1,227

  Global Workplace Solutions
256

 
—

 
(253
)
 
—

 
(3
)
 
—

  Asia
387

 
34

 
—

 
—

 
(7
)
 
414

  Other
1,004

 
837

 
—

 
(47
)
 
(6
)
 
1,788

Automotive Experience
 
 
 
 
 
 
 
 
 
 

  Seating
2,678

 
—

 
—

 
—

 
(122
)
 
2,556

  Interiors
—

 
—

 
(12
)
 
—

 
12

 
—

Power Solutions
1,164

 
4

 
—

 
—

 
(26
)
 
1,142

Total
$
6,717

 
$
875

 
$
(265
)
 
$
(47
)
 
$
(153
)
 
$
7,127


 
September 30, 2014
 
Business Acquisitions
 
Business Divestitures
 
Impairments
 
Currency Translation and Other
 
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
Building Efficiency
 
 
 
 
 
 
 
 
 
 
 
  North America Systems and
Service
$
1,227

 
$
—

 
$
—

 
$
—

 
$
(1
)
 
$
1,226

  Asia
414

 
—

 
—

 
—

 
(10
)
 
404

  Other
1,788

 
5

 
—

 
—

 
(15
)
 
1,778

Automotive Experience
 
 
 
 
 
 
 
 
 
 
 
  Seating
2,556

 
—

 
—

 
—

 
(74
)
 
2,482

  Interiors
—

 
9

 
(9
)
 
—

 
—

 
—

Power Solutions
1,142

 
—

 
—

 
—

 
(22
)
 
1,120

Total
$
7,127

 
$
14

 
$
(9
)
 
$
—

 
$
(122
)
 
$
7,010



At December 31, 2013, accumulated goodwill impairment charges include $430 million related to the Automotive Experience Interiors segment. The nine months ended September 30, 2014 Building Efficiency Global Workplace Solutions business

13

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
(unaudited)


divestiture amount includes $253 million of goodwill transferred to assets held for sale on the consolidated statement of financial position. The nine months ended September 30, 2014 Automotive Experience Interiors business divestiture amount includes $12 million of goodwill transferred to noncurrent assets held for sale on the consolidated statement of financial position. The three months ended December 31, 2014 Automotive Experience Interiors business divestiture amount includes $9 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.

During the nine months ended September 30, 2014, as a result of recent operating results, restructuring actions and expected future profitability, the Company's forecasted cash flow estimates used in the goodwill assessment were negatively impacted as of September 30, 2014 for the Building Efficiency Other - Latin America reporting unit. As a result, the Company concluded that the carrying value of the Building Efficiency Other - Latin America reporting unit exceeded its fair value as of September 30, 2014. The Company recorded a goodwill impairment charge of $47 million in the fourth quarter of fiscal 2014, 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 Building Efficiency Other - Latin America reporting unit had no remaining goodwill at September 30, 2014.

The Company's impairment testing in the fourth quarter of fiscal 2014 indicated that the estimated fair value of the Building Efficiency Other - Middle East reporting unit exceeded its corresponding carrying amount including goodwill by approximately 9%. Accordingly, the Company has not recognized any impairment of goodwill associated with this reporting unit, which as of December 31, 2014 had a goodwill balance of $85 million. The Company continuously monitors for events and circumstances that could negatively impact the key assumptions in determining fair value, including long-term revenue growth projections, profitability, discount rates, recent market valuations from transactions by comparable companies, volatility in the Company's market capitalization, and general industry, market and macro-economic conditions. It is possible that future changes in such circumstances, or in the variables associated with the judgments, assumptions and estimates used in assessing the fair value of the reporting unit, would require the Company to record a non-cash impairment charge.

The assumptions included in the impairment test required judgment, and changes to the 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 was 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 businesses, there are significant judgments in determining the expected future cash flows.

The Company’s other intangible assets, primarily from business acquisitions valued based on independent appraisals, consisted of (in millions):
 
December 31, 2014
 
September 30, 2014
 
December 31, 2013
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Amortized intangible assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Patented technology
$
85

 
$
(57
)
 
$
28

 
$
86

 
$
(56
)
 
$
30

 
$
91

 
$
(52
)
 
$
39

Customer relationships
1,000

 
(172
)
 
828

 
1,017

 
(161
)
 
856

 
609

 
(149
)
 
460

Miscellaneous
312

 
(113
)
 
199

 
312

 
(106
)
 
206

 
353

 
(99
)
 
254

Total amortized intangible assets
1,397

 
(342
)
 
1,055

 
1,415

 
(323
)
 
1,092

 
1,053

 
(300
)
 
753

Unamortized intangible assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trademarks/trade names
545

 
—

 
545

 
547

 
—

 
547

 
317

 
—

 
317

Total intangible assets
$
1,942

 
$
(342
)
 
$
1,600

 
$
1,962

 
$
(323
)
 
$
1,639

 
$
1,370

 
$
(300
)
 
$
1,070


Amortization of other intangible assets for the three month periods ended December 31, 2014 and 2013 was $24 million and $20 million, respectively. Excluding the impact of any future acquisitions, the Company anticipates amortization for fiscal 2016, 2017, 2018, 2019 and 2020 will be approximately $89 million, $86 million, $83 million, $76 million and $69 million per year, respectively.


14

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, 2014 and 2013 were as follows (in millions):
 
Three Months Ended
December 31,
 
2014
 
2013
 
 
 
 
Balance at beginning of period
$
319

 
$
256

Accruals for warranties issued during the period
67

 
70

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

 
1

Settlements made (in cash or in kind) during the period
(69
)
 
(53
)
Currency translation
(3
)
 
—

Balance at end of period
$
315

 
$
274


9.
Significant Restructuring and Impairment 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 significant restructuring plans in fiscal 2014, 2013 and 2012 and recorded $324 million, $957 million and $287 million, respectively, of restructuring and impairment costs in the consolidated statements of income. The restructuring actions related to cost reduction initiatives in the Company’s Automotive Experience, Building Efficiency and Power Solutions businesses and included workforce reductions, plant closures, and asset and goodwill impairments. The restructuring actions are expected to be substantially complete by the end of fiscal 2015.

Additionally, the Company recorded $53 million, $28 million and $10 million of restructuring and impairment costs within discontinued operations related to the Automotive Experience Electronics business in fiscal 2014, 2013 and 2012, respectively.

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, 2014
$
415

 
$
5

 
$
(14
)
 
$
406

Utilized—cash
(68
)
 
(1
)
 
—

 
(69
)
Utilized—noncash
—

 
—

 
(11
)
 
(11
)
Balance at December 31, 2014
$
347

 
$
4

 
$
(25
)
 
$
326


The Company's restructuring plans include workforce reductions of approximately 20,600 employees (11,000 for the Automotive Experience business, 8,500 for the Building Efficiency business and 1,100 for the Power Solutions business).

15

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
(unaudited)


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, 2014, approximately 14,800 of the employees have been separated from the Company pursuant to the restructuring plans. In addition, the restructuring plans include twenty-eight plant closures (nineteen for Automotive Experience, seven for Building Efficiency and two for Power Solutions). As of December 31, 2014, sixteen of the twenty-eight 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 months ended December 31, 2014 and 2013, the Company's effective tax rate for continuing operations was 19%. 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 a 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, 2014, the Company had gross tax effected unrecognized tax benefits of $1,655 million, of which $1,505 million, if recognized, would impact the effective tax rate. Total net accrued interest at September 30, 2014 was approximately $106 million (net of tax benefit). The net change in interest and penalties during the three months ended December 31, 2014 and 2013 was not material. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense.

In the first quarter of fiscal 2015, the Company settled tax audits in multiple jurisdictions. The benefit of those settlements was substantially offset by a net tax provision recorded in the quarter where it was more likely than not that the losses would not be realized.


16

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
(unaudited)


In the U.S., fiscal years 2010 through 2012 are currently under exam by the Internal Revenue Service (IRS) and 2007 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
 
2012
Brazil
 
2004 - 2008, 2011 - 2012
Canada
 
2007 - 2012
France
 
2002 - 2013
Germany
 
2001 - 2012
Italy
 
2005 - 2009, 2011
Korea
 
2008 - 2012
Mexico
 
2003 - 2004, 2007 - 2013
Poland
 
2012 - 2013
Slovakia
 
2010 - 2013
United Kingdom
 
2011 - 2012

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

Impacts of Tax Legislation

The "look-through rule," under subpart F of the U.S. Internal Revenue Code, expired for the Company on September 30, 2014. 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 December 2014 retroactive to the beginning of the Company's 2015 fiscal year.

During the first quarter of fiscal 2015, other tax legislation was adopted in various jurisdictions. These law changes did not have a material impact on the Company's consolidated financial statements.

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.



17

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
December 31, 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):
 
Pension Benefits
 
U.S. Plans
Three Months Ended
December 31,
 
Non-U.S. Plans
Three Months Ended
December 31,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Service cost
$
8

 
$
18

 
$
9

 
$
10

Interest cost
30

 
34

 
16

 
18

Expected return on plan assets
(45
)
 
(51
)
 
(19
)
 
(19
)
Curtailment gain
—

 
—

 
(13
)
 
—

Net periodic benefit cost (credit)
$
(7
)
 
$
1

 
$
(7
)
 
$
9

 
Postretirement Benefits
 
 
 
 
 
Three Months Ended
December 31,
 
 
 
2014
 
2013
 
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
1

 
$
1

 
 
 
 
Interest cost
2

 
3

 
 
 
 
Expected return on plan assets
(3
)
 
(3
)
 
 
 
 
Amortization of prior service credit
—

 
(2
)
 
 
 
 
Net periodic benefit credit
$
—

 
$
(1
)
 
 
 
 

The curtailment gain in the three months ended December 31, 2014 was the result of a lost contract in the Building Efficiency Global Workplace Solutions segment.

12.
Debt and Financing Arrangements

In November 2014 and December 2014, a $35 million and a $100 million committed revolving credit facility, respectively, expired. The Company entered into a new $35 million committed revolving credit facility scheduled to expire in November 2015 and a new $100 million committed revolving credit facility scheduled to expire in December 2015. As of December 31, 2014, there were no draws on either facility. In December 2014, the Company also terminated a $50 million committed revolving credit facility initially scheduled to mature in September 2015.

In December 2014, the Company entered into a nine-month, $500 million, floating rate term loan scheduled to mature in September 2015. Proceeds from the term loan were used for general corporate purposes.

In December 2014, the Company entered into a nine-month, $100 million, floating rate term loan scheduled to mature in September 2015. Proceeds from the term loan were used for general corporate purposes.

In December 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.

In December 2013, the Company entered into a nine-month, $500 million, floating rate term loan that matured in September 2014. Proceeds from the term loan were used for general corporate purposes.

18

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
(unaudited)


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, 2014 and 2013 contained the following components (in millions):
 
Three Months Ended
December 31,
 
2014
 
2013
 
 
 
 
Interest expense, net of capitalized interest costs
$
71

 
$
57

Banking fees and bond cost amortization
6

 
4

Interest income
(3
)
 
(3
)
Net foreign exchange results for financing activities
(3
)
 
(3
)
Net financing charges
$
71

 
$
55


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
December 31,
 
2014
 
2013
Income Available to Common Shareholders
 
 
 
Income from continuing operations
$
507

 
$
451

Income from discontinued operations
—

 
18

Basic and diluted income available to common shareholders
$
507

 
$
469

 
 
 
 
Weighted Average Shares Outstanding
 
 
 
Basic weighted average shares outstanding
661.4

 
674.1

Effect of dilutive securities:
 
 
 
Stock options and unvested restricted stock
6.6

 
8.1

Diluted weighted average shares outstanding
668.0

 
682.2

 
 
 
 
Antidilutive Securities
 
 
 
Options to purchase common shares
0.2

 
0.2


19

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
(unaudited)


During the three months ended December 31, 2014, the Company declared a dividend of $0.26 per common share, which was paid in the month subsequent to the end of this fiscal quarter. The Company declared a dividend of $0.22 per common share in the three months ended December 31, 2013, which was paid in the month subsequent to the end of the 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 December 31, 2014
 
Three Months Ended December 31, 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, September 30
$
11,311

 
$
251

 
$
11,562

 
$
12,314

 
$
260

 
$
12,574

Total comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Net income
507

 
20

 
527

 
469

 
22

 
491

Foreign currency translation adjustments
(351
)
 
—

 
(351
)
 
(14
)
 
—

 
(14
)
Realized and unrealized losses on derivatives
(10
)
 
—

 
(10
)
 
(1
)
 
—

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

 
—

 
—

 
(2
)
 
—

 
(2
)
Pension and postretirement plans
(3
)
 
—

 
(3
)
 
(1
)
 
—

 
(1
)
Other comprehensive loss
(364
)
 
—

 
(364
)
 
(18
)
 
—

 
(18
)
Comprehensive income
143

 
20

 
163

 
451

 
22

 
473

 
 
 
 
 
 
 
 
 
 
 
 
Other changes in equity:
 
 
 
 
 
 
 
 
 
 
 
Cash dividends—common stock
(172
)
 
—

 
(172
)
 
(147
)
 
—

 
(147
)
Dividends attributable to noncontrolling interests
—

 
(8
)
 
(8
)
 
—

 
(21
)
 
(21
)
Repurchases of common stock
(600
)
 
—

 
(600
)
 
(1,199
)
 
—

 
(1,199
)
Other, including options exercised
141

 
—

 
141

 
112

 
—

 
112

Ending balance, December 31
$
10,823

 
$
263

 
$
11,086

 
$
11,531

 
$
261

 
$
11,792


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. For the three month periods ended December 31, 2014 and 2013, the Company repurchased approximately $600 million and $1.2 billion of its common shares, respectively.

The Company consolidates certain subsidiaries in which the noncontrolling interest party has within its 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, 2014
(unaudited)


The following schedules present changes in the redeemable noncontrolling interests (in millions):
 
Three Months Ended
December 31,
 
2014
 
2013
 
 
 
 
Beginning balance, September 30
$
194

 
$
157

Net income
19

 
14

Dividends
(4
)
 
(2
)
Ending balance, December 31
$
209

 
$
169


The following schedules present changes in accumulated other comprehensive income (AOCI) attributable to Johnson Controls, Inc. (in millions, net of tax):
 
Three Months Ended
December 31,
 
2014
 
2013
 
 
 
 
Foreign currency translation adjustments
 
 
 
Balance at beginning of period
$
(248
)
 
$
392

Aggregate adjustment for the period (net of tax effect of $2 and $6)
(351
)
 
(14
)
Balance at end of period
(599
)
 
378

 
 
 
 
Realized and unrealized gains (losses) on derivatives
 
 
 
Balance at beginning of period
4

 
7

Current period changes in fair value (net of tax effect of $(5) and $0)
(9
)
 
—

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

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

 
7

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

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

 
(1
)
Balance at end of period
—

 
5

 
 
 
 
Pension and postretirement plans
 
 
 
Balance at beginning of period
7

 
12

Reclassification to income (net of tax effect of $(1)) ***
(3
)
 
(1
)
Balance at end of period
4

 
11

 
 
 
 
Accumulated other comprehensive income (loss), end of period
$
(601
)
 
$
400


* 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, 2014
(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, 2014, the amounts reclassified from AOCI into income for pension and postretirement plans were primarily recorded in selling, general and administrative expenses on the consolidated statement of income. For the three months ended December 31, 2013, the amounts reclassified from AOCI into income for pension and postretirement plans were primarily recorded in cost of sales 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, 2014, September 30, 2014 and December 31, 2013 the Company had four 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, 2014
 
September 30, 2014
 
December 31, 2013
 
 
 
 
 
 
 
 
 
Copper
 
Pounds
 
11,070,000

 
9,536,000

 
12,070,000

Lead
 
Metric Tons
 
10,125

 
5,200

 
7,500

Aluminum
 
Metric Tons
 
890

 
—

 
1,693

Tin
 
Metric Tons
 
1,485

 
2,070

 
1,504


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, 2014, September 30, 2014 and December 31, 2013, the Company had hedged approximately 4.1 million, 4.4 million and 4.6 million shares of its common stock, respectively.

The Company selectively uses interest rate swaps to reduce market risk associated with changes in interest rates for its fixed-rate bonds. As fair value hedges, the interest rate swaps and related debt balances are valued under a market approach using publicized swap curves. Changes in the fair value of the swap and hedged portion of the debt are recorded in the consolidated

22

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
(unaudited)


statements of income. In the second quarter of fiscal 2011, the Company entered into five fixed to floating interest rate swaps totaling $450 million to hedge the coupon of its 1.75% notes which matured on March 1, 2014. In the fourth quarter of fiscal 2013, the Company entered into one fixed to floating interest rate swap totaling approximately $125 million to hedge the coupon of its 7.7% notes maturing March 1, 2015 and four fixed to floating interest rate swaps totaling $800 million to hedge the coupon of its 5.5% notes maturing January 15, 2016. In the third quarter of fiscal 2014, the Company entered into four fixed to floating interest rate swaps totaling $400 million to hedge the coupon of its 2.6% notes maturing December 1, 2016, three fixed to floating interest rate swaps totaling $300 million to hedge the coupon of its 1.4% notes maturing November 2, 2017 and one fixed to floating interest rate swap totaling $150 million to hedge the coupon of its 7.125% coupon maturing July 15, 2017. There were thirteen interest rate swaps outstanding as of December 31, 2014 and September 30, 2014, and ten interest rate swaps outstanding as of December 31, 2013.

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,
2014
 
September 30,
2014
 
December 31,
2013
 
December 31,
2014
 
September 30,
2014
 
December 31,
2013
Other current assets
 
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange derivatives
$
38

 
$
21

 
$
21

 
$
28

 
$
13

 
$
14

Commodity derivatives
—

 
—

 
5

 
—

 
—

 
—

Interest rate swaps
—

 
—

 
1

 
—

 
—

 
—

Cross-currency interest rate swaps
25

 
15

 
19

 
—

 
—

 
—

Other noncurrent assets
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
2

 
2

 
4

 
—

 
—

 
—

Equity swap
—

 
—

 
—

 
196

 
192

 
236

Total assets
$
65

 
$
38

 
$
50

 
$
224

 
$
205

 
$
250

 
 
 
 
 
 
 
 
 
 
 
 
Other current liabilities
 
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange derivatives
$
49

 
$
22

 
$
24

 
$
24

 
$
11

 
$
12

Commodity derivatives
7

 
3

 
1

 
—

 
—

 
—

Current portion of long-term debt
 
 
 
 
 
 
 
 
 
 
 
Fixed rate debt swapped to floating
125

 
125

 
451

 
—

 
—

 
—

Long-term debt
 
 
 
 
 
 
 
 
 
 
 
Fixed rate debt swapped to floating
1,651

 
1,649

 
928

 
—

 
—

 
—

Other noncurrent liabilities
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
1

 
3

 
—

 
—

 
—

 
—

Total liabilities
$
1,833

 
$
1,802

 
$
1,404

 
$
24

 
$
11

 
$
12


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, 2014, September 30, 2014 and December 31, 2013, no cash collateral was received or pledged under the master netting agreements.

23

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
(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,
2014
 
September 30,
2014
 
December 31,
2013
 
December 31,
2014
 
September 30,
2014
 
December 31,
2013
Gross amount recognized
$
289

 
$
243

 
$
300

 
$
1,857

 
$
1,813

 
$
1,416

Gross amount eligible for offsetting
(21
)
 
(11
)
 
(9
)
 
(21
)
 
(11
)
 
(9
)
Net amount
$
268

 
$
232

 
$
291

 
$
1,836

 
$
1,802

 
$
1,407


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, 2014 and 2013 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,
 
2014
 
2013
Foreign currency exchange derivatives
 
Cost of sales
 
$
1

 
$
2

Commodity derivatives
 
Cost of sales
 
—

 
(1
)
Total
 
 
 
$
1

 
$
1


Derivatives in ASC 815 Cash Flow Hedging Relationships
 
Amount of Gain (Loss) Recognized in AOCI on Derivative
 
December 31, 2014
 
September 30, 2014
 
December 31, 2013
Foreign currency exchange derivatives
 
$
(7
)
 
$
—

 
$
(4
)