Q2 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 March 31, 2015
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 March 31, 2015
Common Stock: $1.00 par value per share
 
654,830,612
 
 
 
 
 

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 March 31, 2015, September 30, 2014 and March 31, 2014
 
 
Consolidated Statements of Income for the Three and Six Month Periods Ended March 31, 2015 and 2014
 
 
Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Month Periods Ended March 31, 2015 and 2014
 
 
Consolidated Statements of Cash Flows for the Three and Six Month Periods Ended March 31, 2015 and 2014
 
 
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)
 
 
 
 
 
 
 
March 31,
2015
 
September 30,
2014
 
March 31,
2014
Assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
164

 
$
409

 
$
209

Accounts receivable - net
5,384

 
5,871

 
7,028

Inventories
2,414

 
2,477

 
2,516

Assets held for sale
1,969

 
2,157

 
816

Other current assets
2,262

 
2,193

 
2,490

Current assets
12,193

 
13,107

 
13,059

 
 
 
 
 
 
Property, plant and equipment - net
5,870

 
6,314

 
6,632

Goodwill
6,788

 
7,127

 
6,722

Other intangible assets - net
1,558

 
1,639

 
1,056

Investments in partially-owned affiliates
1,239

 
1,018

 
1,110

Noncurrent assets held for sale
693

 
630

 
—

Other noncurrent assets
2,709

 
2,969

 
2,638

Total assets
$
31,050

 
$
32,804

 
$
31,217

 
 
 
 
 
 
Liabilities and Equity
 
 
 
 
 
 
 
 
 
 
 
Short-term debt
$
1,321

 
$
183

 
$
1,375

Current portion of long-term debt
815

 
140

 
143

Accounts payable
4,640

 
5,270

 
6,042

Accrued compensation and benefits
815

 
1,124

 
996

Liabilities held for sale
1,511

 
1,801

 
333

Other current liabilities
2,870

 
3,176

 
3,263

Current liabilities
11,972

 
11,694

 
12,152

 
 
 
 
 
 
Long-term debt
5,448

 
6,357

 
4,733

Pension and postretirement benefits
785

 
865

 
726

Other noncurrent liabilities
1,861

 
2,132

 
1,464

Long-term liabilities
8,094

 
9,354

 
6,923

 
 
 
 
 
 
Commitments and contingencies (Note 18)


 


 


 
 
 
 
 
 
Redeemable noncontrolling interests
202

 
194

 
183

 
 
 
 
 
 
Common stock, $1.00 par value
713

 
707

 
704

Capital in excess of par value
2,895

 
2,669

 
2,565

Retained earnings
10,649

 
9,956

 
9,764

Treasury stock, at cost
(2,598
)
 
(1,784
)
 
(1,734
)
Accumulated other comprehensive income (loss)
(1,076
)
 
(237
)
 
387

Shareholders’ equity attributable to Johnson Controls, Inc.
10,583

 
11,311

 
11,686

Noncontrolling interests
199

 
251

 
273

Total equity
10,782

 
11,562

 
11,959

Total liabilities and equity
$
31,050

 
$
32,804

 
$
31,217


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
March 31,
 
Six Months Ended
 March 31,
 
 
2015
 
2014
 
2015
 
2014
 
Net sales
 
 
 
 
 
 
 
 
Products and systems*
$
8,292

 
$
8,558

 
$
17,015

 
$
17,163

 
Services*
906

 
909

 
1,807

 
1,801

 
 
9,198

 
9,467

 
18,822

 
18,964

 
Cost of sales
 
 
 
 
 
 
 
 
Products and systems*
7,004

 
7,406

 
14,410

 
14,783

 
Services*
621

 
589

 
1,230

 
1,203

 
 
7,625

 
7,995

 
15,640

 
15,986

 
 
 
 
 
 
 
 
 
 
Gross profit
1,573

 
1,472

 
3,182

 
2,978

 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
(975
)
 
(952
)
 
(1,980
)
 
(1,949
)
 
Net financing charges
(69
)
 
(56
)
 
(140
)
 
(111
)
 
Equity income
82

 
73

 
184

 
185

 
 
 
 
 
 
 
 
 
 
Income from continuing operations before income taxes
611

 
537

 
1,246

 
1,103

 
 
 
 
 
 
 
 
 
 
Income tax provision
132

 
101

 
250

 
204

 
 
 
 
 
 
 
 
 
 
Net income from continuing operations
479

 
436

 
996

 
899

 
 
 
 
 
 
 
 
 
 
Income (loss) from discontinued operations, net of tax (Note 4)
78

 
(143
)
 
107

 
(101
)
 
 
 
 
 
 
 
 
 
 
Net income
557

 
293

 
1,103

 
798

 
 
 
 
 
 
 
 
 
 
Income from continuing operations attributable to noncontrolling
   interests
27

 
26

 
63

 
56

 
 
 
 
 
 
 
 
 
 
Income from discontinued operations attributable to noncontrolling
   interests
1

 
6

 
4

 
12

 
 
 
 
 
 
 
 
 
 
Net income attributable to Johnson Controls, Inc.
$
529

 
$
261

 
$
1,036

 
$
730

 
 
 
 
 
 
 
 
 
 
Amounts attributable to Johnson Controls, Inc. common
   shareholders:
 
 
 
 
 
 
 
 
Income from continuing operations
$
452

 
$
410

 
$
933

 
$
843

 
Income (loss) from discontinued operations
77

 
(149
)
 
103

 
(113
)
 
Net income
$
529

 
$
261

 
$
1,036

 
$
730

 
 
 
 
 
 
 
 
 
 
Basic earnings (loss) per share attributable to Johnson Controls, Inc.
 
 
 
 
 
 
 
 
Continuing operations
$
0.69

 
$
0.62

 
$
1.42

 
$
1.26

 
Discontinued operations
0.12

 
(0.22
)
 
0.16

 
(0.17
)
 
Net income **
$
0.81

 
$
0.39

 
$
1.57

 
$
1.09

 
 
 
 
 
 
 
 
 
 
Diluted earnings (loss) per share attributable to Johnson Controls, Inc.
 
 
 
 
 
 
 
 
Continuing operations
$
0.68

 
$
0.61

 
$
1.40

 
$
1.25

 
Discontinued operations
0.12

 
(0.22
)
 
0.15

 
(0.17
)
 
Net income **
$
0.80

 
$
0.39

 
$
1.56

 
$
1.08

 
*
Products and systems consist of Automotive Experience and Power Solutions products and systems and Building Efficiency installed systems. Services are Building Efficiency technical services.
**
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
March 31,
 
Six Months Ended
March 31,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Net income
$
557

 
$
293

 
$
1,103

 
$
798

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(504
)
 
(4
)
 
(855
)
 
(18
)
Realized and unrealized gains (losses) on derivatives
7

 
(3
)
 
(3
)
 
(4
)
Realized and unrealized losses on marketable common stock
—

 
(5
)
 
—

 
(7
)
Pension and postretirement plans
—

 
(1
)
 
(3
)
 
(2
)
 
 
 
 
 
 
 
 
Other comprehensive loss
(497
)
 
(13
)
 
(861
)
 
(31
)
 
 
 
 
 
 
 
 
Total comprehensive income
60

 
280

 
242

 
767

 
 
 
 
 
 
 
 
Comprehensive income attributable to noncontrolling interests
6

 
32

 
45

 
68

 
 
 
 
 
 
 
 
Comprehensive income attributable to Johnson Controls, Inc.
$
54

 
$
248

 
$
197

 
$
699


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
March 31,
 
Six Months Ended
March 31,
 
2015
 
2014
 
2015
 
2014
Operating Activities
 
 
 
 
 
 
 
Net income attributable to Johnson Controls, Inc.
$
529

 
$
261

 
$
1,036

 
$
730

Income from continuing operations attributable to noncontrolling interests
27

 
26

 
63

 
56

Income from discontinued operations attributable to noncontrolling interests
1

 
6

 
4

 
12

Net income
557

 
293

 
1,103

 
798

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
 
 
 
 
Depreciation and amortization
205

 
247

 
429

 
491

Pension and postretirement benefit expense (income)
(1
)
 
7

 
(15
)
 
16

Pension and postretirement contributions
(28
)
 
(22
)
 
(52
)
 
(47
)
Equity in earnings of partially-owned affiliates, net of dividends received
(77
)
 
(71
)
 
(169
)
 
(145
)
Deferred income taxes
152

 
(67
)
 
248

 
(53
)
Gain on divestitures
(200
)
 
—

 
(200
)
 
(9
)
Fair value adjustment of equity investment
—

 
—

 
—

 
(19
)
Equity-based compensation
25

 
23

 
46

 
41

Other
4

 
(8
)
 
(1
)
 
(7
)
Changes in assets and liabilities, excluding acquisitions and divestitures:
 
 
 
 
 
 
 
Receivables
(299
)
 
(338
)
 
111

 
193

Inventories
(81
)
 
(66
)
 
(101
)
 
(161
)
Other assets
22

 
(67
)
 
(107
)
 
(108
)
Restructuring reserves
(68
)
 
(62
)
 
(145
)
 
(124
)
Accounts payable and accrued liabilities
246

 
552

 
(456
)
 
(380
)
Accrued income taxes
(97
)
 
309

 
(491
)
 
(37
)
Cash provided by operating activities
360

 
730

 
200

 
449

 
 
 
 
 
 
 
 
Investing Activities
 
 
 
 
 
 
 
Capital expenditures
(294
)
 
(257
)
 
(556
)
 
(602
)
Sale of property, plant and equipment
3

 
28

 
17

 
49

Acquisition of businesses, net of cash acquired
(9
)
 
—

 
(22
)
 
(128
)
Business divestitures, net of cash divested
141

 
—

 
141

 
13

Changes in long-term investments
(47
)
 
3

 
(45
)
 
6

Other
6

 
4

 
11

 
9

Cash used by investing activities
(200
)
 
(222
)
 
(454
)
 
(653
)
 
 
 
 
 
 
 
 
Financing Activities
 
 
 
 
 
 
 
Increase in short-term debt - net
267

 
392

 
1,165

 
1,259

Increase in long-term debt
—

 
—

 
—

 
302

Repayment of long-term debt
(131
)
 
(810
)
 
(140
)
 
(816
)
Stock repurchases
(210
)
 
—

 
(810
)
 
(1,199
)
Payment of cash dividends
(171
)
 
(146
)
 
(317
)
 
(276
)
Proceeds from the exercise of stock options
57

 
33

 
162

 
117

Other
(34
)
 
5

 
(53
)
 
9

Cash (used) provided by financing activities
(222
)
 
(526
)
 
7

 
(604
)
Effect of exchange rate changes on cash and cash equivalents
39

 
(20
)
 
(18
)
 
(39
)
Cash held for sale
19

 
2

 
20

 
1

Decrease in cash and cash equivalents
(4
)
 
(36
)
 
(245
)
 
(846
)
Cash and cash equivalents at beginning of period
168

 
245

 
409

 
1,055

Cash and cash equivalents at end of period
$
164

 
$
209

 
$
164

 
$
209

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

6

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
March 31, 2015
(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 and six month periods ended March 31, 2015 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 March 31, 2015, September 30, 2014 and March 31, 2014, 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 and six month periods ended March 31, 2015 and 2014 was not material. The VIE is named as a co-obligor under a third party debt agreement of $164 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 $58 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
March 31, 2015
(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):
 
March 31,
2015
 
September 30,
2014
 
March 31,
2014
 
 
 
 
 
 
Current assets
$
269

 
$
218

 
$
296

Noncurrent assets
134

 
138

 
137

Total assets
$
403

 
$
356

 
$
433

 
 
 
 
 
 
Current liabilities
$
200

 
$
189

 
$
195

Noncurrent liabilities
35

 
37

 
38

Total liabilities
$
235

 
$
226

 
$
233


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 $60 million at March 31, 2015, September 30, 2014 and March 31, 2014, 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 March 31, 2015, September 30, 2014 and March 31, 2014, the Company held restricted cash of approximately $8 million, $4 million and $22 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

At March 31, 2015, the Company determined that its Building Efficiency Global Workplace Solutions (GWS) 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 April 2015, the FASB issued Accounting Standards Update (ASU) No. 2015-03, "Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs." ASU No. 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability.

8

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
March 31, 2015
(unaudited)


ASU No. 2015-03 will be effective retrospectively for the Company for the quarter ending December 31, 2016, with early adoption permitted. The adoption of this guidance is not expected to have a significant impact on the Company's consolidated financial statements.

In February 2015, the FASB issued ASU No. 2015-02, "Consolidation (Topic 810): Amendments to the Consolidation Analysis." ASU No. 2015-02 amends the analysis performed to determine whether a reporting entity should consolidate certain types of legal entities. ASU No. 2015-02 will be effective retrospectively for the Company for the quarter ending December 31, 2016, with early adoption permitted. The Company is currently assessing the impact adoption of this guidance will have on its consolidated financial statements.

In May 2014, the FASB issued 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. The original standard will be effective retrospectively for the Company for the quarter ending December 31, 2017; however in April 2015, the FASB proposed a one-year deferral of the standard. If the deferral is approved, the new standard will become effective retrospectively for the Company for the quarter ending December 31, 2018, with early adoption permitted, but not before the original effective date. 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 six months of fiscal 2015, the Company completed three acquisitions for a combined purchase price, net of cash acquired, of $47 million, $18 million of which was paid in the six months ended March 31, 2015. 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 six months 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 six months ended March 31, 2015. Also, in connection with this acquisition, the Company recorded additional goodwill of $21 million in fiscal 2015 related to the purchase price allocations. In fiscal 2014, the Company recorded goodwill of $837 million in the Building Efficiency Other segment as a result of the ADT acquisition. 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 near the end of fiscal 2015, pending regulatory approvals.

On March 31, 2015, the Company announced that it had reached a definitive agreement to sell its GWS business to CBRE Group Inc., subject to regulatory and other approvals. Estimated proceeds are expected to be $1.475 billion and the sale is expected to close near the end of fiscal 2015. At March 31, 2015, the Company determined that the GWS segment met the

9

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
March 31, 2015
(unaudited)


criteria to be classified as a discontinued operation. Refer to Note 4, "Discontinued Operations," of the notes to the consolidated financial statements for further disclosure related to the Company's discontinued operations.

In the three months ended March 31, 2015, the Company completed the sale of its interests in two GWS joint ventures to Brookfield Asset Management, Inc. The selling price, net of cash divested, was $141 million, all of which was received as of March 31, 2015. In connection with the sale, the Company recorded a $200 million gain, $127 million net of tax, within income from discontinued operations, net of tax on the consolidated statements of income and reduced goodwill in assets held for sale by $20 million.

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 six months ended March 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 $100 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 six months of fiscal 2014, the Company completed one divestiture for a sales price of $13 million, all of which was received as of March 31, 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 six months of fiscal 2014, the Company adjusted the purchase price allocation of certain fiscal 2013 acquisitions and recorded additional goodwill of $2 million.


4.
Discontinued Operations

In the second quarter of fiscal 2015, the Company completed the sale of its interests in two GWS joint ventures to Brookfield Asset Management, Inc. On March 31, 2015, the Company announced that it had reached a definitive agreement to sell the remainder of the GWS business to CBRE Group Inc., subject to regulatory and other approvals. The agreement includes a 10-year strategic relationship between the Company and CBRE. The Company will be the preferred provider of HVAC equipment, building automation systems and related services to the portfolio of real estate and corporate facilities managed globally by CBRE and GWS. The Company also expects to engage GWS for facility management services. The annual cash flows resulting from these activities with the legacy GWS business are not expected to be significant. The sale is expected to close near the end of fiscal 2015.

At March 31, 2015, the Company determined that its GWS 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 GWS segment were reflected as held for sale in the consolidated statements of financial position at March 31, 2015 and September 30, 2014.


10

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
March 31, 2015
(unaudited)


The following table summarizes the results of GWS, reclassified as discontinued operations for the three and six month periods ended March 31, 2015 and 2014 (in millions):

 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Net sales
$
803

 
$
996

 
$
1,845

 
$
2,073

 
 
 
 
 
 
 
 
Income from discontinued operations before income taxes
227

 
36

 
269

 
65

Provision for income taxes on discontinued operations
149

 
9

 
162

 
17

Income from discontinued operations attributable to noncontrolling interests, net of tax
1

 
4

 
4

 
7

Income from discontinued operations
$
77

 
$
23

 
$
103

 
$
41


For the three and six months ended March 31, 2015, the income from discontinued operations before income taxes included a $200 million gain on divestiture of the Company's interest in two GWS joint ventures. For the three and six months ended March 31, 2015, the income from discontinued operations before income taxes included current year transaction costs of $10 million and $17 million, respectively.

For the three and six months ended March 31, 2015, the effective tax rate was greater than the U.S. federal statutory rate of 35% primarily due to a second quarter discrete non-cash tax charge of $67 million related to the change in the Company's assertion over reinvestment of foreign undistributed earnings as well as the tax consequences of the sale of the GWS joint ventures, partially offset by foreign tax rate differentials. For the three and six months ended March 31, 2014, the effective tax rate was less than the U.S. federal statutory rate of 35% primarily due to foreign tax rate differentials.

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 March 31, 2014.

There were no amounts related to the Automotive Experience Electronics business classified as discontinued operations for the three or six month periods ended March 31, 2015. The following table summarizes the results of the Automotive Experience Electronics business, classified as discontinued operations for the three and six month periods ended March 31, 2014 (in millions):
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
2014
 
2014
 
 
 
 
Net sales
$
344

 
$
678

 
 
 
 
Income from discontinued operations before income taxes
18

 
54

Provision for income taxes on discontinued operations
188

 
203

Income from discontinued operations attributable to noncontrolling interests, net of tax
2

 
5

Loss from discontinued operations
$
(172
)
 
$
(154
)

11

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
March 31, 2015
(unaudited)



For the three and six months ended March 31, 2014, the effective tax rate 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.

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. In April 2015, the Company signed an agreement formally establishing the previously announced 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. At March 31, 2015, the Company determined certain product lines of the Automotive Experience Interiors segment which are not to be contributed to the aforementioned automotive interiors joint venture met the criteria to be classified as held for sale. 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 the Interiors and GWS assets and liabilities held for sale (in millions):

 
March 31, 2015
 
September 30, 2014
 
Interiors
 
Global Workplace Solutions
 
Total
 
Interiors
 
Global Workplace Solutions
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
—

 
$
—

 
$
—

 
$
—

 
$
20

 
$
20

Accounts receivable - net
583

 
582

 
1,165

 
596

 
723

 
1,319

Inventories
219

 
6

 
225

 
209

 
9

 
218

Other current assets
175

 
80

 
255

 
174

 
57

 
231

Property, plant and equipment - net
583

 
26

 
609

 
496

 
34

 
530

Goodwill
21

 
216

 
237

 
12

 
253

 
265

Other intangible assets - net
3

 
18

 
21

 
4

 
35

 
39

Investments in partially-owned affiliates
58

 
—

 
58

 
83

 
—

 
83

Other noncurrent assets
36

 
56

 
92

 
35

 
47

 
82

Assets held for sale
$
1,678

 
$
984

 
$
2,662

 
$
1,609

 
$
1,178

 
$
2,787

 
 
 
 
 
 
 
 
 
 
 
 
Short-term debt
$
18

 
$
1

 
$
19

 
$
—

 
$
3

 
$
3

Accounts payable
633

 
425

 
1,058

 
655

 
591

 
1,246

Accrued compensation and benefits
42

 
71

 
113

 
24

 
128

 
152

Other current liabilities
165

 
156

 
321

 
154

 
246

 
400

Liabilities held for sale
$
858

 
$
653

 
$
1,511

 
$
833

 
$
968

 
$
1,801


These divestitures could result in a gain or loss on sale to the extent the ultimate selling price or contribution value differs from the carrying value of the net assets recorded for each business. The Interiors businesses classified as held for sale do not meet the criteria to be classified as a discontinued operation at March 31, 2015 primarily due to the Company's anticipated continuing involvement in these operations following a divestiture and the immateriality of certain product lines to the Company.

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.


12

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
March 31, 2015
(unaudited)


The following table summarizes the carrying value of the Electronics and headliner and sun visor assets and liabilities held for sale (in millions):
 
March 31,
2014
 
 
Cash and cash equivalents
$
3

Accounts receivable - net
214

Inventories
128

Other current assets
63

Property, plant and equipment - net
174

Goodwill
74

Other intangible assets - net
62

Investments in partially-owned affiliates
31

Other noncurrent assets
67

Assets held for sale
$
816

 
 
Short-term debt
$
5

Accounts payable
248

Accrued compensation and benefits
35

Other current liabilities
32

Pension and postretirement benefits
11

Other noncurrent liabilities
2

Liabilities held for sale
$
333


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.


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 $462 million, $507 million and $461 million at March 31, 2015, September 30, 2014 and March 31, 2014, respectively. Billings in excess of costs and earnings related to these contracts were $397 million, $363 million and $383 million at March 31, 2015, September 30, 2014 and March 31, 2014, respectively.


13

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
March 31, 2015
(unaudited)


6.
Inventories

Inventories consisted of the following (in millions):
 
March 31,
2015
 
September 30,
2014
 
March 31,
2014
 
 
 
 
 
 
Raw materials and supplies
$
1,062

 
$
1,129

 
$
1,170

Work-in-process
391

 
398

 
402

Finished goods
961

 
950

 
944

Inventories
$
2,414

 
$
2,477

 
$
2,516


7.
Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill in each of the Company’s reportable segments for the six month period ended September 30, 2014 and the six month period ended March 31, 2015 were as follows (in millions):
 
March 31,
2014
 
Business Acquisitions
 
Business Divestitures
 
Impairments
 
Currency Translation and Other
 
September 30,
2014
 
 
 
 
 
 
 
 
 
 
 
 
Building Efficiency
 
 
 
 
 
 
 
 
 
 
 
  North America Systems and
       Service
$
1,227

 
$
—

 
$
—

 
$
—

 
$
—

 
$
1,227

  Global Workplace Solutions
259

 
—

 
(253
)
 
—

 
(6
)
 
—

  Asia
380

 
34

 
—

 
—

 
—

 
414

  Other
1,009

 
837

 
—

 
(47
)
 
(11
)
 
1,788

Automotive Experience
 
 
 
 
 
 
 
 
 
 

  Seating
2,686

 
—

 
—

 
—

 
(130
)
 
2,556

  Interiors
—

 
—

 
(12
)
 
—

 
12

 
—

Power Solutions
1,161

 
6

 
—

 
—

 
(25
)
 
1,142

Total
$
6,722

 
$
877

 
$
(265
)
 
$
(47
)
 
$
(160
)
 
$
7,127


 
September 30, 2014
 
Business Acquisitions
 
Business Divestitures
 
Impairments
 
Currency Translation and Other
 
March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
Building Efficiency
 
 
 
 
 
 
 
 
 
 
 
  North America Systems and
Service
$
1,227

 
$
—

 
$
—

 
$
—

 
$
(2
)
 
$
1,225

  Asia
414

 
—

 
—

 
—

 
(12
)
 
402

  Other
1,788

 
21

 
—

 
—

 
(59
)
 
1,750

Automotive Experience
 
 
 
 
 
 
 
 
 
 
 
  Seating
2,556

 
—

 
—

 
—

 
(229
)
 
2,327

  Interiors
—

 
9

 
(9
)
 
—

 
—

 
—

Power Solutions
1,142

 
—

 
—

 
—

 
(58
)
 
1,084

Total
$
7,127

 
$
30

 
$
(9
)
 
$
—

 
$
(360
)
 
$
6,788


At March 31, 2014, accumulated goodwill impairment charges include $430 million related to the Automotive Experience Interiors segment. The six months ended September 30, 2014 GWS business divestiture amount includes $253 million of goodwill transferred to assets held for sale on the consolidated statement of financial position. The six months ended September

14

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
March 31, 2015
(unaudited)


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 six months ended March 31, 2015 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 six 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 March 31, 2015 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):
 
March 31, 2015
 
September 30, 2014
 
March 31, 2014
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Amortized intangible assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Patented technology
$
82

 
$
(58
)
 
$
24

 
$
86

 
$
(56
)
 
$
30

 
$
91

 
$
(54
)
 
$
37

Customer relationships
982

 
(180
)
 
802

 
1,017

 
(161
)
 
856

 
607

 
(157
)
 
450

Miscellaneous
296

 
(107
)
 
189

 
312

 
(106
)
 
206

 
356

 
(104
)
 
252

Total amortized intangible assets
1,360

 
(345
)
 
1,015

 
1,415

 
(323
)
 
1,092

 
1,054

 
(315
)
 
739

Unamortized intangible assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trademarks/trade names
543

 
—

 
543

 
547

 
—

 
547

 
317

 
—

 
317

Total intangible assets
$
1,903

 
$
(345
)
 
$
1,558

 
$
1,962

 
$
(323
)
 
$
1,639

 
$
1,371

 
$
(315
)
 
$
1,056


Amortization of other intangible assets for the three month periods ended March 31, 2015 and 2014 was $22 million and $20 million, respectively. Amortization of other intangible assets for the six month periods ended March 31, 2015 and 2014 was $46 million and $40 million, respectively. Excluding the impact of any future acquisitions, the Company anticipates amortization for fiscal 2016, 2017, 2018, 2019 and 2020 will be approximately $88 million, $84 million, $82 million, $75 million and $68 million per year, respectively.


15

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
March 31, 2015
(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 six months ended March 31, 2015 and 2014 were as follows (in millions):
 
Six Months Ended
March 31,
 
2015
 
2014
 
 
 
 
Balance at beginning of period
$
319

 
$
256

Accruals for warranties issued during the period
136

 
159

Accruals related to pre-existing warranties (including changes in estimates)
(2
)
 
—

Settlements made (in cash or in kind) during the period
(144
)
 
(132
)
Currency translation
(7
)
 
—

Balance at end of period
$
302

 
$
283


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 commits to restructuring plans as necessary.

In fiscal 2014, the Company committed to a significant restructuring plan (2014 Plan) and recorded $324 million of restructuring and impairment costs in the consolidated statements of income. This is the total amount incurred to date and the total amount expected to be incurred for this restructuring plan. The restructuring actions related primarily 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. Of the restructuring and impairment costs recorded, $130 million related to the Automotive Experience Interiors segment, $126 million related to the Building Efficiency Other segment, $29 million related to the Automotive Experience Seating segment, $16 million related to the Power Solutions segment, $12 million related to the Building Efficiency North America Systems and Service segment, $7 million related to Corporate and $4 million related to the Building Efficiency Asia segment. The restructuring actions are expected to be substantially complete in fiscal 2016.

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


16

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
March 31, 2015
(unaudited)


The following table summarizes the changes in the Company’s 2014 Plan reserve, included within other current liabilities in the consolidated statements of financial position (in millions):

 
Employee Severance and Termination Benefits
 
Long-Lived Asset Impairments
 
Goodwill Impairment
 
Other
 
Currency
Translation
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Original Reserve
$
191

 
$
134

 
$
47

 
$
5

 
$
—

 
$
377

Utilized—cash
(8
)
 
—

 
—

 
—

 
—

 
(8
)
Utilized—noncash
—

 
(134
)
 
(47
)
 
—

 
(6
)
 
(187
)
Balance at September 30, 2014
$
183

 
$
—

 
$
—

 
$
5

 
$
(6
)
 
$
182

Utilized—cash
(34
)
 
—

 
—

 
(2
)
 
—

 
(36
)
Utilized—noncash
—

 
—

 
—

 
—

 
(18
)
 
(18
)
Balance at March 31, 2015
$
149

 
$
—

 
$
—

 
$
3

 
$
(24
)
 
$
128


In fiscal 2013, the Company committed to a significant restructuring plan (2013 Plan) and recorded $903 million of restructuring and impairment costs in the consolidated statements of income. This is the total amount incurred to date and the total amount expected to be incurred for this restructuring plan. 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. Of the restructuring and impairment costs recorded, $560 million related to the Automotive Experience Interiors segment, $152 million related to the Automotive Experience Seating segment, $95 million related to the Building Efficiency Other segment, $38 million related to the Building Efficiency North America Systems and Service segment, $36 million related to the Power Solutions segment, $17 million related to Corporate and $5 million related to the Building Efficiency Asia segment. The restructuring actions are expected to be substantially complete in fiscal 2016.

Additionally, the Company recorded $82 million of restructuring costs within discontinued operations, of which $54 million related to the GWS business and $28 million related to the Automotive Experience Electronics business in fiscal 2013.


17

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
March 31, 2015
(unaudited)


The following table summarizes the changes in the Company’s 2013 Plan reserve, included within other current liabilities in the consolidated statements of financial position (in millions):

 
Employee Severance and Termination Benefits
 
Long-Lived Asset Impairments
 
Goodwill Impairment
 
Other
 
Currency
Translation
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Original Reserve
$
392

 
$
156

 
$
430

 
$
7

 
$
—

 
$
985

Utilized—cash
(26
)
 
—

 
—

 
—

 
—

 
(26
)
Utilized—noncash
—

 
(156
)
 
(430
)
 
(4
)
 
4

 
(586
)
Transfer to liabilities held for sale
(31
)
 
—

 
—

 
—

 
—

 
(31
)
Balance at September 30, 2013
$
335

 
$
—

 
$
—

 
$
3

 
$
4

 
$
342

Utilized—cash
(144
)
 
—

 
—

 
(3
)
 
—

 
(147
)
Utilized—noncash
—

 
—

 
—

 
—

 
(11
)
 
(11
)
Transfer from liabilities held for sale
31

 
—

 
—

 
—

 
—

 
31

Transfer to liabilities held for sale
(24
)
 
—

 
—

 
—

 
—

 
(24
)
Balance at September 30, 2014
$
198

 
$
—

 
$
—

 
$
—

 
$
(7
)
 
$
191

Utilized—cash
(83
)
 
—

 
—

 
—

 
—

 
(83
)
Utilized—noncash
—

 
—

 
—

 
—

 
(13
)
 
(13
)
Balance at March 31, 2015
$
115

 
$
—

 
$
—

 
$
—

 
$
(20
)
 
$
95


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 September 30, 2014 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.

In fiscal 2012, the Company committed to a significant restructuring plan (2012 Plan) and recorded $271 million of restructuring and impairment costs in the consolidated statements of income. This is the total amount incurred to date and the total amount expected to be incurred for this restructuring plan. 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 impairments. Of the restructuring and impairment costs recorded, $101 million related to the Automotive Experience Seating segment, $64 million related to the Building Efficiency Other segment, $48 million related to the Automotive Experience Interiors segment, $37 million related to the Power Solutions segment, $12 million related to Corporate, $8 million related to the Building Efficiency North America Systems and Service segment, and $1 million related to the Building Efficiency Asia segment. The restructuring actions are expected to be substantially complete by the end of fiscal 2015.

Additionally, the Company recorded $26 million of restructuring costs within discontinued operations, of which $16 million related to the GWS business and $10 million related to the Automotive Experience Electronics business in fiscal 2012.


18

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
March 31, 2015
(unaudited)


The following table summarizes the changes in the Company’s 2012 Plan reserve, included within other current liabilities in the consolidated statements of financial position (in millions):

 
Employee Severance and Termination Benefits
 
Long-Lived Asset Impairments
 
Other
 
Currency
Translation
 
Total
 
 
 
 
 
 
 
 
 
 
Original Reserve
$
237

 
$
39

 
$
21

 
$
—

 
$
297

Utilized—cash
(16
)
 
—

 
(6
)
 
—

 
(22
)
Utilized—noncash
—

 
(39
)
 
(8
)
 
—

 
(47
)
Balance at September 30, 2012
$
221

 
$
—

 
$
7

 
$
—

 
$
228

Utilized—cash
(115
)
 
—

 
(7
)
 
—

 
(122
)
Utilized—noncash
—

 
—

 
—

 
(2
)
 
(2
)
Balance at September 30, 2013
$
106

 
$
—

 
$
—

 
$
(2
)
 
$
104

Utilized—cash
(72
)
 
—

 
—

 
—

 
(72
)
Utilized—noncash
—

 
—

 
—

 
1

 
1

Balance at September 30, 2014
$
34

 
$
—

 
$
—

 
$
(1
)
 
$
33

Utilized—cash
(10
)
 
—

 
—

 
—

 
(10
)
Utilized—noncash
—

 
—

 
—

 
(3
)
 
(3
)
Balance at March 31, 2015
$
24

 
$
—

 
$
—

 
$
(4
)
 
$
20


The Company's fiscal 2014, 2013 and 2012 restructuring plans included 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). 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 March 31, 2015, approximately 15,900 of the employees have been separated from the Company pursuant to the restructuring plans. In addition, the restructuring plans included twenty-eight plant closures (twenty for Automotive Experience, six for Building Efficiency and two for Power Solutions). As of March 31, 2015, seventeen 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 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 six months ended March 31, 2015, the Company's effective tax rate for continuing operations was 22% and 20%, respectively. 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, partially offset by a tax rate change in Japan. For the three and six months ended March 31, 2014, the Company's effective tax rate for continuing operations was 19% for both periods. 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.


19

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
March 31, 2015
(unaudited)


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 six months ended March 31, 2015 and 2014 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.

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 - 2014
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
Slovakia
 
2012
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 $70 million benefit to tax expense.

Impacts of Tax Legislation

During the six months ended March 31, 2015, tax legislation was adopted in Japan which reduced its statutory income tax rate. As a result of the law change, the Company recorded income tax expense of $17 million. Tax legislation was also adopted in various other jurisdictions during the six month period ended March 31, 2015, and these changes did not have a material impact on the Company's consolidated financial statements.

20

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
March 31, 2015
(unaudited)


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.

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.


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
March 31,
 
Six Months Ended
March 31,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Service cost
$
7

 
$
17

 
$
15

 
$
35

Interest cost
31

 
35

 
61

 
69

Expected return on plan assets
(45
)
 
(52
)
 
(90
)
 
(103
)
Amortization of prior service cost
—

 
1

 
—

 
1

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

 
$
(14
)
 
$
2

 
Non-U.S. Pension Plans
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
2015
 
2014