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, 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 December 31, 2015
Common Stock: $1.00 par value per share
 
648,235,276
 
 
 
 
 

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, 2015, September 30, 2015 and December 31, 2014
 
 
Consolidated Statements of Income for the Three Month Periods Ended December 31, 2015 and 2014
 
 
Consolidated Statements of Comprehensive Income (Loss) for the Three Month Periods Ended December 31, 2015 and 2014
 
 
Consolidated Statements of Cash Flows for the Three Month Periods Ended December 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)
 
 
 
 
 
 
 
December 31, 2015
 
September 30, 2015
 
December 31, 2014
Assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
414

 
$
597

 
$
168

Accounts receivable - net
5,745

 
5,751

 
5,360

Inventories
2,769

 
2,377

 
2,439

Assets held for sale

 
55

 
2,112

Other current assets
1,993

 
1,689

 
1,783

Current assets
10,921

 
10,469

 
11,862

 
 
 
 
 
 
Property, plant and equipment - net
6,256

 
5,870

 
6,114

Goodwill
6,918

 
6,824

 
7,010

Other intangible assets - net
1,583

 
1,516

 
1,600

Investments in partially-owned affiliates
2,607

 
2,143

 
1,117

Noncurrent assets held for sale

 

 
684

Other noncurrent assets
2,734

 
2,773

 
3,219

Total assets
$
31,019

 
$
29,595

 
$
31,606

 
 
 
 
 
 
Liabilities and Equity
 
 
 
 
 
 
 
 
 
 
 
Short-term debt
$
611

 
$
52

 
$
1,075

Current portion of long-term debt
1,242

 
813

 
139

Accounts payable
4,936

 
5,174

 
4,584

Accrued compensation and benefits
996

 
1,090

 
864

Liabilities held for sale

 
42

 
1,706

Other current liabilities
3,516

 
3,275

 
2,945

Current liabilities
11,301

 
10,446

 
11,313

 
 
 
 
 
 
Long-term debt
5,301

 
5,745

 
6,322

Pension and postretirement benefits
782

 
767

 
833

Other noncurrent liabilities
1,982

 
1,886

 
1,843

Long-term liabilities
8,065

 
8,398

 
8,998

 
 
 
 
 
 
Commitments and contingencies (Note 18)
 
 
 
 
 
 
 
 
 
 
 
Redeemable noncontrolling interests
216

 
212

 
209

 
 
 
 
 
 
Common stock, $1.00 par value
717

 
717

 
711

Capital in excess of par value
3,070

 
3,030

 
2,809

Retained earnings
11,100

 
10,838

 
10,291

Treasury stock, at cost
(3,163
)
 
(3,152
)
 
(2,387
)
Accumulated other comprehensive loss
(1,218
)
 
(1,057
)
 
(601
)
Shareholders’ equity attributable to Johnson Controls, Inc.
10,506

 
10,376

 
10,823

Noncontrolling interests
931

 
163

 
263

Total equity
11,437

 
10,539

 
11,086

Total liabilities and equity
$
31,019

 
$
29,595

 
$
31,606


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,
 
2015
 
2014
Net sales
 
 
 
Products and systems*
$
8,053

 
$
8,723

Services*
876

 
901

 
8,929

 
9,624

Cost of sales
 
 
 
Products and systems*
6,697

 
7,406

Services*
599

 
609

 
7,296

 
8,015

 
 
 
 
Gross profit
1,633

 
1,609

 
 
 
 
Selling, general and administrative expenses
(1,082
)
 
(1,005
)
Net financing charges
(68
)
 
(71
)
Equity income
136

 
102

 
 
 
 
Income from continuing operations before income taxes
619

 
635

 
 
 
 
Income tax provision
129

 
118

 
 
 
 
Net income from continuing operations
490

 
517

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

 
29

 
 
 
 
Net income
490

 
546

 
 
 
 
Income from continuing operations attributable to noncontrolling interests
40

 
36

 
 
 
 
Income from discontinued operations attributable to noncontrolling interests

 
3

 
 
 
 
Net income attributable to Johnson Controls, Inc.
$
450

 
$
507

 
 
 
 
Amounts attributable to Johnson Controls, Inc. common
   shareholders:
 
 
 
Income from continuing operations
$
450

 
$
481

Income from discontinued operations

 
26

Net income
$
450

 
$
507

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

 
$
0.73

Discontinued operations

 
0.04

Net income
$
0.69

 
$
0.77

 
 
 
 
Diluted earnings per share attributable to Johnson Controls, Inc.
 
 
 
Continuing operations
$
0.69

 
$
0.72

Discontinued operations

 
0.04

Net income
$
0.69

 
$
0.76

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

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,
 
2015
 
2014
 
 
 
 
Net income
$
490

 
$
546

 
 
 
 
Other comprehensive loss, net of tax:
 
 
 
Foreign currency translation adjustments
(177
)
 
(351
)
Realized and unrealized losses on derivatives
(3
)
 
(10
)
Pension and postretirement plans

 
(3
)
 
 
 
 
Other comprehensive loss
(180
)
 
(364
)
 
 
 
 
Total comprehensive income
310

 
182

 
 
 
 
Comprehensive income attributable to noncontrolling interests
21

 
39

 
 
 
 
Comprehensive income attributable to Johnson Controls, Inc.
$
289

 
$
143


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,
 
2015
 
2014
Operating Activities
 
 
 
Net income attributable to Johnson Controls, Inc.
$
450

 
$
507

Income from continuing operations attributable to noncontrolling interests
40

 
36

Income from discontinued operations attributable to noncontrolling interests

 
3

Net income
490

 
546

Adjustments to reconcile net income to cash used by operating activities:
 
 
 
Depreciation and amortization
226

 
224

Pension and postretirement benefit income
(17
)
 
(14
)
Pension and postretirement contributions
(19
)
 
(24
)
Equity in earnings of partially-owned affiliates, net of dividends received
(110
)
 
(92
)
Deferred income taxes
(14
)
 
96

Equity-based compensation
28

 
21

Other
1

 
(5
)
Changes in assets and liabilities, excluding acquisitions and divestitures:
 
 
 
Receivables
199

 
410

Inventories
(70
)
 
(20
)
Other assets
(108
)
 
(129
)
Restructuring reserves
(74
)
 
(77
)
Accounts payable and accrued liabilities
(394
)
 
(702
)
Accrued income taxes
(151
)
 
(394
)
Cash used by operating activities
(13
)
 
(160
)
 
 
 
 
Investing Activities
 
 
 
Capital expenditures
(282
)
 
(262
)
Sale of property, plant and equipment
9

 
14

Acquisition of businesses, net of cash acquired
(133
)
 
(13
)
Business divestitures
18

 

Changes in long-term investments

 
2

Other
4

 
5

Cash used by investing activities
(384
)
 
(254
)
 
 
 
 
Financing Activities
 
 
 
Increase in short-term debt - net
521

 
898

Repayment of long-term debt
(7
)
 
(9
)
Stock repurchases

 
(600
)
Payment of cash dividends
(168
)
 
(146
)
Proceeds from the exercise of stock options
16

 
105

Dividends paid to noncontrolling interests
(154
)
 
(11
)
Other
6

 
(8
)
Cash provided by financing activities
214

 
229

Effect of exchange rate changes on cash and cash equivalents

 
(57
)
Cash held for sale

 
1

Decrease in cash and cash equivalents
(183
)
 
(241
)
Cash and cash equivalents at beginning of period
597

 
409

Cash and cash equivalents at end of period
$
414

 
$
168

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

6


Johnson Controls, Inc.
Notes to Consolidated Financial Statements
December 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, 2015. The results of operations for the three month period ended December 31, 2015 are not necessarily indicative of results for the Company’s 2016 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 rights. 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, 2015September 30, 2015 and December 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 month periods ended December 31, 2015 and 2014 was not material. The VIE is named as a co-obligor under a third party debt agreement in the amount of $158 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 $60 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

7


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


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

The carrying amounts and classification of assets (none of which are restricted) and liabilities included in the Company’s consolidated statements of financial position for the consolidated VIEs are as follows (in millions):
 
December 31, 2015
 
September 30, 2015
 
December 31, 2014
 
 
 
 
 
 
Current assets
$
242

 
$
281

 
$
184

Noncurrent assets
127

 
128

 
136

Total assets
$
369

 
$
409

 
$
320

 
 
 
 
 
 
Current liabilities
$
197

 
$
232

 
$
155

Noncurrent liabilities
33

 
34

 
36

Total liabilities
$
230

 
$
266

 
$
191


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 $62 million, $62 million and $60 million at December 31, 2015September 30, 2015 and December 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.

Retrospective Changes

Certain amounts for the three months ended December 31, 2014 have been revised to conform to the current year’s presentation.
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.

Effective October 1, 2015, the Company reorganized the reportable segments within its Building Efficiency business to align with its new management reporting structure and business activities. Prior to this reorganization, Building Efficiency was comprised of three reportable segments for financial reporting purposes: North America Systems and Service, Asia and Other. As a result of this change, Building Efficiency is now comprised of four reportable segments for financial reporting purposes: Systems and Service North America, Products North America, Asia and Rest of World. Historical information has been revised to reflect the new Building Efficiency reportable segments. Refer to Note 7, “Goodwill and Other Intangible Assets,” and Note 17, “Segment Information,” of the notes to consolidated financial statements for further information.




8


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


In November 2015, the FASB issued Accounting Standards Update (ASU) No. 2015-17, "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes." ASU No. 2015-17 requires that deferred tax liabilities and assets be classified as noncurrent in the consolidated statements of financial position. During the quarter ended December 31, 2015, the Company early adopted ASU No. 2015-17 and applied the change retrospectively to all periods presented.

The impact of all adjustments made to the consolidated statements of financial position presented is summarized in the following table (in millions):
 
December 31, 2015
 
Previous
Method
 
As Reported
 
Effect of 
Change
Consolidated Statement of Financial Position
 
 
 
 
 
Other current assets
$
2,607

 
$
1,993

 
$
(614
)
Other noncurrent assets
2,195

 
2,734

 
539

Other current liabilities
3,562

 
3,516

 
(46
)
Other noncurrent liabilities
2,011

 
1,982

 
(29
)

 
September 30, 2015
 
Previously 
Reported
 
Revised
 
Effect of 
Change
Consolidated Statement of Financial Position
 
 
 
 
 
Other current assets
$
2,313

 
$
1,689

 
$
(624
)
Other noncurrent assets
2,227

 
2,773

 
546

Other current liabilities
3,324

 
3,275

 
(49
)
Other noncurrent liabilities
1,915

 
1,886

 
(29
)

 
December 31, 2014
 
Previously 
Reported
 
Revised
 
Effect of 
Change
Consolidated Statement of Financial Position
 
 
 
 
 
Other current assets
$
2,302

 
$
1,783

 
$
(519
)
Other noncurrent assets
2,801

 
3,219

 
418

Other current liabilities
3,019

 
2,945

 
(74
)
Other noncurrent liabilities
1,870

 
1,843

 
(27
)

2. 
New Accounting Standards

In July 2015, the FASB issued ASU No. 2015-11, "Simplifying the Measurement of Inventory." ASU No. 2015-11 requires inventory that is recorded using the first-in, first-out method to be measured at the lower of cost or net realizable value. ASU No. 2015-11 will be effective retrospectively for the Company for the quarter ending December 31, 2017, 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 May 2015, the FASB issued ASU No. 2015-07, "Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)." ASU No. 2015-07 removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. Such investments should be disclosed separate from the fair value hierarchy. ASU No. 2015-07 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 an impact on the Company's consolidated financial statements but will impact pension asset disclosures.

9


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


In April 2015, the FASB issued 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. 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 was effective retrospectively for the Company for the quarter ending December 31, 2017; however in August 2015, the FASB issued ASU No. 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," which defers the effective date of ASU 2014-09 by one-year for all entities. 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 was effective for the Company for the quarter ended December 31, 2015. The adoption of this guidance did not have any impact on the Company's consolidated financial statements as there were no dispositions or disposals during the quarter ended December 31, 2015.

3.
Acquisitions

In the first quarter of fiscal 2016, the Company formed a joint venture with Hitachi to expand its Building Efficiency product offerings. The Company acquired a 60 percent ownership interest in the new entity for approximately $133 million ($563 million purchase price less cash acquired of $430 million). The purchase price, net of cash acquired, was paid as of December 31, 2015. In connection with the acquisition, the Company recorded goodwill of $151 million related to purchase price allocations. The purchase price allocations may be subsequently adjusted to reflect final valuation studies.

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 the first quarter of fiscal 2015 related to the purchase price allocations.

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 sale closed on September 1, 2015. 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

10


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


corporate facilities managed globally by CBRE and GWS. The Company also engages GWS for facility management services. The annual cash flows resulting from these activities with the legacy GWS business are not expected to be significant.

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 December 31, 2014.

The following table summarizes the results of GWS, reclassified as discontinued operations for the three month period ended December 31, 2014 (in millions):
 
Three Months Ended
December 31,
 
2014
 
 
Net sales
$
1,042

 
 
Income from discontinued operations before income taxes
42

Provision for income taxes on discontinued operations
13

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

Income from discontinued operations
$
26


For the three months ended December 31, 2014, the effective tax rate was less than the U.S. federal statutory rate of 35% primarily due to foreign tax rate differentials. For the three months ended December 31, 2014, the income from discontinued operations before income taxes included transaction costs of $7 million.

Assets and Liabilities 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 closed on July 2, 2015. The assets and liabilities to be contributed to the joint venture met the criteria to be classified as held for sale beginning in the third quarter of fiscal 2014.

At March 31, 2015, the Company determined certain product lines of the Automotive Experience Interiors segment that would not be contributed to the aforementioned automotive interiors joint venture also met the criteria to be classified as held for sale. At September 30, 2015, $55 million of assets and $42 million of liabilities related to certain product lines of the Automotive Experience Interiors segment which were not contributed to the automotive interiors joint venture were classified as held for sale. At December 31, 2015, these product lines no longer met the criteria to be classified as held for sale.

The Interiors businesses classified as held for sale did not meet the criteria to be classified as a discontinued operation primarily due to the Company's continuing involvement in these operations following the divestiture.


11


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


The following table summarizes the carrying value of the Interiors and GWS assets and liabilities held for sale (in millions):

 
December 31, 2014
 
Interiors
 
Global Workplace Solutions
 
Total
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
19

 
$
19

Accounts receivable - net
509

 
756

 
1,265

Inventories
214

 
6

 
220

Other current assets
177

 
57

 
234

Property, plant and equipment - net
555

 
38

 
593

Goodwill
21

 
245

 
266

Other intangible assets - net
4

 
34

 
38

Investments in partially-owned affiliates
71

 

 
71

Other noncurrent assets
33

 
57

 
90

Assets held for sale
$
1,584

 
$
1,212

 
$
2,796

 
 
 
 
 
 
Short-term debt
$

 
$
6

 
$
6

Accounts payable
555

 
614

 
1,169

Accrued compensation and benefits
16

 
102

 
118

Other current liabilities
160

 
253

 
413

Liabilities held for sale
$
731

 
$
975

 
$
1,706


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 $410 million, $453 million and $498 million at December 31, 2015September 30, 2015 and December 31, 2014, respectively. Billings in excess of costs and earnings related to these contracts were $337 million, $340 million and $339 million at December 31, 2015September 30, 2015 and December 31, 2014, respectively.

6.
Inventories

Inventories consisted of the following (in millions):
 
December 31, 2015
 
September 30, 2015
 
December 31, 2014
 
 
 
 
 
 
Raw materials and supplies
$
1,204

 
$
1,084

 
$
1,096

Work-in-process
414

 
369

 
382

Finished goods
1,151

 
924

 
961

Inventories
$
2,769

 
$
2,377

 
$
2,439



12


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


7.
Goodwill and Other Intangible Assets

Effective October 1, 2015, the Company reorganized the reportable segments within its Building Efficiency business to align with its new management reporting structure and business activities. Historical information has been revised to reflect the new Building Efficiency reportable segments. Refer to Note 17, “Segment Information,” of the notes to consolidated financial statements for further information.

The changes in the carrying amount of goodwill in each of the Company’s reportable segments for the ninth month period ended September 30, 2015 and the three month period ended December 31, 2015 were as follows (in millions):
 
 
 
Business Acquisitions
 
Business Divestitures
 
Currency Translation and Other
 
 
 
December 31,
 
 
 
 
September 30,
 
2014
 
 
 
 
2015
 
 
 
 
 
 
 
 
 
 
Building Efficiency
 
 
 
 
 
 
 
 
 
     Systems and Service North America
$
983

 
$

 
$
(2
)
 
$
(3
)
 
$
978

     Products North America
1,689

 
29

 
(14
)
 
(3
)
 
1,701

     Asia
404

 

 

 
(15
)
 
389

     Rest of World
332

 

 

 
(22
)
 
310

Automotive Experience
 
 
 
 
 
 
 
 


     Seating
2,482

 

 
(4
)
 
(114
)
 
2,364

Power Solutions
1,120

 

 

 
(38
)
 
1,082

Total
$
7,010

 
$
29

 
$
(20
)
 
$
(195
)
 
$
6,824


 
 
 
Business Acquisitions
 
Business Divestitures
 
Currency Translation and Other
 
 
 
September 30,
 
 
 
 
December 31,
 
2015
 
 
 
 
2015
 
 
 
 
 
 
 
 
 
 
Building Efficiency
 
 
 
 
 
 
 
 
 
     Systems and Service North America
$
978

 
$

 
$

 
$

 
$
978

     Products North America
1,701

 

 

 
(2
)
 
1,699

     Asia
389

 
151

 

 
(8
)
 
532

     Rest of World
310

 

 

 
(7
)
 
303

Automotive Experience
 
 
 
 
 
 
 
 
 
     Seating
2,364

 

 

 
(32
)
 
2,332

Power Solutions
1,082

 

 

 
(8
)
 
1,074

Total
$
6,824

 
$
151

 
$

 
$
(57
)
 
$
6,918


At December 31, 2014, accumulated goodwill impairment charges included $430 million and $47 million related to the Automotive Experience Interiors and Building Efficiency Rest of World - Latin America reporting units, respectively.

At October 1, 2015, the Company assessed goodwill for impairment in the Building Efficiency business due to the change in reportable segments as described in Note 17, “Segment Information,” of the notes to consolidated financial statements. As a result, the Company performed impairment testing for goodwill under the new segments and determined that the estimated fair value of each reporting unit substantially exceeded its corresponding carrying amount including recorded goodwill, and as such, no impairment existed at October 1, 2015. No reporting unit was determined to be at risk of failing step one of the goodwill impairment test.


13


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


The Company’s other intangible assets, primarily from business acquisitions valued based on independent appraisals, consisted of (in millions):
 
December 31, 2015
 
September 30, 2015
 
December 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
$
79

 
$
(60
)
 
$
19

 
$
80

 
$
(59
)
 
$
21

 
$
85

 
$
(57
)
 
$
28

Customer relationships
1,004

 
(221
)
 
783

 
975

 
(206
)
 
769

 
1,000

 
(172
)
 
828

Miscellaneous
371

 
(132
)
 
239

 
307

 
(123
)
 
184

 
312

 
(113
)
 
199

Total amortized intangible assets
1,454

 
(413
)
 
1,041

 
1,362

 
(388
)
 
974

 
1,397

 
(342
)
 
1,055

Unamortized intangible assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trademarks/trade names
542

 

 
542

 
542

 

 
542

 
545

 

 
545

Total intangible assets
$
1,996

 
$
(413
)
 
$
1,583

 
$
1,904

 
$
(388
)
 
$
1,516

 
$
1,942

 
$
(342
)
 
$
1,600


Amortization of other intangible assets for the three month periods ended December 31, 2015 and 2014 was $24 million. Excluding the impact of any future acquisitions, the Company anticipates amortization for fiscal 2017, 2018, 2019, 2020 and 2021 will be approximately $98 million, $96 million, $81 million, $71 million and $64 million per year, respectively.

8.
Product Warranties

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

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

The changes in the carrying amount of the Company’s total product warranty liability, including extended warranties for which deferred revenue is recorded, for the three months ended December 31, 2015 and 2014 were as follows (in millions):
 
Three Months Ended
December 31,
 
2015
 
2014
 
 
 
 
Balance at beginning of period
$
300

 
$
319

Accruals for warranties issued during the period
95

 
67

Accruals from acquisition and divestitures
35

 

Accruals related to pre-existing warranties (including changes in estimates)
(2
)
 
1

Settlements made (in cash or in kind) during the period
(78
)
 
(69
)
Currency translation
(1
)
 
(3
)
Balance at end of period
$
349

 
$
315



14


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


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 2015, the Company committed to a significant restructuring plan (2015 Plan) and recorded $397 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 at Corporate. The costs consist primarily of workforce reductions, plant closures and asset impairments. Of the restructuring and impairment costs recorded, $182 million related to the Automotive Experience Seating segment, $166 million related to Corporate, $27 million related to the Building Efficiency Rest of World segment, $11 million related to the Power Solutions segment, $7 million related to the Building Efficiency Asia segment, $2 million related to the Building Efficiency Systems and Service North America segment and $2 million related to the Building Efficiency Products North America segment. The restructuring actions are expected to be substantially complete in fiscal 2016.

The following table summarizes the changes in the Company’s 2015 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
$
191

 
$
183

 
$
23

 
$

 
$
397

Utilized—cash

 

 

 

 

Utilized—noncash

 
(183
)
 

 

 
(183
)
Balance at September 30, 2015
$
191

 
$

 
$
23

 
$

 
$
214

Utilized—cash
(24
)
 

 
(23
)
 

 
(47
)
Utilized—noncash

 

 

 
(3
)
 
(3
)
Balance at December 31, 2015
$
167

 
$

 
$

 
$
(3
)
 
$
164


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, $119 million related to the Building Efficiency Rest of World 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 Systems and Service North America segment, $7 million related to the Building Efficiency Products North America 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.


15


Johnson Controls, Inc.
Notes to Consolidated Financial Statements
December 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
(65
)
 

 

 
(5
)
 

 
(70
)
Utilized—noncash

 

 

 

 
(13
)
 
(13
)
Balance at September 30, 2015
$
118

 
$

 
$

 
$

 
$
(19
)
 
$
99

Utilized—cash
(12
)
 

 

 

 

 
(12
)
Utilized—noncash

 

 

 

 
(3
)
 
(3
)
Balance at December 31, 2015
$
106

 
$

 
$

 
$

 
$
(22
)
 
$
84


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, $70 million related to the Building Efficiency Rest of World segment, $36 million related to the Power Solutions segment, $35 million related to the Building Efficiency Systems and Service North America segment, $28 million related to the Building Efficiency Products North America 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.


16


Johnson Controls, Inc.
Notes to Consolidated Financial Statements
December 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
(113
)
 

 

 

 

 
(113
)
Utilized—noncash

 

 

 

 
(10
)
 
(10
)
Balance at September 30, 2015
$
85

 
$

 
$

 
$

 
$
(17
)
 
$
68

Utilized—cash
(12
)
 

 

 

 

 
(12
)
Utilized—noncash

 

 

 

 
(1
)
 
(1
)
Balance at December 31, 2015
$
73

 
$

 
$

 
$

 
$
(18
)
 
$
55


The $31 million of transfers from liabilities held for sale represent restructuring reserves that were included in liabilities held for sale in the consolidated statements 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.

The Company's fiscal 2015, 2014 and 2013 restructuring plans included workforce reductions of approximately 13,900 employees (8,200 for the Automotive Experience business, 4,700 for the Building Efficiency business, 900 for the Power Solutions business and 100 for Corporate). 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, 2015, approximately 9,400 of the employees have been separated from the Company pursuant to the restructuring plans. In addition, the restructuring plans included nineteen plant closures (fifteen for Automotive Experience and four for Building Efficiency). As of December 31, 2015, nine of the nineteen 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

17


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


year and each interim period thereafter. For the three months ended December 31, 2015, the Company's effective tax rate for continuing operations was 21%. 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 the tax impacts of separation costs related to the proposed spin-off of the Automotive Experience business. For the three months ended December 31, 2014, 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.

Uncertain Tax Positions

At September 30, 2015, the Company had gross tax effected unrecognized tax benefits of $1,235 million, of which $1,180 million, if recognized, would impact the effective tax rate. Total net accrued interest at September 30, 2015 was approximately $41 million (net of tax benefit). The interest and penalties accrued during the three months ended December 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., it is expected that fiscal years 2013 through 2014 will be examined by the Internal Revenue Service during 2016. Additionally, the Company is currently under exam in the following major foreign jurisdictions:
Tax Jurisdiction
 
Tax Years Covered
 
 
 
Belgium
 
2010 - 2012
Brazil
 
2004 - 2008, 2011 - 2012
Canada
 
2008 - 2013
France
 
2002 - 2013
Germany
 
2007 - 2012
Italy
 
2006, 2011
Korea
 
2008 - 2012
Mexico
 
2010 - 2011
Spain
 
2013
United Kingdom
 
2011 - 2013

It is reasonably possible that certain tax examinations 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, 2015. 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 2015 retroactive to the beginning of the Company’s 2016 fiscal year. The retroactive extension was signed into legislation and was made permanent through the Company's 2020 fiscal year.

18


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


During the first quarter of fiscal 2016, other tax legislation was adopted in various jurisdictions. These law changes did not have a material impact on the Company's consolidated financial statements.

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,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Service cost
$
4

 
$
8

 
$
5

 
$
7

Interest cost
25

 
30

 
10

 
12

Expected return on plan assets
(47
)
 
(45
)
 
(13
)
 
(13
)
Net periodic benefit cost (credit)
$
(18
)
 
$
(7
)
 
$
2

 
$
6


 
Postretirement Benefits
 
Three Months Ended
December 31,
 
2015
 
2014
 
 
 
 
Service cost
$
1

 
$
1

Interest cost
1

 
2

Expected return on plan assets
(3
)
 
(3
)
Net periodic benefit credit
$
(1
)
 
$


12.
Debt and Financing Arrangements

In November 2015 and December 2015, 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 2016 and a new $100 million committed revolving credit facility scheduled to expire in December 2016. As of December 31, 2015, there were no draws on either facility.

In December 2015, the Company entered into a nine-month, $125 million, floating rate term loan scheduled to mature in September 2016. Proceeds from the term loan were used for general corporate purposes.

In December 2015, the Company entered into a nine-month, $200 million, floating rate term loan scheduled to mature in September 2016. Proceeds from the term loan were used for general corporate purposes.

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. The loan was repaid in the quarter ending September 30, 2015.

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. The loan was repaid in the quarter ending September 30, 2015.

19


Johnson Controls, Inc.
Notes to Consolidated Financial Statements
December 31, 2015
(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, 2015 and 2014 contained the following components (in millions):
 
Three Months Ended
December 31,
 
2015
 
2014
 
 
 
 
Interest expense, net of capitalized interest costs
$
73

 
$
71

Banking fees and bond cost amortization
8

 
6

Interest income
(2
)
 
(3
)
Net foreign exchange results for financing activities
(11
)
 
(3
)
Net financing charges
$
68

 
$
71


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,
 
2015
 
2014
Income Available to Common Shareholders
 
 
 
Income from continuing operations
$
450

 
$
481

Income from discontinued operations

 
26

Basic and diluted income available to common shareholders
$
450

 
$
507

 
 
 
 
Weighted Average Shares Outstanding
 
 
 
Basic weighted average shares outstanding
647.7

 
661.4

Effect of dilutive securities:
 
 
 
Stock options, unvested restricted stock and
     unvested performance share awards
5.1

 
6.6

Diluted weighted average shares outstanding
652.8

 
668.0

 
 
 
 
Antidilutive Securities
 
 
 
Options to purchase common shares
0.2

 
0.2


20


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


During the three months ended December 31, 2015 and 2014, the Company declared a dividend of $0.29 and $0.26, respectively, per common share. The Company paid all dividends in the month subsequent to the end of each fiscal quarter.

14.
Equity and Noncontrolling Interests

Other comprehensive income includes activity relating to discontinued operations. The following schedules present changes in consolidated equity attributable to Johnson Controls, Inc. and noncontrolling interests (in millions, net of tax):
 
Three Months Ended December 31, 2015
 
Three Months Ended December 31, 2014
 
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
$
10,376

 
$
163

 
$
10,539

 
$
11,311

 
$
251

 
$
11,562

Total comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Net income
450

 
20

 
470

 
507

 
20

 
527

Foreign currency translation adjustments
(160
)
 
(9
)
 
(169
)
 
(351
)
 

 
(351
)
Realized and unrealized losses on derivatives
(1
)
 

 
(1
)
 
(10
)
 

 
(10
)
Pension and postretirement plans

 

 

 
(3
)
 

 
(3
)
     Other comprehensive loss
(161
)
 
(9
)
 
(170
)
 
(364
)
 

 
(364
)
Comprehensive income
289

 
11

 
300

 
143

 
20

 
163

 
 
 
 
 
 
 
 
 
 
 
 
Other changes in equity:
 
 
 
 
 
 
 
 
 
 
 
Cash dividends—common stock
(188
)
 

 
(188
)
 
(172
)
 

 
(172
)
Dividends attributable to noncontrolling interests

 
(7
)
 
(7
)
 

 
(8
)
 
(8
)
Repurchases of common stock

 

 

 
(600
)
 

 
(600
)
Change in noncontrolling interest share

 
764

 
764

 

 

 

Other, including options exercised
29

 

 
29

 
141

 

 
141

Ending balance, December 31
$
10,506

 
$
931

 
$
11,437

 
$
10,823

 
$
263

 
$
11,086


As previously disclosed, on October 1, 2015, the Company formed a joint venture with Hitachi. In connection with the acquisition, the Company recorded equity attributable to noncontrolling interests of $764 million.

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 period ended December 31, 2014, the Company repurchased approximately $600 million of its common shares.

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.


21


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


The following schedules present changes in the redeemable noncontrolling interests (in millions):
 
Three Months Ended December 31,
 
2015
 
2014
 
 
 
 
Beginning balance, September 30
$
212

 
$
194

Net income
20

 
19

Foreign currency translation adjustments
(8
)
 

Realized and unrealized losses on derivatives
(2
)
 

Dividends
(6
)
 
(4
)
Ending balance, December 31
$
216

 
$
209


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,
 
2015
 
2014
 
 
 
 
Foreign currency translation adjustments
 
 
 
Balance at beginning of period
$
(1,047
)
 
$
(248
)
Aggregate adjustment for the period (net of tax effect of $(4) and $2)
(160
)
 
(351
)
Balance at end of period
(1,207
)
 
(599
)
 
 
 
 
Realized and unrealized gains (losses) on derivatives
 
 
 
Balance at beginning of period
(7
)
 
4

Current period changes in fair value (net of tax effect of $0 and $(5))
2

 
(9
)
Reclassification to income (net of tax effect of $(1) and $0) *
(3
)
 
(1
)
Balance at end of period
(8
)
 
(6
)
 
 
 
 
Pension and postretirement plans
 
 
 
Balance at beginning of period
(3
)
 
7

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

 
(3
)
Balance at end of period
(3
)
 
4

 
 
 
 
Accumulated other comprehensive loss, end of period
$
(1,218
)
 
$
(601
)

* 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 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 income from discontinued operations, net of tax on the consolidated statements 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

22


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


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 and foreign currency denominated debt obligations to selectively hedge portions of its net investment in Japan. The currency effects of the cross-currency interest rate swaps and debt obligations are reflected in the 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, 2015, the Company had three cross-currency interest rate swaps outstanding totaling 15 billion yen and 37 billion yen of foreign denominated debt outstanding designated as net investment hedges in the Company’s net investment in Japan. At September 30, 2015 and December 31, 2014, the Company had four cross-currency interest rate swaps outstanding totaling 20 billion yen. The Company did not have any foreign denominated debt outstanding designated as a net investment hedge at September 30, 2015 or December 31, 2014.

The Company uses commodity hedge 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, occur and affect earnings. Any ineffective portion of the hedge is reflected in the consolidated statements of income. The maturities of the commodity hedge contracts coincide with the expected purchase of the commodities. The Company had the following outstanding contracts to hedge forecasted commodity purchases:
 
 
 
 
Volume Outstanding as of
Commodity
 
Units
 
December 31, 2015
 
September 30, 2015
 
December 31, 2014
 
 
 
 
 
 
 
 
 
Copper
 
Pounds
 
11,805,000

 
14,648,000

 
11,070,000

Lead
 
Metric Tons
 
6,720

 
6,785

 
10,125

Aluminum
 
Metric Tons
 
4,390

 
5,700

 
890

Tin
 
Metric Tons
 
1,456

 
2,080

 
1,485


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, 2015September 30, 2015 and December 31, 2014, the Company had hedged approximately 3.8 million, 4.0 million and 4.1 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 statements of income. 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 that matured in March 2015 and four fixed to floating interest rate swaps totaling $800 million to hedge the coupon of its 5.5% notes maturing January 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 2016, three fixed to floating interest rate swaps totaling $300 million to hedge the coupon of its 1.4% notes maturing November 2017 and one fixed to floating interest rate swap totaling $150 million to

23


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


hedge the coupon of its 7.125% notes maturing July 2017. There were twelve interest rate swaps outstanding as of December 31, 2015 and September 30, 2015. There were thirteen interest rate swaps outstanding as of December 31, 2014.

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,
 
September 30,
 
December 31,
 
December 31,
 
September 30,
 
December 31,
 
2015
 
2015
 
2014
 
2015
 
2015
 
2014
Other current assets
 
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange derivatives
$
26

 
$
31

 
$
38

 
$
21

 
$
27

 
$
28

Commodity derivatives
1

 

 

 

 

 

Interest rate swaps

 
1

 

 

 

 

Cross-currency interest rate swaps
1

 
5

 
25

 

 

 

Other noncurrent assets