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, 2016
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, 2016
Common Stock: $1.00 par value per share
 
648,370,147
 
 
 
 
 

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, 2016, September 30, 2015 and March 31, 2015
 
 
Consolidated Statements of Income for the Three and Six Month Periods Ended March 31, 2016 and 2015
 
 
Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Month Periods Ended March 31, 2016 and 2015
 
 
Consolidated Statements of Cash Flows for the Three and Six Month Periods Ended March 31, 2016 and 2015
 
 
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, 2016
 
September 30, 2015
 
March 31, 2015
Assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
358

 
$
597

 
$
164

Accounts receivable - net
5,987

 
5,751

 
5,384

Inventories
2,922

 
2,377

 
2,414

Assets held for sale
17

 
55

 
1,969

Other current assets
1,774

 
1,689

 
1,790

Current assets
11,058

 
10,469

 
11,721

 
 
 
 
 
 
Property, plant and equipment - net
6,397

 
5,870

 
5,870

Goodwill
7,042

 
6,824

 
6,788

Other intangible assets - net
1,576

 
1,516

 
1,558

Investments in partially-owned affiliates
2,736

 
2,143

 
1,239

Noncurrent assets held for sale
—

 
—

 
693

Other noncurrent assets
2,390

 
2,773

 
3,091

Total assets
$
31,199

 
$
29,595

 
$
30,960

 
 
 
 
 
 
Liabilities and Equity
 
 
 
 
 
 
 
 
 
 
 
Short-term debt
$
1,236

 
$
52

 
$
1,321

Current portion of long-term debt
647

 
813

 
815

Accounts payable
5,360

 
5,174

 
4,640

Accrued compensation and benefits
947

 
1,090

 
815

Liabilities held for sale
—

 
42

 
1,511

Other current liabilities
3,602

 
3,275

 
2,807

Current liabilities
11,792

 
10,446

 
11,909

 
 
 
 
 
 
Long-term debt
5,143

 
5,745

 
5,448

Pension and postretirement benefits
781

 
767

 
785

Other noncurrent liabilities
2,364

 
1,886

 
1,834

Long-term liabilities
8,288

 
8,398

 
8,067

 
 
 
 
 
 
Commitments and contingencies (Note 19)
 
 
 
 
 
 
 
 
 
 
 
Redeemable noncontrolling interests
237

 
212

 
202

 
 
 
 
 
 
Common stock, $1.00 par value
718

 
717

 
713

Capital in excess of par value
3,088

 
3,030

 
2,895

Retained earnings
10,380

 
10,838

 
10,649

Treasury stock, at cost
(3,163
)
 
(3,152
)
 
(2,598
)
Accumulated other comprehensive loss
(1,039
)
 
(1,057
)
 
(1,076
)
Shareholders’ equity attributable to Johnson Controls, Inc.
9,984

 
10,376

 
10,583

Noncontrolling interests
898

 
163

 
199

Total equity
10,882

 
10,539

 
10,782

Total liabilities and equity
$
31,199

 
$
29,595

 
$
30,960


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,
 
2016
 
2015
 
2016
 
2015
Net sales
 
 
 
 
 
 
 
Products and systems*
$
8,161

 
$
8,292

 
$
16,214

 
$
17,015

Services*
870

 
906

 
1,746

 
1,807

 
9,031

 
9,198

 
17,960

 
18,822

Cost of sales
 
 
 
 
 
 
 
Products and systems*
6,707

 
7,004

 
13,404

 
14,410

Services*
595

 
621

 
1,194

 
1,230

 
7,302

 
7,625

 
14,598

 
15,640

 
 
 
 
 
 
 
 
Gross profit
1,729

 
1,573

 
3,362

 
3,182

 
 
 
 
 
 
 
 
Selling, general and administrative expenses
(1,144
)
 
(975
)
 
(2,226
)
 
(1,980
)
Restructuring and impairment costs
(229
)
 
—

 
(229
)
 
—

Net financing charges
(74
)
 
(69
)
 
(142
)
 
(140
)
Equity income
117

 
82

 
253

 
184

 
 
 
 
 
 
 
 
Income from continuing operations before income taxes
399

 
611

 
1,018

 
1,246

 
 
 
 
 
 
 
 
Income tax provision
868

 
132

 
997

 
250

 
 
 
 
 
 
 
 
Net income (loss) from continuing operations
(469
)
 
479

 
21

 
996

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

 
78

 
—

 
107

 
 
 
 
 
 
 
 
Net income (loss)
(469
)
 
557

 
21

 
1,103

 
 
 
 
 
 
 
 
Income from continuing operations attributable to
     noncontrolling interests
61

 
27

 
101

 
63

 
 
 
 
 
 
 
 
Income from discontinued operations attributable to
     noncontrolling interests
—

 
1

 
—

 
4

 
 
 
 
 
 
 
 
Net income (loss) attributable to Johnson Controls, Inc.
$
(530
)
 
$
529

 
$
(80
)
 
$
1,036

 
 
 
 
 
 
 
 
Amounts attributable to Johnson Controls, Inc. common
   shareholders:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
(530
)
 
$
452

 
$
(80
)
 
$
933

Income from discontinued operations
—

 
77

 
—

 
103

Net income (loss)
$
(530
)
 
$
529

 
$
(80
)
 
$
1,036

 
 
 
 
 
 
 
 
Basic earnings (loss) per share attributable to Johnson Controls, Inc.
 
 
 
 
 
 
 
Continuing operations
$
(0.82
)
 
$
0.69

 
$
(0.12
)
 
$
1.42

Discontinued operations
—

 
0.12

 
—

 
0.16

Net income (loss) **
$
(0.82
)
 
$
0.81

 
$
(0.12
)
 
$
1.57

 
 
 
 
 
 
 
 
Diluted earnings (loss) per share attributable to Johnson Controls, Inc.
 
 
 
 
 
 
 
Continuing operations
$
(0.82
)
 
$
0.68

 
$
(0.12
)
 
$
1.40

Discontinued operations
—

 
0.12

 
—

 
0.15

Net income (loss) **
$
(0.82
)
 
$
0.80

 
$
(0.12
)
 
$
1.56

*
Products and systems consist of Automotive Experience and Power Solutions products and systems and Building Efficiency installed systems. Services are Building Efficiency technical 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,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Net income (loss)
$
(469
)
 
$
557

 
$
21

 
$
1,103

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
203

 
(504
)
 
26

 
(855
)
Realized and unrealized gains (losses) on derivatives
5

 
7

 
2

 
(3
)
Pension and postretirement plans
—

 
—

 
—

 
(3
)
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
208

 
(497
)
 
28

 
(861
)
 
 
 
 
 
 
 
 
Total comprehensive income (loss)
(261
)
 
60

 
49

 
242

 
 
 
 
 
 
 
 
Comprehensive income attributable to noncontrolling interests
90

 
6

 
111

 
45

 
 
 
 
 
 
 
 
Comprehensive income (loss) attributable to Johnson Controls, Inc.
$
(351
)
 
$
54

 
$
(62
)
 
$
197


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,
 
2016
 
2015
 
2016
 
2015
Operating Activities
 
 
 
 
 
 
 
Net income (loss) attributable to Johnson Controls, Inc.
$
(530
)
 
$
529

 
$
(80
)
 
$
1,036

Income from continuing operations attributable to noncontrolling interests
61

 
27

 
101

 
63

Income from discontinued operations attributable to noncontrolling interests
—

 
1

 
—

 
4

Net income (loss)
(469
)
 
557

 
21

 
1,103

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
 
 
 
 
Depreciation and amortization
219

 
205

 
445

 
429

Pension and postretirement benefit income
(17
)
 
(1
)
 
(34
)
 
(15
)
Pension and postretirement contributions
(34
)
 
(28
)
 
(53
)
 
(52
)
Equity in earnings of partially-owned affiliates, net of dividends received
(97
)
 
(77
)
 
(207
)
 
(169
)
Deferred income taxes
345

 
152

 
331

 
248

Non-cash restructuring and impairment costs
29

 
—

 
29

 
—

Gain on divestitures
—

 
(200
)
 
—

 
(200
)
Fair value adjustment of equity investment
(4
)
 
—

 
(4
)
 
—

Equity-based compensation
23

 
25

 
51

 
46

Other
4

 
4

 
5

 
(1
)
Changes in assets and liabilities, excluding acquisitions and divestitures:
 
 
 
 
 
 
 
Receivables
(124
)
 
(299
)
 
75

 
111

Inventories
(98
)
 
(81
)
 
(168
)
 
(101
)
Other assets
242

 
22

 
134

 
(107
)
Restructuring reserves
141

 
(68
)
 
67

 
(145
)
Accounts payable and accrued liabilities
83

 
246

 
(311
)
 
(456
)
Accrued income taxes
391

 
(97
)
 
240

 
(491
)
Cash provided by operating activities
634

 
360

 
621

 
200

 
 
 
 
 
 
 
 
Investing Activities
 
 
 
 
 
 
 
Capital expenditures
(261
)
 
(294
)
 
(543
)
 
(556
)
Sale of property, plant and equipment
5

 
3

 
14

 
17

Acquisition of businesses, net of cash acquired
—

 
(9
)
 
(133
)
 
(22
)
Business divestitures
22

 
141

 
40

 
141

Changes in long-term investments
—

 
(47
)
 
—

 
(45
)
Other
1

 
6

 
5

 
11

Cash used by investing activities
(233
)
 
(200
)
 
(617
)
 
(454
)
 
 
 
 
 
 
 
 
Financing Activities
 
 
 
 
 
 
 
Increase in short-term debt - net
619

 
267

 
1,140

 
1,165

Repayment of long-term debt
(807
)
 
(131
)
 
(814
)
 
(140
)
Stock repurchases
—

 
(210
)
 
—

 
(810
)
Payment of cash dividends
(188
)
 
(171
)
 
(356
)
 
(317
)
Proceeds from the exercise of stock options
4

 
57

 
20

 
162

Dividends paid to noncontrolling interests
(73
)
 
(9
)
 
(227
)
 
(20
)
Other
(3
)
 
(25
)
 
3

 
(33
)
Cash provided (used) by financing activities
(448
)
 
(222
)
 
(234
)
 
7

Effect of exchange rate changes on cash and cash equivalents
(9
)
 
39

 
(9
)
 
(18
)
Cash held for sale
—

 
19

 
—

 
20

Decrease in cash and cash equivalents
(56
)
 
(4
)
 
(239
)
 
(245
)
Cash and cash equivalents at beginning of period
414

 
168

 
597

 
409

Cash and cash equivalents at end of period
$
358

 
$
164

 
$
358

 
$
164

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

6

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
March 31, 2016
(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 filed with the SEC on November 18, 2015, portions of which (including Part I, Item 1. Business, and the following items from Part II of the Annual Report: Item 6. Selected Financial Data, Item 7. Management’s Discussion and Analysis and Item 8. Financial Statements and Supplementary Data) were recast in the Company's Current Report on Form 8-K filed with the SEC on March 3, 2016. The results of operations for the three and six month periods ended March 31, 2016 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 March 31, 2016, September 30, 2015 and March 31, 2015, 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, 2016 and 2015 was not material. The VIE is named as a co-obligor under a third party debt agreement in the amount of $154 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

7

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
March 31, 2016
(unaudited)


$61 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 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, 2016
 
September 30, 2015
 
March 31, 2015
 
 
 
 
 
 
Current assets
$
308

 
$
281

 
$
269

Noncurrent assets
123

 
128

 
134

Total assets
$
431

 
$
409

 
$
403

 
 
 
 
 
 
Current liabilities
$
225

 
$
232

 
$
200

Noncurrent liabilities
32

 
34

 
35

Total liabilities
$
257

 
$
266

 
$
235


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 $64 million, $62 million and $60 million at March 31, 2016, September 30, 2015 and March 31, 2015, 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

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 18, "Segment Information," of the notes to consolidated financial statements for further information.

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.


8

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
March 31, 2016
(unaudited)


The impact of all adjustments made to the March 31, 2015 consolidated statements of financial position presented is summarized in the following table (in millions):
 
March 31, 2015
 
Previously 
Reported
 
Revised
 
Effect of 
Change
Consolidated Statement of Financial Position
 
 
 
 
 
Other current assets
$
2,262

 
$
1,790

 
$
(472
)
Other noncurrent assets
2,709

 
3,091

 
382

Other current liabilities
2,870

 
2,807

 
(63
)
Other noncurrent liabilities
1,861

 
1,834

 
(27
)

2. 
New Accounting Standards

In March 2016, the FASB issued ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting." ASU No. 2016-09 impacts certain aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statements of cash flows. ASU No. 2016-09 will be effective for the Company for the quarter ending December 31, 2017, with early adoption permitted. The Company is currently assessing the impact adoption of this guidance will have on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-07, "Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting." ASU No. 2016-07 eliminates the requirement for an investment that qualifies for the use of the equity method of accounting as a result of an increase in the level of ownership or degree of influence to adjust the investment, results of operations and retained earnings retrospectively. ASU No. 2016-07 will be effective prospectively for the Company for increases in the level of ownership interest or degree of influence that result in the adoption of the equity method that occur during or after the quarter ending December 31, 2017, with early adoption permitted. The impact of this guidance for the Company is dependent on any future increases in the level of ownership interest or degree of influence that result in the adoption of the equity method.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)." ASU No. 2016-02 requires recognition of operating leases as lease assets and liabilities on the balance sheet, and disclosure of key information about leasing arrangements. ASU No. 2016-02 will be effective retrospectively for the Company for the quarter ending December 31, 2019, with early adoption permitted. The Company is currently assessing the impact adoption of this guidance will have on its consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." ASU No. 2016-01 amends certain aspects of recognition, measurement, presentation and disclosure of financial instruments. ASU No. 2016-01 will be effective prospectively for the Company for the quarter ending December 31, 2018, with early adoption permitted. The Company is currently assessing the impact adoption of this guidance will have on its consolidated financial statements.

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

9

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
March 31, 2016
(unaudited)


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.

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 No. 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. Additionally, in March 2016, the FASB issued ASU No. 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)," and in April 2016, the FASB issued ASU No. 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing," which provide additional clarification on certain topics addressed in ASU No. 2014-09. ASU No. 2016-08 and ASU No. 2016-10 follow the same implementation guidelines as ASU No. 2014-09 and ASU No. 2015-14. 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 and Divestitures

On October 1, 2015, 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 March 31, 2016. In connection with the acquisition, the Company recorded goodwill of $193 million related to purchase price allocations. The purchase price allocations may be subsequently adjusted to reflect final valuation studies.

In the first six months of fiscal 2016, the Company completed one acquisition for a purchase price, net of cash acquired, of $3 million, none of which was paid as of March 31, 2016. The acquisition was not material to the Company's consolidated financial statements. In connection with the acquisition, the Company recorded goodwill of $4 million. The purchase price allocation may be subsequently adjusted to reflect the final valuation study. The acquisition increased the Company's ownership from a noncontrolling to controlling interest. As a result, the Company recorded a non-cash gain of $4 million in equity income for the Building Efficiency Rest of World segment to adjust the Company's existing equity investment in the partially-owned affiliate to fair value.


10

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
March 31, 2016
(unaudited)


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 Products North America segment as a result of the ADT acquisition.

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.

4.
Discontinued Operations

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 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 currently significant nor are they expected to become significant in the future.

At March 31, 2015, the Company determined that its GWS segment met the criteria to be classified as a discontinued operation. 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.

The following table summarizes the results of GWS, reclassified as discontinued operations for the three and six month periods ended March 31, 2015 (in millions):
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
2015
 
2015
 
 
 
 
Net sales
$
803

 
$
1,845

 
 
 
 
Income from discontinued operations before income taxes
227

 
269

Provision for income taxes on discontinued operations
149

 
162

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

 
4

Income from discontinued operations
$
77

 
$
103


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 transaction costs of $10 million and $17 million, respectively.


11

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
March 31, 2016
(unaudited)


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.

Assets and Liabilities Held for Sale

At March 31, 2016, $17 million of certain corporate assets were 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 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 March 31, 2016, 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.

The following table summarizes the carrying value of the Interiors and GWS assets and liabilities held for sale (in millions):
 
March 31, 2015
 
Interiors
 
Global Workplace Solutions
 
Total
 
 
 
 
 
 
Accounts receivable - net
$
583

 
$
582

 
$
1,165

Inventories
219

 
6

 
225

Other current assets
175

 
80

 
255

Property, plant and equipment - net
583

 
26

 
609

Goodwill
21

 
216

 
237

Other intangible assets - net
3

 
18

 
21

Investments in partially-owned affiliates
58

 
—

 
58

Other noncurrent assets
36

 
56

 
92

Assets held for sale
$
1,678

 
$
984

 
$
2,662

 
 
 
 
 
 
Short-term debt
$
18

 
$
1

 
$
19

Accounts payable
633

 
425

 
1,058

Accrued compensation and benefits
42

 
71

 
113

Other current liabilities
165

 
156

 
321

Liabilities held for sale
$
858

 
$
653

 
$
1,511


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

12

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
March 31, 2016
(unaudited)


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 $411 million, $453 million and $462 million at March 31, 2016, September 30, 2015 and March 31, 2015, respectively. Billings in excess of costs and earnings related to these contracts were $335 million, $340 million and $397 million at March 31, 2016, September 30, 2015 and March 31, 2015, respectively.

6.
Inventories

Inventories consisted of the following (in millions):
 
March 31, 2016
 
September 30, 2015
 
March 31, 2015
 
 
 
 
 
 
Raw materials and supplies
$
1,241

 
$
1,084

 
$
1,062

Work-in-process
439

 
369

 
391

Finished goods
1,242

 
924

 
961

Inventories
$
2,922

 
$
2,377

 
$
2,414


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 18, "Segment Information," of the notes to consolidated financial statements for further information.

The changes in the carrying amount of goodwill in each of the Company’s reportable segments for the six month period ended September 30, 2015 and the six month period ended March 31, 2016 were as follows (in millions):
 
 
 
Business Acquisitions
 
Business Divestitures
 
Currency Translation and Other
 
 
 
March 31,
 
 
 
 
September 30,
 
2015
 
 
 
 
2015
 
 
 
 
 
 
 
 
 
 
Building Efficiency
 
 
 
 
 
 
 
 
 
     Systems and Service North America
$
982

 
$
—

 
$
(2
)
 
$
(2
)
 
$
978

     Products North America
1,697

 
13

 
(14
)
 
5

 
1,701

     Asia
402

 
—

 
—

 
(13
)
 
389

     Rest of World
296

 
—

 
—

 
14

 
310

Automotive Experience
 
 
 
 
 
 
 
 


     Seating
2,327

 
—

 
(4
)
 
41

 
2,364

Power Solutions
1,084

 
—

 
—

 
(2
)
 
1,082

Total
$
6,788

 
$
13

 
$
(20
)
 
$
43

 
$
6,824



13

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
March 31, 2016
(unaudited)


 
 
 
Business Acquisitions
 
Business Divestitures
 
Currency Translation and Other
 
 
 
September 30,
 
 
 
 
March 31,
 
2015
 
 
 
 
2016
 
 
 
 
 
 
 
 
 
 
Building Efficiency
 
 
 
 
 
 
 
 
 
     Systems and Service North America
$
978

 
$
—

 
$
—

 
$
—

 
$
978

     Products North America
1,701

 
—

 
—

 
—

 
1,701

     Asia
389

 
193

 
—

 
(12
)
 
570

     Rest of World
310

 
4

 
—

 
2

 
316

Automotive Experience
 
 
 
 
 
 
 
 
 
     Seating
2,364

 
—

 
—

 
26

 
2,390

Power Solutions
1,082

 
—

 
—

 
5

 
1,087

Total
$
6,824

 
$
197

 
$
—

 
$
21

 
$
7,042


At March 31, 2015, 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 18, "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.

The Company’s other intangible assets, primarily from business acquisitions valued based on independent appraisals, consisted of (in millions):
 
March 31, 2016
 
September 30, 2015
 
March 31, 2015
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Amortized intangible assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Patented technology
$
47

 
$
(28
)
 
$
19

 
$
80

 
$
(59
)
 
$
21

 
$
82

 
$
(58
)
 
$
24

Customer relationships
1,013

 
(238
)
 
775

 
975

 
(206
)
 
769

 
982

 
(180
)
 
802

Miscellaneous
383

 
(144
)
 
239

 
307

 
(123
)
 
184

 
296

 
(107
)
 
189

Total amortized intangible assets
1,443

 
(410
)
 
1,033

 
1,362

 
(388
)
 
974

 
1,360

 
(345
)
 
1,015

Unamortized intangible assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trademarks/trade names
543

 
—

 
543

 
542

 
—

 
542

 
543

 
—

 
543

Total intangible assets
$
1,986

 
$
(410
)
 
$
1,576

 
$
1,904

 
$
(388
)
 
$
1,516

 
$
1,903

 
$
(345
)
 
$
1,558


Amortization of other intangible assets for the three month periods ended March 31, 2016 and 2015 was $24 million and $22 million, respectively. Amortization of other intangible assets for the six month periods ended March 31, 2016 and 2015 was $48 million and $46 million, respectively. Excluding the impact of any future acquisitions, the Company anticipates amortization for fiscal 2017, 2018, 2019, 2020 and 2021 will be approximately $101 million, $99 million, $84 million, $75 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

14

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
March 31, 2016
(unaudited)


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, 2016 and 2015 were as follows (in millions):
 
Six Months Ended
March 31,
 
2016
 
2015
 
 
 
 
Balance at beginning of period
$
300

 
$
319

Accruals for warranties issued during the period
157

 
136

Accruals from acquisition and divestitures
37

 
—

Accruals related to pre-existing warranties (including changes in estimates)
8

 
(2
)
Settlements made (in cash or in kind) during the period
(152
)
 
(144
)
Currency translation
2

 
(7
)
Balance at end of period
$
352

 
$
302


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 2016, the Company committed to a significant restructuring plan (2016 Plan) and recorded $229 million of restructuring and impairment costs in the consolidated statements of income. This is the total amount incurred to date for this restructuring plan. The restructuring actions related to cost reduction initiatives in the Company’s Automotive Experience and Building Efficiency businesses and at Corporate. The costs consist primarily of workforce reductions, plant closures and asset impairments. Of the restructuring and impairment costs recorded, $169 million related to the Automotive Experience Seating segment, $26 million related to the Building Efficiency Asia segment, $16 million related to the Building Efficiency Rest of World segment, $9 million related to the Building Efficiency Products North America segment, $7 million related to Corporate and $2 million related to the Building Efficiency Systems and Service North America segment. The restructuring actions are expected to be substantially complete in fiscal 2017.

The following table summarizes the changes in the Company’s 2016 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
$
194

 
$
29

 
$
6

 
$
—

 
$
229

Utilized—cash
(3
)
 
—

 
(1
)
 
—

 
(4
)
Utilized—noncash
—

 
(29
)
 
—

 
2

 
(27
)
Balance at March 31, 2016
$
191

 
$
—

 
$
5

 
$
2

 
$
198



15

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
March 31, 2016
(unaudited)


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, $13 million related to the Building Efficiency Rest of World segment, $11 million related to the Power Solutions segment, $11 million related to the Building Efficiency Asia segment, $11 million related to the Building Efficiency Products North America segment and $3 million related to the Building Efficiency Systems and Service 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
(37
)
 
—

 
(23
)
 
—

 
(60
)
Utilized—noncash
—

 
—

 
—

 
2

 
2

Balance at March 31, 2016
$
154

 
$
—

 
$
—

 
$
2

 
$
156


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.


16

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
March 31, 2016
(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
(31
)
 
—

 
—

 
—

 
—

 
(31
)
Utilized—noncash
—

 
—

 
—

 
—

 
(2
)
 
(2
)
Balance at March 31, 2016
$
87

 
$
—

 
$
—

 
$
—

 
$
(21
)
 
$
66


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.


17

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
March 31, 2016
(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
(33
)
 
—

 
—

 
—

 
—

 
(33
)
Utilized—noncash
—

 
—

 
—

 
—

 
(1
)
 
(1
)
Balance at March 31, 2016
$
52

 
$
—

 
$
—

 
$
—

 
$
(18
)
 
$
34


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 2016, 2015, 2014 and 2013 restructuring plans included workforce reductions of approximately 17,100 employees (10,000 for the Automotive Experience business, 6,100 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 March 31, 2016, approximately 10,400 of the employees have been separated from the Company pursuant to the restructuring plans. In addition, the restructuring plans included twenty-six plant closures (eighteen for Automotive Experience and eight for Building Efficiency). As of March 31, 2016, ten of the twenty-six 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

18

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
March 31, 2016
(unaudited)


year and each interim period thereafter. For the three and six months ended March 31, 2016, the Company's effective tax rate for continuing operations was 218% and 98%, respectively. The effective rate was higher than the U.S. federal statutory rate of 35% primarily due to the Company’s change in assertion over permanently reinvested earnings as a result of the proposed spin-off of the Automotive Experience business ($780 million), the jurisdictional mix of significant restructuring and impairment costs, and the tax impacts of separation costs, partially offset by the benefits of continuing global tax planning initiatives and foreign tax rate differentials. 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 law change in Japan.

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 six months ended March 31, 2016 and 2015 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 2013 through 2014 are currently under exam by the Internal Revenue Service. 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 - 2014
Mexico
 
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

19

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
March 31, 2016
(unaudited)


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.

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.

During the six months ended March 31, 2016 and March 31, 2015, other tax legislation was adopted in various jurisdictions. These law changes did not have a material impact on the Company's consolidated financial statements.

Other Tax Matters

In the second quarter of fiscal 2016, the Company provided income tax expense on the foreign undistributed earnings of certain non-U.S. subsidiaries associated with the proposed spin-off of the Automotive Experience business, which resulted in a non-cash tax charge of $780 million.

In the second quarter of fiscal 2016, the Company recorded $229 million of significant restructuring and impairment costs. Refer to Note 9, "Significant Restructuring and Impairment Costs," of the notes to consolidated financial statements for additional information. The restructuring costs generated a $17 million tax benefit, which was negatively impacted by the geographic mix, the Company’s current tax position in these jurisdictions and the underlying tax basis in the impaired assets.

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,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Service cost
$
4

 
$
7

 
$
8

 
$
15

Interest cost
25

 
31

 
50

 
61

Expected return on plan assets
(46
)
 
(45
)
 
(93
)
 
(90
)
Net periodic benefit credit
$
(17
)
 
$
(7
)
 
$
(35
)
 
$
(14
)

 
Non-U.S. Pension Plans
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Service cost
$
4

 
$
6

 
$
9

 
$
13

Interest cost
10

 
12

 
20

 
24

Expected return on plan assets
(13
)
 
(13
)
 
(26
)
 
(26
)
Net periodic benefit cost
$
1

 
$
5

 
$
3

 
$
11



20

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
March 31, 2016
(unaudited)


 
Postretirement Benefits
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Service cost
$
—

 
$
—

 
$
1

 
$
1

Interest cost
2

 
3

 
3

 
5

Expected return on plan assets
(2
)
 
(3
)
 
(5
)
 
(6
)
Amortization of prior service credit
(1
)
 
(1
)
 
(1
)
 
(1
)
Net periodic benefit credit
$
(1
)
 
$
(1
)
 
$
(2
)
 
$
(1
)

12.
Debt and Financing Arrangements

In March 2016, the Company entered into a new credit agreement intended to replace its existing credit agreement upon the consummation of the expected merger between the Company and Tyco. The new credit agreement provides for a $2.0 billion revolving credit facility that matures in August 2020, which will become available only upon the consummation of the merger and the satisfaction of certain other closing conditions.

In February 2016, the Company entered into a nine-month, $100 million floating rate term loan scheduled to mature in November 2016. Proceeds from the term loan were used for general corporate purposes.

In February 2016, the Company terminated a 37 million euro committed revolving credit facility scheduled to mature in September 2016, and subsequently entered into a nine-month, 100 million euro, floating rate term loan scheduled to mature in October 2016. Proceeds from the term loan were used for general corporate purposes.

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

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

In January 2016, the Company entered into a one-year, $90 million, committed revolving credit facility scheduled to mature in January 2017. The Company drew on the full credit facility during the quarter ended March 31, 2016. Proceeds from the revolving credit facility were used for general corporate purposes.

In January 2016, the Company retired $800 million in principal amount, plus accrued interest, of its 5.5% fixed rate notes that matured in January 2016.

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 March 31, 2016, 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 March 2015, the Company retired $125 million in principal amount, plus accrued interest, of its 7.7% fixed rate notes that matured in March 2015.


21

Johnson Controls, Inc.
Notes to Consolidated Financial Statements
March 31, 2016
(unaudited)


In February 2015, the Company entered into a seven-month, $150 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 September 2015.

In January 2015, the Company entered into a one-year, $90 million, committed revolving credit facility scheduled to mature in January 2016. The Company drew on the full credit facility during the quarter ended March 31, 2015. Proceeds from the revolving credit facility were used for general corporate purposes. The $90 million was repaid in September 2015.

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

Net Financing Charges

The Company's net financing charges line item in the consolidated statements of income for the three and six month periods ended March 31, 2016 and 2015 contained the following components (in millions):
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
2016
 
2015