þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the Fiscal Year Ended September 30, 2010 | ||
or
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||
o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For The Transition Period From To |
Wisconsin (State of Incorporation) |
39-0380010 (I.R.S. Employer Identification No.) |
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5757 North Green Bay Avenue Milwaukee, Wisconsin (Address of principal executive offices) |
53209 (Zip Code) |
Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock Corporate Units |
New York Stock Exchange New York Stock Exchange |
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o |
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3 | ||||||||
PART I. |
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8 | ||||||||
13 | ||||||||
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17 | ||||||||
18 | ||||||||
18 | ||||||||
PART II. |
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19 | ||||||||
22 | ||||||||
23 | ||||||||
51 | ||||||||
52 | ||||||||
105 | ||||||||
105 | ||||||||
106 | ||||||||
PART III. |
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106 | ||||||||
106 | ||||||||
106 | ||||||||
107 | ||||||||
107 | ||||||||
PART IV. |
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108 | ||||||||
109 | ||||||||
110 | ||||||||
EX-10.F | ||||||||
EX-21 | ||||||||
EX-23 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT | ||||||||
EX-101 DEFINITION LINKBASE DOCUMENT |
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Building Efficiency | ||||||
Delaware
|
Newark (1),(4) | Denmark | Aarhus (3) | |||
Florida
|
Largo (1),(3) | Hornslet (2),(4) | ||||
Medley (1),(4) | Viby (2),(3) | |||||
Illinois
|
Dixon (2),(3) | France | Amiens Glisy (3) | |||
Wheeling (1) | Colombes (1),(3) | |||||
Kansas
|
Wichita (2),(3) | Nantes (1) | ||||
Kentucky
|
Erlanger (1) | Saint Quentin Fallavier (1),(3) | ||||
Maryland
|
Baltimore (1) | Germany | Essen (2),(3) | |||
Sparks (1),(4) | Kempen (1),(3) | |||||
Mississippi
|
Hattiesburg (1) | Mannheim (1) | ||||
Missouri
|
Albany (1) | Hong Kong | Hong Kong (1) | |||
Oklahoma
|
Norman (3) | Italy | Milan (1),(4) | |||
Pennsylvania
|
Philadelphia (1),(4) | India | Chakan (1),(3) | |||
York (1), (3) | Pune (1),(3) | |||||
Waynesboro (3) | Japan | Tokyo (1),(4) | ||||
Texas
|
San Antonio | Mexico | Cienega de Flores (1) | |||
Virginia
|
Roanoke | Durango (1) | ||||
Wisconsin
|
Milwaukee (2),(4) | Monterrey (1) | ||||
Netherlands | Gorinchem (1),(4) | |||||
Austria
|
Graz (4) | Poland | Warsaw (1),(3) | |||
Vienna (4) | Puerto Rico | Carolina (1),(4) | ||||
Brazil
|
Pinhais | Romania | Bucharest (1),(3) | |||
São Paulo (3) | Russia | Moscow (1),(3) | ||||
Belgium
|
Diegem (1),(4) | South Africa | Johannesburg (1),(3) | |||
Canada
|
Ajax (1),(3) | Spain | Sabadell (1),(3) | |||
Victoria (1),(4) | Taiwan | Taipei (1),(4) | ||||
China
|
Qingyuan (2),(3) | Turkey | Istanbul (1),(4) | |||
Wuxi (1),(3) | Izmir (1),(3) | |||||
United Arab Emirates | Dubai (2),(3) | |||||
United Kingdom | Essex (1),(4) |
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Automotive Experience | ||||||
Argentina
|
Buenos Aires (1) | Japan | Ayase (3) | |||
Rosario | Hamakita (3) | |||||
Australia
|
Adelaide (1) | Mouka (3) | ||||
Melbourne | Toyotsucho (2),(3) | |||||
Austria
|
Graz (1),(3) | Yokosuka (2),(3) | ||||
Mandling (3) | Korea | Ansan (1),(4) | ||||
Belgium
|
Geel (3) | Asan (3) | ||||
Gent (1),(3) | Dangjin (3) | |||||
Brazil
|
Pouso Alegre | Namsa (1) | ||||
San Bernardo do Campo (1),(3) | Malaysia | Alor Gajah (1) | ||||
Santo Andre | Mukin Hulu Bernam | |||||
Sao Jose dos Campos | Peramu Jaya (1) | |||||
Sao Jose dos Pinhais (1) | Persiaran Sabak Bernam | |||||
Canada
|
Milton (1) | Mexico | Monclova (3) | |||
Mississauga (1),(3) | Naucalpan de Juarez | |||||
Orangeville | Puebla (1) | |||||
Saint Marys | Ramos Arizpe (2) | |||||
Tilsonburg | Saltillo (1) | |||||
Whitby | Tlaxcala | |||||
China
|
Beijing (3) | Tlazala (1) | ||||
Czech Republic
|
Benatky nad Jizerou (1),(3) | Toluca (1) | ||||
Mlada Boleslav (1),(3) | Poland | Siemianowice | ||||
Ni Ebohy (1) | Tychy | |||||
Straz pod Ralskem (3) | Zory (3) | |||||
France
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Happich (2),(3) | Romania | Mioveni (1),(3) | |||
Rosny (1),(3) | Pitesti (1),(3) | |||||
Strasbourg (3) | Ploiesti (3) | |||||
Germany
|
Boblingen (1),(3) | Russia | St. Petersburg (1),(3) | |||
Bochum (1),(3) | Togliatti (1) | |||||
Bremen (1),(3) | Slovak Republic | Bratislava (1),(3) | ||||
Burscheid (2),(3) | Kostany nad Turcom (3) | |||||
Espelkamp (3) | Lucenec (1),(3) | |||||
Hannover (1),(3) | Namestovo (1),(3) | |||||
Holzgerlingen (1),(3) | Trencin (1),(4) | |||||
Lahnwerk (2),(3) | Zilina (1) | |||||
Luneburg (2) | South Africa | East London (1) | ||||
Neustadt (2),(3) | Pretoria (2),(3) | |||||
Peine (1),(3) | Spain | Alagon (3) | ||||
Rastatt (1),(3) | Madrid (1),(3) | |||||
Remchingen (3) | Valencia (2),(3) | |||||
Saarlouis (1) | Valladolid (3) | |||||
Uberherrn (1),(3) | Sweden | Hamneviksvagen (1),(3) | ||||
Unterriexingen (2),(3) | Thailand | Rayong (3) | ||||
Waghausel (3) | Tunisia | Bir al Bay (2),(3) | ||||
Wuppertal (1),(3) | United Kingdom | Burton-Upon-Trent (2),(3) | ||||
Zwickau (3) | Essex (1),(3) | |||||
Italy
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Cicerale (3) | Leamington Spa (1),(3) | ||||
Grugliasco (1),(3) | Redditch (1) | |||||
Melfi (1),(3) | Speke (3) | |||||
Rocca DEvandro (1) | Sunderland | |||||
Telford (2),(3) | ||||||
Wednesbury (3) |
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Automotive Experience (continued) | ||||||
Alabama
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Cottondale (1) | Mississippi | Madison | |||
McCalla (1) | Missouri | Earth City (1) | ||||
Georgia
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Suwanee (1) | Jefferson City | ||||
LaGrange (1) | Kansas City (1),(3) | |||||
Illinois
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Sycamore | Ohio | Bryan | |||
Indiana
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Kendallville | Northwood | ||||
Princeton (1) | Tennessee | Columbia (1) | ||||
Kentucky
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Cadiz (1) | Pulaski (2) | ||||
Georgetown | Texas | El Paso (1) | ||||
Louisville (1) | San Antonio | |||||
Nicholasville (1) | Wisconsin | Hudson (1) | ||||
Owensboro (1) | ||||||
Shelbyville (1) | ||||||
Winchester (1) | ||||||
Louisiana
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Shreveport | |||||
Michigan
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Battle Creek | |||||
Detroit (3) | ||||||
Highland Park (1) | ||||||
Holland (2),(3) | ||||||
Lansing (3) | ||||||
Oxford | ||||||
Plymouth (2),(3) | ||||||
Warren (3) |
Power Solutions | ||||||
Arizona
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Yuma (3) | Austria | Graz (1),(3) | |||
Delaware
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Middletown (3) | Vienna (1),(3) | ||||
Florida
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Tampa (2),(3) | Brazil | Sorocaba (3) | |||
Illinois
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Geneva (3) | China | Shanghai (2),(3) | |||
Indiana
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Ft. Wayne (3) | Czech Republic | Ceska Lipa (2),(3) | |||
Iowa
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Red Oak (3) | France | Sarreguemines (3) | |||
Kentucky
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Florence (3) | Germany | Hannover (3) | |||
Missouri
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St. Joseph (2),(3) | Krautscheid (3) | ||||
Ohio
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Toledo (3) | Zwickau (2),(3) | ||||
Oregon
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Clackamas (1) | Korea | Gumi (3) | |||
Portland (3) | Mexico | Celaya | ||||
South Carolina
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Florence (3) | Cienega de Flores (2) | ||||
Oconee (2),(3) | Escobedo | |||||
Texas
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San Antonio (3) | Flores | ||||
Wisconsin
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Milwaukee (4) | Monterrey (2),(3) | ||||
Torreon | ||||||
Spain | Burgos (3) | |||||
Guadamar del Segura | ||||||
Guadalajara | ||||||
Sweden | Hultsfred |
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Corporate | ||
Wisconsin
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Milwaukee (4) |
(1) | Leased facility | |
(2) | Includes both leased and owned facilities | |
(3) | Includes both administrative and manufacturing facilities | |
(4) | Administrative facility only |
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ITEM 5 | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Number of Record Holders | ||
Title of Class | as of September 30, 2010 | |
Common Stock, $0.01 7/18 par value | 44,627 |
Common Stock Price Range | Dividends | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
First Quarter |
$ | 23.62 - 28.34 | $ | 13.65 - 30.01 | $ | 0.13 | $ | 0.13 | ||||||||
Second Quarter |
27.21 - 33.60 | 8.35 - 19.64 | 0.13 | 0.13 | ||||||||||||
Third Quarter |
25.56 - 35.77 | 11.78 - 22.65 | 0.13 | 0.13 | ||||||||||||
Fourth Quarter |
26.07 - 31.14 | 19.43 - 27.90 | 0.13 | 0.13 | ||||||||||||
Year |
$ | 23.62 - 35.77 | $ | 8.35 - 30.01 | $ | 0.52 | $ | 0.52 | ||||||||
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Approximate Dollar | ||||||||||||||||
Total Number of | Value of Shares that | |||||||||||||||
Shares Purchased as | May Yet be | |||||||||||||||
Total Number of | Average Price | Part of the Publicly | Purchased under the | |||||||||||||
Period | Shares Purchased | Paid per Share | Announced Program | Programs | ||||||||||||
7/1/10 - 7/31/10 Purchases by Company (1) |
| | | $ | 102,394,713 | |||||||||||
8/1/10 - 8/31/10 Purchases by Company (1) |
| | | $ | 102,394,713 | |||||||||||
9/1/10 - 9/30/10 Purchases by Company (1) |
| | | $ | 102,394,713 | |||||||||||
7/1/10 - 7/31/10 Purchases by Citibank |
| | | NA | ||||||||||||
8/1/10 - 8/31/10 Purchases by Citibank |
| | | NA | ||||||||||||
9/1/10 - 9/30/10 Purchases by Citibank |
| | | NA |
(1) | The repurchases of the Companys common stock by the Company are intended to partially offset dilution related to our stock option and restricted stock equity compensation plans and are treated as repurchases of Company common stock for purposes of this disclosure. |
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COMPANY/INDEX | Sep05 | Sep06 | Sep07 | Sep08 | Sep09 | Sep10 | ||||||||||||||||||||||||||
Johnson Controls, Inc. |
100 | 117.37 | 195.32 | 152.87 | 133.04 | 161.75 | ||||||||||||||||||||||||||
Diversified Industrials Peer Group * |
100 | 114.47 | 152.10 | 113.32 | 115.66 | 141.85 | ||||||||||||||||||||||||||
S&P 500 Comp-Ltd. |
100 | 110.79 | 129.44 | 100.99 | 94.02 | 103.57 | ||||||||||||||||||||||||||
* | The Diversified Industrials Peer Group includes: Danaher Corporation, Dover Corporation, Eaton Corporation, Emerson Electric Corporation, Honeywell International Inc., Illinois Tool Works Inc., Ingersoll-Rand PLC, ITT Corporation, 3M Company, Textron Inc., and United Technologies Corporation. |
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Year ended September 30, | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 (2) | ||||||||||||||||
OPERATING RESULTS |
||||||||||||||||||||
Net sales |
$ | 34,305 | $ | 28,497 | $ | 38,062 | $ | 34,624 | $ | 32,235 | ||||||||||
Segment income (3) |
1,933 | 262 | 2,077 | 1,884 | 1,608 | |||||||||||||||
Income (loss) attributable to Johnson Controls,
Inc. from continuing operations |
1,491 | (338 | ) | 979 | 1,295 | 1,033 | ||||||||||||||
Net income (loss) attributable
to Johnson Controls, Inc. |
1,491 | (338 | ) | 979 | 1,252 | 1,028 | ||||||||||||||
Earnings (loss) per share
from continuing operations (1) |
||||||||||||||||||||
Basic |
$ | 2.22 | $ | (0.57 | ) | $ | 1.65 | $ | 2.19 | $ | 1.77 | |||||||||
Diluted |
2.19 | (0.57 | ) | 1.63 | 2.16 | 1.75 | ||||||||||||||
Earnings (loss) per share (1) |
||||||||||||||||||||
Basic |
$ | 2.22 | $ | (0.57 | ) | $ | 1.65 | $ | 2.12 | $ | 1.76 | |||||||||
Diluted |
2.19 | (0.57 | ) | 1.63 | 2.09 | 1.74 | ||||||||||||||
Return on average shareholders equity
attributable to Johnson Controls, Inc. (4) |
16 | % | -4 | % | 11 | % | 16 | % | 16 | % | ||||||||||
Capital expenditures |
$ | 777 | $ | 647 | $ | 807 | $ | 828 | $ | 711 | ||||||||||
Depreciation and amortization |
691 | 745 | 783 | 732 | 705 | |||||||||||||||
Number of employees |
137,000 | 130,000 | 140,000 | 140,000 | 136,000 | |||||||||||||||
FINANCIAL POSITION |
||||||||||||||||||||
Working capital (5) |
$ | 919 | $ | 1,147 | $ | 1,225 | $ | 1,441 | $ | 1,357 | ||||||||||
Total assets |
25,743 | 24,088 | 24,987 | 24,105 | 21,921 | |||||||||||||||
Long-term debt |
2,652 | 3,168 | 3,201 | 3,255 | 4,166 | |||||||||||||||
Total debt |
3,389 | 3,966 | 3,944 | 4,418 | 4,743 | |||||||||||||||
Shareholders equity attributable
to Johnson Controls, Inc. |
10,071 | 9,100 | 9,406 | 8,873 | 7,316 | |||||||||||||||
Total debt to total capitalization (6) |
25 | % | 30 | % | 30 | % | 33 | % | 39 | % | ||||||||||
Net book value per share (1) (7) |
$ | 14.95 | $ | 13.56 | $ | 15.83 | $ | 14.94 | $ | 12.46 | ||||||||||
COMMON SHARE INFORMATION (1) |
||||||||||||||||||||
Dividends per share |
$ | 0.52 | $ | 0.52 | $ | 0.52 | $ | 0.44 | $ | 0.37 | ||||||||||
Market prices |
||||||||||||||||||||
High |
$ | 35.77 | $ | 30.01 | $ | 44.46 | $ | 43.07 | $ | 30.00 | ||||||||||
Low |
23.62 | 8.35 | 26.00 | 23.84 | 20.09 | |||||||||||||||
Weighted average shares (in millions) |
||||||||||||||||||||
Basic |
672.0 | 595.3 | 593.1 | 590.6 | 583.5 | |||||||||||||||
Diluted |
682.5 | 595.3 | 601.4 | 599.2 | 589.9 | |||||||||||||||
Number of shareholders |
44,627 | 46,460 | 47,543 | 47,810 | 51,240 |
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(1) | All share and per share amounts reflect a three-for-one common stock split payable October 2, 2007 to shareholders of record on September 14, 2007. | |
(2) | In December 2005, the Company acquired York International Corporation, significantly expanding the building efficiency business. | |
(3) | Segment income is calculated as income from continuing operations before income taxes and noncontrolling interests excluding net financing charges, debt conversion costs and restructuring costs. | |
(4) | Return on average shareholders equity attributable to Johnson Controls, Inc. (ROE) represents income from continuing operations divided by average shareholders equity attributable to Johnson Controls, Inc. Income from continuing operations includes $230 million, $495 million and $197 million of restructuring costs in fiscal year 2009, 2008 and 2006, respectively. | |
(5) | Working capital is defined as current assets less current liabilities, excluding cash, short-term debt, the current portion of long-term debt and net assets of discontinued operations. | |
(6) | Total debt to total capitalization represents total debt divided by the sum of total debt and shareholders equity attributable to Johnson Controls, Inc. | |
(7) | Net book value per share represents shareholders equity attributable to Johnson Controls, Inc. divided by the number of common shares outstanding at the end of the period. |
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Year Ended | ||||||||||||
September 30, | ||||||||||||
(in millions) | 2010 | 2009 | Change | |||||||||
Net sales |
$ | 34,305 | $ | 28,497 | 20 | % | ||||||
Segment income |
1,933 | 262 | * |
* | Measure not meaningful |
| The $5.8 billion increase in consolidated net sales was primarily due to higher sales in the automotive experience business ($4.5 billion) as a result of increased industry production levels in all segments, higher sales in the power solutions business ($0.8 billion) reflecting higher sales volumes and the impact of higher lead costs on pricing, the favorable impact of foreign currency translation ($0.5 billion) and a slight increase in building efficiency net sales. |
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| Excluding the favorable impact of foreign currency translation, consolidated net sales increased 19% as compared to the prior year. | ||
| The $1.7 billion increase in consolidated segment income was primarily due to higher volumes in the automotive experience and power solutions businesses, favorable operating costs in the automotive experience North America segment, favorable overall margin rates in the building efficiency business, impairment charges recorded in the prior year on an equity investment in the building efficiency North America unitary products segment ($152 million), incremental warranty charges recorded in the prior year in the building efficiency North America unitary products segment ($105 million), fixed asset impairment charges recorded in the prior year in the automotive experience North America and Europe segments ($77 million and $33 million, respectively), gain on acquisition of a Korean joint venture net of acquisition costs and related purchase accounting adjustments in the power solutions business ($37 million) and higher equity income in the automotive experience and power solutions businesses, partially offset by higher selling, general and administrative expenses, fixed asset impairment charges recorded in the automotive experience Asia segment ($22 million) and the unfavorable impact of foreign currency translation ($6 million). |
Net Sales | Segment Income | |||||||||||||||||||||||
for the Year Ended | for the Year Ended | |||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||
(in millions) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
North America systems |
$ | 2,142 | $ | 2,222 | -4 | % | $ | 262 | $ | 251 | 4 | % | ||||||||||||
North America service |
2,127 | 2,168 | -2 | % | 103 | 204 | -50 | % | ||||||||||||||||
North America unitary products |
787 | 684 | 15 | % | 58 | (324 | ) | * | ||||||||||||||||
Global workplace solutions |
3,288 | 2,832 | 16 | % | 54 | 45 | 20 | % | ||||||||||||||||
Europe |
1,897 | 2,140 | -11 | % | (7 | ) | 41 | * | ||||||||||||||||
Rest of world |
2,561 | 2,447 | 5 | % | 203 | 180 | 13 | % | ||||||||||||||||
$ | 12,802 | $ | 12,493 | 2 | % | $ | 673 | $ | 397 | 70 | % | |||||||||||||
* | Measure not meaningful |
| The decrease in North America systems was primarily due to lower volumes of equipment in the commercial construction and replacement markets ($101 million) partially offset by the favorable impact from foreign currency translation ($21 million). | ||
| The decrease in North America service was primarily due to lower truck-based business ($155 million) partially offset by higher volumes in energy solutions ($72 million), the favorable impact of foreign currency translation ($22 million) and incremental sales due to a business acquisition ($20 million). | ||
| The increase in North America unitary products was primarily due to improvement in the U.S. residential replacement markets ($96 million) and the favorable impact of foreign currency translation ($7 million). | ||
| The increase in global workplace solutions was primarily due to a net increase in services to existing customers ($208 million), new business ($151 million) and the favorable impact of foreign currency translation ($97 million). | ||
| The decrease in Europe was primarily due to lower volumes across the region ($290 million) based on declines in commercial and residential construction partially offset by the favorable impact of foreign currency translation ($47 million). | ||
| The increase in rest of world was primarily due to favorable impact of foreign currency translation ($86 million) and volume increases in Asia ($73 million) and Latin America ($13 million), partially offset by volume decreases in Middle East ($33 million) and other global businesses ($25 million). |
25
| The increase in North America systems was primarily due to favorable margin rates ($33 million), lower selling, general and administrative expenses ($8 million) and the favorable impact of foreign currency translation ($3 million), partially offset by lower volumes ($17 million) and reserves for existing customers ($13 million). | ||
| The decrease in North America service was primarily due to information technology implementation costs and inventory adjustments ($55 million), unfavorable margin rates ($24 million), lower volumes in truck-based services ($18 million) and higher selling, general and administrative expenses ($5 million), partially offset by the favorable impact of foreign currency translation ($2 million). | ||
| The increase in North America unitary products was primarily due to impairment charges recorded on an equity investment in the prior year ($152 million), incremental warranty charges in the prior year ($105 million), favorable volumes and margin rates ($100 million), prior year inventory related charges ($20 million) and lower selling, general, and administrative expenses ($7 million). | ||
| The increase in global workplace solutions was primarily due to higher volumes ($24 million), prior year bad debt expense associated with a customer bankruptcy ($8 million) and the favorable impact of foreign currency translation ($1 million), partially offset by higher selling, general, and administrative expenses ($17 million) primarily related to business development investments and unfavorable margin rates ($7 million). | ||
| The decrease in Europe was primarily due to lower sales volumes ($67 million) partially offset by lower selling, general and administrative expenses ($13 million), favorable margin rates ($8 million) and the favorable impact of foreign currency translation ($2 million). | ||
| The increase in rest of world was primarily due to favorable margin rates ($73 million), higher volumes ($6 million) and the favorable impact of foreign currency translation ($1 million), partially offset by higher selling, general and administrative expenses ($58 million) primarily related to investments in emerging markets and increased engineering spending. |
Net Sales | Segment Income | |||||||||||||||||||||||
for the Year Ended | for the Year Ended | |||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||
(in millions) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
North America |
$ | 6,765 | $ | 4,631 | 46 | % | $ | 379 | $ | (333 | ) | * | ||||||||||||
Europe |
8,019 | 6,287 | 28 | % | 105 | (212 | ) | * | ||||||||||||||||
Asia |
1,826 | 1,098 | 66 | % | 107 | 4 | * | |||||||||||||||||
$ | 16,610 | $ | 12,016 | 38 | % | $ | 591 | $ | (541 | ) | * | |||||||||||||
* | Measure not meaningful |
| The increase in North America was primarily due to higher industry production volumes by the Companys major OEM customers ($2.1 billion) and incremental sales from a business acquisition ($58 million), partially offset by unfavorable commercial settlements and pricing ($36 million). | ||
| The increase in Europe was primarily due to higher production volumes and new customer awards ($1.8 billion) partially offset by unfavorable commercial settlements and pricing ($32 million) and the unfavorable impact of foreign currency translation ($20 million). | ||
| The increase in Asia was primarily due to higher production volumes and new customer awards ($603 million) and the favorable impact of foreign currency translation ($125 million). |
| The increase in North America was primarily due to higher industry production volumes ($478 million), lower operating and selling, general and administration costs ($152 million), an impairment charge on fixed |
26
assets recorded in the prior year ($77 million) and higher equity income ($28 million), partially offset by higher engineering expenses ($22 million). | |||
| The increase in Europe was primarily due to higher production volumes ($350 million), favorable purchasing costs ($64 million), an impairment charge on fixed assets recorded in the prior year ($33 million), higher equity income ($10 million) and favorable operating costs ($8 million), partially offset by higher prior year commercial recoveries ($45 million), higher engineering expenses ($44 million), higher selling, general and administrative costs ($39 million) and the unfavorable impact of foreign currency translation ($19 million). | ||
| The increase in Asia was primarily due to higher production volumes ($90 million), higher equity income at our joint ventures mainly in China ($62 million) and the favorable impact of foreign currency translation ($1 million), partially offset by asset impairment charges in Japan ($22 million), higher engineering expenses ($10 million) and higher selling, general and administrative costs ($17 million). |
Year Ended | ||||||||||||
September 30, | ||||||||||||
(in millions) | 2010 | 2009 | Change | |||||||||
Net sales |
$ | 4,893 | $ | 3,988 | 23 | % | ||||||
Segment income |
669 | 406 | 65 | % |
| Net sales increased primarily due to higher sales volumes ($454 million), the impact of higher lead costs on pricing ($316 million), the favorable impact of foreign currency translation ($69 million), incremental sales due to a business acquisition ($43 million) and favorable price/product mix ($23 million). | ||
| Segment income increased primarily due to higher sales volumes ($164 million), gain on acquisition of a Korean joint venture net of acquisition costs and related purchase accounting adjustments ($37 million) as discussed in Note 2, Acquisitions, to the accompanying financial statements, higher equity income ($27 million), prior year disposal of a former manufacturing facility in Europe and other assets ($20 million), the favorable impact of foreign currency translation ($3 million) and favorable net lead and other commodity costs and pricing ($56 million), which includes a prior year $62 million out of period adjustment as discussed in Note 1, Summary of Significant Accounting Policies, to the accompanying financial statements. Partially offsetting these factors were higher selling, general and administrative costs ($46 million). |
27
Year Ended | ||||||||||||
September 30, | ||||||||||||
(in millions) | 2010 | 2009 | Change | |||||||||
Net financing charges |
$ | 170 | $ | 239 | -29 | % |
| The decrease in net financing charges was primarily due to lower debt levels, including the conversion of the Companys convertible senior notes and Equity Units in September 2009, and lower interest rates in fiscal 2010. |
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Year Ended | ||||||||||||
September 30, | ||||||||||||
(in millions) | 2010 | 2009 | Change | |||||||||
Income (loss) attributable to
noncontrolling interests |
$ | 75 | $ | (12 | ) | * |
* | Measure not meaningful |
| The increase in income attributable to noncontrolling interests was primarily due to improved earnings at certain automotive experience joint ventures in North America and Asia and a power solutions joint venture. |
Year Ended | ||||||||||||
September 30, | ||||||||||||
(in millions) | 2010 | 2009 | Change | |||||||||
Net income (loss) attributable to
Johnson Controls, Inc. |
$ | 1,491 | $ | (338 | ) | * |
* | Measure not meaningful |
| The increase in net income attributable to Johnson Controls, Inc. was primarily due to higher volumes in the automotive experience and power solutions businesses, favorable operating costs in the automotive experience North America segment, favorable overall margin rates in the building efficiency business, impairment charges recorded in the prior year on an equity investment in the building efficiency North America unitary products segment, incremental warranty charges recorded in the prior year in the building efficiency North America unitary products segment, fixed asset impairment charges recorded in the prior year in the automotive experience North America and Europe segments, gain on acquisition of a Korean joint venture in the power solutions business, restructuring charges recorded in the prior year, higher equity income in the automotive experience and power solutions businesses, debt conversion costs incurred in the prior year and lower net financing charges, partially offset by higher selling, general and administrative expenses, fixed asset impairment charges recorded in the automotive experience Asia segment, an increase in the provision for income taxes and higher income attributable to noncontrolling interests. Fiscal 2010 diluted earnings per share was $2.19 compared to prior years diluted loss per share of $0.57. |
Year Ended | ||||||||||||
September 30, | ||||||||||||
(in millions) | 2009 | 2008 | Change | |||||||||
Net sales |
$ | 28,497 | $ | 38,062 | -25 | % | ||||||
Segment income |
262 | 2,077 | -87 | % |
| The $9.6 billion decrease in consolidated net sales was primarily due to lower sales in the automotive experience business ($5.0 billion) as a result of significantly reduced industry production levels by all our major OEM customers primarily in North America and Europe, the unfavorable impact of foreign currency translation ($2.1 billion), lower sales in the power solutions business ($1.6 billion) reflecting the impact of lower lead costs on pricing and lower sales volumes, and lower sales in the building efficiency business ($0.9 billion) as a result of lower sales volumes across all segments. |
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| Excluding the unfavorable effects of foreign currency translation, consolidated net sales decreased 20% as compared to the prior year. | ||
| The $1.8 billion decrease in segment income was primarily due to lower volumes mainly in the automotive experience business as a result of significantly reduced industry production volumes, lead costs not recovered through pricing, first quarter impairment charges recorded on an equity investment ($152 million) in the building efficiency North American unitary products segment and certain fixed asset impairment charges recorded in the automotive experience North America and Europe segments ($77 million and $33 million, respectively), fourth quarter incremental warranty charges recorded in the building efficiency North American unitary products segment ($105 million) and the unfavorable impact of foreign currency translation ($116 million). | ||
| Excluding the unfavorable effects of foreign currency translation, consolidated segment income decreased 82% as compared to the prior year. |
Net Sales | Segment Income | |||||||||||||||||||||||
for the Year Ended | for the Year Ended | |||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||
(in millions) | 2009 | 2008 | Change | 2009 | 2008 | Change | ||||||||||||||||||
North America systems |
$ | 2,222 | $ | 2,282 | -3 | % | $ | 251 | $ | 256 | -2 | % | ||||||||||||
North America service |
2,168 | 2,409 | -10 | % | 204 | 224 | -9 | % | ||||||||||||||||
North America unitary products |
684 | 810 | -16 | % | (324 | ) | 2 | * | ||||||||||||||||
Global workplace solutions |
2,832 | 3,197 | -11 | % | 45 | 59 | -24 | % | ||||||||||||||||
Europe |
2,140 | 2,710 | -21 | % | 41 | 114 | -64 | % | ||||||||||||||||
Rest of world |
2,447 | 2,713 | -10 | % | 180 | 302 | -40 | % | ||||||||||||||||
$ | 12,493 | $ | 14,121 | -12 | % | $ | 397 | $ | 957 | -59 | % | |||||||||||||
* | Measure not meaningful |
| The decrease in North America systems was primarily due to lower volumes of control systems and equipment in the construction and replacement market ($53 million) and the unfavorable impact of foreign currency translation ($21 million), partially offset by the impact of prior year acquisitions ($14 million). | ||
| The decrease in North America service was primarily due to lower truck-based and specialty business ($259 million) and the unfavorable impact of foreign currency translation ($28 million), partially offset by higher volumes in energy solutions ($46 million). | ||
| The decrease in North America unitary products was primarily due to a depressed U.S. residential market, which continues to impact the demand for HVAC equipment in new housing starts ($117 million), and the unfavorable impact of foreign currency translation ($9 million). | ||
| The decrease in global workplace solutions was primarily due to the unfavorable impact of foreign currency translation ($333 million) and a net decrease in services to existing customers ($137 million), partially offset by new business ($105 million). | ||
| The decrease in Europe was primarily due to the unfavorable impact of foreign currency translation ($302 million) and lower control systems and specialty product demand across the region ($268 million). | ||
| The decrease in rest of world was primarily due to lower volumes mainly in Latin America, Asia and the Middle East ($225 million) and the unfavorable impact of foreign currency translation ($41 million). |
| The decrease in North America systems was primarily due to lower net volumes ($8 million), unfavorable margin rates ($33 million) and the unfavorable impact of foreign currency translation ($3 million), partially offset by lower SG&A expenses ($39 million). |
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| The decrease in North America service was primarily due to lower net volumes ($62 million) and the unfavorable impact of foreign currency translation ($3 million), partially offset by lower SG&A expenses ($45 million). | ||
| The decrease in North America unitary products was primarily due to an equity investment impairment charge ($152 million), incremental warranty charges ($105 million), lower volumes ($18 million), and unfavorable margin rates ($56 million), partially offset by lower SG&A expenses ($5 million). The incremental warranty charges were due to a specific product issue and an adjustment to the pre-existing warranty accruals based on analysis of recent actual return rates. | ||
| The decrease in global workplace solutions was primarily due to higher bad debt expense associated with a customer bankruptcy ($8 million), the unfavorable impact of foreign currency translation ($7 million) and lower volumes and unfavorable mix in North America ($11 million), partially offset by lower SG&A expenses ($12 million). | ||
| The decrease in Europe was primarily due to lower volumes ($61 million), the unfavorable impact of foreign currency translation ($16 million) and unfavorable margin rates ($37 million), partially offset by lower SG&A costs ($41 million). | ||
| The decrease in rest of world was primarily due to lower volumes ($53 million), prior year gains on sales of a business and investments ($8 million) and higher SG&A costs ($67 million), partially offset by the favorable impact of foreign currency translation ($6 million). |
Net Sales | Segment Income | |||||||||||||||||||||||
for the Year Ended | for the Year Ended | |||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||
(in millions) | 2009 | 2008 | Change | 2009 | 2008 | Change | ||||||||||||||||||
North America |
$ | 4,631 | $ | 6,723 | -31 | % | $ | (333 | ) | $ | 79 | * | ||||||||||||
Europe |
6,287 | 9,854 | -36 | % | (212 | ) | 464 | * | ||||||||||||||||
Asia |
1,098 | 1,514 | -27 | % | 4 | 36 | -89 | % | ||||||||||||||||
$ | 12,016 | $ | 18,091 | -34 | % | $ | (541 | ) | $ | 579 | * | |||||||||||||
* | Measure not meaningful |
| The decrease in North America was primarily due to the significantly reduced industry production volumes by all of the Companys major OEM customers ($2.5 billion), partially offset by the acquisition of the interior product assets of Plastech Engineered Products, Inc. in July 2008, which had a favorable impact of $299 million in fiscal 2009, and net favorable commercial settlements and pricing ($63 million). | ||
| The decrease in Europe was primarily due to lower industry production volumes across all customers ($2.5 billion), the unfavorable impact of foreign currency translation ($1.0 billion) and higher prior year commercial recoveries ($89 million). | ||
| The decrease in Asia was primarily due to lower production volumes mainly in Korea and Japan ($329 million) and the unfavorable impact of foreign currency translation ($87 million). |
| The decrease in North America was primarily due to lower industry production volumes ($517 million), the unfavorable impact of the acquisition of the interior product assets of Plastech Engineered Products, Inc. ($55 million), an impairment charge on fixed assets in the first quarter ($77 million) and lower equity earnings ($44 million). These factors were partially offset by lower operational and SG&A costs ($154 million) including the benefits of cost reduction initiatives, favorable purchasing and commercial costs ($72 million), and lower engineering expenses ($55 million). | ||
| The decrease in Europe was primarily due to lower industry production volumes ($497 million), pricing and material costs ($93 million), higher operational costs ($73 million), the unfavorable impact of foreign |
34
currency translation ($66 million), an impairment charge on fixed assets in the first quarter ($33 million) and higher net direct material purchasing costs ($31 million). These factors were partially offset by lower engineering expenses ($65 million) and SG&A costs ($52 million). | |||
| The decrease in Asia is primarily due to lower volumes ($60 million) and the unfavorable impact of foreign currency translation ($10 million), partially offset by higher equity income at our joint ventures mainly in China ($24 million), lower SG&A costs ($10 million) and lower engineering expenses ($4 million). |
Year Ended | ||||||||||||
September 30, | ||||||||||||
(in millions) | 2009 | 2008 | Change | |||||||||
Net sales |
$ | 3,988 | $ | 5,850 | -32 | % | ||||||
Segment income |
406 | 541 | -25 | % |
| Net sales decreased primarily due to the impact of lower lead costs on pricing ($1.5 billion), lower sales volumes ($352 million) and the unfavorable impact of foreign currency translation ($260 million), partially offset by improved price/product mix ($215 million). | ||
| Segment income decreased due to lower volumes ($56 million), the unfavorable impact of foreign currency translation ($17 million), a nonrecurring charge related to the disposal of a manufacturing facility and other assets in Europe ($20 million), other nonrecurring items recorded in the prior year ($11 million), and the negative impact of lead and other commodity costs not fully recovered through pricing ($230 million), which includes a $62 million out of period adjustment as discussed in Note 1, Summary of Significant Accounting Policies, to the accompanying financial statements. Partially offsetting these factors was improved price/product mix ($192 million) and higher equity income from joint ventures ($7 million). |
35
Year Ended | ||||||||||||
September 30, | ||||||||||||
(in millions) | 2009 | 2008 | Change | |||||||||
Net financing charges |
$ | 239 | $ | 258 | -7 | % |
| Net financing charges decreased primarily due to lower interest rates during fiscal 2009 partially offset by higher debt levels. |
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Year Ended | ||||||||||||
September 30, | ||||||||||||
(in millions) | 2009 | 2008 | Change | |||||||||
Income (loss) attributable to
noncontrolling interests |
$ | (12 | ) | $ | 24 | * |
* | Measure not meaningful |
| The decrease in income attributable to noncontrolling interests was primarily due to losses at a power solutions joint venture and certain automotive experience joint ventures in North America because of the decline in the global automotive industry. |
Year Ended | ||||||||||||
September 30, | ||||||||||||
(in millions) | 2009 | 2008 | Change | |||||||||
Net income (loss) attributable to
Johnson Controls, Inc. |
$ | (338 | ) | $ | 979 | * |
* | Measure not meaningful |
| Net loss attributable to Johnson Controls, Inc. for fiscal 2009 was $338 million, $1.3 billion less than prior years net income attributable to Johnson Controls, Inc. of $979 million, primarily due to lower volumes mainly in the automotive experience business, lead costs not recovered through pricing, first quarter impairment charges recorded on an equity investment in the North American unitary products group in building efficiency and certain fixed assets in the automotive experience North America and Europe segments, a second quarter restructuring charge, fourth quarter debt conversion costs, fourth quarter incremental warranty charges recorded in the building efficiency North American unitary products segment, and the unfavorable impact of foreign currency translation, partially offset by lower SG&A costs, a decrease in the provision for income taxes and loss attributable to noncontrolling interests. Fiscal 2009 diluted loss per share was $0.57 compared to the prior years diluted earnings per share of $1.63. |
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September 30, | September 30, | |||||||||||
(in millions) | 2010 | 2009 | Change | |||||||||
Working capital |
$ | 919 | $ | 1,147 | -20 | % | ||||||
Accounts receivable |
6,095 | 5,528 | 10 | % | ||||||||
Inventories |
1,786 | 1,521 | 17 | % | ||||||||
Accounts payable |
5,426 | 4,434 | 22 | % |
| The Company defines working capital as current assets less current liabilities, excluding cash, short-term debt, the current portion of long-term debt and net assets of discontinued operations. Management believes that this measure of working capital, which excludes financing-related items and discontinued activities, provides a more useful measurement of the Companys operating performance. | |
| The decrease in working capital at September 30, 2010 as compared to September 30, 2009 was primarily due to higher accounts payable primarily due to increased purchasing activity, partially offset by higher accounts receivable from higher sales volumes, higher inventory levels to support higher sales and a decrease in restructuring reserves. | |
| The Companys days sales in accounts receivable decreased to 55 at September 30, 2010 from 58 for the prior year primarily due to improved collections. The increase in accounts receivable compared to September 30, 2009 was primarily due to increased sales in the fourth quarter of fiscal 2010 compared to the same quarter in the prior year. There has been no significant adverse change in the level of overdue receivables or changes in revenue recognition methods. | |
| The Companys inventory turns during fiscal 2010 were slightly lower compared to the prior year primarily due to increased inventory production to meet increased demand. |
41
| Days in accounts payable at September 30, 2010 increased to 74 days from 72 days at September 30, 2009 primarily due to the timing of supplier payments. |
Year Ended September 30, | ||||||||
(in millions) | 2010 | 2009 | ||||||
Cash provided by operating activities |
$ | 1,514 | $ | 917 | ||||
Cash used by investing activities |
(968 | ) | (828 | ) | ||||
Cash provided (used) by financing activities |
(895 | ) | 278 | |||||
Capital expenditures |
(777 | ) | (647 | ) |
| The increase in cash provided by operating activities was primarily due to higher net income attributable to Johnson Controls, Inc. and favorable working capital changes in accounts payable, partially offset by unfavorable working capital changes in accounts receivable, inventory and restructuring reserves. | |
| The increase in cash used by investing activities was primarily due to higher capital expenditures, the impact of settlement of cross-currency interest rate swaps in the prior year and acquisitions of businesses, partially offset by an increase in sales of property, plant and equipment and lower recoverable engineering expenditures in the current period. | |
| The increase in cash used by financing activities was primarily due to a decrease in overall debt levels partially offset by prior year debt conversion costs. | |
| The increase in capital expenditures in the current year was primarily due to the timing of payments for investments made across the businesses. |
September 30, | September 30, | |||||||||||
(in millions) | 2010 | 2009 | Change | |||||||||
Total debt |
$ | 3,389 | $ | 3,966 | -15 | % | ||||||
Shareholders equity
attributable to Johnson Controls, Inc. |
10,071 | 9,100 | 11 | % | ||||||||
Total capitalization |
$ | 13,460 | $ | 13,066 | 3 | % | ||||||
Total debt as a % of
total capitalization |
25 | % | 30 | % | ||||||||
| The Company believes the percentage of total debt to total capitalization is useful to understanding the Companys financial condition as it provides a review of the extent to which the Company relies on external debt financing for its funding and is a measure of risk to its shareholders. | |
| In fiscal 2008, the Company entered into new committed, revolving credit facilities totaling 350 million euro with 100 million euro expiring in May 2009, 150 million euro expiring in May 2011 and 100 million euro expiring in August 2011. In May 2009, the 100 million euro revolving facility expired and the Company entered into a new one year committed, revolving credit facility in the amount of 50 million euro expiring in May 2010. In May 2010, the 50 million euro revolving facility expired and the Company entered into a new one year committed, revolving credit facility in the amount of 50 million euro expiring in May 2011. At September 30, 2010, there were no draws on the revolving credit facilities. | |
| In January 2009, the Company retired its 24 billion yen, three year, floating rate loan agreement that matured. The Company used proceeds from commercial paper issuances to repay the loan agreement. | |
| In February 2009, the Company entered into a $50 million, three year, floating rate bilateral loan agreement. The Company drew the entire amount under the loan agreement during the course of the second quarter of fiscal 2009. Also during the second quarter of fiscal 2009, the Company retired approximately $54 million in principal amount of its $800 million fixed rate bonds that mature in January 2011. The Company used proceeds from the $50 million floating rate loan agreement to retire the bonds. The Company retired the loan during the fourth quarter of fiscal 2009. |
42
| In March 2009, the Company closed concurrent public offerings. The Company issued $402.5 million aggregate amount of 6.5% senior, unsecured, fixed rate convertible notes that mature September 30, 2012. The notes are convertible into shares of the Companys common stock at a conversion rate of 89.3855 shares of common stock per $1,000 principal amount of notes, which is equal to a conversion price of approximately $11.19 per share, subject to anti-dilution adjustments. The Company also issued nine million Equity Units (the Equity Units) each of which has a stated amount of $50 in an aggregate principal amount of $450 million. The Equity Units consist of (i) a forward purchase contract obligating the holder to purchase from the Company for a price in cash of $50, on the purchase contract settlement date of March 31, 2012, subject to early settlement, a certain number of shares of the Companys common stock and (ii) a 1/20, or 5%, undivided beneficial ownership interest in $1,000 principal amount of the Companys 11.5% subordinated notes due 2042. | |
| In September 2009, the Company settled the results of its previously announced offer to exchange (a) any and all of its outstanding 6.5% convertible senior notes due 2012 for the following consideration per $1,000 principal amount of convertible senior notes: (i) 89.3855 shares of the Companys common stock, (ii) a cash payment of $120 and (iii) accrued and unpaid interest on the convertible senior notes to, but excluding, the settlement date, payable in cash. Upon settlement of the exchange offer, approximately $400 million aggregate principal amount of convertible senior notes were exchanged for approximately 36 million shares of common stock and approximately $61 million in cash ($48 million of debt conversion payments and $13 million of accrued interest on the convertible senior notes). As a result of the exchange, in the fourth quarter of fiscal 2009 the Company recognized approximately $57 million of debt conversion costs within its consolidated statement of income which was comprised of $48 million of debt conversion costs on the exchange and a $9 million charge related to the write-off of unamortized debt issuance costs. | |
| In September 2009, the Company settled the results of its previously announced offer to exchange up to 8,550,000 of its nine million outstanding Equity Units in the form of Corporate Units (the Corporate Units) comprised of a purchase contract obligating the holder to purchase from the Company shares of its common stock and a 1/20, or 5%, undivided beneficial ownership interest in $1,000 principal amount of the Companys 11.50% subordinated notes due 2042, for the following consideration per Corporate Unit: (i) 4.8579 shares of the Companys common stock, (ii) a cash payment of $6.50 and (iii) a distribution consisting of the pro rata share of accrued and unpaid interest on the subordinated notes to, but excluding, the settlement date, payable in cash. Upon settlement of the exchange offer, approximately 8,082,085 Corporate Units (consisting of $404 million aggregate principal amount of outstanding 11.50% subordinated notes due 2042) were exchanged for approximately 39 million shares of common stock and approximately $65 million in cash ($52 million of debt conversion payments and $13 million of accrued interest payments on the subordinated notes). As a result of the exchange, in the fourth quarter of fiscal 2009 the Company recognized approximately $54 million of debt conversion costs within its consolidated statement of income which was comprised of $53 million of debt conversion costs on the exchange and a $1 million charge related to the write-off of unamortized debt issuance costs. | |
| In November 2009, the Company repurchased 670 bonds ($670,000 par value) of its 6.5% convertible notes maturing September 30, 2012. The Company used cash to fund the repurchase. | |
| In December 2009, the Company repurchased an additional 1,015 bonds ($1,015,000 par value) of its 6.5% convertible notes maturing September 30, 2012. The Company used cash to fund the repurchase. | |
| In December 2009, the Company retired its 7 billion yen, three year, floating rate loan agreement that was scheduled to mature on January 18, 2011. The Company used cash to repay the note. | |
| In December 2009, the Company retired its 12 billion yen, three year, floating rate loan agreement that matured. The Company used cash to repay the note. | |
| In December 2009, the Company retired approximately $13 million in principal amount of its fixed rate bonds that was scheduled to mature on January 15, 2011. The Company used cash to fund the repurchase. | |
| In February 2010, the Company retired approximately $30 million in principal amount of its fixed rate bonds that was scheduled to mature on January 15, 2011. The Company used cash to fund the repurchase. | |
| In February 2010, the Company retired its 18 billion yen, three year, floating rate loan agreement that was scheduled to mature on January 18, 2011. The Company used cash to repay the note. | |
| In March 2010, the Company issued $500 million aggregate principal amount of 5.0% senior unsecured fixed rate notes due in fiscal 2020. Net proceeds from the issue were used for general corporate purposes including the retirement of short-term debt. |
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| In March 2010, the Company retired approximately $31 million in principal amount of its fixed rate bonds that was scheduled to mature on January 15, 2011. The Company used cash to fund the repurchase. | |
| In April 2010, a total of 200 bonds ($200,000 par value) of 6.5% convertible senior notes scheduled to mature on September 30, 2012 were redeemed for Johnson Controls, Inc. common stock. | |
| In May 2010, the Company retired approximately $18 million in principal amount of its fixed rate bonds scheduled to mature on January 15, 2011. The Company used cash to fund the repurchases. | |
| In September 2010, the Company entered into a new, $100 million committed revolving facility scheduled to mature in December 2011. At September 30, 2010, there were no draws outstanding. | |
| The Company also selectively makes use of short-term credit lines. The Company estimates that, as of September 30, 2010, it could borrow up to $2.6 billion at its current debt ratings on committed credit lines. | |
| The Company believes its capital resources and liquidity position at September 30, 2010 are adequate to meet projected needs. The Company believes requirements for working capital, capital expenditures, dividends, minimum pension contributions, debt maturities and any potential acquisitions in fiscal 2011 will continue to be funded from operations, supplemented by short- and long-term borrowings, if required. The Company currently manages its short-term debt position in the U.S. and euro commercial paper markets and bank loan markets. In the event the Company is unable to issue commercial paper, it would have the ability to draw on its $2.05 billion revolving credit facility, which extends until December 2011. There were no draws on the revolving credit facility as of September 30, 2010. As such, the Company believes it has sufficient financial resources to fund operations and meet its obligations for the foreseeable future. | |
| The Companys debt financial covenants require a minimum consolidated shareholders equity attributable to Johnson Controls, Inc. of at least $1.31 billion at all times and allow a maximum aggregated amount of 10% of consolidated shareholders equity attributable to Johnson Controls, Inc. for liens and pledges. For purposes of calculating the Companys covenants, consolidated shareholders equity attributable to Johnson Controls, Inc. is calculated without giving effect to (i) the application of ASC 715-60, Defined Benefit Plans- Other Postretirement, or (ii) the cumulative foreign currency translation adjustment. As of September 30, 2010, consolidated shareholders equity attributable to Johnson Controls, Inc. as defined per our covenants was $9.6 billion and there were no outstanding amounts for liens and pledges. The Company expects to remain in compliance with all covenants and other requirements set forth in its credit agreements and indentures for the foreseeable future. None of the Companys debt agreements limit access to stated borrowing levels or require accelerated repayment in the event of a decrease in the Companys credit rating. |
2016 | ||||||||||||||||||||
Total | 2011 | 2012-2013 | 2014-2015 | and Beyond | ||||||||||||||||
Contractual Obligations |
||||||||||||||||||||
Long-term debt (including capital lease obligations)* |
$ | 3,314 | $ | 662 | $ | 450 | $ | 132 | $ | 2,070 | ||||||||||
Interest on long-term debt (including capital lease obligations)* |
1,583 | 160 | 285 | 241 | 897 | |||||||||||||||
Operating leases |
1,028 | 296 | 412 | 205 | 115 | |||||||||||||||
Purchase obligations |
2,934 | 2,079 | 714 | 92 | 49 | |||||||||||||||
Pension and postretirement contributions |
550 | 115 | 96 | 98 | 241 | |||||||||||||||
Total contractual cash obligations |
$ | 9,409 | $ | 3,312 | $ | 1,957 | $ | 768 | $ | 3,372 | ||||||||||
* | See Capitalization for additional information related to the Companys long-term debt. |
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(in millions, except per share data) | First | Second | Third | Fourth | Full | |||||||||||||||
(unaudited) | Quarter | Quarter | Quarter | Quarter | Year | |||||||||||||||
2010 |
||||||||||||||||||||
Net sales |
$ | 8,408 | $ | 8,317 | $ | 8,540 | $ | 9,040 | $ | 34,305 | ||||||||||
Gross profit |
1,236 | 1,223 | 1,339 | 1,491 | 5,289 | |||||||||||||||
Net income attributable
to Johnson Controls, Inc. (1) |
350 | 274 | 418 | 449 | 1,491 | |||||||||||||||
Earnings per share |
||||||||||||||||||||
Basic (3) |
0.52 | 0.41 | 0.62 | 0.67 | 2.22 | |||||||||||||||
Diluted (3) |
0.52 | 0.40 | 0.61 | 0.66 | 2.19 | |||||||||||||||
2009 |
||||||||||||||||||||
Net sales |
$ | 7,336 | $ | 6,315 | $ | 6,979 | $ | 7,867 | $ | 28,497 | ||||||||||
Gross profit |
685 | 682 | 1,039 | 1,143 | 3,549 | |||||||||||||||
Net income (loss) attributable
to Johnson Controls, Inc. (2) |
(608 | ) | (193 | ) | 163 | 300 | (338 | ) | ||||||||||||
Earnings (loss) per share |
||||||||||||||||||||
Basic (3) |
(1.02 | ) | (0.33 | ) | 0.27 | 0.50 | (0.57 | ) | ||||||||||||
Diluted (3) |
(1.02 | ) | (0.33 | ) | 0.26 | 0.47 | (0.57 | ) |
(1) | The fiscal 2010 third quarter net income includes $11 million of fixed asset impairment charges recorded in the automotive experience Asia segment. The fiscal 2010 fourth quarter net income includes $11 million of fixed asset impairment charges recorded in the automotive experience Asia segment, an $8 million charge related to the divestiture of a joint venture recorded in the automotive experience North America segment and a $37 million gain on acquisition of a Korean joint venture net of acquisition costs and related purchase accounting adjustments recorded in the power solutions segment. The preceding amounts are stated on a pre-tax basis. | |
(2) | The fiscal 2009 first quarter net loss includes $152 million of impairment charges recorded on an equity investment in the building efficiency North American unitary products segment and $110 |
50
million of fixed asset impairment charges recorded in the automotive experience North America and Europe segments ($77 million and $33 million, respectively). The fiscal 2009 second quarter net loss includes a $230 million restructuring charge. The fiscal 2009 fourth quarter net income includes $105 million of incremental warranty charges recorded in the building efficiency North American unitary products segment and $111 million of debt conversion costs. The preceding amounts are stated on a pre-tax basis. | ||
(3) | Due to the use of the weighted-average shares outstanding for each quarter for computing earnings per share, the sum of the quarterly per share amounts may not equal the per share amount for the year. |
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Year ended September 30, | ||||||||||||
(in millions, except per share data) | 2010 | 2009 | 2008 | |||||||||
Net sales |
||||||||||||
Products and systems* |
$ | 27,204 | $ | 21,837 | $ | 30,568 | ||||||
Services* |
7,101 | 6,660 | 7,494 | |||||||||
34,305 | 28,497 | 38,062 | ||||||||||
Cost of sales |
||||||||||||
Products and systems* |
23,226 | 19,618 | 26,492 | |||||||||
Services* |
5,790 | 5,330 | 6,044 | |||||||||
29,016 | 24,948 | 32,536 | ||||||||||
Gross profit |
5,289 | 3,549 | 5,526 | |||||||||
Selling, general and administrative expenses |
(3,610 | ) | (3,210 | ) | (3,565 | ) | ||||||
Restructuring costs |
| (230 | ) | (495 | ) | |||||||
Debt conversion costs |
| (111 | ) | | ||||||||
Net financing charges |
(170 | ) | (239 | ) | (258 | ) | ||||||
Equity income (loss) |
254 | (77 | ) | 116 | ||||||||
Income (loss) before income taxes |
1,763 | (318 | ) | 1,324 | ||||||||
Provision for income taxes |
197 | 32 | 321 | |||||||||
Net income (loss) |
1,566 | (350 | ) | 1,003 | ||||||||
Income (loss) attributable to noncontrolling interests |
75 | (12 | ) | 24 | ||||||||
Net income (loss) attributable to Johnson Controls, Inc. |
$ | 1,491 | $ | (338 | ) | $ | 979 | |||||
Earnings (loss) per share |
||||||||||||
Basic |
$ | 2.22 | $ | (0.57 | ) | $ | 1.65 | |||||
Diluted |
$ | 2.19 | $ | (0.57 | ) | $ | 1.63 |
* | Products and systems consist of automotive experience and power solutions products and systems and building efficiency installed systems. Services are building efficiency technical and global workplace solutions. |
55
September 30, | ||||||||
(in millions, except par value and share data) | 2010 | 2009 | ||||||
Assets |
||||||||
Cash and cash equivalents |
$ | 560 | $ | 761 | ||||
Accounts receivable, less allowance for doubtful
accounts of $96 and $99, respectively |
6,095 | 5,528 | ||||||
Inventories |
1,786 | 1,521 | ||||||
Other current assets |
2,211 | 2,016 | ||||||
Current assets |
10,652 | 9,826 | ||||||
Property, plant and equipment net |
4,096 | 3,986 | ||||||
Goodwill |
6,501 | 6,542 | ||||||
Other intangible assets net |
741 | 746 | ||||||
Investments in partially-owned affiliates |
728 | 718 | ||||||
Other noncurrent assets |
3,025 | 2,270 | ||||||
Total assets |
$ | 25,743 | $ | 24,088 | ||||
Liabilities and Equity |
||||||||
Short-term debt |
$ | 75 | $ | 658 | ||||
Current portion of long-term debt |
662 | 140 | ||||||
Accounts payable |
5,426 | 4,434 | ||||||
Accrued compensation and benefits |
1,122 | 872 | ||||||
Other current liabilities |
2,625 | 2,612 | ||||||
Current liabilities |
9,910 | 8,716 | ||||||
Long-term debt |
2,652 | 3,168 | ||||||
Postretirement health and other benefits |
235 | 255 | ||||||
Other noncurrent liabilities |
2,573 | 2,610 | ||||||
Long-term liabilities |
5,460 | 6,033 | ||||||
Commitments and contingencies (Note 20) |
||||||||
Redeemable noncontrolling interests |
196 | 155 | ||||||
Common Stock, $.01 7/18 par value shares authorized: 1,800,000,000 shares issued: 2010 - 676,197,237; 2009 - 673,133,777 |
9 | 9 | ||||||
Capital in excess of par value |
2,448 | 2,354 | ||||||
Retained earnings |
7,765 | 6,615 | ||||||
Treasury stock, at cost (2010 - 2,470,565; 2009 - 2,301,073 shares) |
(74 | ) | (70 | ) | ||||
Accumulated other comprehensive income |
(77 | ) | 192 | |||||
Shareholders equity attributable to Johnson Controls, Inc. |
10,071 | 9,100 | ||||||
Noncontrolling interests |
106 | 84 | ||||||
Total equity |
10,177 | 9,184 | ||||||
Total liabilities and equity |
$ | 25,743 | $ | 24,088 | ||||
56
Year Ended September 30, | ||||||||||||
(in millions) | 2010 | 2009 | 2008 | |||||||||
Operating Activities |
||||||||||||
Net income (loss) attributable to Johnson Controls, Inc. |
$ | 1,491 | $ | (338 | ) | $ | 979 | |||||
Income (loss) attributable to noncontrolling interests |
75 | (12 | ) | 24 | ||||||||
Net income (loss) |
1,566 | (350 | ) | 1,003 | ||||||||
Adjustments to reconcile net income (loss) to
cash provided by operating activities: |
||||||||||||
Depreciation |
648 | 707 | 745 | |||||||||
Amortization of intangibles |
43 | 38 | 38 | |||||||||
Equity in earnings of partially-owned affiliates,
net of dividends received |
5 | 237 | (15 | ) | ||||||||
Deferred income taxes |
(85 | ) | 6 | (40 | ) | |||||||
Impairment charges |
41 | 156 | 43 | |||||||||
Fair value adjustment of equity investment |
(47 | ) | | | ||||||||
Debt conversion costs |
| 101 | | |||||||||
Equity-based compensation |
49 | 60 | 48 | |||||||||
Other |
63 | 40 | 48 | |||||||||
Changes in working capital, excluding acquisitions: |
||||||||||||
Receivables |
(608 | ) | 796 | 281 | ||||||||
Inventories |
(260 | ) | 557 | (49 | ) | |||||||
Other current assets |
323 | (413 | ) | 88 | ||||||||
Restructuring reserves |
(195 | ) | (83 | ) | 388 | |||||||
Accounts payable and accrued liabilities |
218 | (635 | ) | (694 | ) | |||||||
Accrued income taxes |
(247 | ) | (300 | ) | 44 | |||||||
Cash provided by operating activities |
1,514 | 917 | 1,928 | |||||||||
Investing Activities |
||||||||||||
Capital expenditures |
(777 | ) | (647 | ) | (807 | ) | ||||||
Sale of property, plant and equipment |
47 | 28 | 52 | |||||||||
Acquisition of businesses, net of cash acquired |
(61 | ) | (38 | ) | (277 | ) | ||||||
Recoverable customer engineering expenditures |
(76 | ) | (92 | ) | (46 | ) | ||||||
Settlement of cross-currency interest rate swaps |
| 31 | (160 | ) | ||||||||
Changes in long-term investments |
(101 | ) | (110 | ) | (32 | ) | ||||||
Cash used by investing activities |
(968 | ) | (828 | ) | (1,270 | ) | ||||||
Financing Activities |
||||||||||||
Increase (decrease) in short-term debt net |
(575 | ) | 213 | 173 | ||||||||
Increase in long-term debt |
515 | 883 | 240 | |||||||||
Repayment of long-term debt |
(526 | ) | (391 | ) | (935 | ) | ||||||
Payment of cash dividends |
(339 | ) | (309 | ) | (297 | ) | ||||||
Debt conversion costs |
| (101 | ) | | ||||||||
Proceeds from the exercise of stock options |
52 | 8 | 34 | |||||||||
Purchase of treasury stock |
| | (69 | ) | ||||||||
Other |
(22 | ) | (25 | ) | (41 | ) | ||||||
Cash provided (used) by financing activities |
(895 | ) | 278 | (895 | ) | |||||||
Effect of exchange rate changes on cash and cash equivalents |
148 | 10 | (53 | ) | ||||||||
Increase (decrease) in cash and cash equivalents |
$ | (201 | ) | $ | 377 | $ | (290 | ) | ||||
57
Accumulated | ||||||||||||||||||||||||
Capital in | Treasury | Other | ||||||||||||||||||||||
Common | Excess of | Retained | Stock, | Comprehensive | ||||||||||||||||||||
(in millions, except per share data) | Total | Stock | Par Value | Earnings | at Cost | Income (Loss) | ||||||||||||||||||
At September 30, 2007 |
$ | 8,873 | $ | 8 | $ | 1,452 | $ | 6,664 | $ | (33 | ) | $ | 782 | |||||||||||
Comprehensive income: |
||||||||||||||||||||||||
Net income attributable to Johnson Controls, Inc. |
979 | | | 979 | | | ||||||||||||||||||
Foreign currency translation adjustments |
170 | | | | | 170 | ||||||||||||||||||
Realized and unrealized losses on derivatives |
(93 | ) | | | | | (93 | ) | ||||||||||||||||
Employee retirement plans |
(188 | ) | | | | | (188 | ) | ||||||||||||||||
Other comprehensive loss |
(111 | ) | ||||||||||||||||||||||
Comprehensive income |
868 | |||||||||||||||||||||||
Adjustment to initially adopt FIN 48, net of tax |
(68 | ) | | | (68 | ) | | | ||||||||||||||||
Cash dividends |
||||||||||||||||||||||||
Common ($0.52 per share) |
(309 | ) | | | (309 | ) | | | ||||||||||||||||
Redemption value adjustment attributable
to redeemable noncontrolling interests |
16 | | | 16 | | | ||||||||||||||||||
Other, including options exercised |
26 | | 95 | | (69 | ) | | |||||||||||||||||
At September 30, 2008 |
9,406 | 8 | 1,547 | 7,282 | (102 | ) | 671 | |||||||||||||||||
Comprehensive loss: |
||||||||||||||||||||||||
Net loss attributable to Johnson Controls, Inc. |
(338 | ) | | | (338 | ) | | | ||||||||||||||||
Foreign currency translation adjustments |
(194 | ) | | | | | (194 | ) | ||||||||||||||||
Realized and unrealized gains on derivatives |
41 | | | | | 41 | ||||||||||||||||||
Employee retirement plans |
(326 | ) | | | | | (326 | ) | ||||||||||||||||
Other comprehensive loss |
(479 | ) | ||||||||||||||||||||||
Comprehensive loss |
(817 | ) | ||||||||||||||||||||||
Cash dividends |
||||||||||||||||||||||||
Common ($0.52 per share) |
(309 | ) | | | (309 | ) | | | ||||||||||||||||
Debt conversion (Note 9) |
804 | 1 | 803 | | | | ||||||||||||||||||
Redemption value adjustment attributable
to redeemable noncontrolling interests |
(20 | ) | | | (20 | ) | | | ||||||||||||||||
Other, including options exercised |
36 | | 4 | | 32 | | ||||||||||||||||||
At September 30, 2009 |
9,100 | 9 | 2,354 | 6,615 | (70 | ) | 192 | |||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||
Net income attributable to Johnson Controls, Inc. |
1,491 | | | 1,491 | | | ||||||||||||||||||
Foreign currency translation adjustments |
(115 | ) | | | | | (115 | ) | ||||||||||||||||
Realized and unrealized gains on derivatives |
13 | | | | | 13 | ||||||||||||||||||
Unrealized gains on marketable common stock |
3 | 3 | ||||||||||||||||||||||
Employee retirement plans |
(170 | ) | | | | | (170 | ) | ||||||||||||||||
Other comprehensive loss |
(269 | ) | ||||||||||||||||||||||
Comprehensive income |
1,222 | |||||||||||||||||||||||
Cash dividends |
||||||||||||||||||||||||
Common ($0.52 per share) |
(350 | ) | | | (350 | ) | | | ||||||||||||||||
Redemption value adjustment attributable
to redeemable noncontrolling interests |
9 | | | 9 | | | ||||||||||||||||||
Other, including options exercised |
90 | | 94 | | (4 | ) | | |||||||||||||||||
At September 30, 2010 |
$ | 10,071 | $ | 9 | $ | 2,448 | $ | 7,765 | $ | (74 | ) | $ | (77 | ) | ||||||||||
58
1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Principles of Consolidation | ||
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 accounting principles generally accepted in the United States of America (U.S. GAAP). All significant intercompany transactions have been eliminated. Investments in partially-owned affiliates are accounted for by the equity method when the Companys interest exceeds 20% and the Company does not have a controlling interest. The financial results for the year ended September 30, 2009 include an out of period adjustment of $62 million made in the first and second quarters of fiscal 2009 to correct an error related to the power solutions segment. The correction of the error, which reduces segment income, primarily originated in fiscal 2007 and 2008 and resulted in the overstatement of inventory and understatement of cost of sales in prior periods. The Company determined that the impact of the error on the originating periods was immaterial, and accordingly a restatement of prior period amounts was not considered necessary. The Company also determined the impact of correcting the error in fiscal 2009 was not material. | ||
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 when it has less than a 50% ownership. In order to determine whether to consolidate a partially-owned affiliate when the Company has less than a 50% ownership, 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 entitys residual economics; or 4) the entity was established with non-substantive voting. If the entity meets one of these characteristics, the Company then determines if it is the primary beneficiary of the VIE. The party exposed to the majority of the risks and rewards associated with the VIE is the VIEs primary beneficiary and must consolidate the entity. | ||
Based upon the criteria set forth in ASC 810, the Company has determined that for the reporting periods ended September 30, 2010 and 2009 it was the primary beneficiary in two VIEs in which it holds less than 50% ownership as the Company funds the entities short-term liquidity needs. Both entities are consolidated within the automotive experience North America segment. The Company did not have a significant variable interest in any unconsolidated VIEs for the presented reporting periods. The carrying amounts and classification of assets and liabilities included in the Companys consolidated statements of financial position for consolidated VIEs are as follows (in millions): |
September 30, | ||||||||
2010 | 2009 | |||||||
Current assets |
$ | 215 | $ | 146 | ||||
Noncurrent assets |
69 | 101 | ||||||
Total assets |
$ | 284 | $ | 247 | ||||
Current liabilities |
$ | 174 | $ | 103 | ||||
Noncurrent liabilities |
| | ||||||
Total liabilities |
$ | 174 | $ | 103 | ||||
Use of Estimates | ||
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. |
Fair Value of Financial Instruments | ||
The fair values of cash and cash equivalents, accounts receivable, short-term debt and accounts payable approximate their carrying values. The fair value of long-term debt, which was $3.7 billion and $3.4 billion at September 30, 2010 and 2009, respectively, was determined using market quotes. See Note 10, Derivative Instruments and |
59
Hedging Activities, and Note 11, Fair Value Measurements, for fair value of financial instruments, including derivative instruments and hedging activities. |
Cash and Cash Equivalents | ||
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. |
Receivables | ||
Receivables consist of amounts billed and currently due from customers and unbilled costs and accrued profits related to revenues on long-term contracts that have been recognized for accounting purposes but not yet billed to customers. The Company extends credit to customers in the normal course of business and maintains an allowance for doubtful accounts resulting from the inability or unwillingness of customers to make required payments. The allowance for doubtful accounts is based on historical experience, existing economic conditions and any specific customer collection issues the Company has identified. |
Inventories | ||
Inventories are stated at the lower of cost or market. Cost is determined using either the last-in, first-out (LIFO) method or the first-in, first-out (FIFO) method. Finished goods and work-in-process inventories include material, labor and manufacturing overhead costs. |
Pre-Production Costs Related to Long-Term Supply Arrangements | ||
The Companys policy for engineering, research and development, and other design and development costs related to products that will be sold under long-term supply arrangements requires such costs to be expensed as incurred or capitalized if reimbursement from the customer is assured. Customer reimbursements are recorded as an increase in cash and a reduction of selling, general and administrative expense when reimbursement from the customer is received if reimbursement from the customer is not assured. At September 30, 2010 and 2009, the Company recorded within the consolidated statements of financial position approximately $304 million and $282 million, respectively, of engineering and research and development costs for which customer reimbursement is assured. The reimbursable costs are recorded in other current assets if reimbursement will occur in less than one year and in other noncurrent assets if reimbursement will occur beyond one year. | ||
Costs for molds, dies and other tools used to make products that will be sold under long-term supply arrangements are capitalized within property, plant and equipment if the Company has title to the assets or has the non-cancelable right to use the assets during the term of the supply arrangement. Capitalized items, if specifically designed for a supply arrangement, are amortized over the term of the arrangement; otherwise, amounts are amortized over the estimated useful lives of the assets. The carrying values of assets capitalized in accordance with the foregoing policy are periodically reviewed for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. At September 30, 2010 and 2009, approximately $72 million and $87 million, respectively, of costs for molds, dies and other tools were capitalized within property, plant and equipment which represented assets to which the Company had title. In addition, at September 30, 2010 and 2009, the Company recorded within the consolidated statements of financial position in other current assets approximately $212 million and $276 million, respectively, of costs for molds, dies and other tools for which customer reimbursement is assured. |
Property, Plant and Equipment | ||
Property, plant and equipment are recorded at cost. Depreciation is provided over the estimated useful lives of the respective assets using the straight-line method for financial reporting purposes and accelerated methods for income tax purposes. The estimated useful lives range from 10 to 40 years for buildings and improvements and from 3 to 20 years for machinery and equipment. | ||
The Company capitalizes interest on borrowings during the active construction period of major capital projects. Capitalized interest is added to the cost of the underlying assets and is amortized over the useful lives of the assets. |
60
Goodwill and Other Intangible Assets | ||
Goodwill reflects the cost of an acquisition in excess of the fair values assigned to identifiable net assets acquired. The Company reviews goodwill for impairment during the fourth fiscal quarter or more frequently if events or changes in circumstances indicate the asset might be impaired. The Company performs impairment reviews for its reporting units, which have been determined to be the Companys reportable segments, using a fair-value method based on managements judgments and assumptions or third party valuations. The fair value represents the amount at which a reporting unit could be sold in a current transaction between willing parties on an arms-length basis. In estimating the fair value, the Company uses multiples of earnings based on the average of historical, published multiples of earnings of comparable entities with similar operations and economic characteristics. In certain instances, the Company uses discounted cash flow analyses to further support the fair value estimates. The estimated fair value is then compared with the carrying amount of the reporting unit, including recorded goodwill. The Company is subject to financial statement risk to the extent that the carrying amount exceeds the estimated fair value. The impairment testing performed by the Company in the fourth quarter of fiscal year 2010 indicated 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 September 30, 2010. No reporting unit was determined to be at risk of failing step one of the goodwill impairment test. | ||
At March 31, 2009, in conjunction with the preparation of its financial statements, the Company concluded it had a triggering event requiring the assessment of impairment of goodwill in the automotive experience Europe segment due to the continued decline in the automotive market. As a result, the Company performed impairment testing for goodwill and determined that fair value of the reporting unit exceeded its carrying value and no impairment existed at March 31, 2009. | ||
At December 31, 2008, in conjunction with the preparation of its financial statements, the Company concluded it had a triggering event requiring the assessment of impairment of goodwill in the automotive experience North America and Europe segments and the building efficiency unitary products group segment due to the rapid declines in the automotive and construction markets. As a result, the Company performed impairment testing for goodwill and determined that fair values of the reporting units exceed their carrying values and no impairment existed at December 31, 2008. To further support the fair value estimates of the automotive experience North America and building efficiency unitary product group segments, the Company prepared a discounted cash flow analysis that also indicated the fair value exceeded the carrying value for each reporting unit. The assumptions supporting the estimated future cash flows of the reporting units, including profit margins, long-term sales forecasts and growth rates, reflect the Companys best estimates. The assumptions related to automotive experience sales volumes reflected the expected continued automotive industry decline with a return to fiscal 2008 volume production levels by fiscal 2013. The assumptions related to the construction market sales volumes reflected steady growth beginning in fiscal 2010. | ||
Indefinite lived other intangible assets are also subject to at least annual impairment testing. Other intangible assets with definite lives continue to be amortized over their estimated useful lives and are subject to impairment testing if events or changes in circumstances indicate that the asset might be impaired. A considerable amount of management judgment and assumptions are required in performing the impairment tests. While the Company believes the judgments and assumptions used in the impairment tests are reasonable and no impairment existed at September 30, 2010, different assumptions could change the estimated fair values and, therefore, impairment charges could be required. |
Impairment of Long-Lived Assets | ||
The Company reviews long-lived assets, including property, plant and equipment and other intangible assets with definite lives, for impairment whenever events or changes in circumstances indicate that carrying amount may not be recoverable. See Note 17, Impairment of Long-Lived Assets, for disclosure of the impairment analyses performed by the Company during fiscal 2010 and 2009. |
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 within accounts receivable net and billings in excess of costs and earnings on uncompleted contracts within other current liabilities in the consolidated statements of financial |
61
position. Amounts included within accounts receivable net related to these contracts were $683 million and $579 million at September 30, 2010 and 2009, respectively. Amounts included within other current liabilities were $639 million and $601 million at September 30, 2010 and 2009, respectively. | ||
Revenue Recognition | ||
The Companys building efficiency business recognizes revenue from certain long-term contracts over the contractual period under the percentage-of-completion method of accounting. This method of accounting recognizes sales and gross profit as work is performed based on the relationship between actual costs incurred and total estimated costs at completion. Sales and gross profit are adjusted using the cumulative catch-up method for revisions in estimated total contract costs and contract values. Estimated losses are recorded when identified. Claims against customers are recognized as revenue upon settlement. The amount of accounts receivable due after one year is not significant. | ||
The building efficiency business enters into extended warranties and long-term service and maintenance agreements with certain customers. For these arrangements, revenue is recognized on a straight-line basis over the respective contract term. | ||
The Companys building efficiency business also sells certain heating, ventilating and air conditioning (HVAC) products and services in bundled arrangements, where multiple products and/or services are involved. In accordance with ASC 605-25, MultipleElement Arrangements, the Company divides bundled arrangements into separate deliverables and revenue is allocated to each deliverable based on the relative fair value of all elements or the fair value of undelivered elements. | ||
In all other cases, the Company recognizes revenue at the time title passes to the customer or as services are performed. |
Research and Development Costs | ||
Expenditures for research activities relating to product development and improvement are charged against income as incurred and included within selling, general and administrative expenses in the consolidated statement of income. Such expenditures for the years ended September 30, 2010, 2009 and 2008 were $723 million, $767 million and $829 million, respectively. | ||
A portion of the costs associated with these activities is reimbursed by customers and, for the fiscal years ended September 30, 2010, 2009 and 2008 were $315 million, $431 million and $405 million, respectively. |
Earnings Per Share | ||
Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share are computed by dividing net income by diluted weighted average shares outstanding. Diluted weighted average shares include the dilutive effect of common stock equivalents which would arise from the exercise of stock options and any outstanding Equity Units and convertible senior notes as of the beginning of the period, for the years ended September 30, 2010 and 2008. However, dilutive shares due to stock options, Equity Units and convertible senior notes were not included in the computation of diluted net loss per common share for the year ended September 30, 2009, since to do so would decrease the loss per share. See Note 13, Earnings per Share, for the calculation of earnings per share. |
Foreign Currency Translation | ||
Substantially all of the Companys international operations use the respective local currency as the functional currency. Assets and liabilities of international entities have been translated at period-end exchange rates, and income and expenses have been translated using average exchange rates for the period. Monetary assets and liabilities denominated in non-functional currencies are adjusted to reflect period-end exchange rates. The aggregate transaction gains included in net income for the years ended September 30, 2010, 2009 and 2008 were $19 million, $21 million and $3 million, respectively. |
62
Derivative Financial Instruments | ||
The Company has written policies and procedures that place all financial instruments under the direction of corporate treasury and restrict all derivative transactions to those intended for hedging purposes. The use of financial instruments for speculative purposes is strictly prohibited. The Company uses financial instruments to manage the market risk from changes in foreign exchange rates, commodity prices, stock-based compensation liabilities and interest rates. | ||
The fair values of all derivatives are recorded in the consolidated statements of financial position. The change in a derivatives fair value is recorded each period in current earnings or accumulated other comprehensive income, depending on whether the derivative is designated as part of a hedge transaction and if so, the type of hedge transaction. See Note 10, Derivative Instruments and Hedging Activities, and Note 11, Fair Value Measurements, for disclosure of the Companys derivative instruments and hedging activities. |
Reclassification | ||
Certain prior year amounts have been revised to conform to the current years presentation. Redeemable noncontrolling interests are classified as mezzanine equity (temporary equity) in the consolidated statements of financial position. Refer to Note 14, Equity and Noncontrolling Interests, to the financial statements for further information. Also, certain prior year amounts in Note 18, Income Taxes, to the financial statements have been reclassified for comparative purposes. | ||
New Accounting Pronouncements | ||
In December 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-17, Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. ASU No. 2009-17 changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entitys purpose and design and a companys ability to direct the activities of the entity that most significantly impact the entitys economic performance. This statement is effective for the Company beginning in the first quarter of fiscal 2011 (October 1, 2010). The adoption of this guidance is not expected to have a significant impact on the Companys consolidated financial condition and results of operations. | ||
In October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements a consensus of the FASB Emerging Issues Task Force. ASU No. 2009-13 establishes the accounting and reporting guidance for arrangements under which a vendor will perform multiple revenue-generating activities. Specifically, this ASU addresses how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of accounting. This guidance will be effective for the Company beginning in the first quarter of fiscal 2011 (October 1, 2010) and, when adopted, will change the Companys accounting treatment for multiple-element revenue arrangements on a prospective basis. The adoption of this guidance is not expected to have a significant impact on the Companys consolidated financial condition and results of operations. | ||
In December 2008, the FASB issued guidance on an employers disclosures about plan assets of a defined benefit pension plan. The guidance requires enhanced transparency surrounding the types of plan assets and associated risks, as well as disclosure of information about fair value measurements of plan assets. This guidance is included in ASC 715, Compensation Retirement Benefits, and is effective for the Company for the fiscal year ending September 30, 2010. The adoption of this guidance did not impact on the Companys consolidated financial condition and results of operations. Refer to Note 15, Retirement Plans, for the Companys disclosures of plan assets. | ||
In December 2007, the FASB issued guidance changing the accounting for business combinations in a number of areas including the treatment of contingent consideration, preacquisition contingencies, transaction costs, in-process research and development and restructuring costs. In addition, under this guidance changes in an acquired entitys deferred tax assets and uncertain tax positions after the measurement period will impact income tax expense. This guidance is included in ASC 805, Business Combinations, and was adopted by the Company in the first quarter of fiscal 2010 (October 1, 2009). This guidance changes the Companys accounting treatment for business combinations on a prospective basis. |
63
In December 2007, the FASB issued guidance changing the accounting and reporting for minority interests, which are recharacterized as noncontrolling interests and classified as a component of equity. This new consolidation method changes the accounting for transactions with minority interest holders. This guidance is included in ASC 810, Consolidation, and was adopted by the Company in the first quarter of fiscal 2010 (October 1, 2009). The adoption of this guidance did not have a material impact on the Companys consolidated financial condition and results of operations. Refer to Note 14, Equity and Noncontrolling Interests, for further discussion. | ||
In September 2006, the FASB issued guidance that defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This guidance also establishes a fair value hierarchy that prioritizes information used in developing assumptions when pricing an asset or liability. This guidance is included in ASC 820, Fair Value Measurements and Disclosures. The Company adopted this guidance effective October 1, 2008. In February 2008, the FASB delayed the effective date of this guidance for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed in the financial statements on a nonrecurring basis to fiscal years beginning after November 15, 2008. The provisions of this guidance for nonfinancial assets and nonfinancial liabilities were effective for the Company in the first quarter of fiscal 2010 (October 1, 2009) and will be applied prospectively to fair value assessments such as the Companys long-lived asset impairment analyses. Refer to Note 17, Impairment of Long-Lived Assets, for further discussion. |
2. | ACQUISITIONS |
In July 2010, the Company acquired an additional 40% of a power solutions Korean joint venture. The acquisition increased the Companys ownership percentage to 90%. The remaining 10% was acquired by the local management team. The Company paid approximately $86 million (excluding cash acquired of $57 million) for the additional ownership percentage and incurred approximately $10 million of acquisition costs and related purchase accounting adjustments. As a result of the acquisition, the Company recorded a non-cash gain of $47 million within power solutions equity income to adjust the Companys existing equity investment in the Korean joint venture to fair value. Goodwill of $51 million was recorded as part of the transaction. The purchase price allocation may be subsequently adjusted to reflect final valuation studies. | ||
Also during fiscal 2010, the Company completed three acquisitions for a combined purchase price of $35 million, of which $32 million was paid as of September 30, 2010. The acquisitions in the aggregate were not material to the Companys consolidated financial statements. In connection with the acquisitions, the Company recorded goodwill of $9 million. The purchase price allocation may be subsequently adjusted to reflect final valuation studies. | ||
During fiscal 2009, the Company completed four acquisitions for a combined purchase price of $43 million, of which $38 million was paid in the twelve months ended September 30, 2009. None of the acquisitions were material to the Companys consolidated financial statements. In connection with these acquisitions, the Company recorded goodwill of $30 million, of which $26 million was recorded during fiscal 2009. | ||
In July 2008, the Company formed a joint venture to acquire the interior product assets of Plastech Engineered Products, Inc. (Plastech). Plastech filed for bankruptcy in February 2008. The Company owns 70% of the newly formed entity and certain Plastech term lenders hold the remaining noncontrolling interest. The Company contributed cash and injection molding plants to the new entity with a fair value of $262 million. The lenders contributed their rights to receive Plastechs interiors business obtained in exchange for certain Plastech debt. The combined equity in the new entity was approximately $375 million. Goodwill of $199 million was recorded as part of the transaction. In the third quarter of fiscal 2009, the Company finalized valuations associated with the acquisition and recorded a $21 million increase to goodwill. | ||
Also in fiscal 2008, the Company completed seven additional acquisitions for a combined purchase price of $108 million, none of which were material to the Companys consolidated financial statements. In connection with these acquisitions, the Company recorded goodwill of $66 million. |
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3. | INVENTORIES |
Inventories consisted of the following (in millions): |
September 30, | ||||||||
2010 | 2009 | |||||||
Raw materials and supplies |
$ | 899 | $ | 712 | ||||
Work-in-process |
278 | 225 | ||||||
Finished goods |
743 | 674 | ||||||
FIFO inventories |
1,920 | 1,611 | ||||||
LIFO reserve |
(134 | ) | (90 | ) | ||||
Inventories |
$ | 1,786 | $ | 1,521 | ||||
Inventories valued using the LIFO method of accounting were approximately 22% of total inventories at September 30, 2010 and 2009. |
4. | PROPERTY, PLANT AND EQUIPMENT |
Property, plant and equipment consisted of the following (in millions): |
September 30, | ||||||||
2010 | 2009 | |||||||
Buildings and improvements |
$ | 2,161 | $ | 2,231 | ||||
Machinery and equipment |
6,342 | 6,411 | ||||||
Construction in progress |
752 | 423 | ||||||
Land |
366 | 374 | ||||||
Total property, plant and equipment |
9,621 | 9,439 | ||||||
Less accumulated depreciation |
(5,525 | ) | (5,453 | ) | ||||
Property, plant and equipment net |
$ | 4,096 | $ | 3,986 | ||||
Interest costs capitalized during the fiscal years ended September 30, 2010, 2009 and 2008 were $21 million, $16 million and $12 million, respectively. Accumulated depreciation related to capital leases at September 30, 2010 and 2009 was $48 million and $107 million, respectively. |
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5. | GOODWILL AND OTHER INTANGIBLE ASSETS |
The changes in the carrying amount of goodwill in each of the Companys reporting segments for the fiscal years ended September 30, 2010 and 2009 were as follows (in millions): |
Currency | ||||||||||||||||
September 30, | Business | Translation and | September 30, | |||||||||||||
2008 | Acquisitions | Other | 2009 | |||||||||||||
Building efficiency |
||||||||||||||||
North America systems |
$ | 515 | $ | | $ | 10 | $ | 525 | ||||||||
North America service |
657 | | 11 | 668 | ||||||||||||
North America unitary products |
481 | | 9 | 490 | ||||||||||||
Global workplace solutions |
178 | | (4 | ) | 174 | |||||||||||
Europe |
428 | | (20 | ) | 408 | |||||||||||
Rest of world |
574 | 24 | (11 | ) | 587 | |||||||||||
Automotive experience |
||||||||||||||||
North America |
1,356 | 21 | (1 | ) | 1,376 | |||||||||||
Europe |
1,219 | 2 | (10 | ) | 1,211 | |||||||||||
Asia |
200 | | 23 | 223 | ||||||||||||
Power solutions |
905 | | (25 | ) | 880 | |||||||||||
Total |
$ | 6,513 | $ | 47 | $ | (18 | ) | $ | 6,542 | |||||||
Currency | ||||||||||||||||
September 30, | Business | Translation and | September 30, | |||||||||||||
2009 | Acquisitions | Other | 2010 | |||||||||||||
Building efficiency |
||||||||||||||||
North America systems |
$ | 525 | $ | | $ | (3 | ) | $ | 522 | |||||||
North America service |
668 | 8 | | 676 | ||||||||||||
North America unitary products |
490 | | | 490 | ||||||||||||
Global workplace solutions |
174 | | 3 | 177 | ||||||||||||
Europe |
408 | | (29 | ) | 379 | |||||||||||
Rest of world |
587 | | 8 | 595 | ||||||||||||
Automotive experience |
||||||||||||||||
North America |
1,376 | | 2 | 1,378 | ||||||||||||
Europe |
1,211 | 5 | (76 | ) | 1,140 | |||||||||||
Asia |
223 | | 10 | 233 | ||||||||||||
Power solutions |
880 | 51 | (20 | ) | 911 | |||||||||||
Total |
$ | 6,542 | $ | 64 | $ | (105 | ) | $ | 6,501 | |||||||
September 30, 2010 | September 30, 2009 | |||||||||||||||||||||||
Gross | Gross | |||||||||||||||||||||||
Carrying | Accumulated | Carrying | Accumulated | |||||||||||||||||||||
Amount | Amortization | Net | Amount | Amortization | Net | |||||||||||||||||||
Amortized intangible assets |
||||||||||||||||||||||||
Patented technology |
$ | 277 | $ | (191 | ) | $ | 86 | $ | 308 | $ | (190 | ) | $ | 118 | ||||||||||
Customer relationships |
373 | (70 | ) | 303 | 345 | (56 | ) | 289 | ||||||||||||||||
Miscellaneous |
68 | (31 | ) | 37 | 67 | (25 | ) | 42 | ||||||||||||||||
Total amortized
intangible assets |
718 | (292 | ) | 426 | 720 | (271 | ) | 449 | ||||||||||||||||
Unamortized intangible assets |
||||||||||||||||||||||||
Trademarks |
315 | | 315 | 297 | | 297 | ||||||||||||||||||
Total intangible assets |
$ | 1,033 | $ | (292 | ) | $ | 741 | $ | 1,017 | $ | (271 | ) | $ | 746 | ||||||||||
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Amortization of other intangible assets for the fiscal years ended September 30, 2010, 2009 and 2008 was $43 million, $38 million and $38 million, respectively. Excluding the impact of any future acquisitions, the Company anticipates amortization for fiscal 2011, 2012, 2013, 2014 and 2015 will be approximately $43 million, $37 million, $31 million, $29 million and $27 million, respectively. |
6. | 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 adequacy of the Companys warranty provisions are adjusted as necessary. While the Companys warranty costs have historically been within its calculated estimates, 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. Accruals related to pre-existing warranties includes incremental warranty charges of $105 million recorded in the fourth quarter of fiscal 2009 by the building efficiency North America unitary products segment, of which $76 million was due to a specific product issue and $29 million was a result of the Companys periodic warranty review process and analysis of return rates. The portion of the incremental charge due to a specific product issue related to the anticorrosive film applied to certain coils used in residential indoor heating, ventilating and air conditioning units as a means to promote flow of condensation and adding to the efficiency of the units. | ||
The Companys product warranty liability is recorded in the consolidated statement 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 Companys total product warranty liability for the fiscal years ended September 30, 2010 and 2009 were as follows (in millions): |
Year Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Balance at beginning of period |
$ | 344 | $ | 204 | ||||
Accruals for warranties issued during the period |
260 | 238 | ||||||
Accruals from acquisitions |
1 | | ||||||
Accruals related to pre-existing warranties (including changes in estimates) |
(18 | ) | 115 | |||||
Settlements made (in cash or in kind) during the period |
(245 | ) | (214 | ) | ||||
Currency translation |
(5 | ) | 1 | |||||
Balance at end of period |
$ | 337 | $ | 344 | ||||
7. | LEASES |
Certain administrative and production facilities and equipment are leased under long-term agreements. Most leases contain renewal options for varying periods, and certain leases include options to purchase the leased property during or at the end of the lease term. Leases generally require the Company to pay for insurance, taxes and maintenance of the property. Leased capital assets included in net property, plant and equipment, primarily buildings and improvements, were $41 million and $33 million at September 30, 2010 and 2009, respectively. | ||
Other facilities and equipment are leased under arrangements that are accounted for as operating leases. Total rental expense for the fiscal years ended September 30, 2010, 2009 and 2008 was $389 million, $403 million and $399 million, respectively. |
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Future minimum capital and operating lease payments and the related present value of capital lease payments at September 30, 2010 were as follows (in millions): |
Capital | Operating | |||||||
Leases | Leases | |||||||
2011 |
$ | 7 | $ | 296 | ||||
2012 |
7 | 241 | ||||||
2013 |
6 | 171 | ||||||
2014 |
5 | 121 | ||||||
2015 |
5 | 84 | ||||||
After 2015 |
15 | 115 | ||||||
Total minimum lease payments |
45 | $ | 1,028 | |||||
Interest |
(11 | ) | ||||||
Present value of net minimum lease payments |
$ | 34 | ||||||
8. | SHORT-TERM DEBT AND CREDIT AGREEMENTS |
Short-term debt consisted of the following (in millions): |
September 30, | ||||||||
2010 | 2009 | |||||||
Bank borrowings and commercial paper |
$ | 75 | $ | 658 | ||||
Weighted average interest rate on short-term
debt outstanding |
6.2 | % | 1.8 | % |
The Company has a $2.05 billion committed five-year credit facility to support its outstanding commercial paper. The facility expires in December 2011. There were no draws against the committed credit facility during the fiscal years ended September 30, 2010 and 2009. Average outstanding commercial paper for the fiscal year ended September 30, 2010 was $342 million and none was outstanding at September 30, 2010. Average outstanding commercial paper for the fiscal year ended September 30, 2009 was $804 million and $583 million was outstanding at September 30, 2009. | ||
At September 30, 2010, the Company had three euro-denominated revolving credit facilities totaling 300 million euro with 50 million euro expiring in May 2011, 150 million euro expiring in May 2011 and 100 million euro expiring in August 2011. In addition, the Company has a $100 million revolving credit facility expiring in December 2011. At September 30, 2010, there were no draws on the revolving credit facilities. | ||
At September 30, 2009, the Company had three euro-denominated revolving credit facilities totaling 300 million euro with 50 million euro expiring in May 2010, 150 million euro expiring in May 2011 and 100 million euro expiring in August 2011. At September 30, 2009, there were no draws on the revolving credit facilities. |
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9. | LONG-TERM DEBT AND FINANCING ARRANGEMENTS |
Long-term debt consisted of the following (in millions; due dates by fiscal year): |
September 30, | ||||||||
2010 | 2009 | |||||||
Unsecured notes |
||||||||
5.25% due in 2011 ($654 million 2010 par value,
$746 million 2009 par value) |
$ | 655 | $ | 750 | ||||
6.50% due in 2012 (Convertible senior notes) |
| 2 | ||||||
5.8% due in 2013 ($100 million par value) |
102 | 100 | ||||||
4.875% due in 2013 ($300 million par value) |
327 | 325 | ||||||
7.7% due in 2015 ($125 million par value) |
125 | 125 | ||||||
5.5% due in 2016 ($800 million par value) |
800 | 799 | ||||||
7.125% due in 2017 ($150 million par value) |
167 | 169 | ||||||
6.0% due in 2036 ($400 million par value) |
395 | 395 | ||||||
11.50% due in 2042 (917,915 equity units) |
46 | 46 | ||||||
6.95% due in 2046 ($125 million par value) |
125 | 125 | ||||||
5.00% due in 2020 ($500 million par value) |
498 | | ||||||
Capital lease obligations |
34 | 29 | ||||||
Foreign-denominated debt |
||||||||
Euro |
27 | 31 | ||||||
Japanese yen |
| 412 | ||||||
Other |
13 | | ||||||
Gross long-term debt |
3,314 | 3,308 | ||||||
Less: current portion |
662 | 140 | ||||||
Net long-term debt |
$ | 2,652 | $ | 3,168 | ||||
At September 30, 2010, the Companys euro-denominated long-term debt was at fixed rates with a weighted-average interest rate of 5.0%. At September 30, 2009, the Companys euro-denominated long-term debt was at fixed rates with a weighted-average interest rate of 5.3% and the Companys yen-denominated debt was at floating rates with a weighted average interest rate of 1.1%. | ||
The installments of long-term debt maturing in subsequent fiscal years are: 2011 $662 million; 2012 $5 million; 2013 $445 million; 2014 $4 million; 2015 $128 million; 2016 and thereafter $2,070 million. The Companys long-term debt includes various financial covenants, none of which are expected to restrict future operations. | ||
Total interest paid on both short and long-term debt for the fiscal years ended September 30, 2010, 2009 and 2008 was $181 million, $358 million and $288 million, respectively. The Company uses financial instruments to manage its interest rate exposure (see Note 10, Derivative Instruments and Hedging Activities, and Note 11, Fair Value Measurements). These instruments affect the weighted average interest rate of the Companys debt and interest expense. | ||
Financing Arrangements | ||
In fiscal 2008, the Company entered into new committed, revolving credit facilities totaling 350 million euro with 100 million euro expiring in May 2009, 150 million euro expiring in May 2011 and 100 million euro expiring in August 2011. In May 2009, the 100 million euro revolving facility expired and the Company entered into a new one year committed, revolving credit facility in the amount of 50 million euro expiring in May 2010. In May 2010, the 50 million euro revolving facility expired and the Company entered into a new one year committed, revolving credit facility in the amount of 50 million euro expiring in May 2011. At September 30, 2010, there were no draws on the revolving credit facilities. | ||
In January 2009, the Company retired its 24 billion yen, three year, floating rate loan agreement that matured. The Company used proceeds from commercial paper issuances to repay amounts due under the loan agreement. |
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In February 2009, the Company entered into a $50 million, three year, floating rate bilateral loan agreement. The Company drew the entire amount under the loan agreement during the course of the second quarter of fiscal 2009. Also during the second quarter of fiscal 2009, the Company retired approximately $54 million in principal amount of its $800 million fixed rate bonds that mature in January 2011. The Company used proceeds from the $50 million floating rate loan agreement to retire the bonds. | ||
In March 2009, the Company closed concurrent public offerings. The Company issued $402.5 million aggregate amount of 6.5% senior, unsecured, fixed rate convertible notes that mature September 30, 2012. The notes are convertible into shares of the Companys common stock at a conversion rate of 89.3855 shares of common stock per $1,000 principal amount of the notes, which is equal to a conversion price of approximately $11.19 per share, subject to anti-dilution adjustments. The Company also issued nine million Equity Units (the Equity Units) each of which has a stated amount of $50 in aggregate principal amount of $450 million. The Equity Units consist of (i) a forward purchase contract obligating the holder to purchase from the Company for a price in cash of $50, on the purchase contract settlement date of March 31, 2012, subject to early settlement, a certain number of shares of the Companys common stock and (ii) a 1/20, or 5%, undivided beneficial ownership interest in $1,000 principal amount of the Companys 11.5% subordinated notes due 2042. | ||
In September 2009, the Company settled the results of its previously announced offer to exchange (a) any and all of its outstanding 6.5% convertible senior notes due 2012 for the following consideration per $1,000 principal amount of convertible senior notes: (i) 89.3855 shares of the Companys common stock, (ii) a cash payment of $120 and (iii) accrued and unpaid interest on the convertible senior notes to, but excluding, the settlement date, payable in cash. Upon settlement of the exchange offer, approximately $400 million aggregate principal amount of convertible senior notes were exchanged for approximately 36 million shares of common stock and approximately $61 million in cash ($48 million of debt conversion payments and $13 million of accrued interest payments on the convertible senior notes). As a result of the exchange, the Company recognized approximately $57 million of debt conversion costs within its consolidated statement of income which is comprised of $48 million of debt conversion costs on the exchange and a $9 million charge related to the write-off of unamortized debt issuance costs. | ||
In September 2009, the Company settled the results of its previously announced offer to exchange up to 8,550,000 of its outstanding nine million Equity Units in the form of Corporate Units (the Corporate Units) comprised of a forward purchase contract obligating the holder to purchase from the Company shares of its common stock and a 1/20, or 5%, undivided beneficial ownership interest in $1,000 principal amount of the Companys 11.50% subordinated notes due 2042, for the following consideration per Corporate Unit: (i) 4.8579 shares of the Companys common stock, (ii) a cash payment of $6.50 and (iii) a distribution consisting of the pro rata share of accrued and unpaid interest on the subordinated notes to, but excluding, the settlement date, payable in cash. Upon settlement of the exchange offer 8,082,085 Corporate Units (consisting of $404 million aggregate principal amount of outstanding 11.50% subordinated notes due 2042) were exchanged for approximately 39 million shares of common stock and approximately $65 million in cash ($52 million of debt conversion payments and $13 million of accrued interest payments on the subordinated notes). As a result of the exchange, the Company recognized approximately $54 million of debt conversion costs within its consolidated statement of income which is comprised of $53 million of debt conversion costs on the exchange and a $1 million charge related to the write-off of unamortized debt issuance costs. | ||
During the quarter ended December 31, 2009, the Company retired its 12 billion yen, three year, floating rate loan agreement that matured. Additionally, the Company retired its 7 billion yen, three year, floating rate loan agreement scheduled to mature on January 18, 2011. The Company used cash to repay the notes. | ||
During the quarter ended December 31, 2009, the Company retired approximately $13 million in principal amount of its fixed rate bonds scheduled to mature on January 15, 2011. Additionally, the Company repurchased 1,685 bonds ($1,685,000 par value) of its 6.5% convertible senior notes scheduled to mature on September 30, 2012. The Company used cash to fund the repurchases. | ||
During the quarter ended March 31, 2010, the Company retired its 18 billion yen, three year, floating rate loan agreement scheduled to mature on January 18, 2011. The Company used cash to repay the note. | ||
During the quarter ended March 31, 2010, the Company retired approximately $61 million in principal amount of its fixed rate bonds scheduled to mature on January 15, 2011. The Company used cash to fund the repurchases. |
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During the quarter ended March 31, 2010, the Company issued $500 million aggregate principal amount of 5.0% senior unsecured fixed rate notes due in fiscal 2020. Net proceeds from the issue were used for general corporate purposes including the retirement of short-term debt. | ||
During the quarter ended June 30, 2010, a total of 200 bonds ($200,000 par value) of the Companys 6.5% convertible senior notes scheduled to mature on September 30, 2012, were redeemed for Johnson Controls, Inc. common stock. | ||
During the quarter ended June 30, 2010, the Company retired approximately $18 million in principal amount of its fixed rate bonds scheduled to mature on January 15, 2011. The Company used cash to fund the repurchases. | ||
During the quarter ended September 30, 2010, the Company entered into a new, $100 million committed revolving credit facility scheduled to mature in December 2011. At September 30, 2010, there were no draws outstanding. |
10. | DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES |
In March 2008, the FASB issued guidance enhancing required disclosures regarding derivatives and hedging activities, including how an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for and affect an entitys financial position, financial performance and cash flows. This guidance is included in ASC 815, Derivatives and Hedging, and was effective for the Company beginning in the second quarter of fiscal 2009 and is applied prospectively. | ||
The Company selectively uses derivative instruments to reduce market risk associated with changes in foreign currency, commodities, stock-based compensation liabilities and interest rates. Under Company policy, the use of derivatives is restricted to those intended for hedging purposes; the use of any derivative instrument for speculative purposes is strictly prohibited. A description of each type of derivative utilized by the Company to manage risk is included in the following paragraphs. In addition, refer to Note 11, Fair Value Measurements, to the 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 foreign currency denominated debt obligations and cross-currency interest rate swaps to selectively hedge portions of its net investment in Japan. The currency effects of the debt obligations and cross-currency interest rate swaps are reflected in the accumulated other comprehensive income (AOCI) account within shareholders equity attributable to Johnson Controls, Inc. where they offset gains and losses recorded on the Companys net investment in Japan. At September 30, 2009, the Company had 37 billion yen of foreign denominated debt designated as a net investment hedge. During the first quarter of fiscal 2010, the Company retired 19 billion yen of foreign denominated debt which had previously been designated as a net investment hedge in the Companys net investment in Japan. During the second quarter of fiscal 2010, the Company retired the remaining 18 billion yen of foreign denominated debt which has previously been designated as a net investment hedge in the Companys net investment in Japan. In its place, the Company entered into three cross-currency interest rate swaps totaling 20 billion yen. In the fourth quarter of fiscal 2010, a 5 billion yen cross-currency swap expired and the Company replaced it with a new 5 billion yen cross-currency swap. There were no cross-currency interest rate swaps outstanding at September 30, 2009. |
71
The Company uses commodity contracts in the financial derivatives market in cases where commodity price risk cannot be naturally offset or hedged through supply base fixed price contracts. Commodity risks are systematically managed pursuant to policy guidelines. As cash flow hedges, the effective portion of the hedge gains or losses due to changes in fair value are initially recorded as a component of AOCI and are subsequently reclassified into earnings when the hedged transactions, typically sales or costs related to sales, occur and affect earnings. Any ineffective portion of the hedge is reflected in the consolidated statement of income. The maturities of the commodity contracts coincide with the expected purchase of the commodities. The Company had the following outstanding commodity hedge contracts that hedge forecasted purchases: |
Volume Outstanding as of | ||||||||||
Commodity | Units | September 30, 2010 | September 30, 2009 | |||||||
Copper |
Pounds | 24,550,000 | 12,180,000 | |||||||
Lead |
Metric Tons | 18,450 | | |||||||
Aluminum |
Metric Tons | 8,276 | |
In addition, 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 Companys stock price increases and decrease as the Companys 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 September 30, 2010 and 2009, the Company had hedged approximately 3.4 million and 2.8 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 statement of income. In the fourth quarter of fiscal 2009, the Company entered into three fixed to floating interest rate swaps totaling $700 million to hedge the coupons of its 5.25% bonds maturing on January 15, 2011. In the second quarter of fiscal 2010, the Company unwound $100 million of one of the three outstanding interest rate swaps. During the second quarter of fiscal 2010, the Company entered into a fixed to floating interest rate swap totaling $100 million to hedge the coupon of its 5.80% bond maturing November 15, 2012 and two fixed to floating swaps totaling $300 million to hedge the coupon of its 4.875% bond maturing September 15, 2013. In the fourth quarter of fiscal 2010, the Company terminated all of its interest rate swaps. | ||
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 Companys anticipated fixed-rate note issuance to finance the acquisition of York (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 bonds. 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 Companys debt refinancing, the three forward lock treasury agreements were terminated. |
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The following table presents the location and fair values of derivative instruments and hedging activities included in the Companys consolidated statements of financial position (in millions): |
Derivatives and Hedging Activities | Derivatives and Hedging Activities Not | |||||||||||||||
Designated as Hedging Instruments | Designated as Hedging Instruments | |||||||||||||||
under ASC 815 | under ASC 815 | |||||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Other current assets |
||||||||||||||||
Foreign currency exchange derivatives |
$ | 19 | $ | 40 | $ | 8 | $ | 36 | ||||||||
Commodity derivatives |
14 | 7 | | | ||||||||||||
Other noncurrent assets |
||||||||||||||||
Interest rate swaps |
| 5 | | | ||||||||||||
Equity swap |
| | 104 | 70 | ||||||||||||
Foreign currency exchange derivatives |
1 | 1 | 1 | 1 | ||||||||||||
Total assets |
$ | 34 | $ | 53 | $ | 113 | $ | 107 | ||||||||
Current portion of long-term debt |
||||||||||||||||
Net investment hedges |
$ | | $ | 134 | $ | | $ | | ||||||||
Other current liabilities |
||||||||||||||||
Foreign currency exchange derivatives |
19 | 44 | 8 | 27 | ||||||||||||
Commodity derivatives |
| 1 | | | ||||||||||||
Net investment hedges |
17 | | | | ||||||||||||
Long-term debt |
||||||||||||||||
Fixed rate debt swapped to floating |
| 704 | | | ||||||||||||
Net investment hedges |
| 278 | | | ||||||||||||
Other noncurrent liabilities |
||||||||||||||||
Foreign currency exchange derivatives |
1 | 1 | 1 | 1 | ||||||||||||
Total liabilities |
$ | 37 | $ | 1,162 | $ | 9 | $ | 28 | ||||||||
The following table presents the location and amount of gains and losses on derivative instruments and related hedge items included in the Companys consolidated statements of income for the fiscal year ended September 30, 2010 and the nine months ended September 30, 2009 and gains and losses initially recognized in other comprehensive income (OCI) net of tax or cumulative translation adjustment (CTA) net of tax in the consolidated statements of financial position (in millions): |
As of | Year Ended | Year Ended | ||||||||||||||
September 30, 2010 | September 30, 2010 | September 30, 2010 | ||||||||||||||
Amount of Gain | Amount of Gain | |||||||||||||||
Amount of Gain | Location of Gain (Loss) | (Loss) Reclassified | Location of Gain (Loss) | (Loss) Recognized in | ||||||||||||
(Loss) Recognized in | Reclassified from AOCI | from AOCI into | Recognized in Income on | Income on | ||||||||||||
Derivatives in ASC 815 Cash Flow | OCI on Derivative | into Income (Effective | Income (Effective | Derivative (Ineffective | Derivative | |||||||||||
Hedging Relationships | (Effective Portion) | Portion) | Portion) | Portion) | (Ineffective Portion) | |||||||||||
Foreign currency exchange
derivatives |
$ | | Cost of sales | $ | (3 | ) | Cost of sales | $ | | |||||||
Commodity derivatives |
10 | Cost of sales | (1 | ) | Cost of sales | | ||||||||||
Forward treasury locks |
10 | Net financing charges | 2 | Net financing charges | | |||||||||||
Total |
$ | 20 | $ | (2 | ) | $ | | |||||||||
As of | Nine Months Ended | Nine Months Ended | ||||||||||||||
September 30, 2009 | September 30, 2009 | September 30, 2009 | ||||||||||||||
Amount of Gain | Amount of Gain | |||||||||||||||
Amount of Gain | Location of Gain (Loss) | (Loss) Reclassified | Location of Gain (Loss) | (Loss) Recognized in | ||||||||||||
(Loss) Recognized in | Reclassified from AOCI | from AOCI into | Recognized in Income on | Income on | ||||||||||||
Derivatives in ASC 815 Cash Flow | OCI on Derivative | into Income (Effective | Income (Effective | Derivative (Ineffective | Derivative | |||||||||||
Hedging Relationships | (Effective Portion) | Portion) | Portion) | Portion) | (Ineffective Portion) | |||||||||||
Foreign currency exchange
derivatives |
$ | (3 | ) | Net sales | $ | (16 | ) | Net sales | $ | | ||||||
Commodity derivatives |
3 | Cost of sales | (80 | ) | Cost of sales | (5 | ) | |||||||||
Forward treasury locks |
12 | Net financing charges | 1 | Net financing charges | | |||||||||||
Total |
$ | 12 | $ | (95 | ) | $ | (5 | ) | ||||||||
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As of | As of | |||||||
September 30, 2010 | September 30, 2009 | |||||||
Amount of Gain | Amount of Gain | |||||||
(Loss) Recognized in | (Loss) Recognized in | |||||||
CTA on Outstanding | CTA on Outstanding | |||||||
Hedging Activities in ASC 815 Net | Derivatives (Effective | Derivatives (Effective | ||||||
Investment Hedging Relationships | Portion) | Portion) | ||||||
Net investment hedges |
$ | (10 | ) | $ | (28 | ) | ||
Total |
$ | (10 | ) | $ | (28 | ) | ||
For the fiscal year ended September 30, 2010 and nine months ended September 30, 2009, no gains or losses were reclassified from CTA into income for the Companys outstanding net investment hedges. |
Year Ended | Nine Months Ended | |||||||||
September 30, 2010 | September 30, 2009 | |||||||||
Amount of Gain (Loss) | Amount of Gain (Loss) | |||||||||
Derivatives in ASC 815 Fair Value Hedging | Location of Gain (Loss) Recognized in Income on | Recognized in Income on | Recognized in Income on | |||||||
Relationships | Derivative | Derivative | Derivative | |||||||
Interest rate swap |
Net financing charges | $ | 10 | $ | 5 | |||||
Fixed rate debt swapped to floating |
Net financing charges | (7 | ) | (4 | ) | |||||
Total |
$ | 3 | $ | 1 | ||||||
Year Ended | Nine Months Ended | |||||||||
September 30, 2010 | September 30, 2009 | |||||||||
Amount of Gain (Loss) | Amount of Gain (Loss) | |||||||||
Derivatives Not Designated as Hedging | Location of Gain (Loss) Recognized in Income on | Recognized in Income on | Recognized in Income on | |||||||
Instruments under ASC 815 | Derivative | Derivative | Derivative | |||||||
Foreign currency exchange derivatives |
Cost of sales | $ | 219 | $ | (81 | ) | ||||
Foreign currency exchange derivatives |
Net financing charges | (185 | ) | 123 | ||||||
Equity swap |
Selling, general and administrative expenses | 14 | 28 | |||||||
Commodity derivatives |
Cost of sales | 1 | (4 | ) | ||||||
Total |
$ | 49 | $ | 66 | ||||||
11. | FAIR VALUE MEASUREMENTS |
ASC 820, Fair Value Measurements and Disclosures, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a three-level fair value hierarchy that prioritizes information used in developing assumptions when pricing an asset or liability as follows: |
ASC 820 requires the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement. |
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Recurring Fair Value Measurements |
The following tables present the Companys fair value hierarchy for those assets and liabilities measured at fair value as of September 30, 2010 and 2009 (in millions): |
Fair Value Measurements Using: | ||||||||||||||||
Significant | ||||||||||||||||
Quoted Prices | Other | Significant | ||||||||||||||
in Active | Observable | Unobservable | ||||||||||||||
Total as of | Markets | Inputs | Inputs | |||||||||||||
September 30, 2010 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Other current assets |
||||||||||||||||
Foreign currency exchange derivatives |
$ | 27 | $ | 27 | $ | | $ | | ||||||||
Commodity derivatives |
14 | | 14 | | ||||||||||||
Other noncurrent assets |
||||||||||||||||
Investments in marketable common stock |
31 | 31 | | | ||||||||||||
Equity swap |
104 | 104 | | | ||||||||||||
Foreign currency exchange derivatives |
2 | 2 | | | ||||||||||||
Total |
$ | 178 | $ | 164 | $ | 14 | $ | | ||||||||
Other current liabilities |
||||||||||||||||
Foreign currency exchange derivatives |
$ | 27 | $ | 27 | $ | | $ | | ||||||||
Cross-currency interest rate swaps |
17 | | 17 | | ||||||||||||
Other noncurrent liabilities |
||||||||||||||||
Foreign currency exchange derivatives |
2 | 2 | | | ||||||||||||
Total |
$ | 46 | $ | 29 | $ | 17 | $ | | ||||||||
Fair Value Measurements Using: | ||||||||||||||||
Significant | ||||||||||||||||
Quoted Prices | Other | Significant | ||||||||||||||
in Active | Observable | Unobservable | ||||||||||||||
Total as of | Markets | Inputs | Inputs | |||||||||||||
September 30, 2009 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Other current assets |
||||||||||||||||
Foreign currency exchange derivatives |
$ | 76 | $ | 76 | $ | | $ | | ||||||||
Commodity derivatives |
7 | | 7 | | ||||||||||||
Other noncurrent assets |
||||||||||||||||
Interest rate swaps |
5 | | 5 | | ||||||||||||
Equity swap |
70 | 70 | | | ||||||||||||
Foreign currency exchange derivatives |
2 | 2 | | | ||||||||||||
Total |
$ | 160 | $ | 148 | $ | 12 | $ | | ||||||||
Current portion long-term debt |
||||||||||||||||
Foreign currency denominated debt |
$ | 134 | $ | 134 | $ | | $ | | ||||||||
Other current liabilities |
||||||||||||||||
Foreign currency exchange derivatives |
71 | 71 | | | ||||||||||||
Commodity derivatives |
1 | | 1 | | ||||||||||||
Long-term debt |
||||||||||||||||
Fixed rate debt swapped to floating |
704 | | 704 | | ||||||||||||
Foreign currency denominated debt |
278 | 278 | | | ||||||||||||
Other noncurrent liabilities |
||||||||||||||||
Foreign currency exchange derivatives |
2 | 2 | | | ||||||||||||
Total |
$ | 1,190 | $ | 485 | $ | 705 | $ | | ||||||||
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Valuation Methods |
Foreign currency exchange derivatives The Company selectively hedges anticipated transactions that are subject to foreign exchange rate risk primarily using foreign currency exchange hedge contracts. The foreign currency exchange derivatives are valued under a market approach using publicized spot and forward prices. 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 accumulated other comprehensive income and are subsequently reclassified into earnings when the hedged transactions occur and affect earnings. Any ineffective portion of the hedge is reflected in the consolidated statement of income. These contracts are highly effective in hedging the variability in future cash flows attributable to changes in currency exchange rates at September 30, 2010 and 2009. The fair value of foreign currency exchange derivatives not designated as hedging instruments under ASC 815 are recorded in the consolidated statement of income. |
Commodity derivatives The Company selectively hedges anticipated transactions that are subject to commodity price risk, primarily using commodity hedge contracts, to minimize overall price risk associated with the Companys purchases of lead, copper and aluminum. The commodity derivatives are valued under a market approach using publicized prices, where available, or dealer quotes. 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 accumulated other comprehensive income and are subsequently reclassified into earnings when the hedged transactions, typically sales or cost related to sales, occur and affect earnings. Any ineffective portion of the hedge is reflected in the consolidated statement of income. These contracts are highly effective in hedging the variability in future cash flows attributable to changes in commodity price changes at September 30, 2010 and 2009. |
Interest rate swaps and related debt 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 statement of income. In the fourth quarter of fiscal 2009, the Company entered into three fixed to floating interest rate swaps totaling $700 million to hedge the coupons of its 5.25% bonds maturing on January 15, 2011. In the second quarter of fiscal 2010, the Company terminated a $100 million portion of one of the three interest swaps mentioned above. During the second quarter of fiscal 2010, the Company entered into a fixed to floating interest rate swap totaling $100 million to hedge the coupons of its 5.80% bond maturing November 15, 2012 and two fixed to floating interest rate swaps totaling $300 million to hedge the coupons of its 4.875% bond maturing September 15, 2013. In the fourth quarter of fiscal 2010, the Company terminated all of its interest rate swaps. The fair value adjustments to the related debt will be amortized over the remaining term of the debt. |
Investments in marketable common stock The Company invested in certain marketable common stock during the third quarter of fiscal 2010. The securities are valued under a market approach using publicized share prices. As of September 30, 2010, the Company recorded an unrealized gain of $3 million in accumulated other comprehensive income and no unrealized losses on these investments. |
Equity swaps 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. The equity swaps are valued under a market approach as the fair value of the swaps is based on the Companys stock price at the reporting period date. Changes in fair value on the equity swaps are reflected in the consolidated statement of income within selling, general and administrative expenses. |
Cross-currency interest rate swaps The Company selectively uses cross-currency interest rate swaps to hedge the foreign currency rate risk associated with certain of its investments in Japan. The cross-currency interest rate swaps are valued using market assumptions. Changes in the market value of the swaps are reflected in the foreign currency translation adjustments component of accumulated other comprehensive income where they offset gains and losses recorded on the Companys net investment in Japan. The Company entered into three cross-currency swaps totaling 20 billion yen during the second quarter of fiscal 2010. In the fourth quarter of fiscal 2010, a 5 billion yen cross-currency swap expired and the Company replaced it with a new 5 billion yen cross-currency swap. These swaps are designated as hedges in the Companys net investment in Japan. There were no cross-currency interest rate swaps outstanding at September 30, 2009. |
Foreign currency denominated debt The Company has entered into certain foreign currency denominated debt obligations to selectively hedge portions of its net investment in Japan. The currency effects of the debt obligations are reflected in the foreign currency translation adjustments component of accumulated other comprehensive income |
76
where they offset gains and losses recorded on the Companys net investment in Japan. At September 30, 2009, the Company had 37 billion yen of foreign denominated debt designated as a net investment hedge. During the first quarter of fiscal 2010, the Company retired 19 billion yen of foreign denominated debt which had previously been designated as a net investment hedge in the Companys net investment in Japan. During the second quarter of fiscal 2010, the Company retired the remaining 18 billion yen of foreign denominated debt which had previously been designated as a net investment hedge in the Companys net investment in Japan. There was no foreign currency denominated debt outstanding at September 30, 2010. |
12. | STOCK-BASED COMPENSATION |
Effective October 1, 2005, the Company adopted ASC 718, Stock Compensation, using the modified prospective method. The modified prospective method requires compensation cost to be recognized beginning on the effective date (a) for all share-based payments granted after the effective date and (b) for all awards granted to employees prior to the effective date of ASC 718 that remain unvested on the effective date. The cumulative impact of adopting ASC 718 was not significant to the Companys operating results since the Company had previously adopted certain provisions of this guidance. |
The Company has three share-based compensation plans, which are described below. The compensation cost charged against income for those plans was approximately $52 million, $27 million and $29 million for the fiscal years ended September 30, 2010, 2009 and 2008, respectively. The total income tax benefit recognized in the consolidated statements of income for share-based compensation arrangements was approximately $21 million, $11 million and $11 million for the fiscal years ended September 30, 2010, 2009 and 2008, respectively. |
Prior to the adoption of ASC 718, the Company applied a nominal vesting approach for employee stock-based compensation awards with retirement eligible provisions. Under the nominal vesting approach, the Company recognized compensation cost over the vesting period and, if the employee retired before the end of the vesting period, the Company recognized any remaining unrecognized compensation cost at the date of retirement. For stock-based payments issued after the adoption of ASC 718, the Company applies a non-substantive vesting period approach whereby expense is accelerated for those employees that receive awards and are eligible to retire prior to the award vesting. Had the Company applied the non-substantive vesting period approach prior to the adoption of ASC 718, an approximate $2 million reduction of pre-tax compensation cost would have been recognized for the year ended September 30, 2008. There would have been no impact for the years ended September 30, 2010 and 2009. |
Stock Option Plan |
The Companys 2007 Stock Option Plan, as amended (the Plan), which is shareholder-approved, permits the grant of stock options to its employees for up to approximately 41 million shares of new common stock as of September 30, 2010. Option awards are granted with an exercise price equal to the market price of the Companys stock at the date of grant; those option awards vest between two and three years after the grant date and expire ten years from the grant date (approximately 25 million shares of common stock remained available to be granted at September 30, 2010). |
The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model that uses the assumptions noted in the following table. Expected volatilities are based on the historical volatility of the Companys stock and other factors. The Company uses historical data to estimate option exercises and employee terminations within the valuation model. The expected term of options represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods during the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. |
Year Ended September 30, | ||||||
2010 | 2009 | 2008 | ||||
Expected life of option (years) |
4.3 - 5.0 | 4.2 - 4.5 | 4.5 - 5.25 | |||
Risk-free interest rate |
1.91% - 2.20% | 2.57% - 2.68% | 4.06% - 4.23% | |||
Expected volatility of the
Companys stock |
40.00% | 28.00% | 22.00% | |||
Expected dividend yield on the
Companys stock |
1.73% | 1.52% | 1.55% |
77
A summary of stock option activity at September 30, 2010, and changes for the year then ended, is presented below: |
Weighted | ||||||||||||||||
Average | Aggregate | |||||||||||||||
Weighted | Shares | Remaining | Intrinsic | |||||||||||||
Average | Subject to | Contractual | Value | |||||||||||||
Option Price | Option | Life (years) | (in millions) | |||||||||||||
Outstanding, September 30, 2009 |
$ | 23.62 | 33,244,637 | |||||||||||||
Granted |
24.89 | 5,382,100 | ||||||||||||||
Exercised |
18.97 | (3,095,823 | ) | |||||||||||||
Forfeited or expired |
28.58 | (372,805 | ) | |||||||||||||
Outstanding, September 30, 2010 |
$ | 24.17 | 35,158,109 | 5.8 | $ | 253 | ||||||||||
Exercisable, September 30, 2010 |
$ | 22.23 | 24,386,551 | 4.6 | $ | 217 | ||||||||||
The weighted-average grant-date fair value of options granted during the fiscal years ended September 30, 2010, 2009 and 2008 was $7.70, $6.68 and $9.08, respectively. |
The total intrinsic value of options exercised during the fiscal years ended September 30, 2010, 2009 and 2008 was approximately $33 million, $4 million and $45 million, respectively. |
In conjunction with the exercise of stock options granted, the Company received cash payments for the fiscal years ended September 30, 2010, 2009 and 2008 of approximately $52 million, $8 million and $34 million, respectively. |
The Company has elected to utilize the alternative transition method for calculating the tax effects of stock-based compensation. The alternative transition method includes computational guidance to establish the beginning balance of the additional paid-in capital pool (APIC Pool) related to the tax effects of employee stock-based compensation, and a simplified method to determine the subsequent impact on the APIC Pool for employee stock-based compensation awards that are vested and outstanding upon adoption of ASC 718. The tax benefit from the exercise of stock options, which is recorded in capital in excess of par value, was $7 million, $1 million and $19 million for the fiscal years ended September 30, 2010, 2009 and 2008. The Company does not settle equity instruments granted under share-based payment arrangements for cash. |
At September 30, 2010, the Company had approximately $26 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 0.8 years. |
Stock Appreciation Rights (SARs) |
The Plan also permits SARs to be separately granted to certain employees. SARs vest under the same terms and conditions as option awards; however, they are settled in cash for the difference between the market price on the date of exercise and the exercise price. As a result, SARs are recorded in the Companys consolidated statements of financial position as a liability until the date of exercise. |
The fair value of each SAR award is estimated using a similar method described for option awards. The fair value of each SAR award is recalculated at the end of each reporting period and the liability and expense adjusted based on the new fair value. |
The assumptions used to determine the fair value of the SAR awards at September 30, 2010 were as follows: |
Expected life of SAR (years) |
0.1 - 3.0 | |
Risk-free interest rate |
0.14% - 0.64% | |
Expected volatility of the Companys stock |
40.00% | |
Expected dividend yield on the Companys stock |
1.74% |
78
A summary of SAR activity at September 30, 2010, and changes for the year then ended, is presented below: |
Weighted | ||||||||||||||||
Average | Aggregate | |||||||||||||||
Weighted | Shares | Remaining | Intrinsic | |||||||||||||
Average | Subject to | Contractual | Value | |||||||||||||
SAR Price | SAR | Life (years) | (in millions) | |||||||||||||
Outstanding, September 30, 2009 |
$ | 24.69 | 2,996,198 | |||||||||||||
Granted |
24.87 | 671,335 | ||||||||||||||
Exercised |
20.13 | (383,450 | ) | |||||||||||||
Forfeited or expired |
27.80 | (46,970 | ) | |||||||||||||
Outstanding, September 30, 2010 |
$ | 25.23 | 3,237,113 | 6.4 | $ | 20 | ||||||||||
Exercisable, September 30, 2010 |
$ | 23.20 | 1,909,881 | 5.0 | $ | 16 | ||||||||||
In conjunction with the exercise of SARs granted, the Company made payments of $3 million, $2 million and $5 million during the fiscal years ended September 30, 2010, 2009 and 2008, respectively. |
Restricted (Nonvested) Stock |
In fiscal year 2002, the Company adopted a restricted stock plan that provides for the award of restricted shares of common stock or restricted share units to certain key employees. Awards under the restricted stock plan typically vest 50% after two years from the grant date and 50% after four years from the grant date. The plan allows for different vesting terms on specific grants with approval by the board of directors. |
A summary of the status of the Companys nonvested restricted stock awards at September 30, 2010, and changes for the fiscal year then ended, is presented below: |
Weighted | Shares/Units | |||||||
Average | Subject to | |||||||
Price | Restriction | |||||||
Nonvested, September 30, 2009 |
$ | 34.13 | 956,500 | |||||
Granted |
25.18 | 440,455 | ||||||
Vested |
30.96 | (631,500 | ) | |||||
Nonvested, September 30, 2010 |
$ | 31.60 | 765,455 | |||||
At September 30, 2010, the Company had approximately $10 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the restricted stock plan. That cost is expected to be recognized over a weighted-average period of 1.2 years. |
13. | Earnings Per Share |
The Company presents both basic and diluted earnings per share (EPS) amounts. Basic EPS is calculated by dividing net income by the weighted average number of common shares outstanding during the reporting period. Diluted EPS is calculated by dividing net income 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. The treasury stock method assumes that the Company uses the proceeds from the exercise of 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. |
The Companys outstanding Equity Units due 2042 and 6.5% convertible senior notes due 2012 are reflected in diluted earnings per share using the if-converted method. Under this method, if dilutive, the common stock is |
79
assumed issued as of the beginning of the reporting period and included in calculating diluted earnings per share. In addition, if dilutive, interest expense, net of tax, related to the outstanding Equity Units and convertible senior notes is added back to the numerator in calculating diluted earnings per share. |
The following table reconciles the numerators and denominators used to calculate basic and diluted earnings per share (in millions): |
Year Ended September 30, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Income Available to Common Shareholders |
||||||||||||
Basic income (loss) available to common shareholders |
$ | 1,491 | $ | (338 | ) | $ | 979 | |||||
Interest expense, net of tax |
5 | | | |||||||||
Diluted income (loss) available to common shareholders |
$ | 1,496 | $ | (338 | ) | $ | 979 | |||||
Weighted Average Shares Outstanding |
||||||||||||
Basic weighted average shares outstanding |
672.0 | 595.3 | 593.1 | |||||||||
Effect of dilutive securities: |
||||||||||||
Stock options |
5.9 | | 8.3 | |||||||||
Equity units |
4.5 | | | |||||||||
Convertible senior notes |
0.1 | | | |||||||||
Diluted weighted average shares outstanding |
682.5 | 595.3 | 601.4 | |||||||||
Antidilutive Securities |
||||||||||||
Options to purchase common shares |
0.8 | 2.5 | 1.1 |
For the fiscal year ended September 30, 2009, the total weighted average of potential dilutive shares due to stock options, Equity Units and the convertible senior notes was 47.8 million. However, these items were not included in the computation of diluted net loss per common share for the fiscal year ended September 30, 2009, since to do so would decrease the loss per share. |
During each of the three months ended September 30, 2010 and 2009, the Company declared a dividend of $0.13 per common share, and during each of the twelve months ended September 30, 2010 and 2009, the Company declared four quarterly dividends totaling $0.52 per common share. The Company paid all dividends in the month subsequent to the end of each fiscal quarter. |
14. | EQUITY AND NONCONTROLLING INTERESTS |
In December 2007, the FASB issued guidance changing the accounting and reporting for minority interests, which are recharacterized as noncontrolling interests and classified as a component of equity or as redeemable noncontrolling interests and classified as mezzanine equity (temporary equity). In addition, the guidance changes the presentation and accounting for noncontrolling interests, and requires that equity presented in the consolidated financial statements include amounts attributable to Johnson Controls, Inc. shareholders and the noncontrolling interests. This guidance is included in ASC 810, Consolidation, and was effective for the Company October 1, 2009. |
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The following schedules present changes in consolidated equity attributable to Johnson Controls, Inc. and noncontrolling interests (in millions): |
Equity Attributable to | Equity Attributable to | |||||||||||
Johnson Controls, | Noncontrolling | |||||||||||
Inc. | Interests | Total Equity | ||||||||||
At September 30, 2007 |
$ | 8,873 | $ | 88 | $ | 8,961 | ||||||
Total comprehensive income: |
||||||||||||
Net income |
979 | 25 | 1,004 | |||||||||
Foreign currency translation adjustments |
170 | 8 | 178 | |||||||||
Realized and unrealized losses on derivatives |
(93 | ) | | (93 | ) | |||||||
Employee retirement plans |
(188 | ) | | (188 | ) | |||||||
Other comprehensive income (loss) |
(111 | ) | 8 | (103 | ) | |||||||
Comprehensive income |
868 | 33 | 901 | |||||||||
Other changes in equity: |
||||||||||||
Adjustment to initially adopt FIN 48, net of tax |
(68 | ) | | (68 | ) | |||||||
Cash dividends common stock ($0.52 per share) |
(309 | ) | | (309 | ) | |||||||
Dividends attributable to noncontrolling interests |
| (34 | ) | (34 | ) | |||||||
Redemption value adjustment attributable to redeemable noncontrolling interests |
16 | | 16 | |||||||||
Other, including options exercised |
26 | | 26 | |||||||||
At September 30, 2008 |
9,406 | 87 | 9,493 | |||||||||
Total comprehensive income (loss): |
||||||||||||
Net income (loss) |
(338 | ) | 16 | (322 | ) | |||||||
Foreign currency translation adjustments |
(194 | ) | 3 | (191 | ) | |||||||
Realized and unrealized gains on derivatives |
41 | | 41 | |||||||||
Employee retirement plans |
(326 | ) | | (326 | ) | |||||||
Other comprehensive income (loss) |
(479 | ) | 3 | (476 | ) | |||||||
Comprehensive income (loss) |
(817 | ) | 19 | (798 | ) | |||||||
Other changes in equity: |
||||||||||||
Cash dividends common stock ($0.52 per share) |
(309 | ) | | (309 | ) | |||||||
Dividends attributable to noncontrolling interests |
| (23 | ) | (23 | ) | |||||||
Debt conversion |
804 | | 804 | |||||||||
Redemption value adjustment attributable to redeemable noncontrolling interests |
(20 | ) | | (20 | ) | |||||||
Other, including options exercised |
36 | 1 | 37 | |||||||||
At September 30, 2009 |
9,100 | 84 | 9,184 | |||||||||
Total comprehensive income: |
||||||||||||
Net income |
1,491 | 43 | 1,534 | |||||||||
Foreign currency translation adjustments |
(115 | ) | | (115 | ) | |||||||
Realized and unrealized gains on derivatives |
13 | | 13 | |||||||||
Unrealized gains on marketable common stock |
3 | | 3 | |||||||||
Employee retirement plans |
(170 | ) | | (170 | ) | |||||||
Other comprehensive loss |
(269 | ) | | (269 | ) | |||||||
Comprehensive income |
1,222 | 43 | 1,265 | |||||||||
Other changes in equity: |
||||||||||||
Cash dividends common stock ($0.52 per share) |
(350 | ) | | (350 | ) | |||||||
Dividends attributable to noncontrolling interests |
| (22 | ) | (22 | ) | |||||||
Redemption value adjustment attributable to redeemable noncontrolling interests |
9 | | 9 | |||||||||
Other, including options exercised |
90 | 1 | 91 | |||||||||
At September 30, 2010 |
$ | 10,071 | $ | 106 | $ | 10,177 | ||||||
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The components of accumulated other comprehensive income were as follows (in millions, net of tax): |
September 30, | ||||||||
2010 | 2009 | |||||||
Foreign currency translation adjustments |
$ | 743 | $ | 858 | ||||
Realized and unrealized gains on derivatives |
20 | 7 | ||||||
Unrealized gains on marketable common stock |
3 | | ||||||
Employee retirement plans |
(843 | ) | (673 | ) | ||||
Accumulated other comprehensive income (loss) |
$ | (77 | ) | $ | 192 | |||
The Company consolidates certain subsidiaries in which the noncontrolling interest party has within their 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. |
The following schedules present changes in the redeemable noncontrolling interests (in millions): |
Year Ended | Year Ended | Year Ended | ||||||||||
September 30, 2010 | September 30, 2009 | September 30, 2008 | ||||||||||
Beginning balance, September 30 |
$ | 155 | $ | 167 | $ | 74 | ||||||
Net income (loss) |
32 | (28 | ) | (1 | ) | |||||||
Foreign currency translation adjustments |
1 | (2 | ) | 1 | ||||||||
Increase in noncontrolling interest share |
17 | | 112 | |||||||||
Dividends attributable to noncontrolling interests |
| (2 | ) | (3 | ) | |||||||
Redemption value adjustment |
(9 | ) | 20 | (16 | ) | |||||||
Ending balance, September 30 |
$ | 196 | $ | 155 | $ | 167 | ||||||
15. | RETIREMENT PLANS |
Pension Benefits |
The Company has non-contributory defined benefit pension plans covering most U.S. and certain non-U.S. employees. The benefits provided are primarily based on years of service and average compensation or a monthly retirement benefit amount. Effective January 1, 2006, certain of the Companys U.S. pension plans were amended to prohibit new participants from entering the plans. Effective September 30, 2009, active participants will continue to accrue benefits under the amended plans until December 31, 2014. Funding for U.S. pension plans equals or exceeds the minimum requirements of the Employee Retirement Income Security Act of 1974. Funding for non-U.S. plans observes the local legal and regulatory limits. Also, the Company makes contributions to union-trusteed pension funds for construction and service personnel. |
The Companys investment policies employ an approach whereby a mix of equities and fixed income investments are used to maximize the long-term return of plan assets for a prudent level of risk. The investment portfolio primarily contains a diversified blend of equity and fixed income investments. Equity investments are diversified across domestic and non-domestic stocks, as well as growth, value and small to large capitalizations. Fixed income investments include corporate and government issues, with short-, mid- and long-term maturities, with a focus on investment grade when purchased. Investment and market risks are measured and monitored on an ongoing basis through regular investment portfolio reviews, annual liability measurements and periodic asset/liability studies. The majority of the real estate component of the portfolio is invested in a diversified portfolio of high-quality, operating properties with cash yields greater than the targeted appreciation. Investments in other alternative asset classes, including hedge funds and commodities, are made via mutual funds to diversify the expected investment returns relative to the equity and fixed income investments. As a result of our diversification strategies, there are no significant concentrations of risk within the portfolio of investments. |
The Companys actual asset allocations are in line with target allocations. The Company rebalances asset allocations as appropriate, in order to stay within a range of allocation for each asset category. |
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The Companys pension plan asset allocations by asset category for fiscal 2009 are shown below. |
2009 | ||||
Equity securities: |
||||
U.S. plans |
62 | % | ||
Non-U.S. plans |
50 | % | ||
Fixed income securities: |
||||
U.S. plans |
27 | % | ||
Non-U.S. plans |
42 | % | ||
Real estate/other: |
||||
U.S. plans |
10 | % | ||
Non-U.S. plans |
7 | % | ||
Cash/liquidity: |
||||
U.S. plans |
1 | % | ||
Non-U.S. plans |
1 | % |
In December 2008, the FASB issued guidance on an employers disclosures about plan assets of a defined benefit pension plan. The guidance requires enhanced transparency surrounding the types of plan assets and associated risks, as well as disclosure of information about fair value measurements of plan assets. This guidance is included in ASC 715, Compensation Retirement Benefits, is effective for the Company for fiscal 2010 and is applied prospectively. |
83
The Companys pension plan assets at September 30, 2010, by asset category, are as follows (in millions): |
Fair Value Measurements Using: | ||||||||||||||||
Significant | ||||||||||||||||
Quoted Prices | Other | Significant | ||||||||||||||
in Active | Observable | Unobservable | ||||||||||||||
Total as of | Markets | Inputs | Inputs | |||||||||||||
Asset Category | September 30, 2010 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
U.S. Pension |
||||||||||||||||
Cash |
$ | 52 | $ | 52 | $ | | $ | | ||||||||
Equity Securities |
||||||||||||||||
Large-Cap |
779 | 779 | | | ||||||||||||
Small-Cap |
287 | 287 | | | ||||||||||||
International Developed |
505 | 505 | | | ||||||||||||
Fixed Income Securities |
||||||||||||||||
Government |
147 | 147 | | | ||||||||||||
Corporate/Other |
469 | 469 | | | ||||||||||||
Hedge Funds |
91 | | | 91 | ||||||||||||
Real Estate |
141 | | | 141 | ||||||||||||
Total |
$ | 2,471 | $ | 2,239 | $ | | $ | 232 | ||||||||
Non-U.S. Pension |
||||||||||||||||
Cash |
$ | 28 | $ | 28 | $ | | $ | | ||||||||
Equity Securities |
||||||||||||||||
Large-Cap |
97 | 97 | | | ||||||||||||
International Developed |
452 | 452 | | | ||||||||||||
International Emerging |
13 | 13 | | | ||||||||||||
Fixed Income Securities |
||||||||||||||||
Government |
132 | 132 | | | ||||||||||||
Corporate/Other |
412 | 412 | | | ||||||||||||
Commodities |
11 | 11 | | | ||||||||||||
Real Estate |
71 | | | 71 | ||||||||||||
Total |
$ | 1,216 | $ | 1,145 | $ | | $ | 71 | ||||||||
Following is a description of the valuation methodologies used for assets measured at fair value. |
Cash: The fair value of cash is valued at cost. |
Equity Securities: The fair value of equity securities is determined by indirect quoted market prices. The value of assets held in separate accounts is not published, but the investment managers report daily the underlying holdings. The underlying holdings are direct quoted market prices on regulated financial exchanges. |
Fixed Income Securities: The fair value of fixed income securities is determined by indirect quoted market prices. The value of assets held in separate accounts is not published, but the investment managers report daily the underlying holdings. The underlying holdings are direct quoted market prices on regulated financial exchanges. |
Commodities: The fair value of the commodities is determined by quoted market prices of the underlying holdings on regulated financial exchanges. |
84
Hedge Funds: The fair value of hedge funds is accounted for by a custodian. The custodian obtains valuations from underlying managers based on market quotes for the most liquid assets and alternative methods for assets that do not have sufficient trading activity to derive prices. The Company and custodian review the methods used by the underlying managers to value the assets. The Company believes this is an appropriate methodology to obtain the fair value of these assets. |
Real Estate: The fair value of investment in real estate is valued by the fund managers. The fund managers value the real estate investments via independent third-party appraisals on a periodic basis. Assumptions used to revalue the properties are updated every quarter. The Company believes this is an appropriate methodology to obtain the fair value of these assets. For the component of the real estate portfolio under development, the investments are carried at cost until they are completed and valued by a third-party appraiser. |
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. |
The following sets forth a summary of changes in the fair value of assets measured using significant unobservable inputs (Level 3) (in millions): |
Total | Hedge Funds | Real Estate | ||||||||||
U.S. Pension |
||||||||||||
Asset Value as of September 30, 2009 |
$ | 174 | $ | 86 | $ | 88 | ||||||
Additions |
59 | | 59 | |||||||||
Redemptions |
(9 | ) | | (9 | ) | |||||||
Realized loss |
(5 | ) | | (5 | ) | |||||||
Unrealized gain |
13 | 5 | 8 | |||||||||
Asset Value as of September 30, 2010 |
$ | 232 | $ | 91 | $ | 141 | ||||||
Non-U.S. Pension |
||||||||||||
Asset Value as of September 30, 2009 |
$ | 64 | $ | | $ | 64 | ||||||
Unrealized gain |
7 | | 7 | |||||||||
Asset Value as of September 30, 2010 |
$ | 71 | $ | | $ | 71 | ||||||
The expected return on plan assets is based on the Companys expectation of the long-term average rate of return of the capital markets in which the plans invest. The average market returns are adjusted, where appropriate, for active asset management returns. The expected return reflects the investment policy target asset mix and considers the historical returns earned for each asset category. |
For pension plans with accumulated benefit obligations (ABO) that exceed plan assets, the projected benefit obligation (PBO), ABO and fair value of plan assets of those plans were $3,942 million, $3,804 million and $3,169 million, respectively, as of September 30, 2010 and $3,316 million, $3,111 million and $2,219 million, respectively, as of September 30, 2009. |
85
In fiscal 2010, total employer and employee contributions to the defined benefit pension plans were $681 million, of which $509 million were voluntary contributions made by the Company. The Company expects to contribute approximately $250 million in cash to its defined benefit pension plans in fiscal year 2011. Projected benefit payments from the plans as of September 30, 2010 are estimated as follows (in millions): |
2011 |
$ | 240 | ||
2012 |
212 | |||
2013 |
222 | |||
2014 |
231 | |||
2015 |
247 | |||
2016-2020 |
1,334 |
Savings and Investment Plans |
The Company sponsors various defined contribution savings plans primarily in the U.S. that allow employees to contribute a portion of their pre-tax and/or after-tax income in accordance with plan specified guidelines. Under specified conditions, the Company will contribute to certain savings plans based on the employees eligible pay and/or will match a percentage of the employee contributions up to certain limits. Matching contributions charged to expense amounted to $42 million, $35 million and $39 million for the fiscal years ended 2010, 2009 and 2008, respectively. |
Postretirement Health and Other Benefits |
The Company provides certain health care and life insurance benefits for eligible retirees and their dependents primarily in the U.S. Most non-U.S. employees are covered by government sponsored programs, and the cost to the Company is not significant. The U.S. benefits are paid as incurred. No change in the Companys practice of funding these benefits on a pay-as-you-go basis is anticipated. |
Eligibility for coverage is based on meeting certain years of service and retirement age qualifications. These benefits may be subject to deductibles, co-payment provisions and other limitations, and the Company has reserved the right to modify these benefits. Effective January 31, 1994, the Company modified certain salaried plans to place a limit on the Companys cost of future annual retiree medical benefits at no more than 150% of the 1993 cost. |
The September 30, 2010 accumulated postretirement benefit obligation (APBO) for both pre-65 and post-65 years of age employees was determined using assumed medical care cost trend rates of 7.5% and 8% for U.S. plans and non-U.S. plans, respectively, decreasing one half percent each year to an ultimate rate of 5% and prescription drug trend rates of 9.5% and 8% for U.S. plans and non-U.S. plans, respectively, decreasing one half percent each year to an ultimate rate of 6% and 5% for U.S. plans and non-U.S. plans, respectively. The September 30, 2009 APBO for both pre-65 and post-65 years of age employees was determined using medical care cost trend rates of 8.0% and 8.5% for U.S. plans and non-U.S. plans, respectively, decreasing one half percent each year to an ultimate rate of 5% and prescription drug trend rates of 10.0% and 8.5% for U.S. plans and non-U.S. plans, respectively, decreasing one half percent each year to an ultimate rate of 6% and 5% for U.S. plans and non-U.S. plans, respectively. The health care cost trend assumption does not have a significant effect on the amounts reported. To illustrate, a one percentage point increase in the assumed health care cost trend rate would have increased the accumulated benefit obligation by $1 million and $3 million for U.S. plans and non-U.S. plans, respectively, at September 30, 2010 and the sum of the service and interest costs in fiscal year 2010 by less than $1 million. A one percentage point decrease in the assumed health care cost trend rate would have a negligible impact on the accumulated benefit obligation and service and interest costs for U.S. plans and decreased the accumulated benefit obligation of non-U.S. plans by $3 million at September 30, 2010. |
86
The Company expects to contribute approximately $23 million in cash to its postretirement health and other benefit plans in fiscal year 2011. Projected benefit payments from the plans as of September 30, 2010 are estimated as follows (in millions): |
2011 |
$ | 23 | ||
2012 |
23 | |||
2013 |
23 | |||
2014 |
24 | |||
2015 |
24 | |||
2016-2020 |
101 |
In December 2003, the U.S. Congress enacted the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (Act) for employers sponsoring postretirement health care plans that provide prescription drug benefits. The Act introduces a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care benefit plans providing a benefit that is at least actuarially equivalent to Medicare Part D.1. Under the Act, the Medicare subsidy amount is received directly by the plan sponsor and not the related plan. Further, the plan sponsor is not required to use the subsidy amount to fund postretirement benefits and may use the subsidy for any valid business purpose. Projected subsidy receipts are estimated to be approximately $3 million per year over the next ten years. |
87
The table that follows contains the ABO and reconciliations of the changes in the PBO, the changes in plan assets and the funded status (in millions): |
Pension Benefits | Postretirement | |||||||||||||||||||||||
U.S. Plans | Non-U.S. Plans | Health and Other Benefits | ||||||||||||||||||||||
September 30, | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||
Accumulated Benefit Obligation |
$ | 2,655 | $ | 2,355 | $ | 1,622 | $ | 1,429 | $ | | $ | | ||||||||||||
Change in Projected Benefit Obligation |
||||||||||||||||||||||||
Projected benefit obligation at beginning of
year |
2,512 | 2,174 | 1,521 | 1,334 | 275 | 253 | ||||||||||||||||||
Service cost |
67 | 66 | 38 | 32 | 4 | 4 | ||||||||||||||||||
Interest cost |
152 | 159 | 68 | 65 | 14 | 18 | ||||||||||||||||||
Plan participant contributions |
| | 5 | 5 | 7 | | ||||||||||||||||||
Acquisitions |
| | 1 | 9 | | | ||||||||||||||||||
Divestitures |
| | | (1 | ) | | | |||||||||||||||||
Plan transfers |
| | | 39 | | | ||||||||||||||||||
Actuarial loss |
106 | 438 | 146 | 128 | 23 | 41 | ||||||||||||||||||
Amendments made during the year |
| 1 | (3 | ) | (14 | ) | (44 | ) | (13 | ) | ||||||||||||||
Benefits paid |
(120 | ) | (99 | ) | (68 | ) | (55 | ) | (26 | ) | (29 | ) | ||||||||||||
Estimated subsidy received |
| | | | 2 | 2 | ||||||||||||||||||
Special termination benefits |
| | | 1 | | | ||||||||||||||||||
Curtailment gain |
| (224 | ) | (5 | ) | (4 | ) | | | |||||||||||||||
Other |
| (3 | ) | 6 | | | | |||||||||||||||||
Currency translation adjustment |
| | 16 | (18 | ) | 1 | (1 | ) | ||||||||||||||||
Projected benefit obligation at end of year |
$ | 2,717 | $ | 2,512 | $ | 1,725 | $ | 1,521 | $ | 256 | $ | 275 | ||||||||||||
Change in Plan Assets |
||||||||||||||||||||||||
Fair value of plan assets at beginning of year |
$ | 1,867 | $ | 1,772 | $ | 1,080 | $ | 960 | $ | | $ | | ||||||||||||
Actual return on plan assets |
151 | 8 | 64 | 57 | | | ||||||||||||||||||
Plan transfers |
| | | 38 | | | ||||||||||||||||||
Employer and employee contributions |
573 | 188 | 108 | 105 | 26 | 29 | ||||||||||||||||||
Benefits paid |
(120 | ) | (99 | ) | (68 | ) | (55 | ) | (26 | ) | (29 | ) | ||||||||||||
Other |
| (2 | ) | 4 | | | | |||||||||||||||||
Currency translation adjustment |
| | 28 | (25 | ) | | | |||||||||||||||||
Fair value of plan assets at end of year |
$ | 2,471 | $ | 1,867 | $ | 1,216 | $ | 1,080 | $ | | $ | | ||||||||||||
Funded status |
$ | (246 | ) | $ | (645 | ) | $ | (509 | ) | $ | (441 | ) | $ | (256 | ) | $ | (275 | ) | ||||||
Amounts recognized in the statement of financial position consist of: |
||||||||||||||||||||||||
Prepaid benefit cost |
$ | 7 | $ | 4 | $ | 17 | $ | 23 | $ | | $ | | ||||||||||||
Accrued benefit liability |
(253 | ) | (649 | ) | (526 | ) | (464 | ) | (256 | ) | (275 | ) | ||||||||||||
Net amount recognized |
$ | (246 | ) | $ | (645 | ) | $ | (509 | ) | $ | (441 | ) | $ | (256 | ) | $ | (275 | ) | ||||||
Weighted Average Assumptions (1) |
||||||||||||||||||||||||
Discount rate |
5.50 | % | 6.25 | % | 4.00 | % | 4.75 | % | 5.50 | % | 6.25 | % | ||||||||||||
Rate of compensation increase |
3.20 | % | 4.20 | % | 3.00 | % | 3.20 | % | NA | NA |
(1) | Plan assets and obligations are determined based on a September 30 measurement date at September 30, 2010 and 2009. |
88
The amounts in accumulated other comprehensive income on the consolidated statement of financial position, exclusive of tax impacts, that have not yet been recognized as components of net periodic benefit cost at September 30, 2010 are as follows (in millions): |
Postretirement | ||||||||
Pension | Health and Other | |||||||
Benefits | Benefits | |||||||
Accumulated other comprehensive loss (income) |
||||||||
Net transition obligation |
$ | 3 | $ | | ||||
Net actuarial loss |
1,339 | 22 | ||||||
Net prior service cost (credit) |
3 | (61 | ) | |||||
Total |
$ | 1,345 | $ | (39 | ) | |||
The amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year are shown below (in millions): |
Postretirement | ||||||||
Pension | Health and Other | |||||||
Benefits | Benefits | |||||||
Amortization of: |
||||||||
Net actuarial loss |
$ | 71 | $ | 2 | ||||
Net prior service cost (credit) |
2 | (17 | ) | |||||
Total |
$ | 73 | $ | (15 | ) | |||
The table that follows contains the components of net periodic benefit cost (in millions): |
Pension Benefits | Postretirement | |||||||||||||||||||||||||||||||||||
U.S. Plans | Non-U.S. Plans | Health and Other Benefits | ||||||||||||||||||||||||||||||||||
Year ended September 30 | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||||||||||
Components of Net |
||||||||||||||||||||||||||||||||||||
Periodic Benefit Cost: |
||||||||||||||||||||||||||||||||||||
Service cost |
$ | 67 | $ | 66 | $ | 79 | $ | 38 | $ | 32 | $ | 39 | $ | 4 | $ | 4 | $ | 5 | ||||||||||||||||||
Interest cost |
152 | 159 | 140 | 68 | 65 | 73 | 14 | 18 | 17 | |||||||||||||||||||||||||||
Expected return on plan assets |
(179 | ) | (174 | ) | (166 | ) | (64 | ) | (55 | ) | (67 | ) | | | | |||||||||||||||||||||
Amortization of net actuarial loss (gain) |
28 | 4 | 6 | 11 | 3 | 6 | | (3 | ) | (2 | ) | |||||||||||||||||||||||||
Amortization of prior service cost (credit) |
1 | 1 | 2 | | | | (17 | ) | (7 | ) | (7 | ) | ||||||||||||||||||||||||
Special termination benefits |
| | | | 1 | 2 | | | | |||||||||||||||||||||||||||
Curtailment loss (gain) |
| 4 | 4 | (1 | ) | (2 | ) | | | | | |||||||||||||||||||||||||
Settlement loss |
| | | 2 | |