e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended
September 30, 2011
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For The Transition Period
From To
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Commission File Number 1-5097
JOHNSON CONTROLS,
INC.
(Exact name of registrant as
specified in its charter)
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Wisconsin
(State of
Incorporation)
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39-0380010
(I.R.S. Employer
Identification No.)
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5757 North Green Bay Avenue
Milwaukee, Wisconsin
(Address of principal
executive offices)
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53209
(Zip
Code)
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Registrants telephone number, including area code:
(414) 524-1200
Securities Registered Pursuant to Section 12(b) of the
Exchange Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock
Corporate Units
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New York Stock Exchange
New York Stock Exchange
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Securities
Registered Pursuant to Section 12(g) of the Exchange
Act:
None
Indicate by check mark whether the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See the definitions of large accelerated
filer, accelerated filer and smaller
reporting company in
Rule 12b-2
of the Exchange Act.
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Large
accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of March 31, 2011, the aggregate market value of the
registrants Common Stock held by non-affiliates of the
registrant was approximately $28.2 billion based on the
closing sales price as reported on the New York Stock Exchange.
As of October 31, 2011, 680,381,571 shares of the
registrants Common Stock, par value
$0.017/18
per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to
shareholders in connection with the Annual Meeting of
Shareholders to be held on January 25, 2012 are
incorporated by reference into Part III.
JOHNSON CONTROLS, INC.
Index to Annual Report on Form 10-K
Year Ended September 30, 2011
CAUTIONARY STATEMENTS FOR FORWARD-LOOKING INFORMATION
Unless otherwise indicated, references to Johnson Controls, the Company, we, our and us
in this Annual Report on Form 10-K refer to Johnson Controls, Inc. and its consolidated
subsidiaries.
Certain statements in this report, other than purely historical information, including estimates,
projections, statements relating to our business plans, objectives and expected operating results,
and the assumptions upon which those statements are based, are forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking
statements generally are identified by the words believe, project, expect, anticipate,
estimate, forecast, outlook, intend, strategy, plan, may, should, will, would,
will be, will continue, will likely result, or the negative thereof or variations thereon or
similar terminology generally intended to identify forward-looking statements. Forward-looking
statements are based on current expectations and assumptions that are subject to risks and
uncertainties which may cause actual results to differ materially from the forward-looking
statements. A detailed discussion of risks and uncertainties that could cause actual results and
events to differ materially from such forward-looking statements is included in the section
entitled Risk Factors (refer to Part I, Item 1A, of this Annual Report on Form 10-K). We
undertake no obligation, and we disclaim any obligation, to update or revise publicly any
forward-looking statements, whether as a result of new information, future events or otherwise.
PART I
ITEM 1 BUSINESS
General
Johnson Controls is a global diversified technology and industrial leader serving customers in more
than 150 countries. The Company creates quality products, services and solutions to optimize energy
and operational efficiencies of buildings; lead-acid automotive batteries and advanced batteries
for hybrid and electric vehicles; and interior systems for automobiles.
Johnson Controls was originally incorporated in the state of Wisconsin in 1885 as Johnson Electric
Service Company to manufacture, install and service automatic temperature regulation systems for
buildings. The Company was renamed to Johnson Controls, Inc. in 1974. In 1978, we acquired
Globe-Union, Inc., a Wisconsin-based manufacturer of automotive batteries for both the replacement
and original equipment markets. We entered the automotive seating industry in 1985 with the
acquisition of Michigan-based Hoover Universal, Inc. In 2005, the Company acquired York
International, a global supplier of heating, ventilating, air-conditioning and refrigeration
equipment and services.
Our building efficiency business is a global market leader in designing, producing, marketing and
installing integrated heating, ventilating and air conditioning (HVAC) systems, building management
systems, controls, security and mechanical equipment. In addition, the building efficiency business
provides technical services, energy management consulting and operations of entire real estate
portfolios for the non-residential buildings market. We also provide residential air conditioning
and heating systems and industrial refrigeration products.
Our automotive experience business is one of the worlds largest automotive suppliers, providing
innovative interior systems through our design and engineering expertise. Our technologies extend
into virtually every area of the interior including seating and overhead systems, door systems,
floor consoles, instrument panels, cockpits and integrated electronics. Customers include most of
the worlds major automakers.
Our power solutions business is a leading global supplier of lead-acid automotive batteries for
virtually every type of passenger car, light truck and utility vehicle. We serve both automotive
original equipment manufacturers (OEMs) and the general vehicle battery aftermarket. We are the
leading supplier of batteries to power Start-Stop vehicles, as well as lithium-ion battery
technologies to power certain hybrid and electric vehicles.
Financial Information About Business Segments
Accounting Standards Codification (ASC) 280, Segment Reporting, establishes the standards for
reporting information about operating segments in financial statements. In applying the criteria
set forth in ASC 280, the Company has determined that it has nine
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reportable segments for financial
reporting purposes. The Companys nine reportable segments are presented in the context of its
three primary businesses: building efficiency, automotive experience and power solutions.
Effective October 1, 2010, the building efficiency business unit reorganized its management
reporting structure to reflect its current business activities. Historical information has been
revised to reflect the new building efficiency reportable segment structure.
Refer to Note 18, Segment Information, of the notes to consolidated financial statements for
financial information about business segments.
For the purpose of the following discussion of the Companys businesses, the five building
efficiency reportable segments and the three automotive experience reportable segments are
presented together due to their similar customers and the similar nature of their products,
production processes and distribution channels.
Products/Systems and Services
Building efficiency
Building efficiency is a global leader in delivering integrated control systems, mechanical
equipment, services and solutions designed to improve the comfort, safety and energy efficiency of
non-residential buildings and residential properties with operations in 56 countries. Revenues come
from facilities management, technical services and the replacement and upgrade of HVAC controls and
mechanical equipment in the existing buildings market, where the Companys large base of current
customers leads to repeat business, as well as with installing controls and equipment during the
construction of new buildings. Customer relationships often span entire building lifecycles.
Building efficiency sells its control systems, mechanical equipment and services primarily through
the Companys extensive global network of sales and service offices. Some building controls and
mechanical systems are sold to distributors of air-conditioning, refrigeration and commercial
heating systems throughout the world. Approximately 44% of building efficiencys sales are derived
from HVAC products and installed control systems for construction and retrofit markets, of which
12% of its total sales are related to new commercial construction. Approximately 56% of its sales
originate from its service offerings. In fiscal 2011, building efficiency accounted for 37% of the
Companys consolidated net sales.
The Companys systems include York® chillers, industrial refrigeration products, air handlers and
other HVAC mechanical equipment that provide heating and cooling in non-residential buildings. The
Metasys® control system monitors and integrates HVAC equipment with other critical building systems
to maximize comfort while reducing energy and operating costs. As the largest global supplier of
HVAC technical services, building efficiency staffs, optimizes and repairs building systems made by
the Company and its competitors. The Company offers a wide range of solutions such as performance
contracting under which guaranteed energy savings are used by the customer to fund project costs
over a number of years. In addition, the global workplace solutions segment provides full-time
on-site operations staff and real estate and energy consulting services to help customers,
especially multi-national companies, reduce costs and improve the performance of their facility
portfolios. The Companys on-site staff typically performs tasks related to the comfort and
reliability of the facility, and manages subcontractors for functions such as foodservice,
cleaning, maintenance and landscaping. The Company also produces air conditioning and heating
equipment for the residential market.
Automotive experience
Automotive experience designs and manufactures interior products and systems for passenger cars and
light trucks, including vans, pick-up trucks and sport/crossover utility vehicles. The business
produces automotive interior systems for OEMs and operates approximately 230 wholly- and
majority-owned manufacturing or assembly plants in 33 countries worldwide. Additionally, the
business has partially-owned affiliates in Asia, Europe, North America and South America.
Automotive experience products and systems include complete seating systems and components;
cockpit systems, including instrument panels and clusters, information displays and body
controllers; overhead systems, including headliners and electronic convenience features; floor
consoles; and door systems. In fiscal 2011, automotive experience accounted for 49% of the
Companys consolidated net sales.
The business operates assembly plants that supply automotive OEMs with complete seats on a
just-in-time/in-sequence basis. Seats are assembled to specific order and delivered on a
predetermined schedule directly to an
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automotive assembly line. Certain of the businesss other
automotive interior systems are also supplied on a just-in-time/in-sequence basis. Foam, metal
and plastic seating components, seat covers, seat mechanisms and other components are shipped to
these plants from the businesss production facilities or outside suppliers.
Power solutions
Power solutions services both automotive OEMs and the battery aftermarket by providing advanced
battery technology, coupled with systems engineering, marketing and service expertise. The Company
is the largest producer of lead-acid automotive batteries in the world, producing approximately 130
million lead-acid batteries annually in approximately 70 wholly- and majority-owned manufacturing
or assembly plants in 20 countries worldwide. Investments in new product and process technology
have expanded product offerings to absorbent glass mat (AGM) technology that powers Start-Stop
vehicles, as well as lithium-ion battery technology for certain hybrid and electric vehicles.
Approximately 77% of automotive battery sales worldwide in fiscal 2011 were to the automotive
replacement market, with the remaining sales to the OEM market.
Power solutions accounted for 14% of the Companys fiscal 2011 consolidated net sales. Batteries
and plastic battery containers are manufactured at wholly- and majority-owned plants in North
America, South America, Asia and Europe.
Competition
Building efficiency
The building efficiency business conducts certain of its operations through thousands of individual
contracts that are either negotiated or awarded on a competitive basis. Key factors in the award of
contracts include system and service performance, quality, price, design, reputation, technology,
application engineering capability and construction or project management expertise. Competitors
for contracts in the residential and non-residential marketplace include many regional, national
and international providers; larger competitors include Honeywell International, Inc.; Siemens
Building Technologies, an operating group of Siemens AG; Schneider Electric SA; Carrier
Corporation, a subsidiary of United Technologies Corporation; Trane Incorporated, a subsidiary of
Ingersoll-Rand Company Limited; Daikin Industries, Ltd.; Lennox International, Inc.; Goodman
Global, Inc; CBRE, Inc.; and Jones Lang LaSalle, Inc. The services market, including global
workplace solutions, is highly fragmented. Sales of services are largely dependent upon numerous
individual contracts with commercial businesses worldwide. The loss of any individual contract
would not have a material adverse effect on the Company.
Automotive experience
The automotive experience business faces competition from other automotive suppliers and, with
respect to certain products, from the automobile OEMs who produce or have the capability to produce
certain products the business supplies. The automotive supply industry competes on the basis of
technology, quality, reliability of supply and price. Design, engineering and product planning are
increasingly important factors. Independent suppliers that represent the principal automotive
experience competitors include Lear Corporation, Faurecia SA and Magna International Inc.
Power solutions
Power solutions is the principal supplier of batteries to many of the largest merchants in the
battery aftermarket, including Advance Auto Parts, AutoZone, Robert Bosch GmbH, Costco, NAPA,
OReilly/CSK, Interstate Battery System of America, Pep Boys, Sears, Roebuck & Co. and Wal-Mart
stores. Automotive batteries are sold throughout the world under private labels and under the
Companys brand names (Optima®, Varta®, LTH® and Heliar®) to automotive replacement battery
retailers and distributors and to automobile manufacturers as original equipment. The power
solutions business competes with a number of major domestic and international manufacturers and
distributors of lead-acid batteries, as well as a large number of smaller, regional competitors.
The power solutions business primarily competes in the battery market with Exide Technologies, GS
Yuasa Corporation, East Penn Manufacturing Company and Fiamm Group. The North American, European
and Asian lead-acid battery markets are highly competitive. The manufacturers in these markets
compete on price, quality, technical innovation, service and warranty.
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Backlog
The Companys backlog relating to the building efficiency business is applicable to its sales of
systems and services. At September 30, 2011, the backlog was $5.1 billion, compared with $4.7
billion as of September 30, 2010. The increase in backlog was primarily due to market share gains
and conditions in all geographic markets, with the largest percentage increase in Asia. The backlog
does not include amounts associated with contracts in the global workplace solutions business
because such contracts are typically multi-year service awards, nor does it include unitary
products within the other segment. The backlog amount outstanding at any given time is not
necessarily indicative of the amount of revenue to be earned in the upcoming fiscal year.
At September 30, 2011, the Companys automotive experience backlog of net new incremental business
for its consolidated and unconsolidated subsidiaries to be executed within the next three fiscal
years was approximately $4.2 billion, $1.0 billion of which relates to fiscal 2012. The backlog as
of September 30, 2010 was approximately $4.0 billion. The increase in backlog was primarily due to
higher industry production volumes in North America, Europe and Asia, and the impact of recent
acquisitions. The automotive backlog is generally subject to a number of risks and uncertainties,
such as related vehicle production volumes, the timing of related production launches and changes
in customer development plans.
Raw Materials
Raw materials used by the businesses in connection with their operations, including lead, steel,
urethane chemicals, copper, sulfuric acid and polypropylene, were readily available during the year
and the Company expects such availability to continue. In fiscal 2012, the Company expects
increases in steel, copper, chemicals and resin costs. Lead and other commodity costs are expected
to be relatively stable.
Intellectual Property
Generally, the Company seeks statutory protection for strategic or financially important
intellectual property developed in connection with its business. Certain intellectual property,
where appropriate, is protected by contracts, licenses, confidentiality or other agreements.
The Company owns numerous U.S. and non-U.S. patents (and their respective counterparts), the more
important of which cover those technologies and inventions embodied in current products, or which
are used in the manufacture of those products. While the Company believes patents are important to
its business operations and in the aggregate constitute a valuable asset, no single patent, or
group of patents, is critical to the success of the business. The Company, from time to time,
grants licenses under its patents and technology and receives licenses under patents and technology
of others.
The Companys trademarks, certain of which are material to its business, are registered or
otherwise legally protected in the U.S. and many non-U.S. countries where products and services of
the Company are sold. The Company, from time to time, becomes involved in trademark licensing
transactions.
Most works of authorship produced for the Company, such as computer programs, catalogs and sales
literature, carry appropriate notices indicating the Companys claim to copyright protection under
U.S. law and appropriate international treaties.
Environmental, Health and Safety Matters
Laws addressing the protection of the environment (Environmental Laws) and workers safety and
health (Worker Safety Laws) govern the Companys ongoing global operations. They generally provide
for civil and criminal penalties, as well as injunctive and remedial relief, for noncompliance or
require remediation of sites where Company-related materials have been released into the
environment.
The Company has expended substantial resources globally, both financial and managerial, to comply
with Environmental Laws and Worker Safety Laws and maintains procedures designed to foster and
ensure compliance. Certain of the Companys businesses are, or have been, engaged in the handling
or use of substances that may impact workplace health and safety or the environment. The Company is
committed to protecting its workers and the environment against the risks associated with these
substances.
The Companys operations and facilities have been, and in the future may become, the subject of
formal or informal enforcement actions or proceedings for noncompliance with such laws or for the
remediation of Company-related
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substances released into the environment. Such matters typically are
resolved by negotiation with regulatory authorities that result in commitments to compliance,
abatement or remediation programs and, in some cases, payment of penalties. Historically, neither
such commitments nor such penalties have been material. (See Item 3, Legal Proceedings, of this
report for a discussion of the Companys potential environmental liabilities.)
Environmental Capital Expenditures
The Companys ongoing environmental compliance program often results in capital expenditures.
Environmental considerations are a part of all significant capital expenditure decisions; however,
expenditures in fiscal 2011 related solely to environmental compliance were not material. It is
managements opinion that the amount of any future capital expenditures related solely to
environmental compliance will not have a material adverse effect on the Companys financial results
or competitive position in any one year.
Employees
As of September 30, 2011, the Company employed approximately 162,000 employees, of whom
approximately 97,000 were hourly and 65,000 were salaried.
Seasonal Factors
Certain of building efficiencys sales are seasonal as the demand for residential air conditioning
equipment generally increases in the summer months. This seasonality is mitigated by the other
products and services provided by the building efficiency business that have no material seasonal
effect.
Sales of automotive seating and interior systems and of batteries to automobile OEMs for use as
original equipment are dependent upon the demand for new automobiles. Management believes that
demand for new automobiles generally reflects sensitivity to overall economic conditions with no
material seasonal effect.
The automotive replacement battery market is affected by weather patterns because batteries are
more likely to fail when extremely low temperatures place substantial additional power requirements
upon a vehicles electrical system. Also, battery life is shortened by extremely high temperatures,
which accelerate corrosion rates. Therefore, either mild winter or moderate summer temperatures may
adversely affect automotive replacement battery sales.
Financial Information About Geographic Areas
Refer to Note 18, Segment Information, of the notes to consolidated financial statements for
financial information about geographic areas.
Research and Development Expenditures
Refer to Note 1, Summary of Significant Accounting Policies, of the notes to consolidated
financial statements for research and development expenditures.
Available Information
The Companys filings with the U.S. Securities and Exchange Commission (SEC), including annual
reports on Form 10-K, quarterly reports on Form 10-Q, definitive proxy statements on Schedule 14A,
current reports on Form 8-K, and any amendments to those reports filed pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934, are made available free of charge through the
Investor Relations section of the Companys Internet website at
http://www.johnsoncontrols.com as soon as reasonably practicable after the Company
electronically files such material with, or furnishes it to, the SEC. Copies of any materials the
Company files with the SEC can also be obtained free of charge through the SECs website at
http://www.sec.gov, at the SECs Public Reference Room at 100 F Street, N.E., Washington,
D.C. 20549, or by calling the SECs Office of Investor Education and Assistance at 1-800-732-0330.
The Company also makes available, free of charge, its Ethics Policy, Corporate Governance
Guidelines, Board of Directors committee charters and other information related to the Company on
the Companys Internet website or in printed form upon request. The Company is not including the
information contained on the Companys website as a part of, or incorporating it by reference into,
this Annual Report on Form 10-K.
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ITEM 1A RISK FACTORS
General Risks
General economic, credit and capital market conditions could adversely affect our financial
performance, and may affect our ability to grow or sustain our businesses and could negatively
affect our ability to access the capital markets.
We compete around the world in various geographic regions and product markets. Global economic
conditions affect each of our three primary businesses. As we discuss in greater detail in the
specific risk factors for each of our businesses that appear below, any future financial distress
in the automotive industry or residential and commercial construction markets could negatively
affect our revenues and financial performance in future periods, result in future restructuring
charges, and adversely impact our ability to grow or sustain our businesses.
The capital and credit markets provide us with liquidity to operate and grow our businesses beyond
the liquidity that operating cash flows provide. A worldwide economic downturn and disruption of
the credit markets could reduce our access to capital necessary for our operations and executing
our strategic plan. If our access to capital were to become significantly constrained or costs of
capital increased significantly due to lowered credit ratings, prevailing industry conditions, the
volatility of the capital markets or other factors, then our financial condition, results of
operations and cash flows could be adversely affected. The Companys $2.5 billion four-year
revolving credit facility expires in February 2015. The Company plans to renew the facility prior
to its expiration.
We are subject to pricing pressure from our automotive customers.
We face significant competitive pressures in all of our business segments. Because of their
purchasing size, our automotive customers can influence market participants to compete on price
terms. If we are not able to offset pricing reductions resulting from these pressures by improved
operating efficiencies and reduced expenditures, those pricing reductions may have an adverse
impact on our business.
We are subject to risks associated with our non-U.S. operations that could adversely affect our
results of operations.
We have significant operations in a number of countries outside the U.S., some of which are located
in emerging markets. Long-term economic uncertainty in some of the regions of the world in which we
operate, such as Asia, South America, the Middle East, Central Europe and other emerging markets,
could result in the disruption of markets and negatively affect cash flows from our operations to
cover our capital needs and debt service. The sovereign debt crisis in countries in which we
operate in Europe could negatively impact our access to, and cost of, capital, and therefore could
have an adverse effect on our business, results of operations, financial condition and competitive
position.
In addition, as a result of our global presence, a significant portion of our revenues and expenses
is denominated in currencies other than the U.S. dollar. We are therefore subject to foreign
currency risks and foreign exchange exposure. Our primary exposures are to the euro, British pound,
Japanese yen, Czech koruna, Mexican peso, Romanian lei, Hungarian forint, Polish zloty, Canadian
dollar and Chinese renminbi. While we employ financial instruments to hedge transactional and
foreign exchange exposure, these activities do not insulate us completely from those exposures.
Exchange rates can be volatile and could adversely impact our financial results and comparability
of results from period to period.
There are other risks that are inherent in our non-U.S. operations, including the potential for
changes in socio-economic conditions, laws and regulations, including import, export, labor and
environmental laws, and monetary and fiscal policies, protectionist measures that may prohibit
acquisitions or joint ventures, unsettled political conditions, corruption, natural and man-made
disasters, hazards and losses, violence and possible terrorist attacks.
These and other factors may have a material adverse effect on our non-U.S. operations and therefore
on our business and results of operations.
We are subject to regulation of our international operations that could adversely affect our
business and results of operations.
Due to our global operations, we are subject to many laws governing international relations,
including those that prohibit improper payments to government officials and commercial customers,
and restrict where we can do
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business, what information or products we can supply to certain
countries and what information we can provide to a non-U.S. government, including but not limited
to the Foreign Corrupt Practices Act and the U.S. Export Administration Act. Violations of these
laws, which are complex, may result in criminal penalties or sanctions that could have a material
adverse effect on our business, financial condition and results of operations.
Increased public awareness and concern regarding global climate change may result in more regional
and/or federal requirements to reduce or mitigate the effects of greenhouse gas emissions. There
continues to be a lack of consistent climate legislation, which creates economic and regulatory
uncertainty. Such uncertainty extends to future incentives for energy efficient buildings and
vehicles and costs of compliance, which may impact the demand for our products and our results of
operations.
Global climate change could negatively affect our business.
There is a growing consensus that greenhouse gas emissions are linked to global climate changes.
Climate changes, such as extreme weather conditions, create financial risk to our business. For
example, the demand for our products and services, such as residential air conditioning equipment
and automotive replacement batteries, may be affected by unseasonable weather conditions. Climate
changes could also disrupt our operations by impacting the availability and cost of materials
needed for manufacturing and could increase insurance and other operating costs. These factors may
impact our decisions to construct new facilities or maintain existing facilities in areas most
prone to physical climate risks. The Company could also face indirect financial risks passed
through the supply chain, and process disruptions due to physical climate changes could result in
price modifications for our products and the resources needed to produce them.
We are subject to requirements relating to environmental regulation and environmental remediation
matters, which could adversely affect our business and results of operations.
Because of uncertainties associated with environmental regulation and environmental remediation
activities at sites where we may be liable, future expenses that we may incur to remediate
identified sites could be considerably higher than the current accrued liability on our
consolidated statement of financial position, which could have a material adverse effect on our
business and results of operations.
Negative or unexpected tax consequences could adversely affect our results of operations.
Adverse changes in the underlying profitability and financial outlook of our operations in several
jurisdictions could lead to changes in our valuation allowances against deferred tax assets and
other tax reserves on our statement of financial position that could materially and adversely
affect our results of operations. Additionally, changes in tax laws in the U.S. or in other
countries where we have significant operations could materially affect deferred tax assets and
liabilities on our consolidated statement of financial position and tax expense.
We are also subject to tax audits by governmental authorities in the U.S. and in non-U.S.
jurisdictions. Negative unexpected results from one or more such tax audits could adversely affect
our results of operations.
Legal proceedings in which we are, or may be, a party may adversely affect us.
We are currently and may in the future become subject to legal proceedings and commercial or
contractual disputes. These are typically claims that arise in the normal course of business
including, without limitation, commercial or contractual disputes with our suppliers, intellectual
property matters, third party liability, including product liability claims and employment claims.
There exists the possibility that such claims may have an adverse impact on our results of
operations that is greater than we anticipate.
A downgrade in the ratings of our debt could restrict our ability to access the debt capital
markets and increase our interest costs.
Changes in the ratings that rating agencies assign to our debt may ultimately impact our access to
the debt capital markets and the costs we incur to borrow funds. If ratings for our debt fall below
investment grade, our access to the debt capital markets would become restricted. Tightening in the
credit markets and the reduced level of liquidity in many financial markets due to turmoil in the
financial and banking industries could affect our access to the debt capital markets or the price
we pay to issue debt. Historically, we have relied on our ability to issue commercial paper rather
than to draw on our credit facility to support our daily operations, which means that a downgrade
in our ratings or continued volatility in the financial markets causing limitations to the debt
capital markets could have an adverse effect on our business or our ability to meet our liquidity
needs.
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Additionally, several of our credit agreements generally include an increase in interest rates if
the ratings for our debt are downgraded. Further, an increase in the level of our indebtedness may
increase our vulnerability to adverse general economic and industry conditions and may affect our
ability to obtain additional financing.
We are subject to potential insolvency or financial distress of third parties.
We are exposed to the risk that third parties to various arrangements who owe us money or goods and
services, or who purchase goods and services from us, will not be able to perform their obligations
or continue to place orders due to insolvency or financial distress. If third parties fail to
perform their obligations under arrangements with us, we may be forced to replace the underlying
commitment at current or above market prices or on other terms that are less favorable to us. In
such events, we may incur losses, or our results of operations, financial position or liquidity
could otherwise be adversely affected.
We may be unable to complete or integrate acquisitions effectively, which may adversely affect our
growth, profitability and results of operations.
We expect acquisitions of businesses and assets to play a role in our future growth. We cannot be
certain that we will be able to identify attractive acquisition targets, obtain financing for
acquisitions on satisfactory terms or successfully acquire identified targets. Additionally, we may
not be successful in integrating acquired businesses into our existing operations and achieving
projected synergies. Competition for acquisition opportunities in the various industries in which
we operate may rise, thereby increasing our costs of making acquisitions or causing us to refrain
from making further acquisitions. We are also subject to applicable antitrust laws and must avoid
anticompetitive behavior. These and other acquisition-related factors may negatively and adversely
impact our growth, profitability and results of operations.
We are subject to business continuity risks associated with centralization of certain
administrative functions.
Certain administrative functions, primarily in North America, Europe and Asia, have been or are in
the process of being regionally centralized to improve efficiency and reduce costs. To the extent
that these central locations are disrupted or disabled, key business processes, such as invoicing,
payments and general management operations, could be interrupted.
A failure of our information technology (IT) infrastructure could adversely impact our business and
operations.
We rely upon the capacity, reliability and security of our information technology infrastructure
and our ability to expand and continually update this infrastructure in response to the changing
needs of our business. For example, we are implementing new enterprise resource planning and other
IT systems in certain of our businesses over a period of several years. As we implement the new
systems, they may not perform as expected. We also face the challenge of supporting our older
systems and implementing necessary upgrades. If we experience a problem with the functioning of an
important IT system or a security breach of our IT systems, the resulting disruptions could have an
adverse effect on our business.
We and certain of our third-party vendors receive and store personal information in connection with
our human resources operations and other aspects of our business. Despite our implementation of
security measures, our IT systems are vulnerable to damages from computer viruses, natural
disasters, unauthorized access, cyber attack and other similar disruptions. Any system failure,
accident or security breach could result in disruptions to our operations. A material network
breach in the security of our IT systems could include the theft of our intellectual property or
trade secrets. To the extent that any disruptions or security breach results in a loss or damage to
our data, or in inappropriate disclosure of confidential information, it could cause significant
damage to our reputation, affect our relationships with our customers, lead to claims against the
Company and ultimately harm our business. In addition, we may be required to incur significant
costs to protect against damage caused by these disruptions or security breaches in the future.
Our business success depends on attracting and retaining qualified personnel.
Our ability to sustain and grow our business requires us to hire, retain and develop a highly
skilled and diverse management team and workforce. Failure to ensure that we have the leadership
capacity with the necessary skill set and experience could impede our ability to deliver our growth
objectives and execute our strategic plan. Any
10
unplanned turnover or inability to attract and
retain key employees could have a negative effect on our results of operations.
Building Efficiency Risks
Failure to comply with regulations due to our contracts with U.S. government entities could
adversely affect our business and results of operations.
Our building efficiency business contracts with government entities and is subject to specific
rules, regulations and approvals applicable to government contractors. We are subject to routine
audits by the Defense Contract Audit Agency to assure our compliance with these requirements. Our
failure to comply with these or other laws and regulations could result in contract terminations,
suspension or debarment from contracting with the U.S. federal government, civil fines and damages
and criminal prosecution. In addition, changes in procurement policies, budget considerations,
unexpected U.S. developments, such as terrorist attacks, or similar political developments or
events abroad that may change the U.S. federal governments national security defense posture may
affect sales to government entities.
Volatility in commodity prices may adversely affect our results of operations.
Commodity prices were volatile in the past year, primarily steel, aluminum, copper and fuel costs.
Increases in commodity costs negatively impact the profitability of orders in backlog as prices on
those orders are fixed; therefore, in the short term we cannot adjust for changes in commodity
prices. If we are not able to recover commodity cost increases through price increases to our
customers on new orders, then such increases will have an adverse effect on our results of
operations. Additionally, unfavorability in our hedging programs during a period of declining
commodity prices could result in lower margins as we reduce prices to match the market on a fixed
commodity cost level.
Conditions in the residential and commercial new construction markets may adversely affect our
results of operations.
HVAC equipment sales in the residential and commercial new construction markets correlate to the
number of new homes and buildings that are built. The strength of the residential and commercial
markets depends in part on the availability of consumer and commercial financing for our customers,
along with inventory and pricing of existing homes and buildings. If economic and credit market
conditions worsen, it may result in a decline in the residential housing construction market and
construction of new commercial buildings. Such conditions could have an adverse effect on our
results of operations and result in potential liabilities or additional costs, including impairment
charges.
A variety of other factors could adversely affect the results of operations of our building
efficiency business.
Any of the following could materially and adversely impact the results of operations of our
building efficiency business: loss of, changes in, or failure to perform under facility management
supply contracts with our major customers; cancellation of, or significant delays in, projects in
our backlog; delays or difficulties in new product development; the potential introduction of
similar or superior technologies; financial instability or market declines of our major component
suppliers; the unavailability of raw materials (primarily steel, copper and electronic components)
necessary for production of HVAC equipment; price increases of limited-source components, products
and services that we are unable to pass on to the market; unseasonable weather conditions in
various parts of the world; changes in energy costs or governmental regulations that would decrease
the incentive for customers to update or improve their building control systems; revisions to
energy efficiency legislation; a decline in the outsourcing of facility management services;
availability of labor to support growth of our service businesses; and natural or man-made
disasters or losses that impact our ability to deliver facility management and other products and
services to our customers.
Automotive Experience Risks
Conditions in the automotive industry may adversely affect our results of operations.
Our financial performance depends, in part, on conditions in the automotive industry. In fiscal
2011, our largest customers globally were automobile manufacturers Ford Motor Company (Ford),
General Motors Corporation (GM) and Daimler AG. If automakers experience a decline in the number of
new vehicle sales, we may experience reductions in orders from these customers, incur write offs of
accounts receivable, incur impairment charges or
11
require additional restructuring actions beyond
our current restructuring plans, particularly if any of the automakers cannot adequately fund their
operations or experience financial distress.
Financial distress of the automotive supply chain could harm our results of operations.
Automotive industry conditions could adversely affect the original equipment supplier base. Lower
production levels for key customers, increases in certain raw material, commodity and energy costs
and global credit market conditions could result in financial distress among many companies within
the automotive supply base. Financial distress within the supplier base may lead to commercial
disputes and possible supply chain interruptions, which in turn could disrupt our production. In
addition, an adverse industry environment may require us to provide financial support to distressed
suppliers or take other measures to ensure uninterrupted production, which could involve additional
costs or risks. If any of these risks materialize, we are likely to incur losses, or our results of
operations, financial position or liquidity could otherwise be adversely affected.
Change in consumer demand may adversely affect our results of operations.
Increases in energy costs or other factors (e.g., climate change concerns) may shift consumer
demand away from motor vehicles that typically have higher interior content that we supply, such as
light trucks, cross-over vehicles, minivans and SUVs, to smaller vehicles having less interior
content. The loss of business with respect to, or a lack of commercial success of, one or more
particular vehicle models for which we are a significant supplier could reduce our sales and harm
our profitability, thereby adversely affecting our results of operations.
We may not be able to successfully negotiate pricing terms with our customers in the automotive
experience business, which may adversely affect our results of operations.
We negotiate sales prices annually with our automotive customers. Cost-cutting initiatives that our
customers have adopted generally result in increased downward pressure on pricing. In some cases
our customer supply agreements require reductions in component pricing over the period of
production. If we are unable to generate sufficient production cost savings in the future to offset
price reductions, our results of operations may be adversely affected. In particular, large
commercial settlements with our customers may adversely affect our results of operations or cause
our financial results to vary on a quarterly basis.
Volatility in commodity prices may adversely affect our results of operations.
Commodity prices can be volatile from year to year. If commodity prices rise, and if we are not
able to recover these cost increases from our customers, these increases will have an adverse
effect on our results of operations.
The cyclicality of original equipment automobile production rates may adversely affect the results
of operations in our automotive experience business.
Our automotive experience business is directly related to automotive production by our customers.
Automotive production and sales are highly cyclical and depend on general economic conditions and
other factors, including consumer spending and preferences. An economic decline that results in a
reduction in automotive production by our automotive experience customers could have a material
adverse impact on our results of operations.
A variety of other factors could adversely affect the results of operations of our automotive
experience business.
Any of the following could materially and adversely impact the results of operations of our
automotive experience business: the loss of, or changes in, automobile supply contracts or sourcing
strategies with our major customers or suppliers; start-up expenses associated with new vehicle
programs or delays or cancellations of such programs; underutilization of our manufacturing
facilities, which are generally located near, and devoted to, a particular customers facility;
inability to recover engineering and tooling costs; market and financial consequences of any
recalls that may be required on products that we have supplied; delays or difficulties in new
product development; complexity of new program launches, which are subject to our customers
timing, performance, design and quality standards; interruption of supply of certain single-source
components; the potential introduction of similar or superior technologies; changing nature of our
joint ventures and relationships with our strategic business partners; and global overcapacity and
vehicle platform proliferation.
12
Power Solutions Risks
We face competition and pricing pressure from other companies in the power solutions business.
Our power solutions business competes with a number of major domestic and international
manufacturers and distributors of lead-acid batteries, as well as a large number of smaller,
regional competitors. The North American, European and Asian lead-acid battery markets are highly
competitive. The manufacturers in these markets compete on price, quality, technical innovation,
service and warranty. If we are unable to remain competitive and maintain market share in the
regions and markets we serve, our results of operations may be adversely affected.
Volatility in commodity prices may adversely affect our results of operations.
Lead is a major component of our lead-acid batteries. The price of lead has been highly volatile
over the last several years. We attempt to manage the impact of changing lead prices through the
recycling of used batteries returned to us by our aftermarket customers, commercial terms and
commodity hedging programs. Our ability to mitigate the impact of lead price changes can be
impacted by many factors, including customer negotiations, inventory level fluctuations and sales
volume/mix changes, any of which could have an adverse effect on our results of operations.
Additionally, the prices of other commodities, primarily fuel, acid and resin, have been volatile.
If other commodity prices rise, and if we are not able to recover these cost increases through
price increases to our customers, such increases will have an adverse effect on our results of
operations. Moreover, the implementation of any price increases to our customers could negatively
impact demand for our products.
Decreased demand from our customers in the automotive industry may adversely affect our results of
operations.
Our financial performance in the power solutions business depends, in part, on conditions in the
automotive industry. Sales to OEMs accounted for approximately 23% of the total sales of the power
solutions business in fiscal 2011. Declines in the North American and European automotive
production levels could reduce our sales and adversely affect our results of operations. In
addition, if any OEMs reach a point where they cannot fund their operations, we may incur write
offs of accounts receivable, incur impairment charges or require additional restructuring actions
beyond our current restructuring plans.
A variety of other factors could adversely affect the results of operations of our power solutions
business.
Any of the following could materially and adversely impact the results of operations of our power
solutions business: loss of, or changes in, automobile battery supply contracts with our large
original equipment and aftermarket customers; the increasing quality and useful life of batteries
or use of alternative battery technologies, both of which may contribute to a growth slowdown in
the lead-acid battery market; delays or cancellations of new vehicle programs; market and financial
consequences of any recalls that may be required on our products; delays or difficulties in new
product development, including lithium-ion technology; financial instability or market declines of
our customers or suppliers; interruption of supply of certain single-source components; changing
nature of our joint ventures and relationships with our strategic business partners; the increasing
global environmental and safety regulations related to the manufacturing and recycling of lead-acid
batteries; our ability to secure sufficient tolling capacity to recycle batteries; and the lack of
the development of a market for hybrid and electric vehicles.
ITEM 1B UNRESOLVED STAFF COMMENTS
The Company has no unresolved written comments regarding its periodic or current reports from the
staff of the SEC.
13
ITEM 2 PROPERTIES
At September 30, 2011, the Company conducted its operations in 61 countries throughout the world,
with its world headquarters located in Milwaukee, Wisconsin. The Companys wholly- and
majority-owned facilities, which are listed in the table on the following pages by business and
location, totaled approximately 95 million square feet of floor space and are owned by the Company
except as noted. The facilities primarily consisted of manufacturing, assembly and/or warehouse
space. The Company considers its facilities to be suitable and adequate for their current uses. The
majority of the facilities are operating at normal levels based on capacity.
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Building Efficiency |
Arizona
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Phoenix (1),(4)
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Austria
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Graz (4) |
California
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Fremont (1),(4)
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Vienna (4) |
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Roseville (1),(4)
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Brazil
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São Paulo (3) |
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Simi Valley (1),(4)
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Belgium
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Diegem (1),(4) |
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Whittier (4)
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Canada
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Ajax (1),(3) |
Delaware
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Newark (1),(4)
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Victoria (1),(4) |
Florida
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Largo (1),(3)
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Oakville (1),(4) |
Georgia
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Atlanta (1),(4)
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China
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Qingyuan (2),(3) |
Illinois
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Arlington Heights (4)
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Wuxi (2),(3) |
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Dixon (3)
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Denmark
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Aarhus (3) |
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Elmhurst (1),(4)
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Hornslet (2),(4) |
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Wheeling (1),(4)
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Viby (2),(3) |
Kansas
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Lenexa (1),(4)
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France
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Amiens Glisy (3) |
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Wichita (2),(3)
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Carquefou Bel Air (3) |
Kentucky
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Erlanger (1)
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Colombes (1),(3) |
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Louisville (1),(4)
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Nantes (1) |
Maryland
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Capitol Heights (1),(4)
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Saint Quentin Fallavier (1),(3) |
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Rossville (1)
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Germany
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Essen (2),(3) |
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Sparks (1),(4)
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Kempen (1),(3) |
Massachusetts
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Lynnfield (4)
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Mannheim (1),(3) |
Michigan
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Sterling Heights (1),(3)
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Hong Kong
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Hong Kong (1),(3) |
Minnesota
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Plymouth (1),(4)
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India
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Chakan (1),(3) |
Mississippi
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Hattiesburg (1)
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Pune (1),(3) |
Missouri
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Albany
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Italy
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Milan (1),(4) |
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St. Louis (1),(4)
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Japan
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Tokyo (1),(4) |
New Jersey
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Hainesport (1),(4)
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Mexico
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Apodaca (1),(3) |
North Carolina
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Charlotte (1),(4)
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Durango (3) |
Oregon
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Portland (1),(4)
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Juarez (2),(3) |
Oklahoma
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Norman (3)
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Monterrey (1),(3) |
Pennsylvania
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Audubon (1),(4)
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Reynosa (3) |
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York (1)
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Netherlands
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Gorinchem (1),(4) |
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Waynesboro (3)
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Poland
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Warsaw (1),(3) |
Texas
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Houston (1),(4)
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Romania
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Bucharest (1),(3) |
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Irving (4)
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Russia
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Moscow (1),(3) |
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San Antonio
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South Africa
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Johannesburg (1),(3) |
Washington
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Fife (1),(4)
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Spain
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Sabadell (1),(3) |
Wisconsin
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Milwaukee (2),(4)
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Switzerland
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Basel (1) |
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Waukesha (1),(4)
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Turkey
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Izmir (1),(3) |
14
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Automotive Experience |
Alabama
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Clanton
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Argentina
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Buenos Aires (1) |
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Cottondale
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Cordoba (1) |
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Eastaboga
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Rosario |
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McCalla (1)
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Australia
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Adelaide (1) |
Georgia
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LaGrange (1)
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Austria
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Graz (1) |
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West Point (1)
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Mandling |
Illinois
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Chicago (1)
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Belgium
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Assenede (1) |
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Lawrenceville
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Geel (1),(3) |
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Sycamore
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Brazil
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Gravatai |
Indiana
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Kendallville
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Pouso Alegre |
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Munice (1)
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Quatro Barras (2) |
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Cadiz
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San Bernardo do Campo |
Kentucky
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Georgetown (2)
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Santo Andre |
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Harrodsburg (3)
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Sao Jose dos Campos |
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Leitchfield
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Sao Jose dos Pinhais (1) |
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Louisville (1)
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Bulgaria
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Sofia (1),(4) |
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Nicholasville (1)
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Canada
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Milton |
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Owensboro (1)
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Mississauga (1),(3) |
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Shelbyville (1)
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Saint Marys |
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Winchester (1)
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Tillsonburg |
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Shreveport
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Whitby (2) |
Louisiana
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Auburn Hills (1)
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China
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Beijing (3) |
Michigan
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Battle Creek
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Shanghai (1),(3) |
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Cascade (1)
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Czech Republic
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Benatky (1) |
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Croswell (1)
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Ceska Lipa (4) |
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Detroit
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Mlada Boleslav (1) |
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Fowlerville
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Roudnice |
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Highland Park (1)
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Rychnov (1) |
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Holland (2),(3)
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Strakonice |
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Kentwood (1)
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Straz pod Ralskem |
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Lansing (2)
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France
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Cergy (1),(4) |
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Monroe (1)
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Conflans-sur-Lanterne |
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Port Huron (1)
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Creutzwald |
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Plymouth (3)
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Fesches-le-Chatel (1) |
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Romulus (1)
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La Ferte Bernard |
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Taylor (1)
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Rosny |
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Troy (1)
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Strasbourg |
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Warren (1) |
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Missouri
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Eldon (2) |
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Kansas City (1) |
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Riverside (1) |
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Ohio
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Bryan |
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Greenfield |
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Northwood |
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St. Marys (2) |
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Wauseon |
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Tennessee
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Columbia (1) |
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Franklin |
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Murfreesboro (2) |
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Pulaski (1) |
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Texas
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El Paso (1) |
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San Antonio (1) |
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Wisconsin
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Hudson |
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15
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Automotive Experience (continued) |
Germany
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Boblingen (1),(3)
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Poland
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Bierun |
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Bochum (2)
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Siemianowice |
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Bremen (1)
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Skarbimierz (1) |
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Burscheid (2),(3)
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Swiebodzin |
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Dautphe
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Zory |
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Espelkamp
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Portugal
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Palmela |
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Grefrath
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Republic of Slovenia
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Novo Mesto (1) |
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Hannover (1)
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Slovenj Gradec |
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Hilchenbach (1)
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Romania
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Craiova (1) |
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Holzgerlingen (1)
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Jimbolia (1) |
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Kaiserslautern
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Mioveni (1) |
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Karlsruhe (1),(4)
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Pitesti (1) |
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Luneburg
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Ploesti |
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Mannweiler (1)
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Timisoara (1) |
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Markgroningen (1)
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Russia
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St. Petersburg (1) |
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Neustadt
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Togliatti (1) |
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Rastatt (1)
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Slovak Republic
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Bratislava (1),(4) |
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Remscheid (1)
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Kostany nad Turcom (2) |
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Rockenhausen
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Lozorno (1) |
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Saarlouis (1)
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Lucenec (2) |
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Solingen
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Namestovo (1) |
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Uberherrn
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Trencin (1) |
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Waghausel (3)
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Zilina (2) |
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Zwickau
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South Africa
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East London (1) |
Italy
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Grugliasco (1)
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Pretoria |
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Melfi
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Uitenhage (1) |
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Ogliastro Cilento
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Spain
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Abrera |
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Rocca DEvandro
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Alagon |
Japan
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Ayase
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Almussafes (2) |
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Hamamatsu
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Calatorao (1) |
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Higashiomi
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Pedrola |
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Yamato
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Redondela (1) |
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Yokohama (1),(4)
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Valladolid |
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Yokosuka (2)
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Sweden
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Goteburg (1) |
Korea
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Ansan (1),(4)
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Thailand
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Rayong |
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Asan
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Tunesia
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Bir al Bay (1) |
Macedonia
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Skopje
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Turkey
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Bursa (1) |
Malaysia
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Melaka (1)
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Kocaeli |
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Pekan (1)
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United Kingdom
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Birmingham |
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Perak Darul Redzuan (1)
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Burton-Upon-Trent |
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Selangor Darul Ehsan
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Ellesmere (1) |
Mexico
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Ecapetec Edo (1)
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Garston (1) |
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Juarez (2)
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Sunderland |
|
|
Matamaros (1)
|
|
|
|
Telford (1) |
|
|
Monclova
|
|
|
|
Wednesbury |
|
|
Puebla (2) |
|
|
|
|
|
|
Ramos Arizpe |
|
|
|
|
|
|
Reynosa (1) |
|
|
|
|
|
|
Saltillo |
|
|
|
|
|
|
Tlaxcala |
|
|
|
|
|
|
Toluca (1) |
|
|
|
|
16
|
|
|
|
|
|
|
Power Solutions |
Arizona
|
|
Yuma (3)
|
|
Austria
|
|
Graz (1) |
Delaware
|
|
Middletown (3)
|
|
|
|
Vienna (1) |
Florida
|
|
Tampa (3)
|
|
Brazil
|
|
Sorocaba (3) |
Illinois
|
|
Geneva (3)
|
|
China
|
|
Changxing (3) |
Indiana
|
|
Ft. Wayne (3)
|
|
|
|
Chongqing (3) |
Iowa
|
|
Red Oak (3)
|
|
|
|
Shanghai (2),(3) |
Kentucky
|
|
Florence (1),(3)
|
|
Czech Republic
|
|
Ceska Lipa (2),(3) |
Michigan
|
|
Holland (3)
|
|
France
|
|
Rouen |
Missouri
|
|
St. Joseph (2),(3)
|
|
|
|
Sarreguemines (3) |
North Carolina
|
|
Kernersville (3)
|
|
Germany
|
|
Hannover (3) |
Ohio
|
|
Toledo (3)
|
|
|
|
Krautscheid (3) |
Oregon
|
|
Portland (2),(3)
|
|
|
|
Zwickau (2),(3) |
South Carolina
|
|
Florence (3)
|
|
Korea
|
|
Gumi (2),(3) |
|
|
Oconee (3)
|
|
Mexico
|
|
Celaya |
Texas
|
|
San Antonio (3)
|
|
|
|
Cienega de Flores (2) |
Wisconsin
|
|
Milwaukee (4)
|
|
|
|
Escobedo |
|
|
|
|
|
|
Flores |
|
|
|
|
|
|
Garcia |
|
|
|
|
|
|
San Pedro (1),(4) |
|
|
|
|
|
|
Torreon |
|
|
|
|
Spain
|
|
Burgos |
|
|
|
|
|
|
Guadamar del Segura |
|
|
|
|
|
|
Guadalajara (1) |
|
|
|
|
|
|
Ibi (3) |
|
|
|
|
Sweden
|
|
Hultsfred |
|
|
|
Corporate |
Wisconsin
|
|
Milwaukee (4) |
|
|
|
(1) |
|
Leased facility |
|
(2) |
|
Includes both leased and owned facilities |
|
(3) |
|
Includes both administrative and manufacturing facilities |
|
(4) |
|
Administrative facility only |
In addition to the above listing, which identifies large properties (greater than 25,000
square feet), there are approximately 644 building efficiency branch offices and other
administrative offices located in major cities throughout the world. These offices are primarily
leased facilities and vary in size in proportion to the volume of business in the particular
locality.
ITEM 3 LEGAL PROCEEDINGS
As noted in Item 1, liabilities potentially arise globally under various Environmental Laws and
Worker Safety Laws for activities that are not in compliance with such laws and for the cleanup of
sites where Company-related substances have been released into the environment.
Currently, the Company is responding to allegations that it is responsible for performing
environmental remediation, or for the repayment of costs spent by governmental entities or others
performing remediation, at approximately 42 sites in the U.S. Many of these sites are landfills
used by the Company in the past for the disposal of waste materials; others are secondary lead
smelters and lead recycling sites where the Company returned lead-containing materials for
recycling; a few involve the cleanup of Company manufacturing facilities; and the remaining fall
into miscellaneous categories. The Company may face similar claims of liability at additional sites
in the future. Where potential liabilities are alleged, the Company pursues a course of action
intended to mitigate them.
The Company accrues for potential environmental liabilities in a manner consistent with accounting
principles generally accepted in the United States; that is, when it is probable a liability has
been incurred and the amount of the liability is reasonably estimable. Reserves for environmental
liabilities totaled $30 million and $47 million at
17
September 30, 2011 and 2010, respectively. The
Company reviews the status of its environmental sites on a quarterly basis and adjusts its reserves
accordingly. Such potential liabilities accrued by the Company do not take into consideration
possible recoveries of future insurance proceeds. They do, however, take into account the likely
share other parties will bear at remediation sites. It is difficult to estimate the Companys
ultimate level of liability at many remediation sites due to the large number of other parties that
may be involved, the complexity of determining the relative liability among those parties, the
uncertainty as to the nature and scope of the investigations and remediation to be conducted, the
uncertainty in the application of law and risk assessment, the various choices and costs associated
with diverse technologies that may be used in corrective actions at the sites, and the often quite
lengthy periods over which eventual remediation may occur. Nevertheless, the Company does not
currently believe that any claims, penalties or costs in connection with known environmental
matters will have a material adverse effect on the Companys financial position, results of
operations or cash flows.
The Company is involved in a number of product liability and various other casualty lawsuits
incident to the operation of its businesses. Insurance coverages are maintained and estimated costs
are recorded for claims and lawsuits of this nature. It is managements opinion that none of these
will have a material adverse effect on the Companys financial position, results of operations or
cash flows. Costs related to such matters were not material to the periods presented.
ITEM 4 (REMOVED AND RESERVED)
EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3) of Form 10-K, the following list of executive officers of the
Company as of November 16, 2011 is included as an unnumbered Item in Part I of this report in lieu
of being included in the Companys Proxy Statement relating to the Annual Meeting of Shareholders
to be held on January 25, 2012.
Jeffrey G. Augustin, 49, was elected a Corporate Vice President in March 2005 and has
served as Vice President of Finance for the building efficiency business since December 2005.
Previously, Mr. Augustin served as Corporate Controller from March 2005 to March 2007. From 2001
to March 2005, Mr. Augustin was Vice President of Finance and Corporate Controller of Gateway,
Inc.
Beda Bolzenius, 55, was elected a Corporate Vice President in November 2005 and serves as
President of the automotive experience business. He previously served as Executive Vice
President and General Manager Europe, Africa and South America for automotive experience from
November 2004 to November 2005. Dr. Bolzenius joined the Company in November 2004 from Robert
Bosch GmbH, a global manufacturer of automotive and industrial technology, consumer goods and
building technology, where he most recently served as the president of Boschs Body Electronics
division.
Colin Boyd, 52, was elected Vice President, Information Technology and Chief Information
Officer in October 2008. Mr. Boyd previously served as Chief Information Officer and Corporate
Vice President of Sony Ericsson from 2002 to 2008.
Susan F. Davis, 58, was elected Executive Vice President of Human Resources in September
2006. She previously served as Vice President of Human Resources from May 1994 to September 2006
and as Vice President of Organizational Development for automotive experience from August 1993
to April 1994. Ms. Davis joined the Company in 1983.
Jeffrey S. Edwards, 49, was elected a Corporate Vice President in May 2004 and serves as
Group Vice President and General Manager for automotive experience Asia. He previously served as
Group Vice President and General Manager for automotive experience North America from August
2002 to May 2004 and Group Vice President and General Manager for product and business
development. Mr. Edwards joined the Company in 1984.
Charles A. Harvey, 59, was elected Corporate Vice President of Diversity and Public Affairs
in November 2005. He previously served as Vice President of Human Resources for the automotive
experience business and in other human resources leadership positions. Mr. Harvey joined the
Company in 1991.
William C. Jackson, 51, was elected Executive Vice President, Operations and Innovation, in
July 2011. Prior to joining Johnson Controls, Mr. Jackson was Vice President and President of
Automotive at Sears Holdings Corporation from 2009 to 2010. Prior to that, he served as Senior
Vice President and board member of Booz,
18
Allen & Hamilton and Booz & Company, a strategy and
consulting firm, where he led the firms Global Automotive, Transportation and Industrials
Practice.
Susan M. Kreh, 49, was elected a Corporate Vice President in March 2007 and has served as
Vice President of Finance for the power solutions business since November 2009. Ms. Kreh served
as Corporate Controller from March 2007 to November 2009. Prior to joining the Company, Ms. Kreh
served 22 years at PPG Industries, Inc., including as Corporate Treasurer from January 2002
until March 2007.
R. Bruce McDonald, 51, was elected Executive Vice President in September 2006 and Chief
Financial Officer in May 2005. He previously served as Corporate Vice President from January
2002 to September 2006, Assistant Chief Financial Officer from October 2004 to May 2005 and
Corporate Controller from November 2001 to October 2004. Mr. McDonald joined the Company in
2001.
Alex A. Molinaroli, 52, was elected a Corporate Vice President in May 2004 and has served
as President of the power solutions business since January 2007. Previously, Mr. Molinaroli
served as Vice President and General Manager for North America Systems & the Middle East for the
building efficiency business and has held increasing levels of responsibility for controls
systems and services sales and operations. Mr. Molinaroli joined the Company in 1983.
C. David Myers, 48, was elected a Corporate Vice President and President of the building
efficiency business in December 2005, when he joined the Company in connection with the
acquisition of York International Corporation (York). At York, Mr. Myers served as Chief
Executive Officer from February 2004 to December 2005, President from June 2003 to December
2005, Executive Vice President and Chief Financial Officer from January 2003 to June 2003 and
Vice President and Chief Financial Officer from February 2000 to January 2003.
Jerome D. Okarma, 59, was elected Vice President, Secretary and General Counsel in November
2004 and was named a Corporate Vice President in September 2003. He previously served as
Assistant Secretary from 1990 to November 2004 and as Deputy General Counsel from June 2000 to
November 2004. Mr. Okarma joined the Company in 1989.
Stephen A. Roell, 61, was elected Chief Executive Officer effective in October 2007,
Chairman effective in January 2008, and President effective in May 2009. He was first elected to
the Board of Directors in October 2004 and served as Executive Vice President from October 2004
through September 2007. Mr. Roell previously served as Chief Financial Officer between 1991 and
May 2005, Senior Vice President from September 1998 to October 2004 and Vice President from 1991
to September 1998. Mr. Roell joined the Company in 1982.
Brian J. Stief, 55, was elected Vice President and Corporate Controller in July 2010 and
serves as the Companys Principal Accounting Officer. Prior to joining the Company, Mr. Stief
was a partner with PricewaterhouseCoopers LLP, which he joined in 1979 and became partner in
1989. He served several of the firms largest clients and also held various office managing
partner roles.
Jacqueline F. Strayer, 57, was elected Vice President, Corporate Communication in September
2008. She previously served as Vice President, Corporate Communications, for Arrow Electronics,
Inc. from 2004 to 2008. Prior to that, she held communication leadership positions at United
Technologies Corporation and GE Capital Corporation.
Frank A. Voltolina, 51, was elected a Corporate Vice President and Corporate Treasurer in
July 2003 when he joined the Company. Prior to joining the Company, Mr. Voltolina was Vice
President and Treasurer at ArvinMeritor, Inc.
There are no family relationships, as defined by the instructions to this item, among the Companys
executive officers.
All officers are elected for terms that expire on the date of the meeting of the Board of Directors
following the Annual Meeting of Shareholders or until their successors are elected and qualified.
19
PART II
|
|
|
ITEM 5 |
|
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES |
The shares of the Companys common stock are traded on the New York Stock Exchange under the
symbol JCI.
|
|
|
|
|
Number of Record Holders |
Title of Class |
|
as of September 30, 2011 |
Common Stock, $0.01 7/18 par value
|
|
43,340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Price Range |
|
|
Dividends |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
First Quarter |
|
$ |
29.95 - 40.15 |
|
|
$ |
23.62 - 28.34 |
|
|
$ |
0.16 |
|
|
$ |
0.13 |
|
Second Quarter |
|
|
36.95 - 42.42 |
|
|
|
27.21 - 33.60 |
|
|
|
0.16 |
|
|
|
0.13 |
|
Third Quarter |
|
|
35.37 - 42.53 |
|
|
|
25.56 - 35.77 |
|
|
|
0.16 |
|
|
|
0.13 |
|
Fourth Quarter |
|
|
25.91 - 42.92 |
|
|
|
26.07 - 31.14 |
|
|
|
0.16 |
|
|
|
0.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year |
|
$ |
25.91 - 42.92 |
|
|
$ |
23.62 - 35.77 |
|
|
$ |
0.64 |
|
|
$ |
0.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In September 2006, the Companys Board of Directors authorized a stock repurchase program to
acquire up to $200 million of the Companys outstanding common stock. Stock repurchases under this
program may be made through open market, privately negotiated transactions or otherwise at times
and in such amounts as Company management deems appropriate. The stock repurchase program does not
have an expiration date and may be amended or terminated by the Board of Directors at any time
without prior notice.
The Company entered into an Equity Swap Agreement, dated March 13, 2009, with Citibank, N.A.
(Citibank). The Company selectively uses equity swaps to reduce market risk associated with 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 Equity Swap Agreement moves in the opposite
direction of these liabilities, allowing the Company to fix a portion of the liabilities at a
stated amount.
In connection with the Equity Swap Agreement, Citibank may purchase unlimited shares of the
Companys stock in the market or in privately negotiated transactions. The Company disclaims that
Citibank is an affiliated purchaser of the Company as such term is defined in Rule 10b-18(a)(3)
under the Securities Exchange Act or that Citibank is purchasing any shares for the Company. The
Equity Swap Agreement has no stated expiration date. The net effect of the change in fair value of
the Equity Swap Agreement and the change in equity compensation liabilities was not material to the
Companys earnings for the three months ended September 30, 2011.
20
The following table presents information regarding the repurchase of the Companys common stock by
the Company as part of the publicly announced program and purchases of the Companys common stock
by Citibank in connection with the Equity Swap Agreement during the three months ended September
30, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
7/1/11 - 7/31/11
Purchases by Company
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
102,394,713 |
|
8/1/11 - 8/31/11
Purchases by Company
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
102,394,713 |
|
9/1/11 - 9/30/11
Purchases by Company
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
102,394,713 |
|
|
7/1/11 - 7/31/11
Purchases by Citibank |
|
|
|
|
|
|
|
|
|
|
|
|
|
NA |
8/1/11 - 8/31/11
Purchases by Citibank |
|
|
|
|
|
|
|
|
|
|
|
|
|
NA |
9/1/11 - 9/30/11
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. |
21
The following information in Item 5 is not deemed to be soliciting material or to be filed
with the SEC or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934
(Exchange Act) or to the liabilities of Section 18 of the Exchange Act, and will not be deemed to
be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act,
except to the extent the Company specifically incorporates it by reference into such a filing.
The line graph below compares the cumulative total shareholder return on our Common Stock with the
cumulative total return of companies on the Standard & Poors (S&Ps) 500 Stock Index and companies
in our Diversified Industrials Peer Group.* This graph assumes the investment of $100 on September
30, 2006 and the reinvestment of all dividends since that date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPANY INDEX |
|
|
Sep06 |
|
|
|
Sep07 |
|
|
|
Sep08 |
|
|
|
Sep09 |
|
|
|
Sep10 |
|
|
|
Sep11 |
|
|
|
Johnson Controls, Inc. |
|
|
|
100 |
|
|
|
|
166.42 |
|
|
|
|
130.25 |
|
|
|
|
113.35 |
|
|
|
|
137.82 |
|
|
|
|
121.27 |
|
|
|
Diversified Industrials Peer Group |
|
|
|
100 |
|
|
|
|
132.87 |
|
|
|
|
98.99 |
|
|
|
|
101.03 |
|
|
|
|
123.91 |
|
|
|
|
115.49 |
|
|
|
S&P 500 Comp-Ltd. |
|
|
|
100 |
|
|
|
|
116.83 |
|
|
|
|
91.16 |
|
|
|
|
84.86 |
|
|
|
|
93.48 |
|
|
|
|
94.55 |
|
|
|
|
|
|
* |
|
The JCI Diversified Industrials Peer Group includes: Danaher Corporation, Dover Corporation,
Eaton Corporation, Emerson Electric Corporation. Honeywell International Inc., Ingersol Rand
Plc., Illinois Tool Works Inc., ITT Corporation, 3M Company, Textron Inc., and United
Technologies Corporation. |
The Companys transfer agents contact information is as follows:
Wells Fargo Bank, N.A.
Shareowner Services Department
P.O. Box 64856
St. Paul, MN 55164-0856
(877) 602-7397
22
ITEM 6 SELECTED FINANCIAL DATA
The following selected financial data reflects the results of operations, financial position data,
and common share information for the fiscal years ended September 30, 2007 through September 30,
2011 (in millions, except per share data and number of employees and shareholders).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30, |
|
|
2011 |
|
2010 |
|
2009 |
|
2008 |
|
2007 |
OPERATING RESULTS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
40,833 |
|
|
$ |
34,305 |
|
|
$ |
28,497 |
|
|
$ |
38,062 |
|
|
$ |
34,624 |
|
Segment income (2) |
|
|
2,285 |
|
|
|
1,933 |
|
|
|
262 |
|
|
|
2,077 |
|
|
|
1,884 |
|
Income (loss) attributable to Johnson Controls,
Inc. from continuing operations |
|
|
1,624 |
|
|
|
1,491 |
|
|
|
(338 |
) |
|
|
979 |
|
|
|
1,295 |
|
Net income (loss) attributable
to Johnson Controls, Inc. |
|
|
1,624 |
|
|
|
1,491 |
|
|
|
(338 |
) |
|
|
979 |
|
|
|
1,252 |
|
Earnings (loss) per share
from continuing operations (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
2.40 |
|
|
$ |
2.22 |
|
|
$ |
(0.57 |
) |
|
$ |
1.65 |
|
|
$ |
2.19 |
|
Diluted |
|
|
2.36 |
|
|
|
2.19 |
|
|
|
(0.57 |
) |
|
|
1.63 |
|
|
|
2.16 |
|
Earnings (loss) per share (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
2.40 |
|
|
$ |
2.22 |
|
|
$ |
(0.57 |
) |
|
$ |
1.65 |
|
|
$ |
2.12 |
|
Diluted |
|
|
2.36 |
|
|
|
2.19 |
|
|
|
(0.57 |
) |
|
|
1.63 |
|
|
|
2.09 |
|
Return on average shareholders equity
attributable to Johnson Controls, Inc. (3) |
|
|
15 |
% |
|
|
16 |
% |
|
|
-4 |
% |
|
|
11 |
% |
|
|
16 |
% |
Capital expenditures |
|
$ |
1,325 |
|
|
$ |
777 |
|
|
$ |
647 |
|
|
$ |
807 |
|
|
$ |
828 |
|
Depreciation and amortization |
|
|
731 |
|
|
|
691 |
|
|
|
745 |
|
|
|
783 |
|
|
|
732 |
|
Number of employees |
|
|
162,000 |
|
|
|
137,000 |
|
|
|
130,000 |
|
|
|
140,000 |
|
|
|
140,000 |
|
FINANCIAL POSITION |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital (4) |
|
$ |
1,589 |
|
|
$ |
919 |
|
|
$ |
1,147 |
|
|
$ |
1,225 |
|
|
$ |
1,441 |
|
Total assets |
|
|
29,676 |
|
|
|
25,743 |
|
|
|
24,088 |
|
|
|
24,987 |
|
|
|
24,105 |
|
Long-term debt |
|
|
4,533 |
|
|
|
2,652 |
|
|
|
3,168 |
|
|
|
3,201 |
|
|
|
3,255 |
|
Total debt |
|
|
5,146 |
|
|
|
3,389 |
|
|
|
3,966 |
|
|
|
3,944 |
|
|
|
4,418 |
|
Shareholders equity attributable
to Johnson Controls, Inc. |
|
|
11,042 |
|
|
|
10,071 |
|
|
|
9,100 |
|
|
|
9,406 |
|
|
|
8,873 |
|
Total debt to total capitalization (5) |
|
|
32 |
% |
|
|
25 |
% |
|
|
30 |
% |
|
|
30 |
% |
|
|
33 |
% |
Net book value per share (1) (6) |
|
$ |
16.23 |
|
|
$ |
14.95 |
|
|
$ |
13.56 |
|
|
$ |
15.83 |
|
|
$ |
14.94 |
|
COMMON SHARE INFORMATION (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per share |
|
$ |
0.64 |
|
|
$ |
0.52 |
|
|
$ |
0.52 |
|
|
$ |
0.52 |
|
|
$ |
0.44 |
|
Market prices |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
$ |
42.92 |
|
|
$ |
35.77 |
|
|
$ |
30.01 |
|
|
$ |
44.46 |
|
|
$ |
43.07 |
|
Low |
|
|
25.91 |
|
|
|
23.62 |
|
|
|
8.35 |
|
|
|
26.00 |
|
|
|
23.84 |
|
Weighted average shares (in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
677.7 |
|
|
|
672.0 |
|
|
|
595.3 |
|
|
|
593.1 |
|
|
|
590.6 |
|
Diluted |
|
|
689.9 |
|
|
|
682.5 |
|
|
|
595.3 |
|
|
|
601.4 |
|
|
|
599.2 |
|
Number of shareholders |
|
|
43,340 |
|
|
|
44,627 |
|
|
|
46,460 |
|
|
|
47,543 |
|
|
|
47,810 |
|
23
|
|
|
(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) |
|
Segment income is calculated as income from continuing operations before income taxes and
noncontrolling interests excluding net financing charges, debt conversion costs and
significant restructuring costs. |
|
(3) |
|
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
and $495 million of significant restructuring costs in fiscal year 2009 and 2008,
respectively. |
|
(4) |
|
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. |
|
(5) |
|
Total debt to total capitalization represents total debt divided by the sum of total debt and
shareholders equity attributable to Johnson Controls, Inc. |
|
(6) |
|
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. |
ITEM 7 MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF
OPERATIONS
General
The Company operates in three primary businesses: building efficiency, automotive experience and
power solutions. Building efficiency provides facility systems, services and workplace solutions
including comfort, energy and security management for the residential and non-residential buildings
markets. Automotive experience designs and manufactures interior systems and products for passenger
cars and light trucks, including vans, pick-up trucks and sport/crossover utility vehicles. Power
solutions designs and manufactures automotive batteries for the replacement and original equipment
markets.
This discussion summarizes the significant factors affecting the consolidated operating results,
financial condition and liquidity of the Company for the three-year period ended September 30,
2011. This discussion should be read in conjunction with Item 8, the consolidated financial
statements and the notes to consolidated financial statements.
Executive Overview
In fiscal 2011, the Company recorded net sales of $40.8 billion, a 19% increase from the prior
year. Net income attributable to Johnson Controls, Inc. was $1.6 billion, a 9% increase from the
prior year. The increase is primarily the result of increased industry production volumes in the
automotive markets and the impact of acquisitions. The Company experienced market share gains and
higher segment income in all three businesses. The Company continues to introduce new and enhanced
technology applications in all businesses and markets served, while at the same time improving the
quality of its products.
Building efficiency business net sales and segment income increased 16% and 6%, respectively,
compared to the prior year primarily due to higher sales volumes in all segments, strong emerging
market growth and the favorable impact of foreign currency translation.
The automotive experience business net sales and segment income increased 21% and 29%,
respectively, compared to the prior year primarily due to higher automobile production in all
segments, the impact of acquisitions and the favorable impact of foreign currency translation.
Net sales and segment income for the power solutions business increased by 20% and 21%,
respectively, compared to the prior year primarily due to increased demand and higher unit prices
resulting from increases in the cost of lead.
Compared to September 30, 2010, the Companys overall debt increased by $1.8 billion, increasing
the total debt to capitalization ratio to 32% at September 30, 2011 from 25% at September 30, 2010.
24
Outlook
In fiscal 2012, the Company anticipates that net sales will grow to approximately $44.2 billion, an
increase of 8% from fiscal 2011 net sales, and that earnings will increase to approximately $2.85 -
$3.00 per diluted share. Sales and margin improvements are expected in all three businesses in
fiscal 2012. The Company expects higher 2012 automotive production in North America and China, with
relatively flat European production versus fiscal 2011. The Company forecasts that the global
building efficiency market will improve slightly in fiscal 2012 as strong growth in the emerging
markets, especially China and the Middle East, offset softness in mature geographic markets.
The Company expects building efficiency revenues to increase by 9% 11% in fiscal 2012 due to
strong backlogs, a moderate improvement in service revenues, and the continued growth of its energy
solutions and global workplace solutions businesses. Segment margins are expected to increase to
5.6% 5.8% led by the benefits of global volume growth and improvements in the service business.
The Company expects that the higher margins will be partially offset by investments in growth
initiatives including a sales force expansion, information technology investments and costs
associated with the introduction of new products. The Company recently introduced Panoptix, a suite
of cloud-hosted building efficiency applications that make it easy to collect and manage data from
disparate building systems and other data sources.
The Company forecasts approximately 6% revenue growth in fiscal 2012 by its automotive experience
business, reflecting higher global production volumes and approximately $1.4 billion in new program
launches, partially offset by the negative impact of a weaker euro. Excluding currency, revenues
are expected to increase 9%. In China, inclusive of non-consolidated joint ventures, the Company
expects total revenues to increase by 21% to approximately $4.8 billion. Segment margins are
expected to improve to 5.3% 5.5% in fiscal 2012 as a result of the higher volumes and the full
year benefit of acquisitions completed in fiscal 2011. In Europe, margins are expected to improve
significantly as the Company continues to reduce operational and launch related inefficiencies.
Power solutions fiscal 2012 revenues are expected to increase 11% 13% due to higher volumes
across all regions resulting from market share gains and the full year impact of production at the
Changxing plant in China. Segment margins are expected to increase to 13.5% 13.9% reflecting the
benefits of vertical integration for the recycling of lead and the start of a product mix shift
toward absorbent glass mat (AGM) battery technology. The higher segment margin from these factors
will be partially offset by expenses associated with the consolidation of its hybrid battery
business.
Segment Analysis
Management evaluates the performance of its business units based primarily on segment income, which
is defined as income from continuing operations before income taxes and noncontrolling interests
excluding net financing charges, debt conversion costs and significant restructuring costs.
Effective October 1, 2010, the building efficiency business unit reorganized its management
reporting structure to reflect its current business activities. Historical information has been
revised to reflect the new building efficiency reportable segment structure and certain building
efficiency cost allocation methodology changes. Refer to Note 18, Segment Information, of the
notes to consolidated financial statements for further information.
FISCAL YEAR 2011 COMPARED TO FISCAL YEAR 2010
Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
September 30, |
|
|
(in millions) |
|
2011 |
|
2010 |
|
Change |
Net sales |
|
$ |
40,833 |
|
|
$ |
34,305 |
|
|
|
19 |
% |
Segment income |
|
|
2,285 |
|
|
|
1,933 |
|
|
|
18 |
% |
|
|
|
The $6.5 billion increase in consolidated net sales was primarily due to higher sales in
the automotive experience business ($3.1 billion) as a result of increased industry
production levels in all segments and incremental sales due to business acquisitions;
higher sales in the building efficiency business ($1.7 billion)
as a result of higher sales
in all segments; higher sales in the power solutions business ($0.9 billion) |
25
|
|
|
reflecting
higher sales volumes, the impact of higher lead costs on pricing and sales associated with
a prior year business acquisition; and the favorable impact of foreign currency translation
($0.8 billion). |
|
|
|
|
Excluding the favorable impact of foreign currency translation, consolidated net sales
increased 17% as compared to the prior year. |
|
|
|
|
The $352 million increase in segment income was primarily due to higher volumes in the
automotive experience, building efficiency and power solutions businesses; favorable
pricing and product mix net of lead and other commodity costs in the power solutions
business; operating income of current year acquisitions in the automotive experience Europe
segment; and the favorable impact of foreign currency translation ($45 million). These
factors were partially offset by higher selling, general and administrative expenses net of
an automotive experience legal settlement award; unfavorable margin rates in the building
efficiency business; and the negative impact of the earthquake in Japan and related events.
Fiscal 2011 segment income includes a gain on acquisition of a partially-owned affiliate
net of acquisition costs, related purchase accounting adjustments and a partially-owned
affiliates restatement of prior period income in the power solutions business ($37
million); costs related to business acquisitions in the automotive experience Europe
segment ($64 million); and restructuring costs ($43 million). Fiscal 2010 segment income
includes fixed asset impairment charges recorded in the automotive experience Asia segment
($22 million) and a gain on acquisition of a power solutions Korean partially-owned
affiliate net of acquisition costs and related purchase accounting adjustments ($37
million). |
|
|
|
|
Excluding the favorable impact of foreign currency translation, consolidated segment
income increased 16% as compared to the prior year. |
Building Efficiency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
|
|
|
|
|
Segment Income |
|
|
|
|
|
|
for the Year Ended |
|
|
|
|
|
|
for the Year Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
September 30, |
|
|
|
|
(in millions) |
|
2011 |
|
|
2010 |
|
|
Change |
|
|
2011 |
|
|
2010 |
|
|
Change |
|
North America systems |
|
$ |
2,343 |
|
|
$ |
2,142 |
|
|
|
9 |
% |
|
$ |
239 |
|
|
$ |
206 |
|
|
|
16 |
% |
North America service |
|
|
2,305 |
|
|
|
2,127 |
|
|
|
8 |
% |
|
|
113 |
|
|
|
117 |
|
|
|
-3 |
% |
Global workplace solutions |
|
|
4,153 |
|
|
|
3,288 |
|
|
|
26 |
% |
|
|
16 |
|
|
|
40 |
|
|
|
-60 |
% |
Asia |
|
|
1,840 |
|
|
|
1,422 |
|
|
|
29 |
% |
|
|
249 |
|
|
|
178 |
|
|
|
40 |
% |
Other |
|
|
4,252 |
|
|
|
3,823 |
|
|
|
11 |
% |
|
|
99 |
|
|
|
132 |
|
|
|
-25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
14,893 |
|
|
$ |
12,802 |
|
|
|
16 |
% |
|
$ |
716 |
|
|
$ |
673 |
|
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales:
|
|
|
The increase in North America systems was primarily due to higher volumes of equipment
and controls systems in the commercial construction and replacement markets ($191 million)
and the favorable impact from foreign currency translation ($10 million). |
|
|
|
|
The increase in North America service was primarily due to higher volumes, mainly driven
by energy solutions and truck-based business ($120 million), incremental sales due to a
prior year business acquisition ($46 million) and the favorable impact of foreign currency
translation ($12 million). |
|
|
|
|
The increase in global workplace solutions was primarily due to a net increase in
services to new and existing customers ($709 million) and the favorable impact of foreign
currency translation ($156 million). |
|
|
|
|
The increase in Asia was primarily due to higher volumes of equipment and controls
systems ($255 million), the favorable impact of foreign currency translation ($98 million)
and higher service volumes including the negative impact of the Japan earthquake and
related events ($65 million). |
|
|
|
|
The increase in other was primarily due to higher volumes in the Middle East ($198
million), Latin America ($107 million) and Europe ($39 million), and the favorable impact
of foreign currency translation ($85 million). |
26
Segment Income:
|
|
|
The increase in North America systems was primarily due to higher volumes ($38 million),
favorable margin rates ($24 million), prior year reserves for existing customers ($13
million) and the favorable impact of foreign currency translation ($1 million), partially
offset by higher selling, general and administrative expenses ($43 million). |
|
|
|
|
The decrease in North America service was primarily due to unfavorable mix and margin
rates ($79 million) and higher selling, general and administrative expenses ($4 million),
partially offset by prior year inventory adjustments and information technology
implementation costs ($55 million), higher volumes ($25 million) and the favorable impact
of foreign currency translation ($1 million). |
|
|
|
|
The decrease in global workplace solutions was primarily due to unfavorable margin rates
($41 million) and higher selling, general and administrative expenses ($37 million),
partially offset by higher volumes ($49 million) and the favorable impact of foreign
currency translation ($5 million). |
|
|
|
|
The increase in Asia was primarily due to higher volumes ($82 million) and the favorable
impact of foreign currency translation ($15 million), partially offset by higher selling,
general and administrative expenses ($27 million). |
|
|
|
|
The decrease in other was primarily due to higher selling, general and administrative
expenses ($43 million), restructuring costs ($35 million), non-recurring charges related to
South America indirect taxes ($24 million), unfavorable margin rates ($16 million) and
distribution business costs ($11 million), partially offset by higher volumes ($75
million), higher equity income ($18 million) and the favorable impact of foreign currency
translation ($2 million). |
Automotive Experience
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
|
|
|
|
|
Segment Income |
|
|
|
|
|
|
for the Year Ended |
|
|
|
|
|
|
for the Year Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
September 30, |
|
|
|
|
(in millions) |
|
2011 |
|
|
2010 |
|
|
Change |
|
|
2011 |
|
|
2010 |
|
|
Change |
|
North America |
|
$ |
7,431 |
|
|
$ |
6,765 |
|
|
|
10 |
% |
|
$ |
404 |
|
|
$ |
379 |
|
|
|
7 |
% |
Europe |
|
|
10,267 |
|
|
|
8,019 |
|
|
|
28 |
% |
|
|
114 |
|
|
|
105 |
|
|
|
9 |
% |
Asia |
|
|
2,367 |
|
|
|
1,826 |
|
|
|
30 |
% |
|
|
243 |
|
|
|
107 |
|
|
|
127 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
20,065 |
|
|
$ |
16,610 |
|
|
|
21 |
% |
|
$ |
761 |
|
|
$ |
591 |
|
|
|
29 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales:
|
|
|
The increase in North America was primarily due to higher volumes to the Companys major
OEM customers ($779 million), incremental sales due to business acquisitions ($129 million)
and net favorable commercial settlements and pricing ($21 million), partially offset by the
negative impact of the Japan earthquake and related events ($263 million). |
|
|
|
|
The increase in Europe was primarily due to higher volumes and new customer awards
including the negative impact of the Japan earthquake and related events ($1.1 billion),
incremental sales due to business acquisitions ($855 million) and the favorable impact of
foreign currency translation ($295 million), partially offset by net unfavorable commercial
settlements and pricing ($37 million). |
|
|
|
|
The increase in Asia was primarily due to higher volumes and new customer awards
including the negative impact of the Japan earthquake and related events ($455 million),
the favorable impact of foreign currency translation ($88 million) and incremental sales
due to business acquisitions ($13 million), partially offset by unfavorable commercial
settlements and pricing ($15 million). |
Segment Income:
|
|
|
The increase in North America was primarily due to higher volumes ($160 million), higher
equity income ($6 million) and net favorable commercial settlements and pricing ($5
million), partially offset by the negative impact of the earthquake in Japan and related
events ($61 million), higher selling, general and administrative expenses net of a legal
settlement award ($48 million), higher engineering expenses ($27 million) and higher
purchasing costs ($8 million). |
27
|
|
|
The increase in Europe was primarily due to higher volumes including the negative impact
of the earthquake in Japan and related events ($95 million), operating income of current
year acquisitions ($75 million), lower selling, general and administrative expenses ($14
million) and the favorable impact of foreign currency translation ($9 million), partially
offset by costs related to business acquisitions ($64 million), higher operating costs ($58
million), unfavorable commercial settlements and pricing ($34 million), higher engineering
expenses ($22 million) and higher purchasing costs ($9 million). |
|
|
|
|
The increase in Asia was primarily due to higher volumes including the negative impact
of the earthquake in Japan and related events ($84 million), higher equity income mainly in
China ($55 million), prior year asset impairment charges in Japan ($22 million), lower
purchasing costs ($19 million), lower operating costs ($13 million) and the favorable
impact of foreign currency translation ($4 million), partially offset by higher selling,
general and administrative expenses ($34 million), unfavorable pricing ($16 million) and
higher engineering expenses ($12 million). |
Power Solutions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
September 30, |
|
|
(in millions) |
|
2011 |
|
2010 |
|
Change |
Net sales |
|
$ |
5,875 |
|
|
$ |
4,893 |
|
|
|
20 |
% |
Segment income |
|
|
808 |
|
|
|
669 |
|
|
|
21 |
% |
|
|
|
Net sales increased primarily due to the impact of higher lead costs on pricing ($287
million), higher sales volumes including the negative impact of the earthquake in Japan and
related events ($283 million), sales associated with a prior year business acquisition
($261 million), favorable price/product mix ($81 million) and the favorable impact of
foreign currency translation ($70 million). |
|
|
|
|
Segment income increased primarily due to favorable pricing and product mix net of lead
and other commodity costs ($145 million); higher sales volumes ($56 million); gain on
acquisition of a partially-owned affiliate net of acquisition costs, related purchase
accounting adjustments and a partially-owned equity affiliates restatement of prior period
income ($37 million); income associated with a prior year business acquisition ($30
million); and the favorable impact of foreign currency translation ($8 million); partially
offset by higher operating and transportation costs ($47 million); higher selling, general
and administrative expenses ($44 million); prior year net gain on acquisition of a Korean
partially-owned affiliate ($37 million); and lower equity income ($8 million). |
Net Financing Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
September 30, |
|
|
(in millions) |
|
2011 |
|
2010 |
|
Change |
Net financing charges |
|
$ |
174 |
|
|
$ |
170 |
|
|
|
2 |
% |
|
|
The increase in net financing charges was primarily due to higher debt levels partially
offset by lower interest rates in fiscal 2011. |
Provision for Income Taxes
The effective rate is below the U.S. statutory rate due to continuing global tax planning initiatives, income in certain
non-U.S. jurisdictions with a rate of tax lower than the U.S. statutory tax rate and certain discrete period items.
Valuation Allowances
The Company reviews its deferred tax asset valuation allowances on a quarterly basis, or whenever
events or changes in circumstances indicate that a review is required. In determining the
requirement for a valuation
allowance, the historical and projected financial results of the legal
entity or consolidated group recording the net deferred tax asset are considered, along with any
other positive or negative evidence. Since future financial results may differ from previous
estimates, periodic adjustments to the Companys valuation allowances may be necessary.
28
In fiscal 2011, the Company recorded an overall decrease to its valuation allowances of $20
million primarily due to a $30 million discrete period income tax adjustment in the fourth
quarter. In the fourth quarter of fiscal 2011, the Company performed an analysis related to the
realizability of its worldwide deferred tax assets. As a result, and after considering tax
planning initiatives and other positive and negative evidence, the Company determined that it was
more likely than not that the deferred tax assets primarily within Denmark, Italy, automotive
experience in Korea and automotive experience in the United Kingdom would be utilized. Therefore,
the Company released a net $30 million of valuation allowances in the three month period ended
September 30, 2011.
In fiscal 2010, the Company recorded an overall decrease to its valuation allowances of $87
million primarily due to a $111 million discrete period income tax adjustment. In the fourth
quarter of fiscal 2010, the Company performed an analysis related to the realizability of its
worldwide deferred tax assets. As a result, and after considering tax planning initiatives and
other positive and negative evidence, the Company determined that it was more likely than not that
the deferred tax assets primarily within Mexico would be utilized. Therefore, the Company released
$39 million of valuation allowances in the three month period ended September 30, 2010. Further,
the Company determined that it was more likely than not that the deferred tax assets would not be
utilized in selected entities in Europe. Therefore, the Company recorded $14 million of valuation
allowances in the three month period ended September 30, 2010. To the extent the Company improves
its underlying operating results in these entities, these valuation allowances, or a portion
thereof, could be reversed in future periods.
In the third quarter of fiscal 2010, the Company determined that it was more likely than not that a
portion of the deferred tax assets within the Slovakia automotive entity would be utilized.
Therefore, the Company released $13 million of valuation allowances in the three month period ended
June 30, 2010.
In the first quarter of fiscal 2010, the Company determined that it was more likely than not that a
portion of the deferred tax assets within the Brazil automotive entity would be utilized.
Therefore, the Company released $69 million of valuation allowances. This was comprised of a $93
million decrease in income tax expense offset by a $24 million reduction in cumulative translation
adjustments.
In the fourth quarter of fiscal 2010, the Company increased the valuation allowances by $20
million, which was substantially offset by a decrease in its reserves for uncertain tax positions
in a similar amount. These adjustments were based on a review of tax return filing positions taken
in these jurisdictions and the established reserves.
It is reasonably possible that over the next 12 months, valuation allowances recorded against
deferred tax assets in certain jurisdictions of up to $50 million may be adjusted.
Uncertain Tax Positions
The Company is subject to income taxes in the U.S. and numerous non-U.S. jurisdictions. Judgment
is required in determining its worldwide provision for income taxes and recording the related
assets and liabilities. In the ordinary course of the Companys business, there are many
transactions and calculations where the ultimate tax determination is uncertain. The Company is
regularly under audit by tax authorities.
Based on published case law in a non-U.S. jurisdiction and the settlement of a tax audit during
the third quarter of fiscal 2010, the Company released net $38 million of reserves for uncertain
tax positions, including interest and penalties.
As a result of certain events related to prior year tax planning initiatives during the first
quarter of fiscal 2010, the Company increased the reserve for uncertain tax positions by $31
million, including $26 million of interest and penalties.
In the fourth quarter of fiscal 2010, the Company decreased its reserves for uncertain tax
positions by $20 million, which was substantially offset by an increase in its valuation allowances
in a similar amount. These adjustments were based on a review of tax filing positions taken in
jurisdictions with valuation allowances as indicated above.
The Companys federal income tax returns and certain non-U.S. income tax returns for various
fiscal years remain under various stages of audit by the Internal Revenue Service and respective
non-U.S. tax authorities. Although the outcome of tax audits is always uncertain, management
believes that it has appropriate support for the positions
taken on its tax returns and that its
annual tax provisions included amounts sufficient to pay assessments, if any, which may be
proposed by the taxing authorities. At September 30, 2011, the Company had recorded a liability
for its best estimate of the probable loss on certain of its tax positions, the majority of which
is included in other
29
noncurrent liabilities in the consolidated statements of financial position.
Nonetheless, the amounts ultimately paid, if any, upon resolution of the issues raised by the
taxing authorities, may differ materially from the amounts accrued for each year.
It is reasonably possible that certain tax examinations, appellate proceedings and/or tax
litigation will conclude within the next 12 months, the impact of which could be up to a $100
million adjustment to tax expense.
Impacts of Tax Legislation and Change in Statutory Tax Rates
During the fiscal year ended September 30, 2011, tax legislation was adopted in various
jurisdictions. None of these changes are expected to have a material impact on the Companys
consolidated financial condition, results of operations or cash flows.
On March 23, 2010, the U.S. President signed into law comprehensive health care reform legislation
under the Patient Protection and Affordable Care Act (HR3590). Included among the major provisions
of the law is a change in the tax treatment of a portion of Medicare Part D medical payments. The
Company recorded a noncash tax charge of approximately $18 million in the second quarter of fiscal
year 2010 to reflect the impact of this change. In the fourth quarter of fiscal 2010, the amount
decreased by $2 million resulting in an overall impact of $16 million.
Income Attributable to Noncontrolling Interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
September 30, |
|
|
(in millions) |
|
2011 |
|
2010 |
|
Change |
Income attributable to
noncontrolling interests |
|
$ |
117 |
|
|
$ |
75 |
|
|
|
56 |
% |
|
|
The increase in income attributable to noncontrolling interests was primarily due to higher
earnings at certain automotive experience partially-owned affiliates in North America and Asia
and a power solutions partially-owned affiliate. |
Net Income Attributable to Johnson Controls, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
September 30, |
|
|
(in millions) |
|
2011 |
|
2010 |
|
Change |
Net income attributable to
Johnson Controls, Inc. |
|
$ |
1,624 |
|
|
$ |
1,491 |
|
|
|
9 |
% |
|
|
The increase in net income attributable to Johnson Controls, Inc. was primarily due to
higher volumes in the automotive experience, building efficiency and power solutions
businesses; favorable pricing and product mix net of lead and other commodity costs in the
power solutions business; operating income of current year acquisitions in the automotive
experience Europe segment; and the favorable impact of foreign currency translation. These
factors were partially offset by higher selling, general and administrative expenses net of an
automotive experience legal settlement award; unfavorable margin rates in the building
efficiency business; the negative impact of the earthquake in Japan and related events; an
increase in the provision for income taxes; and higher income attributable to noncontrolling
interests. Fiscal 2011 net income attributable to Johnson Controls, Inc. includes a gain on
acquisition of a partially-owned affiliate net of acquisition costs, related purchase
accounting adjustments and a partially-owned affiliates restatement of prior period income in
the power solutions business; costs related to business acquisitions in the automotive
experience Europe segment; and restructuring costs. Fiscal 2010 net income attributable to
Johnson Controls, Inc. includes fixed asset impairment charges recorded in the automotive
experience Asia segment and a gain on acquisition of a power solutions Korean partially-owned
affiliate net of acquisition costs and related purchase accounting
adjustments. Fiscal 2011
diluted earnings per share was $2.36 compared to the prior years diluted earnings per share
of $2.19.
|
30
FISCAL YEAR 2010 COMPARED TO FISCAL YEAR 2009
Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
September 30, |
|
|
(in millions) |
|
2010 |
|
2009 |
|
Change |
Net sales |
|
$ |
34,305 |
|
|
$ |
28,497 |
|
|
|
20 |
% |
Segment income |
|
|
1,933 |
|
|
|
262 |
|
|
|
|
* |
|
|
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. |
|
|
|
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 other segment ($152 million), incremental
warranty charges recorded in the prior year in the building efficiency other 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 partially-owned affiliate 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). |
Building Efficiency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
% |
|
$ |
206 |
|
|
$ |
259 |
|
|
|
-20 |
% |
North America service |
|
|
2,127 |
|
|
|
2,168 |
|
|
|
-2 |
% |
|
|
117 |
|
|
|
188 |
|
|
|
-38 |
% |
Global workplace solutions |
|
|
3,288 |
|
|
|
2,832 |
|
|
|
16 |
% |
|
|
40 |
|
|
|
58 |
|
|
|
-31 |
% |
Asia |
|
|
1,422 |
|
|
|
1,293 |
|
|
|
10 |
% |
|
|
178 |
|
|
|
170 |
|
|
|
5 |
% |
Other |
|
|
3,823 |
|
|
|
3,978 |
|
|
|
-4 |
% |
|
|
132 |
|
|
|
(278 |
) |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,802 |
|
|
$ |
12,493 |
|
|
|
2 |
% |
|
$ |
673 |
|
|
$ |
397 |
|
|
|
70 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales:
|
|
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). |
31
|
|
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 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 increase in Asia was primarily due to favorable impact of foreign currency
translation ($56 million), higher volumes of equipment and controls systems ($39 million)
and higher service volumes ($34 million). |
|
|
|
The decrease in other was primarily due to lower volumes in Europe ($290 million), the
Middle East ($33 million) and other business areas ($11 million), partially offset by
improvement in the U.S. residential replacement markets for unitary products ($96 million)
and the favorable impact of foreign currency translation ($83 million). |
Segment Income:
|
|
The decrease in North America systems was primarily due to lower volumes ($17 million),
unfavorable margin rates ($15 million), reserves for existing customers ($13 million) and
higher selling, general and administrative expenses ($8 million), partially offset by the
favorable impact of foreign currency translation ($3 million). |
|
|
|
The decrease in North America service was primarily due to information technology
implementation costs and inventory adjustments ($55 million), lower volumes in truck-based
services ($18 million), higher selling, general and administrative expenses ($6 million),
partially offset by favorable margin rates ($6 million) and the favorable impact of foreign
currency translation ($2 million). |
|
|
|
The decrease in global workplace solutions was primarily due to higher selling, general,
and administrative expenses ($27 million) primarily related to business development
investments and unfavorable margin rates ($24 million), partially offset by 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). |
|
|
|
The increase in Asia was primarily due to higher sales volumes ($19 million), favorable
margin rates ($14 million) and the favorable impact of foreign currency translation ($4
million), partially offset by higher selling, general and administrative expenses ($29
million). |
|
|
|
The increase in other was primarily due to favorable margin rates ($218 million), prior
year impairment charges recorded on an equity investment ($152 million), prior year
incremental warranty charges ($105 million) and prior year inventory related charges ($20
million), partially offset by higher selling, general and administrative expenses ($66
million) primarily related to investments in emerging markets and increased engineering
spending, and lower volumes ($19 million). |
Automotive Experience
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales:
|
|
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). |
32
|
|
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). |
Segment Income:
|
|
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 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). |
Power Solutions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 partially-owned affiliate net of acquisition costs and related
purchase accounting adjustments ($37 million) as discussed in Note 2, Acquisitions, of
the notes to consolidated 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, of the notes to consolidated financial statements. Partially offsetting these
factors were higher selling, general and administrative costs ($46 million). |
Restructuring Costs
To better align the Companys cost structure with global automotive market conditions, the Company
committed to a restructuring plan (2009 Plan) in the second quarter of fiscal 2009 and recorded a
$230 million restructuring charge. The restructuring charge related to cost reduction initiatives
in the Companys automotive experience, building efficiency and power solutions businesses and
included workforce reductions and plant consolidations. The Company expects to substantially
complete the 2009 Plan by the end of 2011. The automotive-related restructuring actions targeted
excess manufacturing capacity resulting from lower industry production in the European, North
American and Japanese automotive markets. The restructuring actions in building efficiency were
primarily in Europe where the Company is centralizing certain functions and rebalancing its
resources to target the geographic markets with the greatest potential growth. Power solutions
actions focused on optimizing its manufacturing capacity as a result of lower overall demand for
original equipment batteries resulting from lower vehicle production levels.
33
Since the announcement of the 2009 Plan in March 2009, the Company has experienced lower employee
severance and termination benefit cash payouts than previously calculated for automotive
experience in Europe of approximately $70 million, of which $42 million was identified in fiscal
year 2010, due to favorable severance negotiations and the decision to not close previously
planned plants in response to increased customer demand. The underspend of the initial 2009 Plan
reserves has been committed for additional costs incurred as part of power solutions and
automotive experience Europe and North Americas additional cost reduction initiatives.
Refer to Note 15, Restructuring Costs, of the notes to consolidated financial statements for
further disclosure related to the Companys restructuring plans.
Net Financing Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. |
Provision for Income Taxes
The effective rate is below the U.S. statutory rate due to continuing global tax planning initiatives,
income in certain non-U.S. jurisdictions with a rate of tax lower than the U.S. statutory tax rate and certain discrete period items.
Valuation Allowances
The Company reviews its deferred tax asset valuation allowances on a quarterly basis, or whenever
events or changes in circumstances indicate that a review is required. In determining the
requirement for a valuation allowance, the historical and projected financial results of the legal
entity or consolidated group recording the net deferred tax asset are considered, along with any
other positive or negative evidence. Since future financial results may differ from previous
estimates, periodic adjustments to the Companys valuation allowances may be necessary.
In fiscal 2010, the Company recorded an overall decrease to its valuation allowances of $87
million primarily due to a $111 million discrete period tax adjustment.
In the fourth quarter of fiscal 2010, the Company performed an analysis related to the
realizability of its worldwide deferred tax assets. As a result, and after considering tax
planning initiatives and other positive and negative evidence, the Company determined that it was
more likely than not that the deferred tax assets primarily within Mexico would be utilized.
Therefore, the Company released $39 million of valuation allowances in the three month period
ended September 30, 2010. Further, the Company determined that it was more likely than not that
the deferred tax assets would not be utilized in selected entities in Europe. Therefore, the
Company recorded $14 million of valuation allowances in the three month period ended September 30,
2010. To the extent the Company improves its underlying operating results in these entities, these
valuation allowances, or a portion thereof, could be reversed in future periods.
In the third quarter of fiscal 2010, the Company determined that it was more likely than not that a
portion of the deferred tax assets within the Slovakia automotive entity would be utilized.
Therefore, the Company released $13 million of valuation allowances in the three month period ended
June 30, 2010.
In the first quarter of fiscal 2010, the Company determined that it was more likely than not that a
portion of the deferred tax assets within the Brazil automotive entity would be utilized.
Therefore, the Company released $69 million of valuation allowances. This was comprised of a $93
million decrease in income tax expense offset by a $24 million reduction in cumulative translation
adjustments.
In the fourth quarter of fiscal 2010, the Company increased the valuation allowances by $20
million, which was substantially offset by a decrease in its reserves for uncertain tax positions
in a similar amount. These adjustments were based on a review of tax return filing positions taken
in these jurisdictions and the established reserves.
34
In fiscal 2009, the Company recorded an overall increase to its valuation allowances by $245
million. This was comprised of a $252 million increase in income tax expense with the remaining
amount impacting the consolidated statement of financial position.
In the third quarter of fiscal 2009, the Company determined that it was more likely than not that a
portion of the deferred tax assets within the Brazil power solutions entity would be utilized.
Therefore, the Company released $10 million of valuation allowances in the three month period ended
June 30, 2009. This was comprised of a $3 million decrease in income tax expense with the remaining
amount impacting the consolidated statement of financial position because it related to acquired
net operating losses.
In the second quarter of fiscal 2009, the Company determined that it was more likely than not that
the deferred tax asset associated with a capital loss would be utilized. Therefore, the Company
released $45 million of valuation allowances in the three month period ended March 31, 2009.
In the first quarter of fiscal 2009, as a result of the rapid deterioration in the economic
environment, several jurisdictions incurred unexpected losses in the first quarter that resulted
in cumulative losses over the prior three years. As a result, and after considering tax planning
initiatives and other positive and negative evidence, the Company determined that it was more
likely than not that the deferred tax assets would not be utilized in several jurisdictions
including France, Mexico, Spain and the United Kingdom. Therefore, the Company recorded $300
million of valuation allowances in the three month period ended December 31, 2008. To the extent
the Company improves its underlying operating results in these jurisdictions, these valuation
allowances, or a portion thereof, could be reversed in future periods.
Uncertain Tax Positions
The Company is subject to income taxes in the U.S. and numerous non-U.S. jurisdictions. Judgment
is required in determining its worldwide provision for income taxes and recording the related
assets and liabilities. In the ordinary course of the Companys business, there are many
transactions and calculations where the ultimate tax determination is uncertain. The Company is
regularly under audit by tax authorities. In June 2006, the Financial Accounting Standards Board
(FASB) issued guidance prescribing a comprehensive model for how a company should recognize,
measure, present, and disclose in its financial statements uncertain tax positions that a company
has taken or expects to take on a tax return. The Company adopted this guidance, which is included
in ASC 740, Income Taxes, as of October 1, 2007. As such, accruals for tax contingencies are
provided for in accordance with the requirements of ASC 740.
Based on recently published case law in a non-U.S. jurisdiction and the settlement of a tax audit
during the third quarter of fiscal 2010, the Company released net $38 million of reserves for
uncertain tax positions, including interest and penalties.
As a result of certain events related to prior year tax planning initiatives during the first
quarter of fiscal 2010, the Company increased the reserve for uncertain tax positions by $31
million, including $26 million of interest and penalties.
In the fourth quarter of fiscal 2010, the Company decreased its reserves for uncertain tax
positions by $20 million, which was substantially offset by an increase in its valuation allowances
in a similar amount. These adjustments were based on a review of tax filing positions taken in
jurisdictions with valuation allowances as indicated above.
As a result of certain events in various jurisdictions during the fourth quarter of fiscal year
2009, including the settlement of the fiscal 2002 through fiscal 2003 U.S. federal tax
examinations, the Company decreased its total reserve for uncertain tax positions by $32 million.
This was comprised of a $55 million decrease to tax expense and a $23 million increase to goodwill.
As a result of various entities exiting business in certain jurisdictions and certain events
related to prior tax planning initiatives during the third quarter of fiscal 2009, the Company
reduced the reserve for uncertain tax positions by $33 million. This was comprised of a $17
million decrease to tax expense and a $16 million decrease to goodwill.
The Companys federal income tax returns and certain non-U.S. income tax returns for various
fiscal years remain under various stages of audit by the Internal Revenue Service and respective
non-U.S. tax authorities. Although the outcome of tax audits is always uncertain, management
believes that it has appropriate support for the positions taken on its tax returns and that its
annual tax provisions included amounts sufficient to pay assessments, if any, which may be
proposed by the taxing authorities. At September 30, 2010, the Company had recorded a liability
for
35
its best estimate of the probable loss on certain of its tax positions, the majority of which
is included in other noncurrent liabilities in the consolidated statements of financial position.
Nonetheless, the amounts ultimately paid, if any, upon resolution of the issues raised by the
taxing authorities, may differ materially from the amounts accrued for each year.
Change in Tax Status
In the fourth quarter of fiscal 2009, the Company recorded $84 million in discrete period tax
benefits related to a change in tax status of a U.S. and a U.K. subsidiary. This is comprised of a
$59 million tax expense benefit and a $25 million decrease to goodwill. In the second quarter of
fiscal 2009, the Company recorded a $30 million discrete period tax benefit related to a change in
tax status of a French subsidiary.
The changes in tax status resulted from voluntary tax elections that produced deemed liquidations
for U.S. federal income tax purposes. The Company received tax benefits in the U.S. for the losses
from the decrease in value as compared to the original tax basis of its investments. These
elections changed, for U.S. federal income tax purposes, the tax status of these entities and are
reported as a discrete period tax benefit in accordance with the provision of ASC 740.
Impacts of Tax Legislation and Change in Statutory Tax Rates
On March 23, 2010, the U.S. President signed into law comprehensive health care reform legislation
under the Patient Protection and Affordable Care Act (HR3590). Included among the major provisions
of the law is a change in the tax treatment of a portion of Medicare Part D medical payments. The
Company recorded a noncash tax charge of approximately $18 million in the second quarter of fiscal
year 2010 to reflect the impact of this change. In the fourth quarter of fiscal 2010, the amount
decreased by $2 million resulting in an overall impact of $16 million.
During the fiscal year ended September 30, 2010, tax legislation was adopted in various
jurisdictions. None of these changes are expected to have a material impact on the Companys
consolidated financial condition, results of operations or cash flows.
In fiscal 2009, the Company obtained High Tech Enterprise status from the Chinese Tax Bureaus for
various Chinese subsidiaries. This status allows the entities to benefit from a 15% tax rate.
In February 2009, Wisconsin enacted numerous changes to Wisconsin income tax law as part of the
Budget Stimulus and Repair Bill, Wisconsin Act 2. These changes are effective in the Companys tax
year ended September 30, 2010. The major changes included an adoption of corporate unitary
combined reporting and an expansion of the related entity expense add back provisions. These
Wisconsin tax law changes did not have a material impact on the Companys consolidated financial
condition, results of operations or cash flows.
Income Attributable to Noncontrolling Interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
September 30, |
|
|
(in millions) |
|
2010 |
|
2009 |
|
Change |
Income (loss) attributable to
noncontrolling interests |
|
$ |
75 |
|
|
$ |
(12 |
) |
|
|
* |
|
|
|
The increase in income attributable to noncontrolling interests was primarily due to
improved earnings at certain automotive experience partially-owned affiliates in North America
and Asia and a power solutions partially-owned affiliate. |
36
Net Income Attributable to Johnson Controls, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
September 30, |
|
|
(in millions) |
|
2010 |
|
2009 |
|
Change |
Net income (loss) attributable to
Johnson Controls, Inc. |
|
$ |
1,491 |
|
|
$ |
(338 |
) |
|
|
* |
|
|
|
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 other segment, incremental warranty charges
recorded in the prior year in the building efficiency other 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 partially-owned affiliate 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 fiscal
2009 diluted loss per share of $0.57. |
GOODWILL, LONG-LIVED ASSETS AND OTHER INVESTMENTS
Goodwill at September 30, 2011 was $7.0 billion, $515 million higher than the prior year. The
increase was primarily due to the impact of current year acquisitions.
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 or one level below the reportable segments in certain instances,
using a fair-value method based on managements judgments and assumptions or third party
valuations. The fair value of a reporting unit refers to the price that would be received to sell
the unit as a whole in an orderly transaction between market participants at the measurement date.
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 inputs utilized in the analyses are classified as
Level 3 inputs within the fair value hierarchy as defined in ASC 820, Fair Value Measurements and
Disclosures. 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 2011, 2010 and 2009 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, 2011, 2010 and 2009. No
reporting unit was determined to be at risk of failing step one of the goodwill impairment test.
At December 31, 2010, in conjunction with the preparation of its financial statements, the Company
assessed goodwill for impairment in the building efficiency business due to the change in
reportable segments as described in Note 18, Segment Information, of the notes to consolidated
financial statements. As a result, the Company performed impairment testing for goodwill under the
new segment structure and determined that the estimated fair value of each reporting unit
substantially exceeded its corresponding carrying amount including recorded goodwill, and as such,
no impairment existed at December 31, 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
37
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 other segment
(formerly 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 other 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, 2011, 2010 and
2009, different assumptions could change the estimated fair values and, therefore, impairment
charges could be required.
The Company reviews the realizability of its deferred tax assets on a quarterly basis, or whenever
events or changes in circumstances indicate that a review is required. In determining the
requirement for a valuation allowance, the historical and projected financial results of the legal
entity or consolidated group recording the net deferred tax asset are considered, along with any
other positive or negative evidence. Since future financial results may differ from previous
estimates, periodic adjustments to the Companys valuation allowances may be necessary.
The Company has certain subsidiaries, mainly located in France and Spain, which have generated
operating and/or capital losses and, in certain circumstances, have limited loss carryforward
periods. In accordance with ASC 740, Income Taxes, the Company is required to record a valuation
allowance when it is more likely than not the Company will not utilize deductible amounts or net
operating losses for each legal entity or consolidated group based on the tax rules in the
applicable jurisdiction, evaluating both positive and negative historical evidences as well as
expected future events and tax planning strategies.
The Company reviews long-lived assets for impairment whenever events or changes in circumstances
indicate that the assets carrying amount may not be recoverable. The Company conducts its
long-lived asset impairment analyses in accordance with ASC 360-10-15, Impairment or Disposal of
Long-Lived Assets. ASC 360-10-15 requires the Company to group assets and liabilities at the
lowest level for which identifiable cash flows are largely independent of the cash flows of other
assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash
flows. If the undiscounted cash flows do not indicate the carrying amount of the asset group is
recoverable, an impairment charge is measured as the amount by which the carrying amount of the
asset group exceeds its fair value based on discounted cash flow analysis or appraisals.
At September 30, 2011, the Company concluded it did not have any triggering events requiring
assessment of impairment of its long-lived assets.
In the fourth quarter of fiscal 2010, the Company concluded it had a triggering event requiring
assessment of impairment of its long-lived assets due to the planned relocation of a plant in Japan
in the automotive experience Asia segment. As a result, the Company reviewed its long-lived assets
for impairment and recorded an $11 million impairment charge within cost of sales in the fourth
quarter of fiscal 2010 related to the automotive experience Asia segment. The impairment was
measured under a market approach utilizing an appraisal. The inputs utilized in the analysis are
classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, Fair Value
Measurements and Disclosures.
In the third quarter of fiscal 2010, the Company concluded it had a triggering event requiring
assessment of impairment of its long-lived assets due to the planned relocation of its headquarters
building in Japan in the automotive experience Asia segment. As a result, the Company reviewed its
long-lived assets for impairment and
38
recorded an $11 million impairment charge within selling,
general and administrative expenses in the third quarter of fiscal 2010 related to the automotive
experience Asia segment. The impairment was measured under a market approach utilizing an
appraisal. The inputs utilized in the analysis are classified as Level 3 inputs within the fair
value hierarchy as defined in ASC 820, Fair Value Measurements and Disclosures.
In the second quarter of fiscal 2010, the Company concluded it had a triggering event requiring
assessment of impairment of its long-lived assets due to planned plant closures for the automotive
experience North America segment. These closures are a result of the Companys revised
restructuring actions to the 2008 Plan. Refer to Note 15, Restructuring Costs, of the notes to
consolidated financial statements for further information regarding the 2008 Plan. As a result, the
Company reviewed its long-lived assets for impairment and recorded a $19 million impairment charge
in the second quarter of fiscal 2010 related to the automotive experience North America segment.
This impairment charge was offset by a decrease in the Companys restructuring reserve related to
the 2008 Plan due to lower employee severance and termination benefit cash payments than previously
expected, as discussed further in Note 15. The impairment was measured under an income approach
utilizing forecasted discounted cash flows for fiscal 2010 through 2014 to determine the fair value
of the impaired assets. This method is consistent with the method the Company has employed in prior
periods to value other long-lived assets. The inputs utilized in the discounted cash flow analysis
are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, Fair Value
Measurements and Disclosures.
In the third quarter of fiscal 2009, the Company concluded it had a triggering event requiring
assessment of impairment of its long-lived assets in light of the restructuring plans in North
America announced by Chrysler LLC (Chrysler) and General Motors Corporation (GM) during the quarter
as part of their bankruptcy reorganization plans. As a result, the Company reviewed its long-lived
assets relating to the Chrysler and GM platforms within the automotive experience North America
segment and determined no impairment existed.
In the second quarter of fiscal 2009, the Company concluded it had a triggering event requiring
assessment of impairment of its long-lived assets in conjunction with its restructuring plan
announced in March 2009. As a result, the Company reviewed its long-lived assets associated with
the plant closures for impairment and recorded a $46 million impairment charge in the second
quarter of fiscal 2009, of which $25 million related to the automotive experience North America
segment, $16 million related to the automotive experience Asia segment and $5 million related to
the automotive experience Europe segment. Refer to Note 15, Restructuring Costs, of the notes to
consolidated financial statements for further information regarding the 2009 Plan. Additionally, at
March 31, 2009, in conjunction with the preparation of its financial statements, the Company
concluded it had a triggering event requiring assessment of its other long-lived assets within the
automotive experience Europe segment due to significant declines in European automotive sales
volume. As a result, the Company reviewed its other long-lived assets within the automotive
experience Europe segment for impairment and determined no additional impairment existed.
At December 31, 2008, in conjunction with the preparation of its financial statements, the Company
concluded it had a triggering event requiring assessment of impairment of its long-lived assets due
to the significant declines in North American and European automotive sales volumes. As a result,
the Company reviewed its long-lived assets for impairment and recorded a $110 million impairment
charge within cost of sales in the first quarter of fiscal 2009, of which $77 million related to
the automotive experience North America segment and $33 million related to the automotive
experience Europe segment.
Investments in partially-owned affiliates (affiliates) at September 30, 2011 were $811 million,
$83 million higher than the prior year. The increase was primarily due to positive earnings by
certain automotive experience affiliates primarily in Asia, an initial investment in a power
solutions affiliate and affiliates acquired as part of current year business acquisitions,
partially offset by dividends paid by affiliates and the acquisition of the controlling interest in
a formerly unconsolidated power solutions affiliate.
The Company reviews its equity investments for impairment whenever there is a loss in value of an
investment which is other than a temporary decline. The Company conducts its equity investment
impairment analyses in accordance with ASC 323, Investments-Equity Method and Joint Ventures. ASC
323 requires the Company to record an impairment charge for a decrease in value of an investment
when the decline in the investment is considered to be other than temporary.
At December 31, 2008, in conjunction with the preparation of its financial statements, the Company
concluded it had a triggering event requiring assessment of impairment of its equity investment in
a 48%-owned joint venture with U.S. Airconditioning Distributors, Inc. (U.S. Air) due to the
significant decline in North American residential housing construction starts, which had
significantly impacted the financial results of the equity investment. The
39
Company reviewed its
equity investment in U.S. Air for impairment and as a result, recorded a $152 million impairment
charge within equity income (loss) for the building efficiency other segment in the first quarter
of fiscal 2009. The U.S. Air investment balance included in the consolidated statement of financial
position at September 30, 2011 was $53 million. The Company does not anticipate future impairment
of this investment as, based on its current forecasts, a further decline in value that is other
than temporary is not considered reasonably likely to occur.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
September 30, |
|
|
(in millions) |
|
2011 |
|
2010 |
|
Change |
Working capital |
|
$ |
1,589 |
|
|
$ |
919 |
|
|
|
73 |
% |
Accounts receivable |
|
|
7,151 |
|
|
|
6,095 |
|
|
|
17 |
% |
Inventories |
|
|
2,316 |
|
|
|
1,786 |
|
|
|
30 |
% |
Accounts payable |
|
|
6,159 |
|
|
|
5,426 |
|
|
|
14 |
% |
|
|
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 increase in working capital at September 30, 2011 as compared to September 30, 2010 was
primarily due to current year acquisitions, higher accounts receivable from higher sales
volumes and higher inventory levels to support higher sales, partially offset by higher
accounts payable primarily due to increased purchasing activity. |
|
|
|
The Companys days sales in accounts receivable decreased to 52 at September 30, 2011 from
55 for the prior year primarily due to improved collections. The increase in accounts
receivable compared to September 30, 2010 was primarily due to increased sales in the fourth
quarter of fiscal 2011 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 2011 were slightly lower compared to the prior
year primarily due to increased inventory build to meet increased demand. |
|
|
|
Days in accounts payable at September 30, 2011 decreased to 71 days from 74 days at
September 30, 2010 primarily due to the timing of supplier payments. |
Cash Flows
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, |
(in millions) |
|
2011 |
|
2010 |
Cash provided by operating activities |
|
$ |
1,076 |
|
|
$ |
1,438 |
|
Cash used by investing activities |
|
|
(2,637 |
) |
|
|
(892 |
) |
Cash provided (used) by financing activities |
|
|
1,239 |
|
|
|
(895 |
) |
Capital expenditures |
|
|
(1,325 |
) |
|
|
(777 |
) |
|
|
The decrease in cash provided by operating activities was primarily due to unfavorable
changes in accounts receivable, inventory, other assets and accounts payable, partially offset
by higher net income and favorable changes in accrued income taxes. |
|
|
|
The increase in cash used by investing activities was primarily due to higher capital
expenditures and acquisitions of businesses. |
|
|
|
The increase in cash provided by financing activities was primarily due to an increase in
overall debt levels. Refer to Note 8, Debt and Financing Arrangements, of the notes to
consolidated financial statements for further discussion. |
|
|
|
The increase in capital expenditures in the current year primarily related to capacity
increases and vertical integration efforts in the power solutions business, increased
investments to support customer growth and |
40
|
|
enhance the Companys strategic footprint primarily
in Mexico and Southeast Asia, and information technology infrastructure investments. |
Capitalization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
|
(in millions) |
|
2011 |
|
|
2010 |
|
|
Change |
|
Total debt |
|
$ |
5,146 |
|
|
$ |
3,389 |
|
|
|
52 |
% |
Shareholders equity
attributable to Johnson Controls, Inc. |
|
|
11,042 |
|
|
|
10,071 |
|
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
|
Total capitalization |
|
$ |
16,188 |
|
|
$ |
13,460 |
|
|
|
20 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt as a % of
total capitalization |
|
|
32 |
% |
|
|
25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 facility in the amount of 50 million euro expiring in May 2011. In July 2011, the
Company entered into a new 50 million euro committed revolving facility scheduled to mature in
July 2012. In August 2011, the Company entered into a new 100 million euro committed revolving
facility scheduled to mature in August 2014. In September 2011, the Company entered into three
new committed revolving facilities, totaling 73 million euro and an additional $50 million,
scheduled to mature in September 2012. As of September 30, 2011 there were no draws on any of
the revolving facilities. |
|
|
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 notes 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 notes 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. |
|
|
|
In March 2010, the Company retired approximately $31 million in principal amount of its
fixed rate notes that was scheduled to mature on January 15, 2011. The Company used cash to
fund the repurchase. |
|
|
|
In May 2010, the Company retired approximately $18 million in principal amount of its fixed
rate notes 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. In February 2011, the Company retired the
committed facility. There were no draws on the facility. |
|
|
|
In November 2010, the Company repaid debt of $82 million which was acquired as part of an
acquisition in the first quarter of fiscal 2011. The Company used cash to repay the debt. |
|
|
|
In January 2011, the Company retired $654 million in principal amount, plus accrued
interest, of its 5.25% fixed rate notes that matured on January 15, 2011. The Company used
cash to fund the payment. |
41
|
|
In February 2011, the Company issued $350 million aggregate principal amount of floating
rate senior unsecured notes due in fiscal 2014, $450 million aggregate principal amount of
1.75% senior unsecured fixed rate notes due in fiscal 2014, $500 million aggregate principal
amount of 4.25% senior unsecured fixed rate notes due in fiscal 2021 and $300 million
aggregate principal amount of 5.7% senior unsecured fixed rate notes due in fiscal 2041.
Aggregate net proceeds of $1.6 billion from the issues were used for general corporate
purposes including the retirement of short-term debt. |
|
|
|
In February 2011, the Company entered into a six-year, 100 million euro, floating rate loan
scheduled to mature in February 2017. Proceeds from the facility were used for general
corporate purposes. |
|
|
|
In February 2011, the Company replaced its $2.05 billion committed five-year credit
facility, scheduled to mature in December 2011, with a $2.5 billion committed four-year credit
facility scheduled to mature in February 2015. The facility is used to support the Companys
outstanding commercial paper. At September 30, 2011, there were no draws on the facility. |
|
|
|
In April 2011, a total of 157,820 equity units, which had a purchase contract settlement
date of March 31, 2012, were early exercised. As a result, the Company issued 766,673 shares
of Johnson Controls, Inc. common stock and approximately $8 million of 11.5% notes due 2042. |
|
|
|
The Company also selectively makes use of short-term credit lines. The Company estimates
that, as of September 30, 2011, it could borrow up to $2.4 billion at its current debt ratings
on committed credit lines. |
|
|
|
The Company believes its capital resources and liquidity position at September 30, 2011 are
adequate to meet projected needs. The Company believes requirements for working capital,
capital expenditures, dividends, minimum pension contributions, debt maturities, announced
acquisitions and any other potential acquisitions in fiscal 2012 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 $2.5 billion revolving credit facility, which matures in
February 2015. There were no draws on the revolving credit facility as of September 30, 2011.
As such, the Company believes it has sufficient financial resources to fund operations and
meet its obligations for the foreseeable future. |
|
|
The Company earns a significant amount of its operating income outside the U.S., which is
deemed to be permanently reinvested in foreign jurisdictions. We currently do not intend nor
foresee a need to repatriate these funds. The Company expects existing domestic cash and
liquidity to continue to be sufficient to fund our domestic operating activities and cash
commitments for investing and financing activities for at least the next twelve months and
thereafter for the foreseeable future. In addition, the Company expects existing foreign cash,
cash equivalents, short term investments and cash flows from operations to continue to be
sufficient to fund our foreign operating activities and cash commitments for investing
activities, such as material capital expenditures, for at least the next twelve months and
thereafter for the foreseeable future. Should the Company require more capital in the U.S.
than is generated by our operations domestically, we could elect to raise capital in the U.S.
through debt or equity issuances. This alternative could result in increased interest expense
or other dilution of our earnings. We have borrowed funds domestically and continue to have
the ability to borrow funds domestically at reasonable interest rates. |
|
|
|
The Companys debt financial covenants require a minimum consolidated shareholders equity
attributable to Johnson Controls, Inc. of at least $3.5 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, 2011, consolidated shareholders equity attributable to Johnson Controls, Inc.
as defined per the Companys debt financial covenants was $10.5 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. |
42
A summary of the Companys significant contractual obligations as of September 30, 2011 is as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 |
|
|
|
Total |
|
|
2012 |
|
|
2013-2014 |
|
|
2015-2016 |
|
|
and Beyond |
|
Contractual Obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
(including capital lease obligations)* |
|
$ |
4,550 |
|
|
$ |
17 |
|
|
$ |
1,367 |
|
|
$ |
937 |
|
|
$ |
2,229 |
|
Interest on long-term debt
(including capital lease obligations)* |
|
|
2,383 |
|
|
|
213 |
|
|
|
390 |
|
|
|
304 |
|
|
|
1,476 |
|
Operating leases |
|
|
992 |
|
|
|
289 |
|
|
|
401 |
|
|
|
202 |
|
|
|
100 |
|
Purchase obligations |
|
|
2,390 |
|
|
|
1,772 |
|
|
|
514 |
|
|
|
95 |
|
|
|
9 |
|
Pension and postretirement contributions |
|
|
424 |
|
|
|
89 |
|
|
|
49 |
|
|
|
71 |
|
|
|
215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations |
|
$ |
10,739 |
|
|
$ |
2,380 |
|
|
$ |
2,721 |
|
|
$ |
1,609 |
|
|
$ |
4,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
See Capitalization for additional information related to the Companys long-term debt. |
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
The Company prepares its consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America (U.S. GAAP). This requires management to make
estimates and assumptions that affect reported amounts and related disclosures. Actual results
could differ from those estimates. The following policies are considered by management to be the
most critical in understanding the judgments that are involved in the preparation of the Companys
consolidated financial statements and the uncertainties that could impact the Companys results of
operations, financial position and cash flows.
Revenue Recognition
The Companys building efficiency business recognizes revenue from certain long-term contracts over
the contractual period under the percentage-of-completion
(POC) 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. Recognized revenues that
will not be billed under the terms of the contract until a later date are recorded in unbilled
accounts receivable. Likewise, contracts where billings to date have exceeded recognized revenues
are recorded in other current liabilities. Changes to the original estimates may be required during
the life of the contract and such estimates are reviewed monthly. 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 use of the POC method of accounting involves considerable use of estimates in
determining revenues, costs and profits and in assigning the amounts to accounting periods. The
periodic reviews have not resulted in adjustments that were significant to the Companys results of
operations. The Company continually evaluates all of the assumptions, risks and uncertainties
inherent with the application of the POC method of accounting.
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) and refrigeration products and services in bundled arrangements, where multiple
products and/or services are involved. In accordance with ASU No. 2009-13, Revenue Recognition
(Topic 605): Multiple-Deliverable Revenue Arrangements A Consensus of the FASB Emerging Issues
Task Force, the Company divides bundled arrangements into separate deliverables and revenue is
allocated to each deliverable based on the relative selling price method. Significant deliverables
within these arrangements include equipment, commissioning, service labor and extended warranties.
In order to estimate relative selling price, market data and transfer price studies are utilized.
Approximately four to twelve months separate the timing of the first deliverable until the last
piece of
43
equipment is delivered, and there may be extended warranty arrangements with duration of
one to five years commencing upon the end of the standard warranty period.
In all other cases, the Company recognizes revenue at the time title passes to the customer or as
services are performed.
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 or one level below the reportable segments in certain instances,
using a fair-value method based on managements judgments and assumptions or third party
valuations. The fair value of a reporting unit refers to the price that would be received to sell
the unit as a whole in an orderly transaction between market participants at the measurement date.
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 inputs utilized in the analyses are classified as
Level 3 inputs within the fair value hierarchy as defined in ASC 820, Fair Value Measurements and
Disclosures. 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 2011, 2010 and 2009 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, 2011, 2010 and 2009. No
reporting unit was determined to be at risk of failing step one of the goodwill impairment test.
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, 2011, 2010 and
2009, different assumptions could change the estimated fair values and, therefore, impairment
charges could be required.
Employee Benefit Plans
The Company provides a range of benefits to its employees and retired employees, including pensions
and postretirement health and other benefits. Plan assets and obligations are measured annually, or
more frequently if there is a remeasurement event, based on the Companys measurement date
utilizing various actuarial assumptions such as discount rates, assumed rates of return,
compensation increases, turnover rates and health care cost trend rates as of that date.
Measurements of net periodic benefit cost are based on the assumptions used for the previous
year-end measurements of assets and obligations. The Company reviews its actuarial assumptions on
an annual basis and makes modifications to the assumptions based on current rates and trends when
appropriate. As required by U.S. GAAP, the effects of the modifications are recorded currently or
amortized over future periods.
U.S. GAAP requires that companies recognize in its statement of financial position a liability for
defined benefit pension and postretirement plans that are underfunded or unfunded, or an asset for
defined benefit pension and postretirement benefit plans that are overfunded. U.S. GAAP also
requires that companies measure the benefit obligations and fair value of plan assets that
determine a benefit plans funded status as of the date of the employers fiscal year-end.
The Company considers the expected benefit payments on a plan-by-plan basis when setting assumed
discount rates. As a result, the Company uses different discount rates for each plan depending on
the plan jurisdiction, the demographics of participants and the expected timing of benefit
payments. For the U.S. pension and postretirement health and other benefit plans, the Company uses
a discount rate provided by an independent third party calculated based on an appropriate mix of
high quality bonds. For the non-U.S. pension and postretirement health and other benefit plans, the
Company consistently uses the relevant country specific benchmark indices for determining the
various discount rates. The Companys discount rate on U.S. plans was 5.25% and 5.50% at September
30, 2011 and 2010, respectively. The Companys weighted average discount rate on non-U.S. plans was
4.00% at September 30, 2011 and 2010.
44
In estimating the expected return on plan assets, the Company considers the historical returns on
plan assets, adjusted for forward-looking considerations, inflation assumptions and the impact of
the active management of the plans invested assets. Reflecting the relatively long-term nature of
the plans obligations, approximately 50% of the plans assets are invested in equities, with the
remainder primarily invested in fixed income and alternative investments. For the years ending
September 30, 2011 and 2010, the Companys expected long-term return on U.S. pension plan assets
used to determine net periodic benefit cost was 8.50%. The actual rate of return on U.S. pension
plans was below 8.50% in fiscal 2011 and 2010. For the years ending September 30, 2011 and 2010,
the Companys weighted average expected long-term return on non-U.S. pension plan assets was 5.50%
and 6.00%, respectively. Plan assets for the Companys postretirement health and other benefit
plans were contributed at the end of fiscal 2011 and not contemplated in fiscal 2011 net periodic
benefit cost.
Beginning in fiscal 2012 the Company believes the long-term rate of return will approximate 8.50%,
5.25% and 6.30% for U.S. pension, non-U.S. pension, and postretirement health and other benefit
plans, respectively. Any differences between actual results and the expected long-term asset
returns will be reflected in other comprehensive income and amortized to expense in future years.
If the Companys actual returns on plan assets are less than the Companys expectations, additional
contributions may be required.
For purposes of expense recognition, the Company uses a market-related value of assets that
recognizes the difference between the expected return and the actual return on plan assets over a
three-year period. As of September 30, 2011, the Company had approximately $119 million of
unrecognized asset losses associated with its U.S. pension plans, which will be recognized in the
calculation of the market-related value of assets and subject to amortization in future periods.
In fiscal 2011, total employer and employee contributions to the defined benefit pension plans were
$280 million, of which $183 million were voluntary contributions made by the Company. The Company
expects to contribute approximately $350 million in cash to its defined benefit pension plans in
fiscal year 2012. In fiscal 2011, total employer and employee contributions to the postretirement
health and other benefit plans were $183 million, of which $156 million were voluntary
contributions made by the Company. The Company expects to contribute approximately $60 million in
cash to its postretirement health and other benefit plans in fiscal year 2012.
Based on information provided by its independent actuaries and other relevant sources, the Company
believes that the assumptions used are reasonable; however, changes in these assumptions could
impact the Companys financial position, results of operations or cash flows.
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 of
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. At September 30, 2011, the Company had recorded $301 million
of warranty reserves. 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.
Income Taxes
The Company accounts for income taxes in accordance with ASC 740, Income Taxes. Deferred tax
assets and liabilities are recognized for the future tax consequences attributable to differences
between financial statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and other loss carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled. The Company records a
valuation allowance that primarily represents non-U.S. operating and other loss carryforwards for
which utilization is uncertain. Management judgment is required in determining the Companys
provision for income taxes, deferred tax assets and liabilities and the valuation allowance
recorded against the Companys net deferred tax assets. In calculating the provision for income
taxes on an interim basis, the Company uses an estimate of the annual effective tax rate based upon
the facts and circumstances known at each interim period. On a quarterly basis, the actual
effective tax rate is adjusted as appropriate based upon the actual results as compared to those
forecasted at the beginning of the fiscal year. In determining the need for a valuation allowance,
the historical and projected financial results of the legal entity or consolidated group recording
the net deferred tax asset are considered, along with any other positive or negative evidence.
Since future financial results may differ from previous estimates,
45
periodic adjustments to the
Companys valuation allowance may be necessary. At September 30, 2011, the Company had a valuation
allowance of $719 million, of which $559 million relates to net operating loss carryforwards
primarily in France and Spain, for which sustainable taxable income has not been demonstrated; and
$160 million for other deferred tax assets.
The Company is subject to income taxes in the U.S. and numerous non-U.S. jurisdictions. Judgment
is required in determining its worldwide provision for income taxes and recording the related
assets and liabilities. In the ordinary course of the Companys business, there are many
transactions and calculations where the ultimate tax determination is uncertain. The Company is
regularly under audit by tax authorities. At September 30, 2011, the Company had unrecognized tax
benefits of $1,357 million.
The Company does not provide additional U.S. income taxes on undistributed earnings of non-U.S.
consolidated subsidiaries included in shareholders equity attributable to Johnson Controls, Inc.
Such earnings could become taxable upon the sale or liquidation of these non-U.S. subsidiaries or
upon dividend repatriation. The Companys intent is for such earnings to be reinvested by the
subsidiaries or to be repatriated only when it would be tax effective through the utilization of
foreign tax credits. Refer to Capitalization within the Liquidity and Capital Resources section
for discussion of domestic and foreign cash projections.
NEW ACCOUNTING PRONOUNCEMENTS
In September 2011, the FASB issued ASU No. 2011-09, Compensation Retirement Benefits
Multiemployer Plans (Subtopic 715-80): Disclosures about an Employers Participation in a
Multiemployer Plan. ASU No. 2011-09 requires additional quantitative and qualitative disclosures
about an employers participation in multiemployer pension plans, including disclosure of the name
and identifying number of the significant multiemployer plans in which the employer participates,
the level of the employers participation in the plans, the financial health of the plans and the
nature of the employer commitments to the plans. ASU No. 2011-09 will be effective for the Company
for the fiscal year ending September 30, 2012. The adoption of this guidance will have no impact on
the Companys consolidated financial condition and results of operations.
In September 2011, the FASB issued ASU No. 2011-08, Intangibles Goodwill and Other (Topic 350):
Testing Goodwill for Impairment. ASU No. 2011-08 provides companies an option to perform a
qualitative assessment to determine whether further goodwill impairment testing is necessary. If,
as a result of the qualitative assessment, it is determined that it is more likely than not that a
reporting units fair value is less than its carrying amount, the two-step quantitative impairment
test is required. Otherwise, no further testing is required. ASU No. 2011-08 will be effective for
the Company for goodwill impairment tests performed in the fiscal year ending September 30, 2013,
with early adoption permitted. The adoption of this guidance is expected to have no impact on the
Companys consolidated financial condition and results of operations.
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of
Comprehensive Income. ASU No. 2011-05 eliminates the option to present components of other
comprehensive income as part of the statement of shareholders equity. All non-owner changes in
shareholders equity instead must be presented either in a single continuous statement of
comprehensive income or in two separate but consecutive statements. Also, reclassification
adjustments for items that are reclassified from other comprehensive income to net income must be
presented on the face of the financial statements. ASU No. 2011-05 will be effective for the
Company for the quarter ending December 31, 2012. The adoption of this guidance will have no impact
on the Companys consolidated financial condition and results of operations.
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to
Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ASU No.
2011-04 clarifies and changes the application of various fair value measurement principles and
disclosure requirements, and will be effective for the Company in the second quarter of fiscal 2012
(January 1, 2012). The Company has assessed the updated guidance and expects adoption to have no
impact on the Companys consolidated financial condition and results of operations. Refer to Note
10, Fair Value Measurements, of the notes to consolidated financial statements for disclosures
surrounding the Companys fair value measurements.
In December 2009, the FASB issued 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 was effective for the Company beginning in
46
the first
quarter of fiscal 2011 (October 1, 2010). The adoption of this guidance had no impact on the
Companys consolidated financial condition and results of operations. Refer to the Principles of
Consolidation section of Note 1, Summary of Significant Accounting Policies, of the notes to
consolidated financial statements for further discussion.
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 provides application guidance on whether multiple deliverables exist, how the
deliverables should be separated and how the consideration should be allocated to one or more units
of accounting. This guidance eliminates the use of the residual method allocation and requires that
arrangement consideration be allocated at the inception of the arrangement to all deliverables
using the relative selling price method. The selling price used for each deliverable will be based
on vendor-specific objective evidence if available, third party evidence if vendor-specific
objective evidence is not available, or estimated selling price if neither vendor-specific or third
party evidence is available. The amendments in this ASU also expand the disclosures related to a
vendors multiple-deliverable revenue arrangements. The Company adopted ASU No. 2009-13 on October
1, 2010 and appropriate disclosures have been included herein. As each deliverable had a
determinable relative selling price and the residual method was not previously utilized by the
Company, there were no changes in units of accounting, the allocation process, or the pattern and
timing of revenue recognition upon adoption of ASU No. 2009-13. Furthermore, adoption of this ASU
is not expected to have a material effect on the consolidated financial condition or results of
operations in subsequent periods.
RISK MANAGEMENT
The Company selectively uses derivative instruments to reduce market risk associated with changes
in foreign currency, commodities, interest rates and stock-based compensation. All hedging
transactions are authorized and executed pursuant to clearly defined policies and procedures, which
strictly prohibit the use of financial instruments for speculative purposes. At the inception of
the hedge, the Company assesses the effectiveness of the hedge instrument and designates the hedge
instrument as either (1) a hedge of a recognized asset or liability or of a recognized firm
commitment (a fair value hedge), (2) a hedge of a forecasted transaction or of the variability of
cash flows to be received or paid related to an unrecognized asset or liability (a cash flow hedge)
or (3) a hedge of a net investment in a non-U.S. operation (a net investment hedge). The Company
performs hedge effectiveness testing on an ongoing basis depending on the type of hedging
instrument used.
For all foreign currency derivative instruments designated as cash flow hedges, retrospective
effectiveness is tested on a monthly basis using a cumulative dollar offset test. The fair value of
the hedged exposures and the fair value of the hedge instruments are revalued and the ratio of the
cumulative sum of the periodic changes in the value of the hedge instruments to the cumulative sum
of the periodic changes in the value of the hedge is calculated. The hedge is deemed as highly
effective if the ratio is between 80% and 125%. For commodity derivative contracts designated as
cash flow hedges, effectiveness is tested using a regression calculation. Ineffectiveness is
minimal as the Company aligns most of the critical terms of its derivatives with the supply
contracts.
For net investment hedges, the Company assesses its net investment positions in the non-U.S.
operations and compares it with the outstanding net investment hedges on a quarterly basis. The
hedge is deemed effective if the aggregate outstanding principal of the hedge instruments
designated as the net investment hedge in a non-U.S. operation does not exceed the Companys net
investment positions in the respective non-U.S. operation.
The Company selectively uses interest rate swaps to reduce market risk associated with changes in
interest rates for its fixed-rate bonds. For the five fixed to floating interest rate swaps
totaling $450 million to hedge the coupon of its 1.75% notes maturing March 2014, the Company
elected the short cut method as the criteria to apply the short cut method as defined in ASC 815
was met and the critical terms for both the hedge and underlying hedged item are identical at
inception of the hedge and the presented reporting periods. In applying the short cut method, the
Company is allowed to assume zero ineffectiveness without performing detailed effectiveness
assessments and does not record any ineffectiveness related to the hedge relationship. For
remaining interest rate swaps, the long-haul method is used. The Company therefore assesses
retrospective and prospective effectiveness on a quarterly basis and records any measured
ineffectiveness in the consolidated statements of income.
For equity swaps, these derivative instruments are not designated as hedging instruments under ASC
815, Derivatives and Hedging, and require no assessment of effectiveness on a quarterly basis.
A discussion of the Companys accounting policies for derivative financial instruments is included
in Note 1, Summary of Significant Accounting Policies, of the notes to consolidated financial
statements, and further
47
disclosure relating to derivatives and hedging activities is included in
Note 9, Derivative Instruments and Hedging Activities, and Note 10, Fair Value Measurements, of
the notes to consolidated financial statements.
Foreign Exchange
The Company has manufacturing, sales and distribution facilities around the world and thus makes
investments and enters into transactions denominated in various foreign currencies. In order to
maintain strict control and achieve the benefits of the Companys global diversification, foreign
exchange exposures for each currency are netted internally so that only its net foreign exchange
exposures are, as appropriate, hedged with financial instruments.
The Company hedges 70% to 90% of the nominal amount of each of its known foreign exchange
transactional exposures. The Company primarily enters into foreign currency exchange contracts to
reduce the earnings and cash flow impact of the variation of non-functional currency denominated
receivables and payables. Gains and losses resulting from hedging instruments offset the foreign
exchange gains or losses on the underlying assets and liabilities being hedged. The maturities of
the forward exchange contracts generally coincide with the settlement dates of the related
transactions. Realized and unrealized gains and losses on these contracts are recognized in the
same period as gains and losses on the hedged items. The Company also selectively hedges
anticipated transactions that are subject to foreign exchange exposure, primarily with foreign
currency exchange contracts, which are designated as cash flow hedges in accordance with ASC 815.
At September 30, 2011 and 2010, the Company estimates that an unfavorable 10% change in the
exchange rates would have decreased net unrealized gains by approximately $54 million and $107
million, respectively.
The Company has entered into cross-currency interest rate swaps to selectively hedge portions of
its net investment in Japan. The currency effects of the cross-currency interest rate swaps are
reflected in the accumulated other comprehensive income (AOCI) account within shareholders equity
attributable to Johnson Controls, Inc. where they offset gains and losses recorded on the Companys
net investment in Japan.
Interest Rates
The Company uses interest rate swaps to offset its exposure to interest rate movements. In
accordance with ASC 815, these outstanding swaps qualify and are designated as fair value hedges.
As of September 30, 2011, the Company had eight interest rate swaps totaling $850 million
outstanding. A 10% increase in the average cost of the Companys variable rate debt would result in
an unfavorable change in pre-tax interest expense of approximately $5 million and $1 million at
September 30, 2011 and 2010, respectively.
Commodities
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 a cash flow hedge,
gains and losses resulting from the hedging instruments offset the gains or losses on purchases of
the underlying commodities that will be used in the business. The maturities of the commodity
contracts coincide with the expected purchase of the commodities.
ENVIRONMENTAL, HEALTH AND SAFETY AND OTHER MATTERS
The Companys global operations are governed by Environmental Laws and Worker Safety Laws. Under
various circumstances, these laws impose civil and criminal penalties and fines, as well as
injunctive and remedial relief, for noncompliance and require remediation at sites where
Company-related substances have been released into the environment.
The Company has expended substantial resources globally, both financial and managerial, to comply
with applicable Environmental Laws and Worker Safety Laws, and to protect the environment and
workers. The Company believes it is in substantial compliance with such laws and maintains
procedures designed to foster and ensure compliance. However, the Company has been, and in the
future may become, the subject of formal or informal enforcement actions or proceedings regarding
noncompliance with such laws or the remediation of Company-related substances released into the
environment. Such matters typically are resolved by negotiation with regulatory authorities
resulting in commitments to compliance, abatement or remediation programs and in some cases payment
of penalties. Historically, neither such commitments nor penalties imposed on the Company have been
material.
Environmental considerations are a part of all significant capital expenditure decisions; however,
expenditures in fiscal 2011 related solely to environmental compliance were not material. At
September 30, 2011 and 2010, the
48
Company recorded environmental liabilities of $30 million and $47
million, respectively. A charge to income is recorded when it is probable that a liability has been
incurred and the amount of the liability is reasonably estimable. The Companys environmental
liabilities do not take into consideration any possible recoveries of future insurance proceeds.
Because of the uncertainties associated with environmental remediation activities at sites where
the Company may be potentially liable, future expenses to remediate identified sites could be
considerably higher than the accrued liability. However, while neither the timing nor the amount of
ultimate costs associated with known environmental remediation matters can be determined at this
time, the Company does not expect that these matters will have a material adverse effect on its
financial position, results of operations or cash flows. In addition, the Company has identified
asset retirement obligations for environmental matters that are expected to be addressed at the
retirement, disposal, removal or abandonment of existing owned facilities, primarily in the power
solutions business. At September 30, 2011 and 2010, the Company recorded conditional asset
retirement obligations of $91 million and $84 million, respectively.
Additionally, the Company is involved in a number of product liability and various other casualty
lawsuits incident to the operation of its businesses. Insurance coverages are maintained and
estimated costs are recorded for claims and suits of this nature. It is managements opinion that
none of these will have a materially adverse effect on the Companys financial position, results of
operations or cash flows (see Note 19, Commitments and Contingencies, of the notes to
consolidated financial statements). Costs related to such matters were not material to the periods
presented.
QUARTERLY FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except per share data) |
|
First |
|
Second |
|
Third |
|
Fourth |
|
Full |
(unaudited) |
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
Year |
2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
9,537 |
|
|
$ |
10,144 |
|
|
$ |
10,364 |
|
|
$ |
10,788 |
|
|
$ |
40,833 |
|
Gross profit |
|
|
1,414 |
|
|
|
1,474 |
|
|
|
1,550 |
|
|
|
1,732 |
|
|
|
6,170 |
|
Net income attributable
to Johnson Controls, Inc. (1) |
|
|
375 |
|
|
|
354 |
|
|
|
357 |
|
|
|
538 |
|
|
|
1,624 |
|
Earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (3) |
|
|
0.56 |
|
|
|
0.52 |
|
|
|
0.53 |
|
|
|
0.79 |
|
|
|
2.40 |
|
Diluted (3) |
|
|
0.55 |
|
|
|
0.51 |
|
|
|
0.52 |
|
|
|
0.78 |
|
|
|
2.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. (2) |
|
|
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 |
|
|
|
|
(1) |
|
The fiscal 2011 second quarter net income includes $36 million of costs related
to business acquisitions recorded in the automotive experience Europe segment. The
fiscal 2011 third quarter net income includes $28 million of costs related to business
acquisitions recorded in the automotive experience Europe segment. The fiscal 2011
fourth quarter net income includes a $37 million gain on acquisition of a power
solutions partially-owned affiliate net of acquisition costs, related purchase
accounting adjustments and a power solutions partially-owned affiliates restatement of
prior period income, and $43 million of restructuring costs recorded in the building
efficiency and automotive experience businesses. The preceding amounts are stated on a
pre-tax basis. |
|
(2) |
|
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 partially-owned affiliate recorded in the automotive experience North
America segment and a $37 million gain on acquisition of a Korean partially-owned
affiliate 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. |
49
|
|
|
(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. |
|
|
|
ITEM 7A |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
See
Risk Management included in Item 7 Managements Discussion and Analysis of Financial
Condition and Results of Operations.
50
|
|
|
ITEM 8 |
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Index to Consolidated Financial Statements
|
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|
Page |
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52 |
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54 |
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|
|
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|
55 |
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56 |
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57 |
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58 |
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|
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|
105 |
|
|
|
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|
|
51
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Johnson Controls, Inc.
In our opinion, the consolidated financial statements listed in the accompanying index present
fairly, in all material respects, the financial position of Johnson Controls, Inc. and its
subsidiaries at September 30, 2011 and 2010, and the results of their operations and their cash
flows for each of the three years in the period ended September 30, 2011 in conformity with
accounting principles generally accepted in the United States of America. In addition, in our
opinion, the financial statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth therein when read in conjunction with
the related consolidated financial statements. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of September 30, 2011,
based on criteria established in Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is responsible
for these financial statements and financial statement schedule, for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting, included in Managements Report on Internal Control Over Financial
Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial
statements, on the financial statement schedule, and on the Companys internal control over
financial reporting based on our integrated audits. We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement and whether effective internal control over financial
reporting was maintained in all material respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. Our audit of internal control over
financial reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the companys assets that could have a material
effect on the financial statements.
PricewaterhouseCoopers LLP, 100 East Wisconsin Avenue, Milwaukee, WI 53202
T: (414)212- 1600, F: (414) 212- 1880, www.pwc.com/us
52
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
November 22, 2011
53
Johnson Controls, Inc.
Consolidated Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30, |
|
(in millions, except per share data) |
|
2011 |
|
|
2010 |
|
|
2009 |
|
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
Products and systems* |
|
$ |
32,420 |
|
|
$ |
27,204 |
|
|
$ |
21,837 |
|
Services* |
|
|
8,413 |
|
|
|
7,101 |
|
|
|
6,660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,833 |
|
|
|
34,305 |
|
|
|
28,497 |
|
Cost of sales |
|
|
|
|
|
|
|
|
|
|
|
|
Products and systems* |
|
|
27,631 |
|
|
|
23,226 |
|
|
|
19,618 |
|
Services* |
|
|
7,032 |
|
|
|
5,790 |
|
|
|
5,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,663 |
|
|
|
29,016 |
|
|
|
24,948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
6,170 |
|
|
|
5,289 |
|
|
|
3,549 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
(4,183 |
) |
|
|
(3,610 |
) |
|
|
(3,210 |
) |
Restructuring costs |
|
|
|
|
|
|
|
|
|
|
(230 |
) |
Debt conversion costs |
|
|
|
|
|
|
|
|
|
|
(111 |
) |
Net financing charges |
|
|
(174 |
) |
|
|
(170 |
) |
|
|
(239 |
) |
Equity income (loss) |
|
|
298 |
|
|
|
254 |
|
|
|
(77 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
2,111 |
|
|
|
1,763 |
|
|
|
(318 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
370 |
|
|
|
197 |
|
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
1,741 |
|
|
|
1,566 |
|
|
|
(350 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) attributable to noncontrolling interests |
|
|
117 |
|
|
|
75 |
|
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Johnson Controls, Inc. |
|
$ |
1,624 |
|
|
$ |
1,491 |
|
|
$ |
(338 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
2.40 |
|
|
$ |
2.22 |
|
|
$ |
(0.57 |
) |
Diluted |
|
$ |
2.36 |
|
|
$ |
2.19 |
|
|
$ |
(0.57 |
) |
|
|
|
* |
|
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. |
The accompanying notes are an integral part of the financial statements.
54
Johnson Controls, Inc.
Consolidated Statements of Financial Position
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
(in millions, except par value and share data) |
|
2011 |
|
|
2010 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
257 |
|
|
$ |
560 |
|
Accounts receivable, less allowance for doubtful
accounts of $89 and $96, respectively |
|
|
7,151 |
|
|
|
6,095 |
|
Inventories |
|
|
2,316 |
|
|
|
1,786 |
|
Other current assets |
|
|
2,291 |
|
|
|
2,211 |
|
|
|
|
|
|
|
|
Current assets |
|
|
12,015 |
|
|
|
10,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment net |
|
|
5,616 |
|
|
|
4,096 |
|
Goodwill |
|
|
7,016 |
|
|
|
6,501 |
|
Other intangible assets net |
|
|
945 |
|
|
|
741 |
|
Investments in partially-owned affiliates |
|
|
811 |
|
|
|
728 |
|
Other noncurrent assets |
|
|
3,273 |
|
|
|
3,025 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
29,676 |
|
|
$ |
25,743 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt |
|
$ |
596 |
|
|
$ |
75 |
|
Current portion of long-term debt |
|
|
17 |
|
|
|
662 |
|
Accounts payable |
|
|
6,159 |
|
|
|
5,426 |
|
Accrued compensation and benefits |
|
|
1,315 |
|
|
|
1,122 |
|
Other current liabilities |
|
|
2,695 |
|
|
|
2,625 |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
10,782 |
|
|
|
9,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
4,533 |
|
|
|
2,652 |
|
Pension, postretirement health and other benefits |
|
|
1,102 |
|
|
|
993 |
|
Other noncurrent liabilities |
|
|
1,819 |
|
|
|
1,815 |
|
|
|
|
|
|
|
|
Long-term liabilities |
|
|
7,454 |
|
|
|
5,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 19) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable noncontrolling interests |
|
|
260 |
|
|
|
196 |
|
|
|
|
|
|
|
|
|
|
Common Stock, $.01 7/18 par value
shares authorized: 1,800,000,000
shares issued: 2011 - 682,634,236; 2010 - 676,197,237 |
|
|
9 |
|
|
|
9 |
|
Capital in excess of par value |
|
|
2,620 |
|
|
|
2,448 |
|
Retained earnings |
|
|
8,922 |
|
|
|
7,765 |
|
Treasury stock, at cost (2011 - 2,470,168; 2010 - 2,470,565 shares) |
|
|
(74 |
) |
|
|
(74 |
) |
Accumulated other comprehensive income (loss) |
|
|
(435 |
) |
|
|
(77 |
) |
|
|
|
|
|
|
|
Shareholders equity attributable to Johnson Controls, Inc. |
|
|
11,042 |
|
|
|
10,071 |
|
|
|
|
|
|
|
|
Noncontrolling interests |
|
|
138 |
|
|
|
106 |
|
|
|
|
|
|
|
|
Total equity |
|
|
11,180 |
|
|
|
10,177 |
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
$ |
29,676 |
|
|
$ |
25,743 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the financial statements.
55
Johnson Controls, Inc.
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, |
|
(in millions) |
|
2011 |
|
|
2010 |
|
|
2009 |
|
Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Johnson Controls, Inc. |
|
$ |
1,624 |
|
|
$ |
1,491 |
|
|
$ |
(338 |
) |
Income (loss) attributable to noncontrolling interests |
|
|
117 |
|
|
|
75 |
|
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
1,741 |
|
|
|
1,566 |
|
|
|
(350 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income (loss) to
cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
678 |
|
|
|
648 |
|
|
|
707 |
|
Amortization of intangibles |
|
|
53 |
|
|
|
43 |
|
|
|
38 |
|
Equity in earnings of partially-owned affiliates,
net of dividends received |
|
|
(15 |
) |
|
|
5 |
|
|
|
237 |
|
Deferred income taxes |
|
|
(144 |
) |
|
|
(85 |
) |
|
|
6 |
|
Impairment charges |
|
|
|
|
|
|
41 |
|
|
|
156 |
|
Fair value adjustment of equity investment |
|
|
(89 |
) |
|
|
(47 |
) |
|
|
|
|
Debt conversion costs |
|
|
|
|
|
|
|
|
|
|
101 |
|
Equity-based compensation |
|
|
59 |
|
|
|
49 |
|
|
|
60 |
|
Other |
|
|
37 |
|
|
|
36 |
|
|
|
18 |
|
Changes in assets and liabilities, excluding acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
Receivables |
|
|
(721 |
) |
|
|
(608 |
) |
|
|
796 |
|
Inventories |
|
|
(387 |
) |
|
|
(260 |
) |
|
|
557 |
|
Other assets |
|
|
(118 |
) |
|
|
274 |
|
|
|
(483 |
) |
Restructuring reserves |
|
|
(94 |
) |
|
|
(195 |
) |
|
|
(83 |
) |
Accounts payable and accrued liabilities |
|
|
(55 |
) |
|
|
218 |
|
|
|
(635 |
) |
Accrued income taxes |
|
|
131 |
|
|
|
(247 |
) |
|
|
(300 |
) |
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities |
|
|
1,076 |
|
|
|
1,438 |
|
|
|
825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(1,325 |
) |
|
|
(777 |
) |
|
|
(647 |
) |
Sale of property, plant and equipment |
|
|
54 |
|
|
|
47 |
|
|
|
28 |
|
Acquisition of businesses, net of cash acquired |
|
|
(1,226 |
) |
|
|
(61 |
) |
|
|
(38 |
) |
Settlement of cross-currency interest rate swaps |
|
|
|
|
|
|
|
|
|
|
31 |
|
Changes in long-term investments |
|
|
(140 |
) |
|
|
(101 |
) |
|
|
(110 |
) |
|
|
|
|
|
|
|
|
|
|
Cash used by investing activities |
|
|
(2,637 |
) |
|
|
(892 |
) |
|
|
(736 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in short-term debt net |
|
|
510 |
|
|
|
(575 |
) |
|
|
213 |
|
Increase in long-term debt |
|
|
1,852 |
|
|
|
515 |
|
|
|
883 |
|
Repayment of long-term debt |
|
|
(787 |
) |
|
|
(526 |
) |
|
|
(391 |
) |
Payment of cash dividends |
|
|
(413 |
) |
|
|
(339 |
) |
|
|
(309 |
) |
Debt conversion costs |
|
|
|
|
|
|
|
|
|
|
(101 |
) |
Proceeds from the exercise of stock options |
|
|
105 |
|
|
|
52 |
|
|
|
8 |
|
Settlement of interest rate swaps |
|
|
24 |
|
|
|
|
|
|
|
|
|
Cash paid to acquire a noncontrolling interest |
|
|
(23 |
) |
|
|
|
|
|
|
|
|
Other |
|
|
(29 |
) |
|
|
(22 |
) |
|
|
(25 |
) |
|
|
|
|
|
|
|
|
|
|
Cash provided (used) by financing activities |
|
|
1,239 |
|
|
|
(895 |
) |
|
|
278 |
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
19 |
|
|
|
148 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
(303 |
) |
|
|
(201 |
) |
|
|
377 |
|
Cash and cash equivalents at beginning of period |
|
|
560 |
|
|
|
761 |
|
|
|
384 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
257 |
|
|
$ |
560 |
|
|
$ |
761 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the financial statements.
56
Johnson Controls, Inc.
Consolidated Statements of Shareholders Equity Attributable to Johnson Controls, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 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 8) |
|
|
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 |
) |
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Johnson Controls, Inc. |
|
|
1,624 |
|
|
|
|
|
|
|
|
|
|
|
1,624 |
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
(109 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(109 |
) |
Realized and unrealized losses on derivatives |
|
|
(47 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(47 |
) |
Unrealized gains on marketable common stock |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
Employee retirement plans |
|
|
(205 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(205 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss |
|
|
(358 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
1,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common ($0.64 per share) |
|
|
(435 |
) |
|
|
|
|
|
|
|
|
|
|
(435 |
) |
|
|
|
|
|
|
|
|
Redemption value adjustment attributable
to redeemable noncontrolling interests |
|
|
(32 |
) |
|
|
|
|
|
|
|
|
|
|
(32 |
) |
|
|
|
|
|
|
|
|
Other, including options exercised |
|
|
172 |
|
|
|
|
|
|
|
172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2011 |
|
$ |
11,042 |
|
|
$ |
9 |
|
|
$ |
2,620 |
|
|
$ |
8,922 |
|
|
$ |
(74 |
) |
|
$ |
(435 |
) |
|
The accompanying notes are an integral part of the financial statements.
57
Johnson Controls, Inc.
Notes to Consolidated Financial Statements
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.
On October 1, 2010, the Company adopted 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 amends the consolidation guidance applicable to
variable interest entities (VIEs) and requires additional disclosures concerning an enterprises
continuing involvement with VIEs. Under certain criteria as provided for in Financial Accounting
Standards Board (FASB) Accounting Standards Codification (ASC) 810, Consolidation, the Company
may consolidate a partially-owned affiliate. To determine whether to consolidate a partially-owned
affiliate, the Company first determines if the entity is a 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 with the power to direct
activities of the VIE that most significantly impact the VIEs economic performance and the
potential to absorb benefits or losses that could be significant to the VIE is considered the
primary beneficiary and consolidates the VIE. The Company evaluated the impact of this guidance and
determined that the adoption did not result in consolidation of additional entities or
deconsolidation of existing VIEs. As such, the adoption of this guidance had no impact on the
Companys consolidated financial condition and results of operations, and appropriate disclosures
have been included herein.
Consolidated VIEs
Based upon the criteria set forth in ASC 810, the Company has determined that for the reporting
periods ended September 30, 2011 and 2010 it was the primary beneficiary in two VIEs in which it
holds less than 50% ownership as the Company absorbs significant economics of the entities and has
the power to direct the activities that are considered most significant to the entities. The
Company funds the entities short term liquidity needs through revolving credit facilities and has
the power to direct the activities that are considered most significant to the entities through its
key customer supply relationships. These two VIEs manufacture products in North America for the
automotive industry. The carrying amounts and classification of assets (none of which are
restricted) and liabilities included in the Companys consolidated statements of financial position
for the consolidated VIEs are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
2011 |
|
|
2010 |
|
Current assets |
|
$ |
207 |
|
|
$ |
215 |
|
Noncurrent assets |
|
|
55 |
|
|
|
69 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
262 |
|
|
$ |
284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
144 |
|
|
$ |
174 |
|
Noncurrent liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
144 |
|
|
$ |
174 |
|
|
|
|
|
|
|
|
58
Nonconsolidated VIEs
During the three month period ended June 30, 2011, the Company acquired a 40% interest in an equity
method investee. The investee produces and sells lead-acid batteries of which the Company will both
purchase and supply certain batteries to complement each investment partners portfolio. Commencing
on the third anniversary of the closing date, the Company has a contractual right to purchase the
remaining 60% equity interest in the investee (the call option). If the Company does not exercise
the call option on or before the fifth anniversary of the closing date and for a period of six
months thereafter, the Company is subject to a contractual obligation at the counterpartys option
to sell the Companys equity investment in the investee to the counterparty (the repurchase
option). The purchase price is fixed under both the call option and the repurchase option. Based
upon the criteria set forth in ASC 810, the Company has determined that the investee is a VIE as
the equity holders, through their equity investments, may not participate fully in the entitys
residual economics. The Company is not the primary beneficiary as the Company does not have the
power to make key operating decisions considered to be most significant to the VIE. Therefore, the
investee is accounted for under the equity method of accounting as the Companys interest exceeds
20% and the Company does not have a controlling interest. The investment balance included within
investments in partially-owned affiliates in the consolidated statement of financial position at
September 30, 2011 was $49 million, which represents the Companys maximum exposure to loss.
Current assets and liabilities related to the VIE are immaterial and represent normal course of
business trade receivables and payables for all presented periods.
Based upon the criteria set forth in ASC 810, the Company has determined that it holds a variable
interest in an equity method investee that was considered thinly capitalized at the time of its
initial investment. The entity has been primarily financed with third party debt. During the three
month period ended March 31, 2011, the owners of the remaining interest exercised their option to
put their interest to the Company. The Company has twelve months from the date the notice was
received to set the date of the put closing, reorganize the ownership structure or secure a third
party buyer. The value of the put will be at a price that approximates fair value. The Company is
not the primary beneficiary as the Company cannot make key operating decisions considered to be
most significant to the VIE prior to the put closing. Therefore, the entity is accounted for under
the equity method of accounting as the Companys interest exceeds 20% and the Company does not have
a controlling interest. The Companys maximum exposure to loss, which includes the partially-owned
affiliate investment balance and a note receivable, approximates $43 million at September 30, 2011
and $41 million at September 30, 2010. Current liabilities due to the VIE are immaterial and
represent normal course of business trade payables for all presented periods. Additionally, the
Company consumes a significant amount of the investees manufacturing output.
The Company did not have a significant variable interest in any other nonconsolidated VIEs for the
presented reporting periods.
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. See Note 9, Derivative Instruments and Hedging
Activities, and Note 10, Fair Value Measurements, of the notes to consolidated financial
statements for fair value of financial instruments, including derivative instruments, hedging
activities and long-term debt.
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
59
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, 2011 and 2010, the Company recorded within the
consolidated statements of financial position approximately $215 million and $304 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, 2011 and 2010, approximately $109
million and $72 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, 2011 and 2010, the Company recorded within the consolidated statements
of financial position in other current assets approximately $254 million and $212 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 15 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.
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 or one level below the reportable segments in certain instances,
using a fair-value method based on managements judgments and assumptions or third party
valuations. The fair value of a reporting unit refers to the price that would be received to sell
the unit as a whole in an orderly transaction between market participants at the measurement date.
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 inputs utilized in the analyses are classified as
Level 3 inputs within the fair value hierarchy as defined in ASC 820, Fair Value Measurements and
Disclosures. 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 2011, 2010 and 2009 indicated that the estimated fair
value of each reporting unit substantially
60
exceeded its corresponding carrying amount including
recorded goodwill, and as such, no impairment existed at September 30, 2011, 2010 and 2009. No
reporting unit was determined to be at risk of failing step one of the goodwill impairment test.
At December 31, 2010, in conjunction with the preparation of its financial statements, the Company
assessed goodwill for impairment in the building efficiency business due to the change in
reportable segments as described in Note 18, Segment Information, of the notes to consolidated
financial statements. As a result, the Company performed impairment testing for goodwill under the
new segment structure and determined that the estimated fair value of each reporting unit
substantially exceeded its corresponding carrying amount including recorded goodwill, and as such,
no impairment existed at December 31, 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 other segment
(formerly 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 other 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, 2011, 2010 and
2009, 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 the assets carrying amount may not be recoverable. The Company conducts its long-lived asset
impairment analyses in accordance with ASC 360-10-15, Impairment or Disposal of Long-Lived
Assets. ASC 360-10-15 requires the Company to group assets and liabilities at the lowest level for
which identifiable cash flows are largely independent of the cash flows of other assets and
liabilities and evaluate the asset group against the sum of the undiscounted future cash flows. If
the undiscounted cash flows do not indicate the carrying amount of the asset is recoverable, an
impairment charge is measured as the amount by which the carrying amount of the asset group exceeds
its fair value based on discounted cash flow analysis or appraisals. See Note 16, Impairment of
Long-Lived Assets, for disclosure of the impairment analyses performed by the Company during
fiscal 2011, 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 position. Amounts included within accounts receivable net related to these
contracts were $773 million and $683
61
million at September 30, 2011 and 2010, respectively. Amounts
included within other current liabilities were $730 million and $639 million at September 30, 2011
and 2010, respectively.
Revenue Recognition
The Companys building efficiency business recognizes revenue from certain long-term contracts over
the contractual period under the percentage-of-completion (POC) 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. Recognized revenues that
will not be billed under the terms of the contract until a later date are recorded in unbilled
accounts receivable. Likewise, contracts where billings to date have exceeded recognized revenues
are recorded in other current liabilities. Changes to the original estimates may be required during
the life of the contract and such estimates are reviewed monthly. 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 use of the POC method of accounting involves considerable use of estimates in
determining revenues, costs and profits and in assigning the amounts to accounting periods. The
periodic reviews have not resulted in adjustments that were significant to the Companys results of
operations. The Company continually evaluates all of the assumptions, risks and uncertainties
inherent with the application of the POC method of accounting.
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) and refrigeration products and services in bundled arrangements, where multiple
products and/or services are involved. In accordance with ASU No. 2009-13, Revenue Recognition
(Topic 605): Multiple-Deliverable Revenue Arrangements A Consensus of the FASB Emerging Issues
Task Force, the Company divides bundled arrangements into separate deliverables and revenue is
allocated to each deliverable based on the relative selling price method. Significant deliverables
within these arrangements include equipment, commissioning, service labor and extended warranties.
In order to estimate relative selling price, market data and transfer price studies are utilized.
Approximately four to twelve months separate the timing of the first deliverable until the last
piece of equipment is delivered, and there may be extended warranty arrangements with duration of
one to five years commencing upon the end of the standard warranty period.
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, 2011, 2010
and 2009 were $876 million, $723 million and $767 million, respectively.
A portion of the costs associated with these activities is reimbursed by customers and, for the
fiscal years ended September 30, 2011, 2010 and 2009 were $366 million, $315 million and $431
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, 2011 and 2010. 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 12, Earnings per Share, of the notes to consolidated financial statements for the
calculation of earnings per share.
62
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 (losses) included in
net income for the years ended September 30, 2011, 2010 and 2009 were ($30) million, $50
million and ($18) million, respectively.
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 9, Derivative
Instruments and Hedging Activities, and Note 10, Fair Value Measurements, of the notes to
consolidated financial statements 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.
Recoverable customer engineering expenditures are included in the changes in other assets line
within the operating activities section of the consolidated statements of cash flows. In prior
years, these cash flows were included in the investing activities section. Also, the long-term
portion of pension liabilities is now included in the pension, postretirement health and other
benefits line within the long-term liabilities section of the consolidated statements of financial
position. In prior years, these liabilities were included in the other noncurrent liabilities line.
Also, effective October 1, 2010, the building efficiency business reorganized its management
reporting structure to reflect its current business activities. Historical information has been
revised to reflect the new building efficiency reportable segment structure. Refer to Note 18,
Segment Information, of the notes to consolidated financial statements for further information.
New Accounting Pronouncements
In September 2011, the FASB issued ASU No. 2011-09, Compensation Retirement Benefits
Multiemployer Plans (Subtopic 715-80): Disclosures about an Employers Participation in a
Multiemployer Plan. ASU No. 2011-09 requires additional quantitative and qualitative disclosures
about an employers participation in multiemployer pension plans, including disclosure of the name
and identifying number of the significant multiemployer plans in which the employer participates,
the level of the employers participation in the plans, the financial health of the plans and the
nature of the employer commitments to the plans. ASU No. 2011-09 will be effective for the Company
for the fiscal year ending September 30, 2012. The adoption of this guidance will have no impact on
the Companys consolidated financial condition and results of operations.
In September 2011, the FASB issued ASU No. 2011-08, Intangibles Goodwill and Other (Topic 350):
Testing Goodwill for Impairment. ASU No. 2011-08 provides companies an option to perform a
qualitative assessment to determine whether further goodwill impairment testing is necessary. If,
as a result of the qualitative assessment, it is determined that it is more likely than not that a
reporting units fair value is less than its carrying amount, the two-step quantitative impairment
test is required. Otherwise, no further testing is required. ASU No. 2011-08 will be effective for
the Company for goodwill impairment tests performed in the fiscal year ending September 30, 2013,
with early adoption permitted. The adoption of this guidance is expected to have no impact on the
Companys consolidated financial condition and results of operations.
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of
Comprehensive Income. ASU No. 2011-05 eliminates the option to present components of other
comprehensive income as part of the statement of shareholders equity. All non-owner changes in
shareholders equity instead must be presented either in a single continuous statement of
comprehensive income or in two separate but consecutive statements. Also, reclassification
adjustments for items that are reclassified from other comprehensive income to net
63
income must be
presented on the face of the financial statements. ASU No. 2011-05 will be effective for the
Company for the quarter ending December 31, 2012. The adoption of this guidance will have no impact
on the Companys consolidated financial condition and results of operations.
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to
Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ASU No.
2011-04 clarifies and changes the application of various fair value measurement principles and
disclosure requirements, and will be effective for the Company in the second quarter of fiscal 2012
(January 1, 2012). The Company has assessed the updated guidance and expects adoption to have no
impact on the Companys consolidated financial condition and results of operations. Refer to Note
10, Fair Value Measurements, of the notes to consolidated financial statements for disclosures
surrounding the Companys fair value measurements.
In December 2009, the FASB issued 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 was effective for the Company beginning in the first
quarter of fiscal 2011 (October 1, 2010). The adoption of this guidance had no impact on the
Companys consolidated financial condition and results of operations. Refer to the Principles of
Consolidation section of Note 1, Summary of Significant Accounting Policies, of the notes to
consolidated financial statements for further discussion.
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 provides application guidance on whether multiple deliverables exist, how the
deliverables should be separated and how the consideration should be allocated to one or more units
of accounting. This guidance eliminates the use of the residual method allocation and requires that
arrangement consideration be allocated at the inception of the arrangement to all deliverables
using the relative selling price method. The selling price used for each deliverable will be based
on vendor-specific objective evidence if available, third party evidence if vendor-specific
objective evidence is not available, or estimated selling price if neither vendor-specific or third
party evidence is available. The amendments in this ASU also expand the disclosures related to a
vendors multiple-deliverable revenue arrangements. The Company adopted ASU No. 2009-13 on October
1, 2010 and appropriate disclosures have been included herein. As each deliverable had a
determinable relative selling price and the residual method was not previously utilized by the
Company, there were no changes in units of accounting, the allocation process, or the pattern and
timing of revenue recognition upon adoption of ASU No. 2009-13. Furthermore, adoption of this ASU
is not expected to have a material effect on the consolidated financial condition or results of
operations in subsequent periods.
During the fourth quarter of fiscal 2011, the Company acquired an additional 49% of a power
solutions partially-owned affiliate. The acquisition increased the Companys ownership percentage
to 100%. The Company paid approximately $143 million (excluding cash acquired of $11 million) for
the additional ownership percentage and incurred approximately $15 million of acquisition costs and
related purchase accounting adjustments. As a result of the acquisition, the Company recorded a
non-cash gain of $75 million within power solutions equity income to adjust the Companys existing
equity investment in the partially-owned affiliate to fair value. Goodwill of $94 million was
recorded as part of the transaction. The purchase price allocation may be subsequently adjusted to
reflect final valuation studies.
During the third quarter of fiscal 2011, the Company completed its acquisition of
Keiper/Recaro Automotive, a leader in recliner system technology with engineering and manufacturing
expertise in metals and mechanisms for automobile seats, based in Kaiserslautern, Germany. The
total purchase price, net of cash acquired, was approximately $450 million, all of which was paid
as of September 30, 2011. In connection with the Keiper/Recaro Automotive acquisition, the Company
recorded goodwill of $126 million in the automotive experience Europe segment. The purchase price
allocation may be subsequently adjusted to reflect final valuation studies.
The Keiper/Recaro Automotive acquisition strengthens the Companys metal components and mechanisms
business. Keiper/Recaros expertise includes the complete engineering process and technologies used
to produce metal seat components, structures and mechanisms. The product range encompasses
mechanisms which adjust the seats length and height, recliners that adjust the backrest position
of vehicle seats, and rear seat latches. The acquisition
64
strengthens the Companys competitive position in key seating components with expanded opportunities to develop new differentiating
products and technologies. Increasing vertical integration and enhancing the Companys seating
components technologies are expected to accelerate future growth of the Companys automotive
seating business.
During the second quarter of fiscal 2011, the Company completed its acquisition of the C. Rob.
Hammerstein Group (Hammerstein), a leading global supplier of high-quality metal seat structures,
components and mechanisms based in Solingen, Germany. The total purchase price, net of cash
acquired, was approximately $529 million, all of which was paid as of September 30, 2011. In
connection with the Hammerstein acquisition, the Company recorded goodwill of $193 million
primarily in the automotive experience Europe segment. The purchase price allocation may be
subsequently adjusted to reflect final valuation studies.
The Hammerstein acquisition enables the Companys automotive experience business to enhance its
expertise in metal seat structures and expand into premium vehicle segments. Hammersteins strong
product portfolio and customer base in the premium segment complements the Companys product
portfolio, which is primarily comprised of vehicle segments with high production volumes.
Hammersteins product capabilities include front seat structures, seat tracks and height adjusters,
multi-way adjusters, power gear boxes, as well as special applications such as steering column
adjusters. Hammersteins expertise includes the complete product development process, from design
and engineering to the manufacture of individual components and complete seat systems.
Also during fiscal 2011, the Company completed five additional acquisitions for a combined
purchase price, net of cash acquired, of $115 million, all of which was paid as of September 30,
2011. The acquisitions in the aggregate were not material to the Companys consolidated financial
statements. As a result of one of these acquisitions, which increased the Companys ownership from
a noncontrolling to controlling interest, the Company recorded a non-cash gain of $14 million
within automotive experience Asia equity income to adjust the Companys existing equity investment
in the partially-owned affiliate to fair value. In connection with the acquisitions, the Company
recorded goodwill of $105 million. The purchase price allocations may be subsequently adjusted to
reflect final valuation studies.
In July 2010, the Company acquired an additional 40% of a power solutions Korean partially-owned
affiliate. 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 partially-owned affiliate
to fair value. Goodwill of $51 million was recorded as part of the transaction.
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.
During fiscal 2009, the Company completed four acquisitions for a combined purchase price of $43
million, of which $38 million was paid as of September 30, 2009. The acquisitions in the aggregate
were not 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.
65
Inventories consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
2011 |
|
|
2010 |
|
Raw materials and supplies |
|
$ |
1,136 |
|
|
$ |
899 |
|
Work-in-process |
|
|
434 |
|
|
|
278 |
|
Finished goods |
|
|
867 |
|
|
|
743 |
|
|
|
|
|
|
|
|
FIFO inventories |
|
|
2,437 |
|
|
|
1,920 |
|
LIFO reserve |
|
|
(121 |
) |
|
|
(134 |
) |
|
|
|
|
|
|
|
Inventories |
|
$ |
2,316 |
|
|
$ |
1,786 |
|
|
|
|
|
|
|
|
Inventories valued using the LIFO method of accounting were approximately 18% and 22% of total
inventories at September 30, 2011 and 2010, respectively.
4. |
|
PROPERTY, PLANT AND EQUIPMENT |
Property, plant and equipment consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
2011 |
|
|
2010 |
|
Buildings and improvements |
|
$ |
2,488 |
|
|
$ |
2,161 |
|
Machinery and equipment |
|
|
7,205 |
|
|
|
6,342 |
|
Construction in progress |
|
|
1,419 |
|
|
|
752 |
|
Land |
|
|
360 |
|
|
|
366 |
|
|
|
|
|
|
|
|
Total property, plant and equipment |
|
|
11,472 |
|
|
|
9,621 |
|
Less accumulated depreciation |
|
|
(5,856 |
) |
|
|
(5,525 |
) |
|
|
|
|
|
|
|
Property, plant and equipment net |
|
$ |
5,616 |
|
|
$ |
4,096 |
|
|
|
|
|
|
|
|
Interest costs capitalized during the fiscal years ended September 30, 2011, 2010 and 2009 were $34
million, $21 million and $16 million, respectively. Accumulated depreciation related to capital
leases at September 30, 2011 and 2010 was $44 million and $48 million, respectively.
5. |
|
GOODWILL AND OTHER INTANGIBLE ASSETS |
Effective October 1, 2010, the building efficiency business reorganized its management reporting
structure to reflect its current business activities. Historical information has been revised to
reflect the new building efficiency reportable segment structure. Refer to Note 18, Segment
Information, of the notes to consolidated financial statements for further information.
66
The changes in the carrying amount of goodwill in each of the Companys reporting segments for the
fiscal years ended September 30, 2011 and 2010 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
Global workplace solutions |
|
|
174 |
|
|
|
|
|
|
|
3 |
|
|
|
177 |
|
Asia |
|
|
369 |
|
|
|
|
|
|
|
10 |
|
|
|
379 |
|
Other |
|
|
1,116 |
|
|
|
|
|
|
|
(31 |
) |
|
|
1,085 |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency |
|
|
|
|
|
|
September 30, |
|
|
Business |
|
|
Translation and |
|
|
September 30, |
|
|
|
2010 |
|
|
Acquisitions |
|
|
Other |
|
|
2011 |
|
Building efficiency |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America systems |
|
$ |
522 |
|
|
$ |
|
|
|
$ |
(3 |
) |
|
$ |
519 |
|
North America service |
|
|
676 |
|
|
|
33 |
|
|
|
1 |
|
|
|
710 |
|
Global workplace solutions |
|
|
177 |
|
|
|
|
|
|
|
7 |
|
|
|
184 |
|
Asia |
|
|
379 |
|
|
|
|
|
|
|
12 |
|
|
|
391 |
|
Other |
|
|
1,085 |
|
|
|
|
|
|
|
(20 |
) |
|
|
1,065 |
|
Automotive experience |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
|
1,378 |
|
|
|
2 |
|
|
|
(1 |
) |
|
|
1,379 |
|
Europe |
|
|
1,140 |
|
|
|
371 |
|
|
|
(8 |
) |
|
|
1,503 |
|
Asia |
|
|
233 |
|
|
|
16 |
|
|
|
12 |
|
|
|
261 |
|
Power solutions |
|
|
911 |
|
|
|
96 |
|
|
|
(3 |
) |
|
|
1,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,501 |
|
|
$ |
518 |
|
|
$ |
(3 |
) |
|
$ |
7,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys other intangible assets, primarily from business acquisitions, are valued based
on independent appraisals and consisted of (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2011 |
|
September 30, 2010 |
|
|
Gross |
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Carrying |
|
Accumulated |
|
|
|
|
|
Carrying |
|
Accumulated |
|
|
|
|
Amount |
|
Amortization |
|
Net |
|
Amount |
|
Amortization |
|
Net |
|
|
|
|
|
Amortized intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patented technology |
|
$ |
298 |
|
|
$ |
(209 |
) |
|
$ |
89 |
|
|
$ |
277 |
|
|
$ |
(191 |
) |
|
$ |
86 |
|
Customer relationships |
|
|
487 |
|
|
|
(91 |
) |
|
|
396 |
|
|
|
373 |
|
|
|
(70 |
) |
|
|
303 |
|
Miscellaneous |
|
|
184 |
|
|
|
(38 |
) |
|
|
146 |
|
|
|
68 |
|
|
|
(31 |
) |
|
|
37 |
|
|
|
|
|
|
Total amortized
intangible assets |
|
|
969 |
|
|
|
(338 |
) |
|
|
631 |
|
|
|
718 |
|
|
|
(292 |
) |
|
|
426 |
|
Unamortized intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks |
|
|
314 |
|
|
|
|
|
|
|
314 |
|
|
|
315 |
|
|
|
|
|
|
|
315 |
|
|
|
|
|
|
Total intangible assets |
|
$ |
1,283 |
|
|
$ |
(338 |
) |
|
$ |
945 |
|
|
$ |
1,033 |
|
|
$ |
(292 |
) |
|
$ |
741 |
|
|
|
|
|
|
Amortization of other intangible assets for the fiscal years ended September 30, 2011, 2010
and 2009 was $53 million, $43 million and $38 million, respectively. Excluding the impact of any
future acquisitions, the Company anticipates amortization for fiscal 2012, 2013, 2014, 2015 and
2016 will be approximately $61 million, $54 million, $54 million, $51 million and $46 million,
respectively.
67
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. The Company monitors its warranty activity and adjusts its
reserve estimates when it is probable that future warranty costs will be different than those
estimates.
The 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, 2011 and 2010 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
September 30, |
|
|
|
2011 |
|
|
2010 |
|
Balance at beginning of period |
|
$ |
337 |
|
|
$ |
344 |
|
Accruals for warranties issued during the period |
|
|
217 |
|
|
|
260 |
|
Accruals from acquisitions |
|
|
12 |
|
|
|
1 |
|
Accruals related to pre-existing warranties (including changes in estimates) |
|
|
(32 |
) |
|
|
(18 |
) |
Settlements made (in cash or in kind) during the period |
|
|
(233 |
) |
|
|
(245 |
) |
Currency translation |
|
|
|
|
|
|
(5 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
301 |
|
|
$ |
337 |
|
|
|
|
|
|
|
|
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
$68 million and $41 million at September 30, 2011 and 2010, 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, 2011, 2010 and 2009 was $424
million, $389 million and $403 million, respectively.
Future minimum capital and operating lease payments and the related present value of capital lease
payments at September 30, 2011 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
Capital |
|
|
Operating |
|
|
|
Leases |
|
|
Leases |
|
2012 |
|
$ |
13 |
|
|
$ |
289 |
|
2013 |
|
|
11 |
|
|
|
231 |
|
2014 |
|
|
11 |
|
|
|
170 |
|
2015 |
|
|
9 |
|
|
|
122 |
|
2016 |
|
|
6 |
|
|
|
80 |
|
After 2016 |
|
|
36 |
|
|
|
100 |
|
|
|
|
|
|
|
|
Total minimum lease payments |
|
|
86 |
|
|
$ |
992 |
|
|
|
|
|
|
|
|
|
Interest |
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Present value of net minimum lease payments |
|
$ |
70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
68
8. |
|
DEBT AND FINANCING ARRANGEMENTS |
Short-term debt consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
2011 |
|
2010 |
Bank borrowings and commercial paper |
|
$ |
596 |
|
|
$ |
75 |
|
|
|
|
|
|
|
|
|
|
Weighted average interest rate on short-term
debt outstanding |
|
|
2.4 |
% |
|
|
6.2 |
% |
During the quarter ended March 31, 2011, the Company replaced its $2.05 billion committed five-year
credit facility, scheduled to maturity in December 2011, with a $2.5 billion committed four-year
credit facility scheduled to mature in February 2015. The facility is used to support the Companys
outstanding commercial paper. There were no draws against the committed credit facilities during
the fiscal years ended September 30, 2011 and 2010. Average outstanding commercial paper for the
fiscal year ended September 30, 2011 was $955 million and $409 million was outstanding at September
30, 2011. Average outstanding commercial paper for the fiscal year ended September 30, 2010 was
$342 million and none was outstanding at September 30, 2010.
Long-term debt consisted of the following (in millions; due dates by fiscal year):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
2011 |
|
|
2010 |
|
Unsecured notes |
|
|
|
|
|
|
|
|
5.25% due in 2011 ($654 million 2010 par value) |
|
$ |
|
|
|
$ |
655 |
|
5.8% due in 2013 ($100 million par value) |
|
|
101 |
|
|
|
102 |
|
4.875% due in 2013 ($300 million par value) |
|
|
321 |
|
|
|
327 |
|
Floating rate notes due in 2014 ($350 million par value) |
|
|
350 |
|
|
|
|
|
1.75% due in 2014 ($450 million par value) |
|
|
462 |
|
|
|
|
|
7.7% due in 2015 ($125 million par value) |
|
|
125 |
|
|
|
125 |
|
5.5% due in 2016 ($800 million par value) |
|
|
800 |
|
|
|
800 |
|
7.125% due in 2017 ($150 million par value) |
|
|
164 |
|
|
|
167 |
|
5.0% due in 2020 ($500 million par value) |
|
|
498 |
|
|
|
498 |
|
4.25% due 2021 ($500 million par value) |
|
|
497 |
|
|
|
|
|
6.0% due in 2036 ($400 million par value) |
|
|
395 |
|
|
|
395 |
|
5.7% due in 2041 ($300 million par value) |
|
|
299 |
|
|
|
|
|
11.5% due in 2042 (760,100 and 917,915 equity units in
2011 and 2010, respectively) |
|
|
38 |
|
|
|
46 |
|
11.5% notes due in 2042 ($8 million par value) |
|
|
8 |
|
|
|
|
|
6.95% due in 2046 ($125 million par value) |
|
|
125 |
|
|
|
125 |
|
Capital lease obligations |
|
|
70 |
|
|
|
34 |
|
Foreign-denominated debt |
|
|
|
|
|
|
|
|
Euro |
|
|
286 |
|
|
|
27 |
|
Other |
|
|
11 |
|
|
|
13 |
|
|
|
|
|
|
|
|
Gross long-term debt |
|
|
4,550 |
|
|
|
3,314 |
|
Less: current portion |
|
|
17 |
|
|
|
662 |
|
|
|
|
|
|
|
|
Net long-term debt |
|
$ |
4,533 |
|
|
$ |
2,652 |
|
|
|
|
|
|
|
|
At September 30, 2011, the Companys euro-denominated long-term debt was at fixed rates with a
weighted-average interest rate of 4.7%. At September 30, 2010, the Companys euro-denominated
long-term debt was at fixed rates with a weighted-average interest rate of 5.0%.
The installments of long-term debt maturing in subsequent fiscal years are: 2012 $17 million;
2013 $437 million; 2014 $930 million; 2015 $132 million; 2016 $805 million; 2017 and
thereafter $2,229 million. The Companys long-term debt includes various financial covenants,
none of which are expected to restrict future operations.
69
Total interest paid on both short and long-term debt for the fiscal years ended September 30, 2011,
2010 and 2009 was $216 million, $181 million and $358 million, respectively. The Company uses
financial instruments to manage its interest rate exposure (see Note 9, Derivative Instruments and
Hedging Activities, and Note 10, Fair Value Measurements). These instruments affect the weighted
average interest rate of the Companys debt and interest expense.
Financing Arrangements
During the quarter ended September 30, 2011, the Company had four euro-denominated revolving credit
facilities totaling 223 million euro with 50 million euro expiring in July 2012, two 36.5 million
euro facilities expiring in September 2012 and 100 million euro expiring in August 2014.
Additionally, the Company had a $50 million revolving credit facility expiring in September 2012.
At September 30, 2011, there were no draws on the revolving credit facilities.
During the quarter ended June 30, 2011, a 150 million euro revolving credit facility and a 50
million euro revolving credit facility matured. There were no draws outstanding on either facility.
During the quarter ended June 30, 2011, a total of 157,820 equity units, which had a purchase
contract settlement date of March 31, 2012, were early exercised. As a result, the Company issued
766,673 shares of Johnson Controls, Inc. common stock and approximately $8 million of 11.5% notes
due 2042.
During the quarter ended March 31, 2011, the Company issued $350 million aggregate principal amount
of floating rate senior unsecured notes due in fiscal 2014, $450 million aggregate principal amount
of 1.75% senior unsecured fixed rate notes due in fiscal 2014, $500 million aggregate principal
amount of 4.25% senior unsecured fixed rate notes due in fiscal 2021 and $300 million aggregate
principal amount of 5.7% senior unsecured fixed rate notes due in fiscal 2041. Aggregate net
proceeds of $1.6 billion from the issues were used for general corporate purposes including the
retirement of short-term debt.
During the quarter ended March 31, 2011, the Company entered into a six-year, 100 million euro,
floating rate loan scheduled to mature in February 2017. Proceeds from the facility were used for
general corporate purposes.
During the quarter ended March 31, 2011, the Company retired $654 million in principal amount, plus
accrued interest, of its 5.25% fixed rate notes that matured on January 15, 2011. The Company used
cash to fund the payment.
During the quarter ended December 31, 2010, the Company repaid debt of $82 million which was
acquired as part of an acquisition in the same quarter. The Company used cash to repay the debt.
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. During the quarter ended March 31,
2011, the Company retired the committed facility. There were no draws on the facility.
During the quarter ended June 30, 2010, the Company retired approximately $18 million in principal
amount of its fixed rate notes scheduled to mature on January 15, 2011. The Company used cash to
fund the repurchases.
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, a 50 million euro revolving credit facility expired and the
Company entered into a new one-year committed, revolving credit facility in the amount of 50
million euro that expired in May 2011.
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 March 31, 2010, the Company retired approximately $61 million in principal
amount of its fixed rate notes scheduled to mature on January 15, 2011. The Company used cash to
fund the repurchases.
70
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 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 notes scheduled to mature on January 15, 2011. Additionally, the
Company repurchased 1,685 notes ($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.
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.
9. |
|
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES |
The Company selectively uses derivative instruments to reduce market risk associated with changes
in foreign currency, commodities, stock-based compensation liabilities and interest rates. Under
Company policy, the use of derivatives is restricted to those intended for hedging purposes; the
use of any derivative instrument for speculative purposes is strictly prohibited. A description of
each type of derivative utilized by the Company to manage risk is included in the following
paragraphs. In addition, refer to Note 10, Fair Value Measurements, of the notes to consolidated
financial statements for information related to the fair value measurements and valuation methods
utilized by the Company for each derivative type.
The Company has global operations and participates in the foreign exchange markets to minimize its
risk of loss from fluctuations in foreign currency exchange rates. The Company primarily uses
foreign currency exchange contracts to hedge certain of its foreign exchange rate exposures. The
Company hedges 70% to 90% of the nominal amount of each of its known foreign exchange
transactional exposures.
The Company has entered into cross-currency interest rate swaps to selectively hedge portions of
its net investment in Japan. The currency effects of the cross-currency interest rate swaps are
reflected in the accumulated other comprehensive income (AOCI) account within shareholders equity
attributable to Johnson Controls, Inc. where they offset gains and losses recorded on the Companys
net investment in Japan. In the second quarter of fiscal 2010, 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 matured. In the first quarter of fiscal 2011, another 5 billion
yen cross-currency swap matured. In the second quarter of fiscal 2011, a 10 billion yen
cross-currency swap matured.
71
All three of these cross-currency interest rate swaps were renewed for
one year in their respective periods. These swaps are designated as hedges of the Companys net
investment in Japan.
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, 2011 |
|
September 30, 2010 |
Copper |
|
Pounds |
|
|
18,760,000 |
|
|
|
24,550,000 |
|
Lead |
|
Metric Tons |
|
|
25,600 |
|
|
|
18,450 |
|
Aluminum |
|
Metric Tons |
|
|
5,398 |
|
|
|
8,276 |
|
Tin |
|
Metric Tons |
|
|
260 |
|
|
|
|
|
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, 2011 and 2010, the Company had hedged approximately 4.3
million and 3.4 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 notes. 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. 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 5.8% notes maturing November
15, 2012 and two fixed to floating swaps totaling $300 million to hedge the coupon of its 4.875%
notes maturing September 15, 2013. In the fourth quarter of fiscal 2010, the Company terminated
all of its interest rate swaps. In the second quarter of fiscal 2011 the Company entered into a
fixed to floating interest rate swap totaling $100 million to hedge the coupon of its 5.8% notes
maturing November 15, 2012, two fixed to floating interest rate swaps totaling $300 million to
hedge the coupon of its 4.875% notes maturing September 15, 2013 and five fixed to floating
interest rate swaps totaling $450 million to hedge the coupon of its 1.75% notes maturing March 1,
2014.
In September 2005, the Company entered into three forward treasury lock agreements to reduce the
market risk associated with changes in interest rates associated with the Companys anticipated
fixed-rate note issuance to finance the acquisition of York International (cash flow hedge). The
three forward treasury lock agreements, which had a combined notional amount of $1.3 billion,
fixed a portion of the future interest cost for 5-year, 10-year and 30-year 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.
72
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, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Other current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange derivatives |
|
$ |
28 |
|
|
$ |
19 |
|
|
$ |
18 |
|
|
$ |
8 |
|
Commodity derivatives |
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
|
|
Other noncurrent assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity swap |
|
|
|
|
|
|
|
|
|
|
112 |
|
|
|
104 |
|
Foreign currency exchange derivatives |
|
|
11 |
|
|
|
1 |
|
|
|
16 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
54 |
|
|
$ |
34 |
|
|
$ |
146 |
|
|
$ |
113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange derivatives |
|
$ |
49 |
|
|
$ |
19 |
|
|
$ |
21 |
|
|
$ |
8 |
|
Commodity derivatives |
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross-currency interest rate swaps |
|
|
20 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate debt swapped to floating |
|
|
865 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange derivatives |
|
|
19 |
|
|
|
1 |
|
|
|
11 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
985 |
|
|
$ |
37 |
|
|
$ |
32 |
|
|
$ |
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the location and amount of gains and losses gross of tax on
derivative instruments and related hedge items included in the Companys consolidated statements of
income for the fiscal year ended September 30, 2011 and 2010 and amounts recorded in AOCI 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, 2011 |
|
|
September 30, 2011 |
|
|
September 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
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 |
|
AOCI on Derivative |
|
|
into Income (Effective |
|
|
Income (Effective |
|
|
Derivative (Ineffective |
|
|
Derivative |
|
Hedging Relationships |
|
(Effective Portion) |
|
|
Portion) |
|
|
Portion) |
|
|
Portion) |
|
|
(Ineffective Portion) |
|
Foreign currency
exchange derivatives |
|
$ |
(16 |
) |
|
Cost of sales |
|
$ |
3 |
|
|
Cost of sales |
|
$ |
|
|
Commodity derivatives |
|
|
(20 |
) |
|
Cost of sales |
|
|
28 |
|
|
Cost of sales |
|
|
|
|
Forward treasury locks |
|
|
9 |
|
|
Net financing charges |
|
|
1 |
|
|
Net financing charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(27 |
) |
|
|
|
|
|
$ |
32 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
AOCI 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 |
|
|
As of |
|
|
|
September 30, 2011 |
|
|
September 30, 2010 |
|
|
|
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 |
|
$ |
(12 |
) |
|
$ |
(10 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
(12 |
) |
|
$ |
(10 |
) |
|
|
|
|
|
|
|
73
For the fiscal year ended September 30, 2011 and 2010, no gains or losses were reclassified
from CTA into income for the Companys outstanding net investment hedges.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
|
|
|
September 30, 2011 |
|
|
September 30, 2010 |
|
|
|
|
|
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 |
|
$ |
15 |
|
|
$ |
10 |
|
Fixed rate debt swapped to floating |
|
Net financing charges |
|
|
(15 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
|
|
|
$ |
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
|
|
|
September 30, 2011 |
|
|
September 30, 2010 |
|
|
|
|
|
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 |
|
$ |
5 |
|
|
$ |
219 |
|
Foreign currency exchange derivatives |
|
Net financing charges |
|
|
3 |
|
|
|
(185 |
) |
Equity swap |
|
Selling, general and administrative expenses |
|
|
(23 |
) |
|
|
14 |
|
Commodity derivatives |
|
Cost of sales |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
(15 |
) |
|
$ |
49 |
|
|
|
|
|
|
|
|
|
|
10. |
|
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:
Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs, other than quoted prices in active markets, that are observable either
directly or indirectly; and
Level 3: Unobservable inputs where there is little or no market data, which requires the
reporting entity to develop its own assumptions.
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.
74
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, 2011 and 2010 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using: |
|
|
|
|
|
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Quoted Prices |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
in Active |
|
|
Observable |
|
|
Unobservable |
|
|
|
Total as of |
|
|
Markets |
|
|
Inputs |
|
|
Inputs |
|
|
|
September 30, 2011 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Other current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange derivatives |
|
$ |
46 |
|
|
$ |
46 |
|
|
$ |
|
|
|
$ |
|
|
Other noncurrent assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
|
15 |
|
|
|
|
|
|
|
15 |
|
|
|
|
|
Investments in marketable common stock |
|
|
34 |
|
|
|
34 |
|
|
|
|
|
|
|
|
|
Equity swap |
|
|
112 |
|
|
|
112 |
|
|
|
|
|
|
|
|
|
Foreign currency exchange derivatives |
|
|
27 |
|
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
234 |
|
|
$ |
219 |
|
|
$ |
15 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange derivatives |
|
$ |
70 |
|
|
$ |
70 |
|
|
$ |
|
|
|
$ |
|
|
Cross-currency interest rate swaps |
|
|
20 |
|
|
|
|
|
|
|
20 |
|
|
|
|
|
Commodity derivatives |
|
|
32 |
|
|
|
|
|
|
|
32 |
|
|
|
|
|
Long-term debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate swapped to floating |
|
|
865 |
|
|
|
|
|
|
|
865 |
|
|
|
|
|
Other noncurrent liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange derivatives |
|
|
30 |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
1,017 |
|
|
$ |
100 |
|
|
$ |
917 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 assets |
|
$ |
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 liabilities |
|
$ |
46 |
|
|
$ |
29 |
|
|
$ |
17 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
75
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, 2011 and 2010. 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, tin 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, 2011 and 2010.
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 notes. 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. 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 5.8% notes maturing November 15, 2012 and two fixed to floating interest rate swaps
totaling $300 million to hedge the coupons of its 4.875% notes maturing September 15, 2013. In the
fourth quarter of fiscal 2010, the Company terminated all of its interest rate swaps. In the second
quarter of fiscal 2011 the Company entered into a fixed to floating interest rate swap totaling
$100 million to hedge the coupon of its 5.8% notes maturing November 15, 2012, two fixed to
floating interest rate swaps totaling $300 million to hedge the coupon of its 4.875% notes maturing
September 15, 2013 and five fixed to floating interest rate swaps totaling $450 million to hedge
the coupon of its 1.75% notes maturing March 1, 2014.
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, 2011 and 2010, the Company recorded an unrealized gain
of $9 million and $3 million, respectively, in accumulated other comprehensive income. The Company
also recorded an unrealized loss of $3 million in accumulated other comprehensive income on these
investments as of September 30, 2011. Unrealized losses recorded on these investments are deemed
immaterial for further disclosure.
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 matured. In the first quarter of fiscal 2011, another 5 billion yen
cross-currency swap matured. In the second quarter of fiscal 2011, a 10 billion yen cross-currency
swap matured. All three of these cross-currency swaps were renewed for one year in their respective
periods. These swaps are designated as hedges of the Companys net investment in Japan.
The fair value 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 $4.9 billion
and $3.7 billion at September 30, 2011 and 2010, respectively, was determined using market quotes.
76
11. |
|
STOCK-BASED COMPENSATION |
The Company has three share-based compensation plans, which are described below. The compensation
cost charged against income for those plans was approximately $47 million, $52 million and $27
million for the fiscal years ended September 30, 2011, 2010 and 2009, respectively. The total
income tax benefit recognized in the consolidated statements of income for share-based compensation
arrangements was approximately $19 million, $21 million and $11 million for the fiscal years ended
September 30, 2011, 2010 and 2009, respectively. 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.
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, 2011. 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
20 million shares of common stock remained available to be granted at September 30, 2011).
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, |
|
|
2011 |
|
2010 |
|
2009 |
Expected life of option (years) |
|
4.5 - 6.0 |
|
4.3 - 5.0 |
|
4.2 - 4.5 |
Risk-free interest rate |
|
1.10% - 1.58% |
|
1.91% - 2.20% |
|
2.57% - 2.68% |
Expected
volatility of the Companys stock |
|
38.00% |
|
40.00% |
|
28.00% |
Expected
dividend yield on the Companys stock |
|
1.74% |
|
1.73% |
|
1.52% |
A summary of stock option activity at September 30, 2011, 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, 2010 |
|
$ |
24.17 |
|
|
|
35,158,109 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
30.64 |
|
|
|
4,994,156 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
19.15 |
|
|
|
(5,522,620 |
) |
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
29.17 |
|
|
|
(405,633 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2011 |
|
$ |
25.87 |
|
|
|
34,224,012 |
|
|
|
5.7 |
|
|
$ |
91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, September 30, 2011 |
|
$ |
24.79 |
|
|
|
22,401,363 |
|
|
|
4.3 |
|
|
$ |
83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of options granted during the fiscal years ended
September 30, 2011, 2010 and 2009 was $9.09, $7.70 and $6.68, respectively.
The total intrinsic value of options exercised during the fiscal years ended September 30, 2011,
2010 and 2009 was approximately $101 million, $33 million and $4 million, respectively.
77
In conjunction with the exercise of stock options granted, the Company received cash payments for
the fiscal years ended September 30, 2011, 2010 and 2009 of approximately $105 million, $52
million and $8 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 $30 million, $7 million and $1
million for the fiscal years ended September 30, 2011, 2010 and 2009, respectively. The Company
does not settle equity instruments granted under share-based payment arrangements for cash.
At September 30, 2011, the Company had approximately $31 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, 2011 were as
follows:
|
|
|
Expected life of SAR (years) |
|
0.5 - 5.2 |
Risk-free interest rate |
|
0.06% - 1.01% |
Expected volatility of the Companys stock |
|
38.00% |
Expected dividend yield on the Companys stock |
|
1.80% |
A summary of SAR activity at September 30, 2011, 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, 2010 |
|
$ |
25.23 |
|
|
|
3,237,113 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
30.54 |
|
|
|
585,190 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
22.91 |
|
|
|
(290,973 |
) |
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
29.28 |
|
|
|
(67,355 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2011 |
|
$ |
26.24 |
|
|
|
3,463,975 |
|
|
|
6.0 |
|
|
$ |
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, September 30, 2011 |
|
$ |
25.16 |
|
|
|
2,032,304 |
|
|
|
4.4 |
|
|
$ |
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In conjunction with the exercise of SARs granted, the Company made payments of $4 million, $3
million and $2 million during the fiscal years ended September 30, 2011, 2010 and 2009,
respectively.
Restricted (Nonvested) Stock
The Company has 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.
78
A summary of the status of the Companys nonvested restricted stock awards at September 30, 2011,
and changes for the fiscal year then ended, is presented below:
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Shares/Units |
|
|
|
Average |
|
|
Subject to |
|
|
|
Price |
|
|
Restriction |
|
Nonvested, September 30, 2010 |
|
$ |
31.60 |
|
|
|
765,455 |
|
Granted |
|
|
35.02 |
|
|
|
331,700 |
|
Vested |
|
|
25.57 |
|
|
|
(32,750 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested, September 30, 2011 |
|
$ |
32.85 |
|
|
|
1,064,405 |
|
|
|
|
|
|
|
|
At September 30, 2011, the Company had approximately $11 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.
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 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.
79
The following table reconciles the numerators and denominators used to calculate basic and diluted
earnings per share (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Income Available to Common Shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) available to common shareholders |
|
$ |
1,624 |
|
|
$ |
1,491 |
|
|
$ |
(338 |
) |
Interest expense, net of tax |
|
|
3 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) available to common shareholders |
|
$ |
1,627 |
|
|
$ |
1,496 |
|
|
$ |
(338 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares Outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
|
677.7 |
|
|
|
672.0 |
|
|
|
595.3 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
8.1 |
|
|
|
5.9 |
|
|
|
|
|
Equity units |
|
|
4.1 |
|
|
|
4.5 |
|
|
|
|
|
Convertible senior notes |
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding |
|
|
689.9 |
|
|
|
682.5 |
|
|
|
595.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antidilutive Securities |
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase common shares |
|
|
0.4 |
|
|
|
0.8 |
|
|
|
2.5 |
|
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 the three months ended September 30, 2011 and 2010, the Company declared a dividend of $0.16
and $0.13, respectively, per common share. During the twelve months ended September 30, 2011 and
2010, the Company declared four quarterly dividends totaling $0.64 and $0.52, respectively, per
common share. The Company paid all dividends in the month subsequent to the end of each fiscal
quarter.
80
13. |
|
EQUITY AND NONCONTROLLING INTERESTS |
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, 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 |
|
Total comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
1,624 |
|
|
|
53 |
|
|
|
1,677 |
|
Foreign currency translation adjustments |
|
|
(109 |
) |
|
|
(1 |
) |
|
|
(110 |
) |
Realized and unrealized losses on derivatives |
|
|
(47 |
) |
|
|
|
|
|
|
(47 |
) |
Unrealized gains on marketable common stock |
|
|
3 |
|
|
|
|
|
|
|
3 |
|
Employee retirement plans |
|
|
(205 |
) |
|
|
|
|
|
|
(205 |
) |
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss |
|
|
(358 |
) |
|
|
(1 |
) |
|
|
(359 |
) |
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
1,266 |
|
|
|
52 |
|
|
|
1,318 |
|
|
|
|
|
|
|
|
|
|
|
Other changes in equity: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends common stock ($0.64 per share) |
|
|
(435 |
) |
|
|
|
|
|
|
(435 |
) |
Dividends attributable to noncontrolling interests |
|
|
|
|
|
|
(32 |
) |
|
|
(32 |
) |
Redemption
value adjustment attributable to redeemable noncontrolling interests |
|
|
(32 |
) |
|
|
|
|
|
|
(32 |
) |
Increase in noncontrolling interest share |
|
|
|
|
|
|
12 |
|
|
|
12 |
|
Other, including options exercised |
|
|
172 |
|
|
|
|
|
|
|
172 |
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2011 |
|
$ |
11,042 |
|
|
$ |
138 |
|
|
$ |
11,180 |
|
|
|
|
|
|
|
|
|
|
|
81
The components of accumulated other comprehensive income were as follows (in millions, net of
tax):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
2011 |
|
|
2010 |
|
Foreign currency translation adjustments |
|
$ |
634 |
|
|
$ |
743 |
|
Realized and unrealized gains (losses) on derivatives |
|
|
(27 |
) |
|
|
20 |
|
Unrealized gains on marketable common stock |
|
|
6 |
|
|
|
3 |
|
Employee retirement plans |
|
|
(1,048 |
) |
|
|
(843 |
) |
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss) |
|
$ |
(435 |
) |
|
$ |
(77 |
) |
|
|
|
|
|
|
|
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, 2011 |
|
|
September 30, 2010 |
|
|
September 30, 2009 |
|
Beginning balance, September 30 |
|
$ |
196 |
|
|
$ |
155 |
|
|
$ |
167 |
|
Net income (loss) |
|
|
64 |
|
|
|
32 |
|
|
|
(28 |
) |
Foreign currency translation adjustments |
|
|
|
|
|
|
1 |
|
|
|
(2 |
) |
Increase (decrease) in noncontrolling interest share |
|
|
(21 |
) |
|
|
17 |
|
|
|
|
|
Dividends attributable to noncontrolling interests |
|
|
(11 |
) |
|
|
|
|
|
|
(2 |
) |
Redemption value adjustment |
|
|
32 |
|
|
|
(9 |
) |
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
Ending balance, September 30 |
|
$ |
260 |
|
|
$ |
196 |
|
|
$ |
155 |
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
The Company has non-contributory defined benefit pension plans covering certain U.S. and 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.
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 $4,339 million,
$4,185 million and $3,346 million, respectively, as of September 30, 2011 and $3,942 million,
$3,804 million and $3,169 million, respectively, as of September 30, 2010.
82
In fiscal 2011, total employer and employee contributions to the defined benefit pension plans were
$280 million, of which $183 million were voluntary contributions made by the Company. The Company
expects to contribute approximately $350 million in cash to its defined benefit pension plans in
fiscal year 2012. Projected benefit payments from the plans as of September 30, 2011 are estimated
as follows (in millions):
|
|
|
|
|
2012 |
|
$ |
276 |
|
2013 |
|
|
250 |
|
2014 |
|
|
262 |
|
2015 |
|
|
266 |
|
2016 |
|
|
275 |
|
2017-2021 |
|
|
1,465 |
|
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.
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, 2011 projected postretirement benefit obligation (PBO) for both pre-65 and
post-65 years of age employees was determined using assumed medical care cost trend rates of 7.5%
for U.S. plans and non-U.S. plans, decreasing one half percent each year to an ultimate rate of 5%
and prescription drug trend rates of 7.5% for U.S. plans and non-U.S. plans, decreasing one half
percent each year to an ultimate rate of 5%. The September 30, 2010 PBO for both pre-65 and post-65
years of age employees was determined using medical care cost trend rates of 7% 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% 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 health care cost trend assumption does not have a significant
effect on the amounts reported.
In fiscal 2011, total employer and employee contributions to the postretirement health and other
benefit plans were $183 million, of which $156 million were voluntary contributions made by the
Company. The Company expects to contribute approximately $60 million in cash to its postretirement
health and other benefit plans in fiscal year 2012. Projected benefit payments from the plans as of
September 30, 2011 are estimated as follows (in millions):
|
|
|
|
|
2012 |
|
$ |
23 |
|
2013 |
|
|
24 |
|
2014 |
|
|
24 |
|
2015 |
|
|
25 |
|
2016 |
|
|
25 |
|
2017-2021 |
|
|
98 |
|
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.
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
83
and/or will match a percentage of the employee contributions up to certain limits. Matching
contributions charged to expense amounted to $67 million, $42 million and $35 million for the
fiscal years ended 2011, 2010 and 2009, respectively.
Multiemployer Pension Plans
The Company participates in multiemployer pension plans for certain of its hourly employees in the
U.S. The Company contributed $51 million, $46 million and $47 million to multiemployer pension
plans in fiscal 2011, 2010 and 2009, respectively.
Plan Assets
The Companys investment policies employ an approach whereby a mix of equities, fixed income and
alternative 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.
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.
84
The Companys plan assets at September 30, 2011 and 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, 2011 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
U.S. Pension |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
25 |
|
|
$ |
25 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large-Cap |
|
|
734 |
|
|
|
734 |
|
|
|
|
|
|
|
|
|
Small-Cap |
|
|
230 |
|
|
|
230 |
|
|
|
|
|
|
|
|
|
International Developed |
|
|
429 |
|
|
|
429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Income Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government |
|
|
162 |
|
|
|
162 |
|
|
|
|
|
|
|
|
|
Corporate/Other |
|
|
494 |
|
|
|
494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedge Funds |
|
|
94 |
|
|
|
|
|
|
|
|
|
|
|
94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate |
|
|
204 |
|
|
|
|
|
|
|
|
|
|
|
204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,372 |
|
|
$ |
2,074 |
|
|
$ |
|
|
|
$ |
298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S. Pension |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
57 |
|
|
$ |
57 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large-Cap |
|
|
141 |
|
|
|
141 |
|
|
|
|
|
|
|
|
|
International Developed |
|
|
347 |
|
|
|
347 |
|
|
|
|
|
|
|
|
|
International Emerging |
|
|
47 |
|
|
|
47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Income Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government |
|
|
276 |
|
|
|
276 |
|
|
|
|
|
|
|
|
|
Corporate/Other |
|
|
499 |
|
|
|
499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodities |
|
|
11 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate |
|
|
93 |
|
|
|
|
|
|
|
|
|
|
|
93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,471 |
|
|
$ |
1,378 |
|
|
$ |
|
|
|
$ |
93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement Health and Other Benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large-Cap |
|
$ |
25 |
|
|
$ |
25 |
|
|
$ |
|
|
|
$ |
|
|
Small-Cap |
|
|
8 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
International Developed |
|
|
19 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
International Emerging |
|
|
9 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Income Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government |
|
|
19 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
Corporate/Other |
|
|
53 |
|
|
|
53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodities |
|
|
14 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate |
|
|
9 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
156 |
|
|
$ |
156 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no postretirement health and other benefit plan assets held at September 30, 2010.
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.
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
86
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 Real Estate Investment Trusts (REITs) is recorded as Level 1 as
these securities are traded on an open exchange. The fair value measurement of other investments in
real estate is deemed Level 3 since the value of these investments is provided by 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 net of redemptions |
|
|
50 |
|
|
|
|
|
|
|
50 |
|
Realized loss |
|
|
(5 |
) |
|
|
|
|
|
|
(5 |
) |
Unrealized gain |
|
|
13 |
|
|
|
5 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset value as of September 30, 2010 |
|
$ |
232 |
|
|
$ |
91 |
|
|
$ |
141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions net of redemptions |
|
|
41 |
|
|
|
|
|
|
|
41 |
|
Realized gain |
|
|
10 |
|
|
|
|
|
|
|
10 |
|
Unrealized gain |
|
|
15 |
|
|
|
3 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset value as of September 30, 2011 |
|
$ |
298 |
|
|
$ |
94 |
|
|
$ |
204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions net of redemptions |
|
|
12 |
|
|
|
|
|
|
|
12 |
|
|
Unrealized gain |
|
|
10 |
|
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset value as of September 30, 2011 |
|
$ |
93 |
|
|
$ |
|
|
|
$ |
93 |
|
|
|
|
|
|
|
|
|
|
|
87
Funded Status
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 Health |
|
|
|
U.S. Plans |
|
|
Non-U.S. Plans |
|
|
and Other Benefits |
|
September 30, |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Accumulated Benefit Obligation |
|
$ |
2,850 |
|
|
$ |
2,655 |
|
|
$ |
1,774 |
|
|
$ |
1,622 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Projected Benefit Obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year |
|
|
2,717 |
|
|
|
2,512 |
|
|
|
1,725 |
|
|
|
1,521 |
|
|
|
256 |
|
|
|
275 |
|
Service cost |
|
|
66 |
|
|
|
67 |
|
|
|
34 |
|
|
|
38 |
|
|
|
5 |
|
|
|
4 |
|
Interest cost |
|
|
145 |
|
|
|
152 |
|
|
|
70 |
|
|
|
68 |
|
|
|
13 |
|
|
|
14 |
|
Plan participant contributions |
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
5 |
|
|
|
6 |
|
|
|
7 |
|
Acquisitions |
|
|
|
|
|
|
|
|
|
|
76 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
Actuarial loss |
|
|
177 |
|
|
|
106 |
|
|
|
9 |
|
|
|
146 |
|
|
|
5 |
|
|
|
23 |
|
Amendments made during the year |
|
|
|
|
|
|
|
|
|
|
(32 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
(44 |
) |
Benefits paid |
|
|
(150 |
) |
|
|
(120 |
) |
|
|
(67 |
) |
|
|
(68 |
) |
|
|
(27 |
) |
|
|
(26 |
) |
Estimated subsidy received |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
2 |
|
Curtailment gain |
|
|
|
|
|
|
|
|
|
|
(30 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
Settlement |
|
|
(2 |
) |
|
|
|
|
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
40 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
Currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
33 |
|
|
|
16 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at end of year |
|
$ |
2,953 |
|
|
$ |
2,717 |
|
|
$ |
1,852 |
|
|
$ |
1,725 |
|
|
$ |
259 |
|
|
$ |
256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year |
|
$ |
2,471 |
|
|
$ |
1,867 |
|
|
$ |
1,216 |
|
|
$ |
1,080 |
|
|
$ |
|
|
|
$ |
|
|
Actual return on plan assets |
|
|
44 |
|
|
|
151 |
|
|
|
29 |
|
|
|
64 |
|
|
|
|
|
|
|
|
|
Acquisitions |
|
|
|
|
|
|
|
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer and employee contributions |
|
|
9 |
|
|
|
573 |
|
|
|
271 |
|
|
|
108 |
|
|
|
183 |
|
|
|
26 |
|
Benefits paid |
|
|
(150 |
) |
|
|
(120 |
) |
|
|
(67 |
) |
|
|
(68 |
) |
|
|
(27 |
) |
|
|
(26 |
) |
Settlement payments |
|
|
(2 |
) |
|
|
|
|
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
Currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
21 |
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year |
|
$ |
2,372 |
|
|
$ |
2,471 |
|
|
$ |
1,471 |
|
|
$ |
1,216 |
|
|
$ |
156 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status |
|
$ |
(581 |
) |
|
$ |
(246 |
) |
|
$ |
(381 |
) |
|
$ |
(509 |
) |
|
$ |
(103 |
) |
|
$ |
(256 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the statement of
financial position
consist of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid benefit cost |
|
$ |
|
|
|
$ |
7 |
|
|
$ |
40 |
|
|
$ |
17 |
|
|
$ |
15 |
|
|
$ |
|
|
Accrued benefit liability |
|
|
(581 |
) |
|
|
(253 |
) |
|
|
(421 |
) |
|
|
(526 |
) |
|
|
(118 |
) |
|
|
(256 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized |
|
$ |
(581 |
) |
|
$ |
(246 |
) |
|
$ |
(381 |
) |
|
$ |
(509 |
) |
|
$ |
(103 |
) |
|
$ |
(256 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Assumptions (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate (2) |
|
|
5.25 |
% |
|
|
5.50 |
% |
|
|
4.00 |
% |
|
|
4.00 |
% |
|
|
5.25 |
% |
|
|
5.50 |
% |
Rate of compensation increase |
|
|
3.30 |
% |
|
|
3.20 |
% |
|
|
2.50 |
% |
|
|
3.00 |
% |
|
NA |
|
NA |
88
|
|
|
(1) |
|
Plan assets and obligations are determined based on a September 30 measurement
date at September 30, 2011 and 2010. |
|
(2) |
|
The Company considers the expected benefit payments on a plan-by-plan basis when
setting assumed discount rates. As a result, the Company uses different discount rates for
each plan depending on the plan jurisdiction, the demographics of participants and the
expected timing of benefit payments. For the U.S. pension and postretirement health and other
benefit plans, the Company uses a discount rate provided by an independent third party
calculated based on an appropriate mix of high quality bonds. For the non-U.S. pension and
postretirement health and other benefit plans, the Company consistently uses the relevant
country specific benchmark indices for determining the various discount rates. |
Accumulated Other Comprehensive Income
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, 2011 are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement |
|
|
|
Pension |
|
|
Health and Other |
|
|
|
Benefits |
|
|
Benefits |
|
Accumulated other comprehensive loss (income) |
|
|
|
|
|
|
|
|
Net transition obligation |
|
$ |
2 |
|
|
$ |
|
|
Net actuarial loss |
|
|
1,663 |
|
|
|
16 |
|
Net prior service credit |
|
|
(11 |
) |
|
|
(35 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
1,654 |
|
|
$ |
(19 |
) |
|
|
|
|
|
|
|
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 |
|
$ |
102 |
|
|
$ |
1 |
|
Net prior service credit |
|
|
|
|
|
|
(17 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
102 |
|
|
$ |
(16 |
) |
|
&nbs |