þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Wisconsin | 39-0380010 | |
(State of Incorporation) | (I.R.S. Employer Identification No.) | |
5757 North Green Bay Avenue | ||
P.O. Box 591 | ||
Milwaukee, Wisconsin | 53201 | |
(Address of principal executive offices) | (Zip Code) |
Title of Each Class | Name of Each Exchange on Which Registered | |
Common Stock, $.04-1/6 par value | New York Stock Exchange |
1
2
Customer | 2006 | 2005 | 2004 | |||||||||
General Motors Corporation |
11 | % | 14 | % | 14 | % | ||||||
DaimlerChrysler AG |
11 | % | 11 | % | 11 | % | ||||||
Ford Motor Company |
10 | % | 11 | % | 14 | % |
3
4
5
6
7
8
9
10
Automotive Experience | ||
Alabama
|
Cottondale (1),(3) | |
Eastaboga | ||
California
|
Livermore (2),(3) | |
Georgia
|
Norcross (1) | |
Suwanee (1) | ||
Illinois
|
Sycamore (2),(3) | |
Indiana
|
Ossian | |
Kentucky
|
Bardstown (3) | |
Cadiz (3) | ||
Georgetown (3) | ||
Shelbyville (1) | ||
Winchester (1) | ||
Louisiana
|
Shreveport | |
Michigan
|
Battle Creek | |
Detroit (3) | ||
Holland (2),(3) | ||
Lansing (3) | ||
Mt. Clemens (1),(3) | ||
Plymouth (2),(3) | ||
Rockwood (3) | ||
Taylor (1),(3) | ||
Van Buren (3) | ||
Warren (3) | ||
Zeeland (1),(3) | ||
Mississippi
|
Madison | |
Missouri
|
Earth City (1),(3) | |
Jefferson City (3) | ||
New Jersey Ohio |
Dayton (1),(3) Greenfield |
|
Northwood | ||
Oberlin (1),(3) | ||
West Carrollton (1) | ||
Oklahoma
|
Oklahoma City (3) | |
Tennessee
|
Athens (2) | |
Lexington (3) | ||
Murfreesboro (2) | ||
Pulaski (2),(3) | ||
Texas
|
El Paso (1),(3) | |
San Antonio (2),(3) | ||
Virginia
|
Chesapeake (1) | |
Wisconsin
|
Hudson (1),(3) | |
Argentina
|
Buenos Aires (1) | |
Rosario | ||
Austria
|
Graz (1),(3) | |
Mandling (3) | ||
Schmiedlstrabe (1),(3) | ||
Belgium
|
Geel (3) | |
Gent (1),(3) | ||
Brazil
|
Gravatai (3) | |
Pouso Alegre | ||
San Bernardo do Campo (1) | ||
Santo Andre | ||
Sao Jose dos Campos | ||
Sao Jose dos Pinhais (1) | ||
Canada
|
Milton (1),(3) | |
Mississauga (1),(3) | ||
Orangeville | ||
Saint Marys | ||
Tecumseh | ||
Tilsonburg (3) | ||
Whitby | ||
China
|
Beijing (3) | |
Czech Republic
|
Benatky nad Jizerou (1),(3) | |
Ceska Lipa (2),(3) | ||
Mlada Boleslav (1),(3) | ||
Ni Ebohy (1) | ||
Roudnice (2),(3) | ||
Rychnov nad Kneznou (1),(3) | ||
Straz pod Ralskem (3) | ||
France
|
Brioude (1),(3) | |
Compagnie (3) | ||
Conflans (3) | ||
Happich (3) | ||
La Ferte Bernard (1),(3) | ||
Rosny | ||
Schweighaus (3) | ||
Strasbourg (3) | ||
Germany
|
Boblingen (1),(3) | |
Bochum (1),(3) | ||
Bremen (1),(3) | ||
Burscheid (2),(3) | ||
Espelkamp (3) | ||
Grefrath (1),(3) | ||
Hansastr (1),(3) | ||
Holzgerlingen (1),(3) | ||
Lahnwerk (2),(3) | ||
Luneburg | ||
Neustadt (3) | ||
Rastatt (1),(3) | ||
Remchingen (3) | ||
Saarlouis (1) | ||
Uberherrn (1),(3) | ||
Unterriexingen (2),(3) | ||
Waghausel (3) | ||
Wuppertal (2),(3) | ||
Zwickau (3) | ||
Hungary
|
Pilis | |
Solymar (2) | ||
Italy
|
Cicerale (3) | |
Grugliasco (1),(3) | ||
Melfi (1),(3) | ||
Rocca DEvandro (1) | ||
Japan
|
Ayase (3) | |
Hamakita | ||
Mouka | ||
Toyotsucho (3) | ||
Yokosuka (2) |
11
Automotive Experience (cont.) | ||
Korea
|
Asan (3) | |
Dangjin (3) | ||
Hwasung | ||
Jeongeup (1) | ||
Namsa (1) | ||
Malaysia
|
Johor Bahru | |
Peramu Jaya (1) | ||
Persiaran Sabak Bernam | ||
Mexico
|
Monclova (3) | |
Naucalpan de Juarez (1) | ||
Puebla (2),(3) | ||
Ramos Arizpe | ||
Tlaxcala (3) | ||
Tlazala (1) | ||
Netherlands
|
Ned Car (1),(3) | |
Poland
|
Tychy (3) | |
Portugal
|
Nelas (3) | |
Portalegre (3) | ||
Romania
|
Mioveni (1),(3) | |
Ploiesti (3) | ||
Russia
|
St. Petersburg (1),(3) | |
Slovak Republic
|
Bratislava (1),(3) | |
Kostany nad Turcom (3) | ||
Slovenia
|
Slovenj Gradec (1),(3) | |
South Africa
|
East London (1) | |
Pretoria (2),(3) | ||
Uitenhage (1) | ||
Spain
|
Alagon (3) | |
Barcelona (3) | ||
Madrid (1),(3) | ||
Prat de Llobregat | ||
Valencia (2),(3) | ||
Valladolid | ||
Zaragoza (3) | ||
Thailand
|
Rayong (3) | |
Tunisia
|
Bir al Bay (3) | |
United Kingdom
|
Burton-Upon-Trent (2),(3) | |
Hedera (1),(3) | ||
Leamington Spa (1),(3) | ||
Speke (3) | ||
Sunderland | ||
Telford (2),(3) | ||
Wednesbury (3) |
Building Efficiency | ||
California
|
Santa Fe Springs (1), (3) | |
Florida
|
Lagro (1) | |
Illinois
|
Dixon (2),(3) | |
Polo | ||
Indiana
|
Goshen (3) | |
Kansas
|
Wichita (2),(3) | |
Mississippi
|
Hattiesburg | |
Missouri
|
Albany | |
Oklahoma
|
Norman (1),(3) | |
Pennsylvania
|
York | |
Waynesboro (3) | ||
Texas
|
San Antonio | |
Virginia
|
Bristol (3) | |
Roanoke | ||
Wisconsin
|
Milwaukee (2),(4) | |
Waukesha (1),(3) | ||
Brazil
|
Pinhais | |
São Paulo (1),(3) | ||
China
|
Guangzhou (1),(3) | |
Shanghai (1),(3) | ||
Qingyuan (2),(3) | ||
Wuxi (1),(3) | ||
Denmark
|
Aarhus (1),(3) | |
Hornslet (2),(3) | ||
Viby | ||
France
|
Craquefou (2),(3) | |
Nantes | ||
Saint Quentin Fallavier (1),(3) | ||
Germany
|
Essen (2),(3) | |
Hong Kong
|
Hong Kong | |
Japan
|
Koga (3) | |
Mexico
|
Apodaca (2) | |
Cienega de Flores (1) | ||
Cuidad Juarez (1),(3) | ||
Durango | ||
Monterrey | ||
Reynosa (3) | ||
South Africa
|
Johannesburg (1),(3) | |
Switzerland
|
Basel (1),(3) | |
Zurich | ||
Thailand
|
Laem Chanbang Chonburi | |
Turkey
|
Istanbul (1),(3) | |
Izmir (1),(3) | ||
United Arab Emirates
|
Dubai (2),(3) |
12
Power Solutions | ||
Arizona
|
Yuma (2) | |
California
|
Fullerton | |
Colorado
|
Aurora (2),(3) | |
Delaware
|
Middletown (2) | |
Florida
|
Tampa (2) | |
Illinois
|
Geneva | |
Indiana
|
Ft. Wayne | |
Iowa
|
Red Oak | |
Kentucky
|
Florence | |
Missouri
|
St. Joseph (2) | |
New Jersey
|
New Brunswick | |
North Carolina
|
Winston-Salem (2) | |
Ohio
|
Toledo | |
Oregon
|
Portland | |
South Carolina
|
Oconee (2) | |
Texas
|
San Antonio (1) | |
Wisconsin
|
Milwaukee (4) | |
Austria
|
Graz (1) | |
Brazil
|
Sorocaba (3) | |
China
|
Shanghai (3) | |
Czech Republic
|
Ceska Lipa (3) | |
France
|
Rouen | |
Sarreguemines (3) | ||
Germany
|
Hannover (3) | |
Krautscheid (3) | ||
Otzenhausen | ||
Zwickau (2),(3) | ||
Mexico
|
Celaya | |
Cienega de Flores | ||
Escobedo | ||
Monterrey (2),(3) | ||
Torreon | ||
Spain
|
Burgos (3) | |
Guadamar del Segura |
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 |
13
14
15
16
ITEM 5 | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Number of Record Holders | ||
Title of Class | as of September 30, 2006 | |
Common Stock, $.04-1/6 par value | 51,240 |
Common Stock Price Range | Dividends | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
First Quarter |
$ | 60.28-73.94 | $ | 53.05-63.98 | $ | 0.28 | $ | 0.25 | ||||||||
Second Quarter |
66.74-77.44 | 55.25-63.88 | 0.28 | 0.25 | ||||||||||||
Third Quarter |
74.00-90.00 | 52.57-58.20 | 0.28 | 0.25 | ||||||||||||
Fourth Quarter |
68.40-85.81 | 55.88-62.70 | 0.28 | 0.25 | ||||||||||||
Year |
$ | 60.28-90.00 | $ | 52.57-63.98 | $ | 1.12 | $ | 1.00 | ||||||||
17
18
As of and For the Year Ended September 30, | ||||||||||||||||||||
2006 (1) | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||
OPERATING RESULTS |
||||||||||||||||||||
Net sales |
$ | 32,235 | $ | 27,479 | $ | 24,603 | $ | 21,171 | $ | 18,782 | ||||||||||
Operating income |
1,282 | 1,066 | 1,135 | 1,028 | 1,006 | |||||||||||||||
Income from continuing operations |
1,033 | 757 | 767 | 645 | 584 | |||||||||||||||
Net income |
1,028 | 909 | 818 | 683 | 601 | |||||||||||||||
Earnings per share from continuing operations |
||||||||||||||||||||
Basic |
$ | 5.31 | $ | 3.95 | $ | 4.08 | $ | 3.57 | $ | 3.26 | ||||||||||
Diluted |
5.25 | 3.90 | 3.98 | 3.40 | 3.09 | |||||||||||||||
Earnings per share |
||||||||||||||||||||
Basic |
$ | 5.29 | $ | 4.74 | $ | 4.35 | $ | 3.78 | $ | 3.35 | ||||||||||
Diluted |
5.23 | 4.68 | 4.24 | 3.60 | 3.18 | |||||||||||||||
Return on average shareholders equity (2) |
15 | % | 13 | % | 16 | % | 17 | % | 18 | % | ||||||||||
Capital expenditures |
$ | 711 | $ | 664 | $ | 817 | $ | 606 | $ | 473 | ||||||||||
Depreciation |
661 | 615 | 572 | 511 | 482 | |||||||||||||||
Number of employees |
136,000 | 114,000 | 113,000 | 108,000 | 102,000 | |||||||||||||||
FINANCIAL POSITION |
||||||||||||||||||||
Working capital (deficiency) (3) |
$ | 1,073 | $ | 298 | $ | (422 | ) | $ | (186 | ) | $ | (41 | ) | |||||||
Total assets |
21,921 | 16,144 | 14,758 | 12,917 | 10,982 | |||||||||||||||
Long-term debt (excluding current portion) |
4,166 | 1,577 | 1,631 | 1,777 | 1,826 | |||||||||||||||
Total debt |
4,743 | 2,342 | 2,671 | 2,355 | 1,972 | |||||||||||||||
Shareholders equity |
7,355 | 6,058 | 5,206 | 4,261 | 3,500 | |||||||||||||||
Total debt to total capitalization |
39 | % | 28 | % | 34 | % | 36 | % | 36 | % | ||||||||||
Book value per share |
$ | 37.57 | $ | 31.41 | $ | 27.41 | $ | 23.23 | $ | 19.35 | ||||||||||
COMMON SHARE INFORMATION |
||||||||||||||||||||
Dividends per share |
$ | 1.12 | $ | 1.00 | $ | 0.90 | $ | 0.72 | $ | 0.66 | ||||||||||
Market prices |
||||||||||||||||||||
High |
$ | 90.00 | $ | 63.98 | $ | 62.32 | $ | 50.44 | $ | 46.60 | ||||||||||
Low |
$ | 60.28 | $ | 52.57 | $ | 47.60 | $ | 34.55 | $ | 32.03 | ||||||||||
Weighted average shares (in millions) |
||||||||||||||||||||
Basic |
194.5 | 191.8 | 187.7 | 178.7 | 176.7 | |||||||||||||||
Diluted |
196.6 | 194.3 | 192.6 | 189.1 | 188.2 | |||||||||||||||
Number of shareholders |
51,240 | 52,964 | 55,460 | 55,823 | 57,551 |
(1) | In December 2005, the Company significantly expanded the building efficiency business with the acquisition of York. See Items 1, 7 and 8 for additional details of the acquisition. | |
(2) | Return on average shareholders equity represents income from continuing operations divided by average equity computed on an annual basis. Income from continuing operations includes $197 million, $210 million and $82 million of restructuring costs in fiscal years 2006, 2005 and 2004, respectively. Additionally, fiscal year 2004 includes an $84 million Japanese pension gain. | |
(3) | Working capital excludes net assets of discontinued operations of $45 million, $351 million, $352 million and $230 million for fiscal years ended September 30, 2006, 2004, 2003 and 2002, respectively. |
19
ITEM 7 | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
20
| North America systems designs, produces, markets and installs mechanical equipment that provides heating and cooling in North American non-residential buildings and industrial applications as well as control systems that integrate the operation of this equipment with other critical building systems. | ||
| North America service provides technical services including inspection, scheduled maintenance, repair and replacement of mechanical and control systems in North America, as well as the retrofit and service components of performance contracts and other solutions. | ||
| North America unitary products designs and produces heating and air conditioning solutions for residential and light commercial applications and markets products to the replacement and new construction markets. | ||
| Workplace solutions provides on-site staff for complete real estate services, facility operation and management to improve the comfort, productivity, energy efficiency and cost effectiveness of building systems around the globe. | ||
| Europe provides HVAC and refrigeration systems and technical services to the European marketplace. | ||
| Rest of world provides HVAC and refrigeration systems and technical services to markets in Asia, the Middle East and Latin America. |
Year Ended | ||||||||||||
September 30, | ||||||||||||
(In millions) | 2006 | 2005 | Change | |||||||||
Net sales |
$ | 32,235 | $ | 27,479 | 17 | % | ||||||
Operating income |
1,282 | 1,066 | 20 | % |
21
| The increase in net sales was primarily due to the impact of the York and Delphi acquisitions and organic growth in the power solutions segment, partially offset by lower North American automobile production and unfavorable foreign currency translation (approximately $500 million). | ||
| Excluding the unfavorable effects of foreign currency translation, consolidated net sales increased 19% as compared to the prior year. | ||
| The increase in operating income was primarily due to the impact of the York and Delphi acquisitions and organic growth in the power solutions segment, partially offset by increased raw material costs, including lead and petroleum-based products, lower North American automobile production and unfavorable foreign currency translation (approximately $25 million). Operating income was also favorably impacted on a net basis in fiscal year 2006 by legal and customer contract settlements which were partially offset by York integration costs. | ||
| Excluding the unfavorable effects of foreign currency translation, operating income increased 23% as compared to the prior year. |
Net Sales for the | Operating Income for the | |||||||||||||||||||||||
for the Year Ended | for the Year Ended | |||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||
(In millions) | 2006 | 2005 | Change | 2006 | 2005 | Change | ||||||||||||||||||
North America Systems |
$ | 1,609 | $ | 1,158 | 39 | % | $ | 132 | $ | 112 | 18 | % | ||||||||||||
North America Service |
1,943 | 1,186 | 64 | % | 145 | 84 | 73 | % | ||||||||||||||||
North America Unitary Products |
853 | | * | 71 | | * | ||||||||||||||||||
Workplace Solutions |
2,046 | 1,863 | 10 | % | 67 | 68 | -1 | % | ||||||||||||||||
Europe |
1,900 | 899 | 111 | % | (7 | ) | (7 | ) | 0 | % | ||||||||||||||
Rest of World |
1,894 | 612 | 209 | % | 128 | 38 | 237 | % | ||||||||||||||||
$ | 10,245 | $ | 5,718 | 79 | % | 536 | 295 | 82 | % | |||||||||||||||
Restructuring costs |
(65 | ) | (51 | ) | ||||||||||||||||||||
$ | 471 | $ | 244 | 93 | % | |||||||||||||||||||
* | Measure not meaningful as segment relates to December 2005 York acquisition |
| The increase in net sales for North America systems, North America service, North America unitary products, Europe and rest of world was primarily due to the impact of the York acquisition. | ||
| The Company did not operate in the North American unitary products markets prior to the York acquisition. | ||
| The increase in net sales for workplace solutions primarily reflects new and expanded contracts in North America and Europe, including Royal Dutch Shell plc, British Broadcasting Corporation, DHL International GmbH, Eastman Kodak Company, T-Mobile, and Intel Corporation. |
| Excluding restructuring costs, the increase in total building efficiency operating income was primarily due to the impact of the York acquisition. | ||
| Restructuring costs by building efficiency reporting segment for the years ended September 30, 2006 and 2005 are as follows: North America systems ($0 and $3 million); North America service ($1 million and $0 million); workplace solutions ($7 million and $13 million); Europe ($40 million and $8 million); and rest of world ($17 million and $27 million). Please see the restructuring costs section below for further details. | ||
| Similarly, the increase in operating income for North America service, North America unitary products and rest of world was primarily due to the impact of the York acquisition. |
22
| The increase in operating income for North America systems was primarily due to an increase in gross profit percentage resulting from operational efficiencies associated with the Companys branch office redesign initiative and a favorable legal settlement associated with the recovery of previously incurred environmental costs ($7 million). The benefit from the legal settlement was substantially offset by other unfavorable commercial and legal settlements. |
Net Sales for the | Operating Income for the | |||||||||||||||||||||||
for the Year Ended | for the Year Ended | |||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||
(In millions) | 2006 | 2005 | Change | 2006 | 2005 | Change | ||||||||||||||||||
North America |
$ | 8,041 | $ | 8,499 | -5 | % | $ | 145 | $ | 350 | -59 | % | ||||||||||||
Europe |
8,774 | 8,935 | -2 | % | 383 | 252 | 52 | % | ||||||||||||||||
Asia |
1,459 | 1,399 | 4 | % | (28 | ) | 30 | -193 | % | |||||||||||||||
$ | 18,274 | $ | 18,833 | -3 | % | 500 | 632 | -21 | % | |||||||||||||||
Restructuring costs |
(129 | ) | (142 | ) | ||||||||||||||||||||
$ | 371 | $ | 490 | -24 | % | |||||||||||||||||||
| North American net sales decreased slightly as higher volumes with DaimlerChrysler AG and Hyundai Motor Co. were more than offset by volume reductions with Ford Motor Co., General Motors Corporation and Nissan Motor Co. and an unfavorable mix of production from light trucks to passenger cars. | ||
| European net sales declined slightly as higher volumes across all major customer platforms were more than offset by the unfavorable impact of foreign currency translation (approximately $300 million). | ||
| Asian net sales increased primarily due to higher volumes with Honda Motor Co. in Japan, partially offset by volume reductions with Nissan Motor Co. in Japan, seating and interiors businesses in Korea and the unfavorable impact of foreign currency translation (approximately $30 million). |
North America |
| Operating income (excluding $75 million of restructuring costs) decreased 59% from the prior year (excluding $12 million of restructuring costs). | ||
| Unfavorable vehicle volume and sales mix decreased operating income by $139 million as compared to the prior year. | ||
| Cost reduction programs, purchasing savings and other operational efficiencies contributed approximately $253 million in operating improvements. | ||
| Operations were unfavorably impacted by customer vehicle program adjustments ($133 million), tooling and launch costs ($68 million), higher labor costs ($48 million) and fuel cost increases ($47 million). | ||
| Selling, General and Administrative (SG&A) expenses increased primarily due to the timing of customer engineering recoveries ($18 million), employee benefit related expenses ($12 million) and plant closure costs related to a customer closure of an assembly plant to which the Company supplied interior products ($8 million), partially offset by administrative efficiencies and cost reduction programs. |
Europe |
| Operating income (excluding $53 million of restructuring costs) increased 52% from the prior year (excluding $130 million of restructuring costs). |
23
| Cost reduction programs, purchasing savings and other operational efficiencies contributed approximately $134 million in savings as compared to the prior period. | ||
| SG&A expenses increased $21 million, primarily due to information technology infrastructure expenses ($16 million) and net engineering expenses ($5 million). |
Asia |
| Asia reported an operating loss in fiscal year 2006, primarily due to lower volumes and product mix, start-up and engineering costs associated with new programs within Japan, Korea and Malaysia and unfavorable material costs. | ||
| Restructuring costs were $1 million in fiscal year 2006 compared to none in fiscal year 2005. |
Year Ended | ||||||||||||
September 30, | ||||||||||||
(In millions) | 2006 | 2005 | Change | |||||||||
Net sales |
$ | 3,716 | $ | 2,928 | 27 | % | ||||||
Restructuring costs |
3 | 17 | -82 | % | ||||||||
Operating income |
443 | 349 | 27 | % |
| The increase in net sales was due to substantially higher unit shipments, primarily from the Delphi battery business acquisition, and the favorable impact of higher lead costs on pricing, partially offset by the unfavorable impact of foreign currency translation (approximately $40 million). Unit sales increased 22% in North America from new account growth in the aftermarket and increased sales to General Motors Corporation related to the Delphi battery business acquisition, 17% in Europe from strong aftermarket demand and 114% in Asia from increased market share. | ||
| The increase in operating income was primarily due to the higher sales volumes and a favorable legal settlement associated with the recovery of previously incurred environmental costs ($33 million), partially offset by unfavorable commodity costs, primarily lead ($72 million). |
24
Year Ended | ||||||||||||
September 30, | ||||||||||||
(In millions) | 2006 | 2005 | Change | |||||||||
Interest expense net |
$ | 248 | $ | 108 | 130 | % | ||||||
Equity income |
112 | 72 | 56 | % | ||||||||
Miscellaneous expense net |
8 | 27 | -70 | % |
| Net interest expense increased primarily due to the financing associated with the York acquisition, partially offset by debt reduction from operating cash flows. | ||
| Equity income increased primarily due to joint ventures included in the Delphi acquisition, higher income from automotive experience joint ventures in China and certain power solutions joint ventures. | ||
| Miscellaneous expense net decreased primarily due to a $9 million gain from the sale of the Companys interest in an automotive experience joint venture and non-recurring losses on the sale of assets in the prior year ($5 million). |
25
26
Net Sales for the | Operating Income for the | |||||||||||||||||||||||
for the Year Ended | for the Year Ended | |||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||
(In millions) | 2005 | 2004 | Change | 2005 | 2004 | Change | ||||||||||||||||||
North America Systems |
$ | 1,158 | $ | 1,132 | 2 | % | $ | 112 | $ | 91 | 23 | % | ||||||||||||
North America Service |
1,186 | 987 | 20 | % | 84 | 52 | 62 | % | ||||||||||||||||
Workplace Solutions |
1,863 | 1,753 | 6 | % | 68 | 59 | 15 | % | ||||||||||||||||
Europe |
899 | 866 | 4 | % | (7 | ) | (6 | ) | -17 | % | ||||||||||||||
Rest of World |
612 | 586 | 4 | % | 38 | 45 | -16 | % | ||||||||||||||||
$ | 5,718 | $ | 5,324 | 7 | % | 295 | 241 | 22 | % | |||||||||||||||
Restructuring costs |
(51 | ) | (13 | ) | ||||||||||||||||||||
$ | 244 | $ | 228 | 7 | % | |||||||||||||||||||
| Excluding the favorable impact of foreign currency translation (approximately $125 million), building efficiency net sales increased 5%, primarily due to growth in North America service markets. | ||
| North America systems showed slight growth in both the existing buildings and new construction market. | ||
| North America service sales increased primarily due to the incremental effect of fiscal year 2005 acquisitions and higher technical services revenues. | ||
| Europe net sales increased primarily due to the positive effects of currency translation. | ||
| Rest of world net sales increased primarily due to new construction market growth in Japan. |
| Excluding restructuring costs, operating income increased 22%, primarily due to sales growth and higher gross profit in North America, partially offset by higher SG&A expenses in all reporting segments. | ||
| North America system and North America service gross margins benefited from improved operational efficiencies associated with the Companys branch office redesign initiative, partially offset by higher SG&A expenses in North America from fiscal year 2005 acquisitions ($32 million). | ||
| Workplace solutions operating income increased primarily due to higher sales volume in Europe. |
27
Net Sales for the | Operating Income for the | |||||||||||||||||||||||
for the Year Ended | for the Year Ended | |||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||
(In millions) | 2005 | 2004 | Change | 2005 | 2004 | Change | ||||||||||||||||||
North America |
$ | 8,499 | $ | 8,237 | 3 | % | $ | 350 | $ | 504 | -31 | % | ||||||||||||
Europe |
8,935 | 7,677 | 16 | % | 252 | 113 | 123 | % | ||||||||||||||||
Asia |
1,399 | 1,093 | 28 | % | 30 | 38 | -21 | % | ||||||||||||||||
$ | 18,833 | $ | 17,007 | 11 | % | 632 | 655 | -4 | % | |||||||||||||||
Restructuring costs |
(142 | ) | (56 | ) | ||||||||||||||||||||
Japaneese pension gain |
| 84 | ||||||||||||||||||||||
$ | 490 | $ | 683 | -28 | % | |||||||||||||||||||
| North America net sales increased slightly, primarily due to new business awards and a favorable mix of vehicle platforms compared to an estimated 2% decrease in the domestic vehicle production. | ||
| Excluding the favorable impact of currency translation (approximately $400 million), Europe net sales increased 11%, primarily due to new contract awards in seating and interior systems, growth in electronics revenue and a slightly positive mix relative to the estimated slight decline in industry production in Europe. | ||
| Excluding the favorable impact of currency translation (approximately $50 million), Asia net sales increased 24%, primarily due to the introduction of significant new models in Japan by original equipment manufacturers and strong sales in our seating business in Korea. |
North America |
| Operating income (excluding $12 million of restructuring costs) decreased 31% (excluding $5 million of restructuring costs), primarily due to selling price reductions and material cost increases in excess of cost savings, partially offset by lower SG&A expenses. | ||
| Lower sales mix of mature vehicle programs and sales price reductions under long term agreements with the Companys customers exceeded cost reductions and operational efficiencies by $71 million for the year. The lower sales mix of mature vehicle programs negatively impacted results as these sales typically deliver more favorable margins due to operational efficiencies and cost reductions that are implemented throughout the vehicle life cycle. In contrast, new vehicle programs require significant engineering and start up costs thereby reducing margins at the onset of the program. Annual price reduction renewal negotiations during the period yielded terms consistent with prior agreements. It should be noted that price reduction commitments are often made in the context of broader customer negotiations on several factors, including volume, potential new business opportunities and geographic expansion. | ||
| Commodity costs, primarily steel, resin and chemicals, increased by approximately $132 million, net of recoveries, compared to the prior year. The Company addresses fluctuations in commodity costs through negotiations with both its customers and suppliers. In order to address future fluctuations, the Company continues to modify the duration and terms of its direct material buy contracts. | ||
| SG&A expenses decreased $49 million, primarily due to lower net engineering expenses compared to the prior year which included increased engineering expenses incurred for new vehicle programs. |
Europe |
| Excluding the favorable impact of foreign currency (approximately $15 million), operating income (excluding $130 million of restructuring costs) increased $125 million (excluding $51 million of restructuring costs), |
28
primarily due to increased volumes of higher margin interior systems, lower launch costs and operational improvements, partially offset by commodity cost increases and higher SG&A expenses. | |||
| Implemented cost reductions, operational efficiencies and the higher sales mix of mature vehicle programs exceeded incremental sales price reductions by approximately $202 million for the year. The segment benefited from implemented cost reductions resulting from the 2005 restructuring plan and continued to benefit from the 2003 turnaround program which concentrated on the implementation of best business practices and six sigma activities on its existing operations. Annual sales price reduction renewal negotiations during the period yielded terms consistent with prior agreements. | ||
| The incremental effect of commodity costs totaled approximately $53 million. The increases were less than those incurred in North America due to the timing of contract renewals and variations in certain terms of the agreements. | ||
| SG&A expenses increased approximately $24 million primarily due to higher program management costs from purchasing and information technology activities, partially offset by lower net engineering expenses. |
Asia |
| Operating income decreased primarily due to start-up and engineering costs associated with new program wins in Japan. The net effect of foreign currency translation was neutral to the segments operating income. |
Year Ended | ||||||||||||
September 30, | ||||||||||||
(In millions) | 2005 | 2004 | Change | |||||||||
Net sales |
$ | 2,928 | $ | 2,272 | 29 | % | ||||||
Restructuring costs |
17 | 13 | 31 | % | ||||||||
Operating income |
349 | 237 | 47 | % |
| Excluding the favorable effects of currency translation (approximately $45 million), net sales increased 27%, primarily due to growth in North America and Europe. | ||
| North American sales of automotive batteries increased 35% primarily due to the acquisition of the remaining 51% interest in the Latin American JV in the fourth quarter of fiscal year 2004, which added $258 million of sales. Sales were also favorably impacted by the pass-through pricing of higher lead costs and higher shipments to existing customers. | ||
| European sales of automotive batteries increased 15% primarily due to higher shipments to existing customers, the favorable impact of currency translation, and the pass-through pricing of higher lead costs to customers. | ||
| Excluding restructuring costs, operating income increased $112 million, primarily due to higher sales volumes in both the Americas and Europe and the acquisition of the remaining interest in the Latin American JV ($24 million). The power solutions business also benefited from a favorable product mix in North America and operational improvements in Europe. The increases were partially offset by the incremental effect of commodity costs, which negatively impacted global operating income by approximately $8 million net of the benefit from the implementation of lead hedges and improved pass through of lead costs. |
29
Year Ended | ||||||||||||
September 30, | ||||||||||||
(In millions) | 2005 | 2004 | Change | |||||||||
Interest expense net |
$ | 108 | $ | 98 | 10 | % | ||||||
Equity income |
72 | 97 | -26 | % | ||||||||
Miscellaneous expense net |
27 | 64 | -58 | % |
| Interest expense net increased, primarily due to higher interest rates. | ||
| Equity income decreased, primarily due to lower earnings at certain automotive experience joint ventures in China and Europe. | ||
| Miscellaneous expense net decreased as the prior year included foreign currency losses of approximately $16 million (compared to a slight gain in the fiscal year 2005), approximately $6 million of expense in fiscal year 2004 associated with the early redemption of outstanding bonds and higher non-recurring litigation expenses in fiscal year 2004. |
30
31
September 30, | September 30, | |||||||||||
(In millions) | 2006 | 2005 | Change | |||||||||
Working capital |
$ | 1,073 | $ | 298 | 260 | % | ||||||
Accounts receivable |
5,697 | 4,987 | 14 | % | ||||||||
Inventories |
1,731 | 983 | 76 | % | ||||||||
Accounts payable |
4,216 | 3,938 | 7 | % |
32
| The increase in working capital, which excludes the net assets of discontinued operations of $45 million at September 30, 2006, is primarily due to the York acquisition and the overall sales and manufacturing growth experienced in fiscal year 2006. Acquired York-related accounts receivable, inventories and other current assets were significantly higher than acquired current liabilities. | ||
| Days sales in accounts receivable for the year ended September 30, 2006, increased to 57 from 54 in the prior year, primarily due to the impact from the York acquisition. There has been no significant deterioration in the credit quality of the Companys receivables or material changes in revenue recognition methods. | ||
| Inventory turnover for the year ended September 30, 2006, decreased to 11 from 18 the prior year, primarily due to the York acquisition. York product inventories turn less frequently than the Companys other businesses where just-in-time production methods are generally used. |
Year Ended September 30, | ||||||||
(In millions) | 2006 | 2005 | ||||||
Cash provided by operating activities |
$ | 1,417 | $ | 877 | ||||
Cash used by investing activities |
3,076 | 338 | ||||||
Cash provided (used) by financing activities |
1,741 | (496 | ) | |||||
Capital expenditures |
711 | 664 |
| The increase in cash provided by operating activities primarily reflects increased net income ($119 million), gain from the sale of discontinued operations ($136 million) and pension contributions in excess of expense ($138 million) in the prior year, and favorable working capital changes in receivables and other current assets, partially offset by changes in deferred income taxes ($379 million) and unfavorable working capital changes in accounts payable and accrued liabilities. | ||
| The increase in cash used in investing activities primarily relates to the York acquisition ($2.5 billion) in the current fiscal year and cash provided by business divestitures ($679 million) in the prior year. | ||
| Cash provided by financing activities in fiscal year 2006 is primarily related to the York acquisition financing. | ||
| Consistent with the prior year, the majority of the fiscal year 2006 capital expenditures were associated with the automotive experience business and are related to investments in launches of new business and cost reduction projects. Management expects fiscal year 2007 capital expenditures to increase slightly with a reinvestment ratio, which is calculated as capital expenditures divided by depreciation expense, of 1.2 to 1, reflecting expected investments in power solutions global capacity expansion and automation. | ||
| A significant portion of the Companys sales are to customers in the automotive industry (See Note 18 to the consolidated financial statements for disclosure of major customers). Future adverse developments in the automotive industry could impact the Companys liquidity position and/or require additional restructuring of the Companys operations. |
33
September 30, | September 30, | |||||||||||
(In millions) | 2006 | 2005 | Change | |||||||||
Short-term debt |
$ | 209 | $ | 684 | -69 | % | ||||||
Long-term debt |
4,534 | 1,658 | 173 | % | ||||||||
Shareholders equity |
7,355 | 6,058 | 21 | % | ||||||||
Total capitalization |
$ | 12,098 | $ | 8,400 | 44 | % | ||||||
Total debt as a % of
total capitalization |
39.2 | % | 27.9 | % | ||||||||
| In August 2006, the Company issued commercial paper to repay the $200 million York note that matured. | ||
| In February 2006, the Company executed additional euro cross currency swaps to hedge its net investment position in foreign operations. Any fluctuation in exchange rates related to hedging transactions is offset by the change in value of the underlying investment. | ||
| In January 2006, the Company issued $2.5 billion in floating and fixed rate notes consisting of the following four series: $500 million floating rate notes due in fiscal year 2008, $800 million fixed rate notes due in fiscal year 2011, $800 million fixed rate notes due in fiscal year 2016 and $400 million fixed rate notes due in fiscal year 2036. The Company also entered into a 24 billion yen (approximately $206 million), three year, floating rate loan. The net proceeds of the note offering and the bank loan were used to repay the unsecured commercial paper obligations that were used to initially finance the York acquisition. | ||
| In October 2005, the Company entered into a five-year, $1.6 billion revolving credit facility which expires in October 2010. This facility replaced the five-year $625 million revolving credit facility, which would have expired in October 2008, and the 364-day $625 million facility, which expired in October 2005. There were no draws on any of the committed credit lines through September 30, 2006. The revolving credit facility was amended and restated effective December 5, 2006 (see Item 9B Other Information in this report for further information). | ||
| In October 2005, the Company entered into a $2.8 billion revolving credit facility. The Company used the revolving credit facility to provide a liquidity backstop for commercial paper that the Company issued to fund the acquisition of York. Subsequent to the repayment of the commercial paper in January 2006, the Company terminated the revolving credit facility. | ||
| The Company also selectively makes use of short-term money market loans. The Company estimates that it could borrow $200 million to $400 million at its current debt ratings in money market loans. | ||
| The Company is in compliance with all covenants and other requirements set forth in its credit agreements and indentures. None of the Companys debt agreements require accelerated repayment in the event of a decrease in credit ratings. Currently, the Company believes it has ample liquidity and full access to the capital markets. The Company believes its capital resources and liquidity position at September 30, 2006 were adequate to meet projected needs. The Company believes requirements for working capital, capital expenditures, dividends, debt maturities and any potential acquisitions in fiscal year 2007 will continue to be funded from operations, supplemented by short- and long-term borrowings, if required. |
34
2012 | ||||||||||||||||||||
Total | 2007 | 2008-2009 | 2010-2011 | and Beyond | ||||||||||||||||
Contractual Obligations |
||||||||||||||||||||
Long-term debt (including capital lease
obligations)* |
$ | 4,534 | $ | 368 | $ | 1,307 | $ | 830 | $ | 2,029 | ||||||||||
Interest on long-term debt (including
capital lease obligations)* |
2,115 | 231 | 357 | 299 | 1,228 | |||||||||||||||
Operating leases |
677 | 173 | 256 | 138 | 110 | |||||||||||||||
Unconditional purchase obligations |
1,991 | 1,621 | 352 | 16 | 2 | |||||||||||||||
Pension and postretirement contributions |
509 | 127 | 75 | 82 | 225 | |||||||||||||||
Total contractual cash obligations |
$ | 9,826 | $ | 2,520 | $ | 2,347 | $ | 1,365 | $ | 3,594 | ||||||||||
* | See Capitalization for additional information related to the Companys long-term debt. |
35
36
37
38
39
September 30, 2006 | ||||||||||||||||||||
Non-USD | ||||||||||||||||||||
Financial Instruments | ||||||||||||||||||||
Designated as Hedges of: | ||||||||||||||||||||
Transactional | Translation | Net | Foreign Exchange | |||||||||||||||||
Foreign | Foreign | Amounts of | Gain/(Loss) from: | |||||||||||||||||
Exposure | Exposure | Instruments | 10% | 10% | ||||||||||||||||
Long/ | Long/ | Long/ | Appreciation | Depreciation | ||||||||||||||||
(Short) | (Short) | (Short) | of USD | of USD | ||||||||||||||||
Brazilian real |
$ | | $ | (34 | ) | $ | (34 | ) | $ | 3 | $ | (3 | ) | |||||||
British pound |
225 | (30 | ) | 195 | (19 | ) | 19 | |||||||||||||
Canadian dollar |
167 | (27 | ) | 140 | (14 | ) | 14 | |||||||||||||
Chinese renminbi |
| 65 | 65 | (7 | ) | 7 | ||||||||||||||
Czech koruna |
332 | (79 | ) | 253 | (25 | ) | 25 | |||||||||||||
Danish kroner |
105 | 8 | 113 | (11 | ) | 11 | ||||||||||||||
Euro |
(440 | ) | (715 | ) | (1,155 | ) | 116 | (116 | ) | |||||||||||
Japanese yen |
(55 | ) | 11 | (44 | ) | 4 | (4 | ) | ||||||||||||
Mexican peso |
99 | 8 | 107 | (11 | ) | 11 | ||||||||||||||
Polish zloty |
(36 | ) | (2 | ) | (38 | ) | 4 | (4 | ) | |||||||||||
Slovenska koruna |
118 | (3 | ) | 115 | (12 | ) | 12 | |||||||||||||
South African rand |
10 | 14 | 24 | (2 | ) | 2 | ||||||||||||||
Swiss franc |
47 | 8 | 55 | (6 | ) | 6 | ||||||||||||||
Other |
38 | 15 | 53 | (5 | ) | 5 | ||||||||||||||
Total |
$ | 610 | $ | (761 | ) | $ | (151 | ) | $ | 15 | $ | (15 | ) | |||||||
40
41
In millions, except per share data; | First | Second | Third | Fourth | Full | |||||||||||||||
(unaudited) | Quarter | Quarter | Quarter | Quarter | Year | |||||||||||||||
2006 |
||||||||||||||||||||
Net sales |
$ | 7,528 | $ | 8,167 | $ | 8,390 | $ | 8,150 | $ | 32,235 | ||||||||||
Gross profit |
917 | 1,053 | 1,213 | 1,237 | 4,420 | |||||||||||||||
Income before the cumulative effect of
a change in accounting principle |
165 | 165 | 338 | 367 | 1,035 | |||||||||||||||
Net income |
165 | 165 | 338 | 360 | 1,028 | |||||||||||||||
Earnings per share before the cumulative
effect of a change in accounting principle |
||||||||||||||||||||
Basic* |
0.86 | 0.85 | 1.73 | 1.87 | 5.32 | |||||||||||||||
Diluted* |
0.85 | 0.84 | 1.71 | 1.85 | 5.26 | |||||||||||||||
Earnings per share |
||||||||||||||||||||
Basic* |
0.86 | 0.85 | 1.73 | 1.84 | 5.29 | |||||||||||||||
Diluted* |
0.85 | 0.84 | 1.71 | 1.82 | 5.23 | |||||||||||||||
2005 |
||||||||||||||||||||
Net sales |
$ | 6,618 | $ | 6,899 | $ | 7,062 | $ | 6,900 | $ | 27,479 | ||||||||||
Gross profit |
806 | 827 | 900 | 949 | 3,482 | |||||||||||||||
Income before the cumulative effect of
a change in accounting principle |
168 | 203 | 255 | 283 | 909 | |||||||||||||||
Net income |
168 | 203 | 255 | 283 | 909 | |||||||||||||||
Earnings per share before the cumulative
effect of a change in accounting principle |
||||||||||||||||||||
Basic* |
0.88 | 1.06 | 1.33 | 1.47 | 4.74 | |||||||||||||||
Diluted* |
0.87 | 1.04 | 1.31 | 1.45 | 4.68 | |||||||||||||||
Earnings per share |
||||||||||||||||||||
Basic* |
0.88 | 1.06 | 1.33 | 1.47 | 4.74 | |||||||||||||||
Diluted* |
0.87 | 1.04 | 1.31 | 1.45 | 4.68 |
* | 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. |
42
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43
PricewaterhouseCoopers LLP | ||
100 E. Wisconsin Ave., Suite 1800 | ||
Milwaukee WI 53202 | ||
Telephone (414) 212 1600 |
44
45
Year ended September 30, | ||||||||||||
(In millions, except per share data) | 2006 | 2005 | 2004 | |||||||||
Net sales |
||||||||||||
Products and systems* |
$ | 26,570 | $ | 24,337 | $ | 21,653 | ||||||
Services* |
5,665 | 3,142 | 2,950 | |||||||||
32,235 | 27,479 | 24,603 | ||||||||||
Cost of sales |
||||||||||||
Products and systems |
23,737 | 21,463 | 18,911 | |||||||||
Services |
4,078 | 2,534 | 2,414 | |||||||||
27,815 | 23,997 | 21,325 | ||||||||||
Gross profit |
4,420 | 3,482 | 3,278 | |||||||||
Selling, general and administrative expenses |
2,941 | 2,206 | 2,145 | |||||||||
Restructuring costs |
197 | 210 | 82 | |||||||||
Japanese pension gain |
| | (84 | ) | ||||||||
Operating income |
1,282 | 1,066 | 1,135 | |||||||||
Interest expense net |
(248 | ) | (108 | ) | (98 | ) | ||||||
Equity income |
112 | 72 | 97 | |||||||||
Miscellaneous net |
(8 | ) | (27 | ) | (64 | ) | ||||||
Other income (expense) |
(144 | ) | (63 | ) | (65 | ) | ||||||
Income before income taxes and minority interests |
1,138 | 1,003 | 1,070 | |||||||||
Provision for income taxes |
63 | 205 | 251 | |||||||||
Minority interests in net earnings of subsidiaries |
42 | 41 | 52 | |||||||||
Income from continuing operations |
1,033 | 757 | 767 | |||||||||
Income from discontinued operations, net of income taxes |
2 | 16 | 51 | |||||||||
Gain on sale of discontinued operations, net of income taxes |
| 136 | | |||||||||
Income
before the cumulative effect of a change in accounting principle
|
1,035 | 909 | 818 | |||||||||
Cumulative effect of a change in accounting principle, net
of income taxes |
(7 | ) | | | ||||||||
Net income |
$ | 1,028 | $ | 909 | $ | 818 | ||||||
Earnings available for common shareholders |
$ | 1,028 | $ | 909 | $ | 816 | ||||||
Earnings per share from continuing operations |
||||||||||||
Basic |
$ | 5.31 | $ | 3.95 | $ | 4.08 | ||||||
Diluted |
$ | 5.25 | $ | 3.90 | $ | 3.98 | ||||||
Earnings per share before the cumulative effect of a
change in accounting principle |
||||||||||||
Basic |
$ | 5.32 | $ | 4.74 | $ | 4.35 | ||||||
Diluted |
$ | 5.26 | $ | 4.68 | $ | 4.24 | ||||||
Earnings per share |
||||||||||||
Basic |
$ | 5.29 | $ | 4.74 | $ | 4.35 | ||||||
Diluted |
$ | 5.23 | $ | 4.68 | $ | 4.24 |
* | Products and systems consist of automotive experience and power solutions products and systems and building efficiency installed systems. Services are building efficiency technical and facility management services. |
46
September 30, | ||||||||
(In millions, except par value and share data) | 2006 | 2005 | ||||||
Assets |
||||||||
Cash and cash equivalents |
$ | 293 | $ | 171 | ||||
Accounts receivable, less allowance for doubtful
accounts of $80 and $47, respectively |
5,697 | 4,987 | ||||||
Inventories |
1,731 | 983 | ||||||
Other current assets |
1,543 | 998 | ||||||
Current assets |
9,264 | 7,139 | ||||||
Property, plant and equipment net |
3,968 | 3,581 | ||||||
Goodwill |
5,910 | 3,733 | ||||||
Other intangible assets net |
799 | 289 | ||||||
Investments in partially-owned affiliates |
463 | 445 | ||||||
Other noncurrent assets |
1,517 | 957 | ||||||
Total assets |
$ | 21,921 | $ | 16,144 | ||||
Liabilities and Shareholders Equity |
||||||||
Short-term debt |
$ | 209 | $ | 684 | ||||
Current portion of long-term debt |
368 | 81 | ||||||
Accounts payable |
4,216 | 3,938 | ||||||
Accrued compensation and benefits |
919 | 704 | ||||||
Accrued income taxes |
229 | 44 | ||||||
Other current liabilities |
2,205 | 1,390 | ||||||
Current liabilities |
8,146 | 6,841 | ||||||
Long-term debt |
4,166 | 1,577 | ||||||
Postretirement health and other benefits |
349 | 159 | ||||||
Minority interests in equity of subsidiaries |
129 | 196 | ||||||
Other noncurrent liabilities |
1,776 | 1,313 | ||||||
Long-term liabilities |
6,420 | 3,245 | ||||||
Commitments and contingencies (Note 19) |
||||||||
Common stock, $.04 1/6 par value |
||||||||
shares authorized: 600,000,000 |
||||||||
shares issued: 2006 - 196,011,787; 2005 - 193,253,563 |
8 | 8 | ||||||
Capital in excess of par value |
1,273 | 1,092 | ||||||
Retained earnings |
5,715 | 4,905 | ||||||
Treasury stock, at cost (2006 - 237,798 shares; 2005 - 382,628 shares) |
(7 | ) | (7 | ) | ||||
Accumulated other comprehensive income |
366 | 60 | ||||||
Shareholders equity |
7,355 | 6,058 | ||||||
Total liabilities and shareholders equity |
$ | 21,921 | $ | 16,144 | ||||
47
September 30, | ||||||||||||
(In millions) | Revised | |||||||||||
2006 | 2005 | 2004 | ||||||||||
Operating Activities |
||||||||||||
Net income |
$ | 1,028 | $ | 909 | $ | 818 | ||||||
Adjustments to reconcile net income to cash provided by operating activities |
||||||||||||
Depreciation |
661 | 615 | 572 | |||||||||
Amortization of intangibles |
44 | 24 | 22 | |||||||||
Equity in earnings of partially-owned affiliates, net of dividends received |
(15 | ) | (47 | ) | (19 | ) | ||||||
Deferred income taxes |
(404 | ) | (25 | ) | 100 | |||||||
Minority interests in net earnings of subsidiaries |
42 | 41 | 52 | |||||||||
Non-cash restructuring costs |
51 | 46 | 7 | |||||||||
Pension contributions in excess of expense |
| (138 | ) | | ||||||||
Gain on sale of discontinued operations |
| (136 | ) | | ||||||||
Japanese pension settlement gain |
| | (84 | ) | ||||||||
Other |
60 | 26 | (26 | ) | ||||||||
Changes in working capital, excluding acquisitions and divestitures of businesses |
||||||||||||
Receivables |
244 | (771 | ) | (346 | ) | |||||||
Inventories |
(77 | ) | (64 | ) | (3 | ) | ||||||
Other current assets |
(32 | ) | (114 | ) | 33 | |||||||
Restructuring reserves |
59 | 102 | 42 | |||||||||
Accounts payable and accrued liabilities |
(360 | ) | 328 | 225 | ||||||||
Accrued income taxes |
116 | 81 | 14 | |||||||||
Cash provided by operating activities of continuing operations |
1,417 | 877 | 1,407 | |||||||||
Investing Activities |
||||||||||||
Capital expenditures |
(711 | ) | (664 | ) | (817 | ) | ||||||
Sale of property, plant and equipment |
90 | 39 | 51 | |||||||||
Acquisition of businesses, net of cash acquired |
(2,629 | ) | (328 | ) | (420 | ) | ||||||
Business divestitures |
| 679 | | |||||||||
Settlement of cross-currency interest rate swaps |
66 | (62 | ) | (143 | ) | |||||||
Changes in long-term investments |
108 | (2 | ) | (79 | ) | |||||||
Cash used by investing activities |
(3,076 | ) | (338 | ) | (1,408 | ) | ||||||
Financing Activities |
||||||||||||
Increase (decrease) in short-term debt net |
(531 | ) | (106 | ) | 660 | |||||||
Increase in long-term debt |
2,739 | 83 | 214 | |||||||||
Repayment of long-term debt |
(359 | ) | (311 | ) | (727 | ) | ||||||
Payment of cash dividends |
(218 | ) | (192 | ) | (171 | ) | ||||||
Proceeds from the exercise of stock options |
97 | 66 | 59 | |||||||||
Other |
13 | (36 | ) | (25 | ) | |||||||
Cash provided (used) by financing activities |
1,741 | (496 | ) | 10 | ||||||||
Effect of exchange rate changes on cash and cash equivalents |
40 | 29 | 6 | |||||||||
Increase in cash and cash equivalents |
$ | 122 | $ | 72 | $ | 15 | ||||||
48
Employee Stock | Accumulated | |||||||||||||||||||||||||||||||
Ownership Plan - | Capital in | Treasury | Other | |||||||||||||||||||||||||||||
Preferred | Unearned | Common | Excess of | Retained | Stock, | Comprehensive | ||||||||||||||||||||||||||
(In millions, except per share data) | Total | Stock | Compensation | Stock | Par Value | Earnings | at Cost | Income (Loss) | ||||||||||||||||||||||||
At September 30, 2003 |
$ | 4,261 | $ | 97 | $ | (23 | ) | $ | 15 | $ | 748 | $ | 3,541 | $ | (10 | ) | $ | (107 | ) | |||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net income |
818 | | | | | 818 | | | ||||||||||||||||||||||||
Foreign currency translation adjustments |
171 | | | | | | | 171 | ||||||||||||||||||||||||
Realized and unrealized gains/losses
on derivatives |
11 | | | | | | | 11 | ||||||||||||||||||||||||
Minimum pension liability adjustment |
(3 | ) | | | | | | | (3 | ) | ||||||||||||||||||||||
Other comprehensive income |
179 | |||||||||||||||||||||||||||||||
Comprehensive income |
997 | |||||||||||||||||||||||||||||||
Reduction of guaranteed ESOP debt |
23 | | 23 | | | | | | ||||||||||||||||||||||||
Cash dividends |
||||||||||||||||||||||||||||||||
Series D preferred ($0.99 per
one ten-thousandth of a share),
net of tax benefit |
(2 | ) | | | | | (2 | ) | | | ||||||||||||||||||||||
Common ($0.90 per share) |
(169 | ) | | | | | (169 | ) | | | ||||||||||||||||||||||
Par value reduction |
| | | (7 | ) | 7 | | | | |||||||||||||||||||||||
Conversion of preferred stock to common
stock |
| (96 | ) | | | 96 | | | | |||||||||||||||||||||||
Other, including options exercised |
96 | (1 | ) | | | 102 | | (5 | ) | | ||||||||||||||||||||||
At September 30, 2004 |
5,206 | | | 8 | 953 | 4,188 | (15 | ) | 72 | |||||||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net income |
909 | | | | | 909 | | | ||||||||||||||||||||||||
Foreign currency translation adjustments |
(29 | ) | | | | | | | (29 | ) | ||||||||||||||||||||||
Realized and unrealized gains/losses
on derivatives |
34 | | | | | | | 34 | ||||||||||||||||||||||||
Minimum pension liability adjustment |
(17 | ) | | | | | | | (17 | ) | ||||||||||||||||||||||
Other comprehensive loss |
(12 | ) | ||||||||||||||||||||||||||||||
Comprehensive income |
897 | |||||||||||||||||||||||||||||||
Cash dividends |
||||||||||||||||||||||||||||||||
Common ($1.00 per share) |
(192 | ) | | | | | (192 | ) | | | ||||||||||||||||||||||
Other, including options exercised |
147 | | | 139 | | 8 | | |||||||||||||||||||||||||
At September 30, 2005 |
6,058 | | | 8 | 1,092 | 4,905 | (7 | ) | 60 | |||||||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net income |
1,028 | | | | | 1,028 | | | ||||||||||||||||||||||||
Foreign currency translation adjustments |
274 | | | | | | | 274 | ||||||||||||||||||||||||
Realized and unrealized gains/losses
on derivatives |
20 | | | | | | | 20 | ||||||||||||||||||||||||
Minimum pension liability adjustment |
12 | | | | | | | 12 | ||||||||||||||||||||||||
Other comprehensive income |
306 | |||||||||||||||||||||||||||||||
Comprehensive income |
1,334 | |||||||||||||||||||||||||||||||
Cash dividends |
||||||||||||||||||||||||||||||||
Common ($1.12 per share) |
(218 | ) | | | | | (218 | ) | | | ||||||||||||||||||||||
Other, including options exercised |
181 | | | 181 | | | | |||||||||||||||||||||||||
At September 30, 2006 |
$ | 7,355 | $ | | $ | | $ | 8 | $ | 1,273 | $ | 5,715 | $ | (7 | ) | $ | 366 | |||||||||||||||
49
1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Principles of Consolidation | ||
The consolidated financial statements include the accounts of Johnson Controls, Inc. and its domestic and foreign 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%. Under certain criteria as provided for in Financial Accounting Standards Board (FASB) Interpretation No. (FIN) 46(R), Consolidation of Variable Interest Entities, the Company may consolidate a partially-owned affiliate when it has less than a 50% ownership. Gains and losses from the translation of substantially all foreign currency financial statements are recorded in the accumulated other comprehensive income account within shareholders equity. | ||
Use of Estimates | ||
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. | ||
Fair Value of Financial Instruments | ||
The fair values of cash and cash equivalents, accounts receivable, short-term debt and accounts payable approximate their carrying values. The fair value of long-term debt, which was $4.6 billion and $1.7 billion at September 30, 2006 and 2005, respectively, was determined using market quotes. See Note 11 for fair value of derivative instruments. | ||
Cash and Cash Equivalents | ||
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. | ||
Receivables | ||
Receivables consist of amounts billed and currently due from customers and unbilled costs and accrued profits related to revenues on long-term contracts that have been recognized for accounting purposes but not yet billed to customers. The Company extends credit to customers in the normal course of business and maintains an allowance for doubtful accounts resulting from the inability or unwillingness of customers to make required payments. The allowance for doubtful accounts is based on historical experience, existing economic conditions and any specific customer collection issues the Company has identified. | ||
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 $455 million and $315 million at September 30, 2006 and 2005, respectively. Amounts included within other current liabilities were $314 million and $226 million at September 30, 2006 and 2005, respectively. |
50
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. 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. 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 evidence of impairment. At September 30, 2006 and 2005, approximately $270 million and $268 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, 2006 and 2005, the Company recorded within other current assets approximately $136 million and $280 million, respectively, of costs for molds, dies and other tools for which customer reimbursement is assured. | ||
Property, Plant and Equipment | ||
Property, plant and equipment are recorded at cost. Depreciation is provided over the estimated useful lives of the respective assets using the straight-line method for financial reporting purposes and accelerated methods for income tax purposes. The estimated useful lives range from 10 to 40 years for buildings and improvements and from 3 to 20 years for machinery and equipment. | ||
The Company capitalizes interest on borrowings during the active construction period of major capital projects. Capitalized interest is added to the cost of the underlying assets and is amortized over the useful lives of the assets. | ||
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 performs an annual goodwill impairment review of its operating segments during the fourth fiscal quarter, or more frequently if events or changes in circumstances indicate that the asset might be impaired, using a fair-value method based on managements judgments and assumptions. The fair value represents the amount at which an operating segment could be bought or sold in a current transaction between willing parties on an arms-length basis. In estimating the fair value, the Company uses historical multiples of earnings and published multiples of earnings of comparable entities with similar operations and economic characteristics. 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 2006 indicated that the estimated fair value of each operating segment exceeded its corresponding carrying amount, including recorded goodwill and, as such, no impairment exists. | ||
Indefinite lived other intangible assets are also subject to at least annual impairment testing. A considerable amount of management judgment and assumptions are required in performing the impairment tests. The Company believes the judgments and assumptions used in the impairment tests are reasonable and no impairment exists at September 30, 2006. |
51
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 its carrying amount may not be recoverable. At September 30, 2006, the Company does not have any material long-lived assets whose recovery is at risk. | ||
Revenue Recognition | ||
The Companys building efficiency business recognizes revenue from long-term systems installation contracts over the contractual period under the percentage-of-completion method of accounting. This method of accounting recognizes sales and gross profit as work is performed based on the relationship between actual costs incurred and total estimated costs at completion. Sales and gross profit are adjusted prospectively for revisions in estimated total contract costs and contract values. Estimated losses are recorded when identified. Claims against customers are recognized as revenue upon settlement. The amount of accounts receivable due after one year is not significant. | ||
The building efficiency business enters into extended warranties and long-term service and maintenance agreements with certain customers. For these arrangements, revenue is recognized on a straight-line basis over the respective contract term. | ||
The Companys building efficiency business also sells certain HVAC products and services in bundled arrangements, where multiple products and/or services are involved. In accordance with Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, the Company divides bundled arrangements into separate deliverables and revenue is allocated to each deliverable based on the relative fair value of all elements or the fair value of undelivered elements. | ||
In all other cases, the Company recognizes revenue at the time products are shipped and 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, 2006, 2005 and 2004 were $743 million, $817 million and $844 million, respectively. | ||
A portion of the costs associated with these activities is reimbursed by customers and, for the years ended September 30, 2006, 2005 and 2004, were $323 million, $402 million and $352 million, respectively. | ||
Earnings Per Share | ||
Basic earnings per share are computed by dividing net income, after deducting dividend requirements on the Series D Convertible Preferred Stock, by the weighted average number of common shares outstanding. Diluted earnings per share are computed by dividing net income, after deducting the after-tax compensation expense that would arise from the assumed conversion of the Series D Convertible Preferred Stock, by diluted weighted average shares outstanding. Diluted weighted average shares assume the conversion of the Series D Convertible Preferred Stock, if dilutive, plus the dilutive effect of common stock equivalents which would arise from the exercise of stock options. Effective December 31, 2003, the Company converted all the outstanding Series D Convertible Preferred Stock (see Note 13). | ||
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. |
52
Accumulated Other Comprehensive Income | ||
Accumulated other comprehensive income is defined as the sum of net income and all other non-owner changes in equity. The components of the non-owner changes in equity, or accumulated other comprehensive income, were as follows (in millions, net of tax): |
September 30, | ||||||||
2006 | 2005 | |||||||
Foreign currency translation adjustments |
$ | 403 | $ | 129 | ||||
Realized and unrealized gains/losses on derivatives |
63 | 43 | ||||||
Minimum pension liability adjustment |
(100 | ) | (112 | ) | ||||
Accumulated other comprehensive income |
$ | 366 | $ | 60 | ||||
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, compensation liabilities and interest rates. | ||
The fair values of all derivatives are recorded in the consolidated statement of financial position. The change in a derivatives fair value is recorded each period in current earnings or accumulated other comprehensive income (OCI), depending on whether the derivative is designated as part of a hedge transaction and if so, the type of hedge transaction. | ||
The Company hedges 70% to 90% of the nominal amount of each of its known foreign exchange transactional exposures. The Company primarily enters into forward exchange contracts to reduce the earnings and cash flow impact of non-functional currency denominated receivables and payables. Gains and losses resulting from these contracts 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. Gains and losses on these contracts are recorded in miscellaneous net in the consolidated statement of income and are recognized in the same period as gains and losses on the hedged items. | ||
Cash Flow Hedges - The Company selectively hedges anticipated transactions that are subject to foreign exchange exposure or commodity price exposure, primarily using foreign currency exchange contracts and commodity contracts, respectively. These instruments are designated as cash flow hedges in accordance with Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137, No. 138 and No. 149 and are recorded in the consolidated statement of financial position at fair value. The effective portion of the contracts gains or losses due to changes in fair value are initially recorded as a component of accumulated OCI and are subsequently reclassified into earnings when the hedged transactions, typically sales or costs related to sales, occur and affect earnings. These contracts are highly effective in hedging the variability in future cash flows attributable to changes in currency exchange rates or commodity price changes. The Company also selectively uses interest rate swaps to modify its exposure to interest rate movements. These swaps also qualify as cash flow hedges, with changes in fair value recorded as a component of accumulated OCI. Interest expense is recorded in earnings at the fixed rate set forth in the swap agreement. As of September 30, 2005, the Company entered into three forward treasury lock agreements designated as cash flow hedges to reduce the market risk associated with changes in interest rates related to the Companys fixed-rate note issuance (see Notes 10 and 11). There were no interest rate swaps designated as cash flow hedges outstanding at September 30, 2006. | ||
For the years ended September 30, 2006, 2005, and 2004, the net amounts recognized in earnings due to ineffectiveness and amounts excluded from the assessment of hedge effectiveness were not material. The amount reported as realized and unrealized gains/losses on derivatives in the accumulated OCI account within shareholders equity represents the net gain/loss on derivatives designated as cash flow hedges. |
53
Fair Value Hedges The Company had two interest rate swaps outstanding at September 30, 2006 and 2005 designated as a hedge of the fair value of a portion of fixed-rate bonds (see Note 11). Both the swap and the hedged portion of the debt are recorded in the consolidated statement of financial position. The change in fair value of the swaps exactly offsets the change in fair value of the hedged debt, with no net impact on earnings. | ||
Net Investment Hedges - The Company has cross-currency interest rate swaps and foreign currency-denominated debt obligations that are designated as hedges of the foreign currency exposure associated with its net investments in foreign operations. The currency effects of the debt obligations are reflected in the accumulated OCI account where they offset translation gains and losses recorded on the Companys net investments in Europe and Japan. The cross-currency interest rate swaps are recorded in the consolidated statement of financial position at fair value, with changes in value attributable to changes in foreign exchange rates recorded in the foreign currency translation adjustments component of accumulated OCI. Net interest payments or receipts from the interest rate swaps are recorded as adjustments to interest expense in earnings on a current basis. A net loss of approximately $29 million associated with hedges of net investments in foreign operations was recorded in the accumulated OCI account for the period ended September 30, 2006. A net gain of approximately $5 million associated with hedges of net investments in foreign operations was recorded in the accumulated OCI account for the period ended September 30, 2005. | ||
New Accounting Pronouncements | ||
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106 and 132 (R). SFAS No. 158 requires that the Company recognize the overfunded or underfunded status of its defined benefit and retiree medical plans as an asset or liability in the fiscal year 2007 year-end balance sheet, with changes in the funded status recognized through other comprehensive income in the year in which they occur. Additionally, SFAS No. 158 requires the Company to measure the funded status of a plan as of the date of its fiscal year-end. The Company is assessing the potential impact that the adoption of SFAS No. 158 will have on its consolidated financial condition. | ||
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 also establishes a fair value hierarchy that prioritizes information used in developing assumptions when pricing an asset or liability. SFAS No. 157 will be effective for us beginning in fiscal year 2008. The Company is assessing the potential impact that the adoption of SFAS No. 157 will have on its consolidated financial condition, results of operations or cash flows. | ||
In June 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109, which clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 allows recognition of only those tax benefits that satisfy a greater than 50% probability threshold. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for the Company beginning October 1, 2007. The Company is assessing the potential impact that the adoption of FIN 48 will have on its previously established tax reserves, consolidated financial condition, results of operations or cash flows. | ||
Effective for the year ended September 30, 2006, the Company adopted FIN 47, Accounting for Conditional Asset Retirement Obligations, which clarifies that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value can be reasonably estimated even though uncertainty exists about the timing and/or method of settlement. See Note 5 for the impact of the Companys adoption of FIN 47 in the fourth quarter of fiscal year 2006. | ||
Effective October 1, 2005, the Company adopted SFAS No. 123(R), Share Based Payment (SFAS No. 123(R)), using the modified prospective method. See Note 12 for additional information regarding stock-based compensation. |
54
Reclassification | ||
Certain prior year amounts have been revised to conform to the current years presentation. Specifically, the Company has revised its consolidated statements of cash flows for the years ended September 30, 2005 and 2004 to combine cash flows from discontinued operations with cash flows from continuing operations. The Company had previously separated these amounts from continuing operations and reported them as cash flows from discontinued operations. |
2. | ACQUISITIONS | |
On December 9, 2005, the Company completed its acquisition of York International Corporation (York). The Company paid $56.50 for each outstanding share of York common stock. The total cost of the acquisition, excluding cash acquired, was approximately $3.1 billion, including the assumption of $563 million of debt, change in control payments and direct costs of the transaction. The Company initially financed the acquisition by issuing unsecured commercial paper, which was refinanced with long-term debt on January 17, 2006. Yorks results of operations have been included in the consolidated financial statements since the date of acquisition. | ||
The acquisition of York enabled the Company to become a single source supplier of integrated products and services for building owners to optimize comfort and energy efficiency. The acquisition enhanced the Companys heating, ventilating, and air conditioning equipment (HVAC), controls, fire and security capabilities and positions the Company in a strategic leadership position in the global building environment industry which offers significant growth potential. | ||
The following table summarizes the preliminary fair values of the York assets acquired and liabilities assumed at the date of acquisition (in millions): |
Current assets, net of cash acquired |
$ | 1,928 | ||
Property, plant and equipment |
399 | |||
Goodwill |
2,047 | |||
Other intangible assets |
502 | |||
Other noncurrent assets |
382 | |||
Total assets |
5,258 | |||
Current liabilities |
1,365 | |||
Noncurrent liabilities |
1,360 | |||
Total liabilities |
2,725 | |||
Net assets acquired |
$ | 2,533 | ||
In conjunction with the York acquisition, the Company recorded goodwill of approximately $2.0 billion, none of which is tax deductible, with allocation to the building efficiency business reporting segments as follows: $422 million to North America systems; $594 million to North America service; $473 million to North America unitary products group; $147 million to Europe; and $411 million to rest of world. In addition, intangible assets subject to amortization were valued at $246 million with useful lives between 1.5 and 30 years, of which $194 million was assigned to customer relationships with useful lives between 20 and 30 years. Intangible assets not subject to amortization, primarily trademarks, were valued at $256 million. The York purchase price allocation has been substantially completed as of September 30, 2006, and final adjustments, if any, are not expected to be material. | ||
The Company has recorded restructuring reserves of approximately $158 million related to the York acquisition, comprised of $80 million of severance costs, $62 million related to contract terminations and facility closures and $16 million of other direct costs associated with exiting certain activities of the acquired business. These restructuring reserves include workforce reductions of approximately 3,000 employees and calls for two manufacturing plants to be closed while other plants and branch offices will be merged into existing facilities of the Company. The costs of these restructuring activities were recorded as costs of the acquisition and were provided for in accordance with FASB Emerging Issues Task Force Issue No. 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination. The Company anticipates that the restructuring actions will be completed by the end of the third quarter of fiscal year 2007. As of September 30, 2006, $59 million of the restructuring reserves have been utilized, including |
55
severance ($30 million), contract termination and facility closure costs ($23 million) and other costs associated with exiting certain activities of the acquired business ($6 million). | ||
Had the York acquisition been completed on October 1, 2004, the Companys unaudited pro forma consolidated results of operations would have been as follows (in millions, except per share amounts): |
Year Ended September 30, | ||||||||
2006 | 2005 | |||||||
Net sales |
$ | 32,983 | $ | 31,901 | ||||
Income from continuing operations |
1,028 | 694 | ||||||
Net income |
1,023 | 851 | ||||||
Earnings per share from continuing operations |
||||||||
Basic |
$ | 5.29 | $ | 3.62 | ||||
Diluted |
$ | 5.23 | $ | 3.57 | ||||
Earnings per share |
||||||||
Basic |
$ | 5.26 | $ | 4.44 | ||||
Diluted |
$ | 5.20 | $ | 4.38 |
The pro forma information for the year ended September 30, 2005 includes expense of approximately $51 million for the amortization of the inventory write-up. The pro forma information for the year ended September 30, 2006 includes the reversal of approximately $51 million related to the amortization of the inventory write-up that was included in the Companys consolidated operating results. The pro forma information does not purport to be indicative of the results that actually would have been achieved if the operations were combined during the periods presented and is not intended to be a projection of future results or trends. | ||
Also in fiscal year 2006, the Company completed six additional acquisitions for a combined purchase price of $111 million, including the assumption of debt, none of which were material to the Companys consolidated financial statements. In connection with these acquisitions, the Company recorded goodwill of $57 million. | ||
In fiscal year 2005, the Company completed six acquisitions for a combined purchase price of approximately $333 million, including the assumption of debt. The most significant of these acquisitions are as follows: |
| In July 2005, the Company completed the acquisition of Delphi Corporations global battery business. This acquisition enables the Company to participate in the rapidly growing Asian automotive battery market, particularly in China. | ||
| In June 2005, the Company completed its acquisition of USI Companies, Inc. This acquisition provides clients with an expanded, integrated mix of global corporate real estate services and enables the Company to further align new and existing customers real estate assets with their business objectives. |
56
The following table summarizes the fair values of the assets acquired and liabilities assumed at the dates of acquisition in fiscal year 2005 (in millions). |
Current assets, net of cash acquired |
$ | 163 | ||
Property, plant and equipment |
134 | |||
Goodwill |
155 | |||
Other intangible assets |
61 | |||
Other noncurrent assets |
63 | |||
Total assets |
576 | |||
Current liabilities |
179 | |||
Long-term liabilities |
69 | |||
Total liabilities |
248 | |||
Net assets acquired |
$ | 328 | ||
The operating results of these acquisitions have been included in the Companys consolidated financial statements from the dates of acquisition. Pro forma information reflecting these acquisitions has not been disclosed as the impact on consolidated net income was not material. | ||
In conjunction with the fiscal year 2005 acquisitions, the Company recorded goodwill of $155 million, with allocation to the reporting segments as follows: $11 million, all of which is tax deductible, to building efficiency North America service; $50 million, all of which is tax deductible, to the building efficiency global facilities management; $8 million, none of which is tax deductible, to automotive experience North America; and $86 million, $82 million of which is tax deductible, to power solutions. In addition, intangible assets subject to amortization, all of which were customer relationships, were valued at $61 million with useful lives between 10 and 50 years. | ||
The Company has recorded restructuring reserves of $67 million related to the Delphi battery acquisition. These restructuring reserves included workforce reductions of approximately 1,500 employees and called for three plants to be closed or merged into existing facilities of the Company. The Company anticipates that the restructuring actions will be completed by the end of the first quarter of fiscal year 2007. As of September 30, 2006, $30 million of these restructuring reserves have been utilized. | ||
In fiscal year 2004, the Company acquired 100% ownership of its power solutions joint venture with Grupo IMSA, S.A. de C.V. (Latin American JV). The purchase price for the remaining 51% interest in the joint venture was $525 million, including the assumption of debt. The acquisition was funded initially with short-term debt. Management believed that the acquisition was in line with the Companys growth strategies and would provide new opportunities to strengthen the Companys global leadership position in the automotive battery industry. |
57
The following table summarizes the fair values of the assets acquired and liabilities assumed in the Latin American JV acquisition, which was effective on August 1, 2004 (in millions). |
Current assets, net of cash acquired |
$ | 164 | ||
Property, plant and equipment |
219 | |||
Goodwill |
458 | |||
Other intangible assets |
37 | |||
Other noncurrent assets |
4 | |||
Total assets |
882 | |||
Current liabilities |
168 | |||
Long-term liabilities |
214 | |||
Total liabilities |
382 | |||
Less historical investment balance in partially-owned affiliate |
117 | |||
Net assets acquired |
$ | 383 | ||
The operating results of the Latin American JV have been included in the Companys consolidated financial statements from the date of acquisition. For periods prior to the acquisition, the Companys investment was accounted for by the equity method. Pro forma information reflecting this acquisition has not been disclosed as the impact on consolidated net income was not material. | ||
In conjunction with the Latin American JV acquisition, the Company recorded goodwill of $458 million, none of which is tax deductible, and assigned it to the power solutions reporting segment. In addition, intangible assets subject to amortization, all of which were customer relationships, were valued at $12 million with a weighted average useful life of approximately 39 years. Intangible assets not subject to amortization, primarily trademarks, were valued at $25 million. | ||
3. | DISCONTINUED OPERATIONS | |
In December 2005, the Company acquired Yorks Bristol Compressor business as part of its acquisition of York (see Note 2) and engaged a firm to actively market the business. The Bristol Compressor business included Scroll Technologies, Inc., an unconsolidated joint venture with Carrier Corporation that was divested in September 2006. The Company continues to market the remainder of the Bristol Compressor business. | ||
In March 2005, the Company completed the sale of its Johnson Controls World Services, Inc. subsidiary, which had been included in the Companys former building efficiency segment, to IAP Worldwide Services, Inc. for $260 million. The sale resulted in a gain of approximately $139 million ($85 million after-tax), net of related costs. | ||
In February 2005, the Company completed the sale of its engine electronics business, which had been included in the automotive experience Europe segment, to Valeo for 316 million. This non-core business was acquired in fiscal year 2002 from Sagem SA. The sale of the engine electronics business resulted in a gain of $81 million ($51 million after-tax), net of related costs. |
58
The following summarizes the net sales and income before income taxes and minority interests of the discontinued operations for the years ended September 30, 2006, 2005, and 2004 (in millions): |
Year Ended September 30, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Net sales |
$ | 178 | $ | 540 | $ | 1,190 | ||||||
Income before income taxes and minority interests |
3 | 26 | 82 | |||||||||
Earnings per share from discontinued operations |
||||||||||||
Basic |
$ | 0.01 | $ | 0.08 | $ | 0.27 | ||||||
Diluted |
$ | 0.01 | $ | 0.08 | $ | 0.26 | ||||||
Earnings per share from gain on sale of discontinued operations |
||||||||||||
Basic |
$ | | $ | 0.71 | $ | | ||||||
Diluted |
$ | | $ | 0.70 | $ | | ||||||
The consolidated statement of financial position at September 30, 2006 includes assets of discontinued operations of $81 million within other current assets, which consisted of accounts receivable net ($27 million), inventories ($44 million), other current assets ($7 million) and property, plant and equipment net ($3 million). Liabilities of discontinued operations at September 30, 2006 within other current liabilities totaled $36 million, which consisted of accounts payable ($26 million) and other current liabilities ($10 million). At September 30, 2005 there were no assets or liabilities of discontinued operations recorded in the consolidated statement of financial position. | ||
Assets of Johnson Controls World Services, Inc. as of the disposal date totaled $178 million, which consisted of accounts receivable ($127 million), goodwill ($30 million), property, plant and equipment net ($10 million) and other miscellaneous assets ($11 million). Liabilities of Johnson Controls World Services, Inc. as of the disposal date totaled $57 million, which consisted of accounts payable ($40 million) and other miscellaneous liabilities ($17 million). | ||
Assets of the engine electronics business as of the disposal date totaled $427 million, which consisted of goodwill ($154 million), accounts receivable ($100 million), property, plant and equipment net ($69 million), other intangible assets net ($59 million) and other miscellaneous assets ($45 million). Liabilities of the engine electronics business as of the disposal date totaled $89 million, which consisted of accounts payable ($82 million) and other miscellaneous liabilities ($7 million). | ||
4. | INVENTORIES | |
Inventories consisted of the following (in millions): |
September 30, | ||||||||
2006 | 2005 | |||||||
Raw materials and supplies |
$ | 655 | $ | 497 | ||||
Work-in-process |
294 | 158 | ||||||
Finished goods |
854 | 378 | ||||||
FIFO inventories |
1,803 | 1,033 | ||||||
LIFO reserve |
(72 | ) | (50 | ) | ||||
Inventories |
$ | 1,731 | $ | 983 | ||||
Inventories valued by the LIFO method of accounting were approximately 25% and 31% of total inventories at September 30, 2006 and 2005, respectively. |
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5. | PROPERTY, PLANT AND EQUIPMENT | |
Property, plant and equipment consisted of the following (in millions): |
September 30, | ||||||||
2006 | 2005 | |||||||
Buildings and improvements |
$ | 1,794 | $ | 1,784 | ||||
Machinery and equipment |
5,787 | 5,086 | ||||||
Construction in progress |
589 | 479 | ||||||
Land |
295 | 249 | ||||||
Total property, plant and equipment |
8,465 | 7,598 | ||||||
Less accumulated depreciation |
(4,497 | ) | (4,017 | ) | ||||
Property, plant and equipment net |
$ | 3,968 | $ | 3,581 | ||||
Interest costs capitalized during the years ended September 30, 2006, 2005, and 2004 were $21 million, $11 million and $16 million, respectively. | ||
In March 2005, the FASB issued FIN 47, which clarifies that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation (ARO) if the fair value can be reasonably estimated even though uncertainty exists about the timing and/or method of settlement. Under FIN 47, companies must accrue for costs related to legal obligations associated with the retirement, disposal, removal or abandonment of tangible long-lived assets when the timing and/or method of settlement of the obligation is conditional on a future event and if the liabilitys fair value can be reasonably estimated. FIN 47 requires that the ARO estimate be recorded as a liability and as an increase to the related asset. The capitalized asset is depreciated over the remaining useful life of the asset. | ||
We have identified certain legal and future environmental obligations at owned properties in the power solutions business as conditional AROs. In the fourth quarter of fiscal year 2006, the Company adopted FIN 47 and, using site-specific surveys and other historical information, recorded an increase in net property, plant and equipment of $16 million, an ARO liability of $28 million and a non-cash, after-tax charge of $7 million ($0.03 per share), which is reported in the fiscal year 2006 consolidated statement of income as a cumulative effect of a change in accounting principle, net of income taxes. |
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6. | GOODWILL AND OTHER INTANGIBLE ASSETS | |
The changes in the carrying amount of goodwill in each of the Companys reporting segments for the years ended September 30, 2006 and 2005 were as follows (in millions): |
Currency | ||||||||||||||||
September 30, | Business | Translation and | September 30, | |||||||||||||
2004 | Acquisitions | Other | 2005 | |||||||||||||
Building efficiency |
||||||||||||||||
North America Systems |
$ | 46 | $ | | $ | (1 | ) | $ | 45 | |||||||
North America Service |
4 | 11 | (4 | ) | 11 | |||||||||||
North America Unitary Products |
| | | | ||||||||||||
Global Facilities Management |
102 | 75 | 5 | 182 | ||||||||||||
Europe |
210 | | (3 | ) | 207 | |||||||||||
Rest of World |
72 | | (1 | ) | 71 | |||||||||||
Interior experience |
||||||||||||||||
North America |
1,177 | 8 | 1 | 1,186 | ||||||||||||
Europe |
1,025 | | (12 | ) | 1,013 | |||||||||||
Asia |
185 | | 7 | 192 | ||||||||||||
Power solutions |
745 | 73 | 8 | 826 | ||||||||||||
Total |
$ | 3,566 | $ | 167 | $ | | $ | 3,733 | ||||||||
Currency | ||||||||||||||||
September 30, | Business | Translation and | September 30, | |||||||||||||
2005 | Acquisitions | Other | 2006 | |||||||||||||
Building efficiency |
||||||||||||||||
North America Systems |
$ | 45 | $ | 451 | $ | | $ | 496 | ||||||||
North America Service |
11 | 601 | 3 | 615 | ||||||||||||
North America Unitary Products |
| 473 | | 473 | ||||||||||||
Global Facilities Management |
182 | | (16 | ) | 166 | |||||||||||
Europe |
207 | 147 | 16 | 370 | ||||||||||||
Rest of World |
71 | 411 | 5 | 487 | ||||||||||||
Interior experience |
||||||||||||||||
North America |
1,186 | | (10 | ) | 1,176 | |||||||||||
Europe |
1,013 | 6 | 47 | 1,066 | ||||||||||||
Asia |
192 | 7 | 1 | 200 | ||||||||||||
Power solutions |
826 | 8 | 27 | 861 | ||||||||||||
Total |
$ | 3,733 | $ | 2,104 | $ | 73 | $ | 5,910 | ||||||||
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The Companys other intangible assets, primarily from business acquisitions, are valued based on independent appraisals and consisted of (in millions): |
September 30, 2006 | September 30, 2005 | |||||||||||||||||||||||
Gross | Gross | |||||||||||||||||||||||
Carrying | Accumulated | Carrying | Accumulated | |||||||||||||||||||||
Amount | Amortization | Net | Amount | Amortization | Net | |||||||||||||||||||
Amortized intangible assets |
||||||||||||||||||||||||
Patented technology |
$ | 300 | $ | (126 | ) | $ | 174 | $ | 231 | $ | (103 | ) | $ | 128 | ||||||||||
Unpatented technology |
31 | (9 | ) | 22 | 31 | (7 | ) | 24 | ||||||||||||||||
Customer relationships |
304 | (15 | ) | 289 | 96 | (8 | ) | 88 | ||||||||||||||||
Miscellaneous |
33 | (20 | ) | 13 | 10 | (8 | ) | 2 | ||||||||||||||||
Total amortized
intangible assets |
668 | (170 | ) | 498 | 368 | (126 | ) | 242 | ||||||||||||||||
Unamortized intangible assets
|
||||||||||||||||||||||||
Trademarks |
295 | | 295 | 40 | | 40 | ||||||||||||||||||
Pension asset |
6 | | 6 | 7 | | 7 | ||||||||||||||||||
Total unamortized
intangible assets |
301 | | 301 | 47 | | 47 | ||||||||||||||||||
Total intangible assets |
$ | 969 | $ | (170 | ) | $ | 799 | $ | 415 | $ | (126 | ) | $ | 289 | ||||||||||
Amortization of other intangible assets for the years ended September 30, 2006, 2005 and 2004 was $44 million, $23 million and $19 million, respectively. Excluding the impact of any future acquisitions, the Company anticipates amortization of other intangible assets will average approximately $37 million per year over the next five years. | ||
7. | PRODUCT WARRANTIES | |
The Company offers warranties to its customers depending upon the specific product and terms of the customer purchase agreement. A typical warranty program requires that the Company replace defective products within a specified time period from the date of sale. The Company records an estimate for future warranty-related costs based on actual historical return rates. Based on analysis of return rates and other factors, the adequacy of the Companys warranty provisions are adjusted as necessary. While the Companys warranty costs have historically been within its calculated estimates, it is possible that future warranty costs could exceed those estimates. The Companys product warranty liability is included in other current liabilities in the consolidated statement of financial position. | ||
The changes in the carrying amount of the Companys total product warranty liability for the years ended September 30, 2006 and 2005 were as follows (in millions): |
Year Ended September 30, | ||||||||
2006 | 2005 | |||||||
Beginning balance |
$ | 61 | $ | 67 | ||||
Accruals for warranties issued during the period |
127 | 47 | ||||||
Accruals from business acquisition |
83 | 3 | ||||||
Accruals related to pre-existing warranties (including changes in estimates) |
(3 | ) | (7 | ) | ||||
Settlements made (in cash or in kind) during the period |
(107 | ) | (49 | ) | ||||
Currency translation |
1 | | ||||||
Ending balance |
$ | 162 | $ | 61 | ||||
62
8. | LEASES | |
Certain administrative and production facilities and equipment are leased under long-term agreements. Most leases contain renewal options for varying periods, and certain leases include options to purchase the leased property during or at the end of the lease term. Leases generally require the Company to pay for insurance, taxes and maintenance of the property. Leased capital assets included in net property, plant and equipment, primarily buildings and improvements, were $57 million and $71 million at September 30, 2006 and 2005, respectively. | ||
Other facilities and equipment are leased under arrangements that are accounted for as operating leases. Total rental expense for the years ended September 30, 2006, 2005 and 2004 was $288 million, $242 million and $235 million, respectively. | ||
Future minimum capital and operating lease payments and the related present value of capital lease payments at September 30, 2006 were as follows (in millions): |
Capital | Operating | |||||||
Leases | Leases | |||||||
2007 |
$ | 12 | $ | 173 | ||||
2008 |
11 | 143 | ||||||
2009 |
46 | 113 | ||||||
2010 |
5 | 80 | ||||||
2011 |
5 | 58 | ||||||
After 2011 |
25 | 110 | ||||||
Total minimum lease payments |
104 | $ | 677 | |||||
Interest |
(14 | ) | ||||||
Present value of net minimum lease payments |
$ | 90 | ||||||
9. | SHORT-TERM DEBT AND CREDIT AGREEMENTS | |
Short-term debt consisted of the following (in millions): |
September 30, | ||||||||
2006 | 2005 | |||||||
Commercial paper |
$ | | $ | 477 | ||||
Bank borrowings |
209 | 207 | ||||||
Short-term debt |
$ | 209 | $ | 684 | ||||
Weighted average interest rate on short-term
debt outstanding |
5.85 | % | 3.75 | % |
The Company has a $1.6 billion committed five-year credit facility to support its outstanding commercial paper. The facility expires in October 2010. Average outstanding commercial paper for the year ended September 30, 2006 was $1.1 billion. There were no draws against the $1.6 billion facility during the year ended September 30, 2006. | ||
In addition, the Company had uncommitted lines of credit from banks totaling approximately $560 million at September 30, 2006 of which $350 million remained unused. The lines of credit are subject to the usual terms and conditions applied by banks. |
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10. | LONG-TERM DEBT | |
Long-term debt consisted of the following (in millions; due dates by fiscal year): |
September 30, | ||||||||
2006 | 2005 | |||||||
Unsecured notes |
||||||||
4.875% due in 2013 ($300 million par value) |
$ | 299 | $ | 299 | ||||
5.0% due in 2007 ($350 million par value) |
352 | 354 | ||||||
6.3% due in 2008 ($175 million par value) |
170 | 175 | ||||||
7.7% due in 2015 ($125 million par value) |
125 | 125 | ||||||
7.125% due in 2017 ($150 million par value) |
149 | 149 | ||||||
6.95% due in 2046 ($125 million par value) |
125 | 125 | ||||||
5.25% due in 2011 ($800 million par value) |
800 | | ||||||
5.5% due in 2016 ($800 million par value) |
799 | | ||||||
6.0% due in 2036 ($400 million par value) |
395 | | ||||||
6.7% due in 2008 ($200 million par value) |
204 | | ||||||
5.8% due in 2013 ($100 million par value) |
100 | | ||||||
Floating rate notes due in 2008 ($500 million par value) |
500 | | ||||||
Unsecured loan |
||||||||
Floating rate loan due in 2009 |
50 | 50 | ||||||
Capital lease obligations |
90 | 105 | ||||||
Foreign-denominated debt |
||||||||
euro |
129 | 131 | ||||||
yen |
237 | 91 | ||||||
Other |
10 | 54 | ||||||
Gross long-term debt |
4,534 | 1,658 | ||||||
Less: current portion |
368 | 81 | ||||||
Net long-term debt |
$ | 4,166 | $ | 1,577 | ||||
In January 2006, the Company issued $2.5 billion in floating and fixed rate notes consisting of the following four series: $500 million floating rate notes due in fiscal year 2008 (interest rate of 5.7% at September 30, 2006), $800 million fixed rate notes due in fiscal year 2011, $800 million fixed rate notes due in fiscal year 2016 and $400 million fixed rate notes due in fiscal year 2036. The Company also entered into a 24 billion yen (approximately $210 million) three year loan. The net proceeds of the note offering and the bank loan were used to repay the unsecured commercial paper obligations that were used to initially finance the acquisition of York. | ||
At September 30, 2006, the Companys euro-denominated long-term debt was at fixed rates with a weighted-average interest rate of 8.0% and the Companys yen-denominated debt was at floating rates with a weighted average interest rate of 0.8%. | ||
The installments of long-term debt maturing in subsequent years are: 2007 $368 million; 2008 $976 million; 2009 $331 million; 2010 $13 million; 2011 $817 million; 2012 and thereafter $2.0 billion. The Companys long-term debt includes various financial covenants, none of which are expected to restrict future operations. | ||
Total interest paid on both short and long-term debt for the years ended September 30, 2006, 2005 and 2004 was $234 million, $133 million and $137 million, respectively. The Company uses financial instruments to manage its interest rate exposure (see Note 11). These instruments affect the weighted average interest rate of the Companys debt and interest expense. |
64
11. | FINANCIAL INSTRUMENTS | |
The Company selectively uses derivative instruments to reduce market risk associated with changes in foreign currency, commodities, compensation expense 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. See Note 1 for additional information regarding the Companys objectives for holding certain derivative instruments, its strategies for achieving those objectives, and its risk management and accounting policies applicable to these instruments. | ||
The Company has global operations and participates in the foreign exchange markets to minimize its risk of loss from fluctuations in currency exchange rates. The Company primarily uses foreign currency exchange contracts to hedge certain of its foreign currency exposure. | ||
The Company selectively uses interest rate swaps to reduce market risk associated with changes in interest rates (cash flow or fair value hedges). In May 2002, the Company entered into a four-and-a-half-year interest rate swap to hedge a portion of the Companys 5% notes maturing in November 2006. Under the swap, the Company receives interest based on a fixed U.S. dollar rate of 5% and pays interest based on a floating three-month U.S. dollar LIBOR rate plus 14.75 basis points. Terms of the four-and-a-half-year swap were modified since inception of the swap resulting in a decrease of the notional amount to $100 million from the original $250 million. In October 2003, the Company entered into a four-year and three-month interest rate swap to hedge the Companys 6.3% notes maturing in February 2008. Under the swap, the Company receives interest based on a fixed U.S. dollar rate of 6.3% and pays interest based on a floating three-month U.S. dollar LIBOR rate plus 283.5 basis points. | ||
In September 2005, the Company entered into three forward treasury lock agreements to reduce the market risk associated with changes in interest rates associated with the Companys anticipated fixed-rate note issuance to finance the acquisition of York (cash flow hedge). The three forward treasury lock agreements, which had a combined notional amount of $1.3 billion, fixed a portion of the future interest cost for 5-year, 10-year and 30-year bonds. The fair value of each treasury lock agreement, or the difference between the treasury lock reference rate and the fixed rate at time of note issuance, was 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. | ||
The Company also selectively uses cross-currency interest rate swaps to hedge the foreign currency exposure associated with its net investment in certain foreign operations (net investment hedges). Under the swaps, the Company receives interest based on a variable U.S. dollar rate and pays interest based on variable euro rates on the outstanding notional principal amounts in dollars and euro, respectively. The Company did not renew the Yen cross-currency interest rate swap that matured on June 30, 2006, and incurred an immaterial foreign exchange loss on the swap. The Company continues to carry Yen debt as a hedge of its Yen exposure related to its net investment in Japan. | ||
In addition, the Company selectively uses equity swaps to reduce market risk associated with its stock-based compensation plans, such as its deferred compensation plans and stock appreciation rights. 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. In March 2004, the Company entered into an equity swap agreement. In connection with the swap agreement, as amended, a third party may purchase shares of the Companys stock in the market or in privately negotiated transactions up to an amount equal to $200 million in aggregate market value at any given time. Although the swap agreement has a stated expiration date, the Companys intention is to continually renew the swap agreement with Citibank, N.A.s consent. The net effect of the change in the fair value of the swap agreement and the change in equity compensation liabilities was not material to the Companys earnings for the years ended September 30, 2006 or 2005. | ||
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 upon purchase of the underlying commodities that will be used in the business. The maturities of the |
65
commodity contracts coincide with the expected purchase of the commodities. Realized and unrealized gains and losses on these contracts are recognized in the same period as gains and losses on the hedged items. | ||
The Companys derivative instruments are recorded at fair value in the consolidated statement of financial position as follows (in millions at U.S. dollar equivalent): |
September 30, | ||||||||||||||||
2006 | 2005 | |||||||||||||||
Notional | Fair Value | Notional | Fair Value | |||||||||||||
Amount | Asset (Liability) | Amount | Asset (Liability) | |||||||||||||
Other current assets |
||||||||||||||||
Treasury lock agreements |
$ | | $ | | $ | 1,275 | $ | 31 | ||||||||
Foreign currency exchange contracts |
2,801 | 3 | 2,988 | 20 | ||||||||||||
Interest rate swaps |
150 | 2 | | | ||||||||||||
Cross-currency interest rate swaps |
| | 737 | 58 | ||||||||||||
Equity swap |
| | 107 | 3 | ||||||||||||
Commodity contracts |
278 | 34 | 62 | 2 | ||||||||||||
Other noncurrent assets |
||||||||||||||||
Commodity contracts |
20 | 5 | | | ||||||||||||
Other current liabilities |
||||||||||||||||
Cross-currency interest rate swaps |
1,162 | (63 | ) | | | |||||||||||
Equity swap |
123 | (1 | ) | | | |||||||||||
Other noncurrent liabilities |
||||||||||||||||
Interest rate swaps |
175 | (5 | ) | 325 | (2 | ) |
It is important to note that the Companys derivative instruments are hedges protecting against underlying changes in foreign currency, interest rates, compensation liabilities and commodity price changes. Accordingly, the implied gains/losses associated with the fair values of foreign currency exchange contracts and cross-currency interest rate swaps would be offset by gains/losses on underlying payables, receivables and net investments in foreign subsidiaries. Similarly, implied gains/losses associated with interest rate swaps offset changes in interest rates and the fair value of long-term debt. | ||
The fair values of interest rate and cross-currency interest rate swaps were determined using dealer quotes and market interest rates. The fair values of foreign currency exchange contracts were determined using market exchange rates. | ||
12. | STOCK-BASED COMPENSATION | |
Effective October 1, 2002, the Company voluntarily adopted the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation and adopted the disclosure requirements of SFAS No. 148, Accounting for Stock-Based Compensation Transition and Disclosure an amendment of SFAS 123. | ||
Effective October 1, 2005, the Company adopted SFAS No. 123(R) using the modified prospective method. The modified prospective method requires compensation cost to be recognized beginning on the effective date (a) based on the requirements of SFAS No. 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date. As such, prior periods will not reflect restated amounts. The cumulative impact of adopting SFAS 123(R) was not significant to the Companys operating results since the Company had previously adopted SFAS No. 123. Pro forma net income and basic and diluted earnings per share have not been disclosed as the impact of applying the fair value based method to all outstanding and unvested awards is not material to the Companys consolidated results of operations. | ||
The Company has two share-based compensation plans, which are described below. The compensation cost charged against income for those plans was approximately $67 million, $38 million and $35 million for the years ended September 30, 2006, 2005 and 2004, respectively. The total income tax benefit recognized in the income statement for |
66
share-based compensation arrangements was approximately $27 million, $15 million and $14 million for the years ended September 30, 2006, 2005 and 2004, respectively. | ||
Prior to the adoption of SFAS No. 123(R), the Company applied a nominal vesting approach for employee stock-based compensation awards with retirement eligible provisions. Under the nominal vesting approach, the Company recognized compensation cost over the vesting period and, if the employee retired before the end of the vesting period, the Company recognized any remaining unrecognized compensation cost at the date of retirement. For stock-based payments issued after the adoption of SFAS No. 123(R), the Company applies a non-substantive vesting period approach whereby expense is accelerated for those employees that receive awards and are eligible to retire prior to the award vesting. Had the Company applied the non-substantive vesting period approach prior to the adoption of SFAS No. 123(R), an approximate $11 million and $5 million reduction of pre-tax compensation cost would have been recognized for the years ended September 30, 2006 and 2005, respectively. For the year ended September 30, 2004, the impact of applying the non-substantive vesting period approach is not significant. | ||
Stock Option Plan | ||
Stock Options | ||
The Companys 2000 Stock Option Plan, as amended (Plan), which is shareholder-approved, permits the grant of stock options to its employees for up to approximately 13 million shares of new common stock (approximately 5 million shares of common stock remained available to be granted at September 30, 2006). 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 10 years from the grant date. | ||
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, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Expected life of option (years) |
4.75 | 5.00 | 5.00 | |||||||||
Risk-free interest rate |
4.46 | % | 3.48 | % | 3.00 | % | ||||||
Expected volatility of the
Companys stock |
22.00 | % | 20.00 | % | 23.00 | % | ||||||
Expected dividend yield on the
Companys stock |
1.70 | % | 1.76 | % | 1.75 | % | ||||||
Expected forfeiture rate |
12.75 | % | 8.00 | % | 7.00 | % |
Weighted | ||||||||||||||||
Average | Aggregate | |||||||||||||||
Weighted | Shares | Remaining | Intrinsic | |||||||||||||
Average | Subject to | Contractual | Value | |||||||||||||
Option Price | Option | Life (years) | (in millions) | |||||||||||||
Outstanding, September 30, 2005 |
$ | 45.62 | 10,524,494 | |||||||||||||
Granted |
67.76 | 2,880,641 | ||||||||||||||
Exercised |
35.97 | (2,809,405 | ) | |||||||||||||
Forfeited or expired |
58.93 | (254,412 | ) | |||||||||||||
Outstanding, September 30, 2006 |
$ | 54.08 | 10,341,318 | 7.2 | $ | 187 | ||||||||||
67
The weighted-average grant-date fair value of options granted during the years ended September 30, 2006, 2005 and 2004 was $15.35, $13.92 and $10.99, respectively. | ||
The total intrinsic value of options exercised during the years ended September 30, 2006, 2005 and 2004 was approximately $106 million, $57 million and $62 million, respectively. | ||
In conjunction with the exercise of stock options granted, the Company received cash payments for the years ended September 30, 2006, 2005, and 2004 of approximately $97 million, $66 million and $59 million, respectively. | ||
In November 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3, Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards. The Company has elected to adopt the alternative transition method provided in the FASB Staff Position for calculating the tax effects of stock-based compensation pursuant to SFAS 123(R). 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 SFAS 123(R). The tax benefit from the exercise of stock options, which is recorded in additional paid-in-capital, was $33 million, $28 million and $19 million, respectively, for the years ended September 30, 2006, 2005 and 2004. The Company does not settle equity instruments granted under share-based payment arrangements for cash. | ||
At September 30, 2006, the Company had approximately $27 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 0.9 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. In accordance with SFAS No. 123(R), 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. Prior to the effective date of SFAS No. 123(R), the SAR liability and expense was determined based on the intrinsic value of each award at the end of each reporting period. The difference between the fair value and intrinsic value of SAR awards on the date of adoption of SFAS No. 123(R) was not material to the Companys consolidated results of operations. | ||
The assumptions used to determine the fair value of the SAR awards at September 30, 2006 were as follows: |
Expected life of SAR (years) |
0.5 - 3.0 | |
Risk-free interest rate |
4.62 - 5.02% | |
Expected volatility of the Companys stock |
22.00% | |
Expected dividend yield on the Companys stock |
1.70% | |
Expected forfeiture rate |
0-20% |
68
A summary of SAR activity at September 30, 2006, 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, 2005 |
$ | 39.05 | 999,165 | |||||||||||||
Granted |
67.69 | 287,643 | ||||||||||||||
Exercised |
37.22 | (255,047 | ) | |||||||||||||
Forfeited or expired |
61.22 | (34,255 | ) | |||||||||||||
Outstanding, September 30, 2006 |
$ | 54.16 | 997,506 | 7.2 | $ | 18 | ||||||||||
Exerciseable, September 30, 2006 |
$ | 39.93 | 378,499 | 5.2 | $ | 12 | ||||||||||
In conjunction with the exercise of SARs granted, the Company made payments of $10 million and $6 million during the years ended September 30, 2006 and 2005, respectively. | ||
Restricted (Nonvested) Stock | ||
In fiscal year 2002, the Company adopted a restricted stock plan that provides for the award of restricted shares of common stock or restricted share units to certain key employees. Awards under the restricted stock plan vest 50% after two years from the grant date and 50% after four years from the grant date. | ||
A summary of the status of the Companys nonvested restricted shares at September 30, 2006, and changes for the year then ended, is presented below: |
Weighted | Shares | |||||||
Average | Subject to | |||||||
Price | Restriction | |||||||
Nonvested, September 30, 2005 |
$ | 51.20 | 410,000 | |||||
Granted |
74.28 | 297,500 | ||||||
Vested |
48.65 | (269,000 | ) | |||||
Forfeited or expired |
| | ||||||
Nonvested, September 30, 2006 |
$ | 68.42 | 438,500 | |||||
At September 30, 2006, the Company had approximately $17 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 1.0 years. | ||
13. | SHAREHOLDERS EQUITY | |
The Company originally issued 341.7969 shares of its 7.75% Series D Convertible Preferred Stock to its ESOP. The preferred stock was issued in fractional amounts representing one ten-thousandth of a share each or 3.4 million preferred stock units in total. Each preferred stock unit has a liquidation value of $51.20. The ESOP financed its purchase of the preferred stock units by issuing debt. An amount representing unearned employee compensation, equivalent in value to the unpaid balance of the ESOP debt, was recorded as a deduction from shareholders equity. |
69
Effective December 31, 2003, the Companys Board of Directors authorized the redemption of all the outstanding Series D Convertible Preferred Stock, held in the ESOP, and the ESOP trustee converted the preferred stock into common shares in accordance with the terms of the preferred stock certificate. The conversion resulted in the issuance of approximately 7.5 million common shares (on a post-split basis) and was accounted for through a transfer from preferred stock to common stock and capital in excess of par value. The conversion of $96 million of preferred shares held by the ESOP has been reflected within Shareholders Equity in the consolidated statement of financial position. The conversion of these shares resulted in their inclusion in the basic weighted average common shares outstanding amount used to compute basic earnings per share (EPS). The conversion of preferred shares has always been assumed in the determination of diluted EPS. The Companys ESOP was financed with debt issued by the ESOP, and the final ESOP debt payment was paid by the Company in December 2003. | ||
On November 19, 2003, the Companys Board of Directors declared a two-for-one split of the Companys common stock payable January 2, 2004 to shareholders of record on December 12, 2003. The stock split resulted in the issuance of approximately 90.5 million additional shares of common stock. In connection with the stock split, the par value of the common stock was changed from $.16 2/3 per share to $.04 1/6 per share. | ||
14. | EARNINGS PER SHARE | |
The Company presents both basic and diluted earnings per share (EPS) amounts. Basic EPS is calculated by dividing net income by the weighted average number of common shares outstanding during the year. Diluted EPS is calculated by dividing net income by the weighted average number of common shares and common equivalent shares outstanding during the year 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 additional paid-in capital when the award generates a tax deduction. If there would be a shortfall resulting in a charge to additional paid-in capital, such an amount would be a reduction of the assumed proceeds. | ||
The following table reconciles the numerators and denominators used to calculate basic and diluted earnings per share for the years ended September 30, 2006, 2005 and 2004 (in millions): |
Year Ended September 30, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Income Available to Common Shareholders |
||||||||||||
Net income and diluted income available to
common shareholders |
$ | 1,028 | $ | 909 | $ | 818 | ||||||
Preferred stock dividends, net of tax benefit |
| | (2 | ) | ||||||||
Basic income available to common shareholders |
$ | 1,028 | $ | 909 | $ | 816 | ||||||
Weighted Average Shares Outstanding |
||||||||||||
Basic weighted average shares outstanding |
194.5 | 191.8 | 187.7 | |||||||||
Effect of dilutive securities: |
||||||||||||
Stock options |
2.1 | 2.5 | 3.0 | |||||||||
Convertible preferred stock |
| | 1.9 | |||||||||
Diluted weighted average shares outstanding |
196.6 | 194.3 | 192.6 | |||||||||
Antidilutive Securities |
||||||||||||
Options to purchase common shares |
0.1 | 0.6 | 0.3 |
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15. | RETIREMENT PLANS | |
Pension Benefits | ||
The Company has non-contributory defined benefit pension plans covering most U.S. and certain non-U.S. employees. The benefits provided are primarily based on years of service and average compensation or a monthly retirement benefit amount. Effective January 1, 2006, certain of the Companys U.S. pension plans were amended to prohibit new participants from entering the plans. Active participants will continue to accrue benefits under the amended plans. Funding for U.S. pension plans equals or exceeds the minimum requirements of the Employee Retirement Income Security Act of 1974. Funding for non-US plans observes the local legal and regulatory limits. Also, the Company makes contributions to union-trusteed pension funds for construction and service personnel. | ||
The Companys investment policies employ an approach whereby a mix of equities and fixed income investments are used to maximize the long-term return of plan assets for a prudent level of risk. The investment portfolio primarily contains a diversified blend of equity and fixed-income investments. Equity investments are diversified across domestic and non-domestic stocks, as well as growth, value, and small to large capitalizations. Fixed income investments include corporate and government issues, with short-, mid- and long-term maturities, with a focus on investment grade when purchased. Investment and market risks are measured and monitored on an ongoing basis through regular investment portfolio reviews, annual liability measurements, and periodic asset/liability studies. | ||
The Companys actual asset allocations are in line with target allocations. The Company rebalances asset allocations monthly, or as appropriate, in order to stay within a range of allocation for each asset category. | ||
The Companys pension plan asset allocations by asset category are shown below. |
2006 | 2005 | |||||||
Equity securities: |
||||||||
U.S. plans |
63 | % | 63 | % | ||||
Non-U.S. plans |
51 | % | 47 | % | ||||
Debt securities: |
||||||||
U.S. plans |
31 | % | 36 | % | ||||
Non-U.S. plans |
43 | % | 47 | % | ||||
Real estate: |
||||||||
U.S. plans |
5 | % | 1 | % | ||||
Non-U.S. plans |
5 | % | 5 | % | ||||
Cash/liquidity: |
||||||||
U.S. plans |
1 | % | | |||||
Non-U.S. plans |
1 | % | 1 | % |
The expected return on plan assets is based on the Companys expectation of the long-term average rate of return of the capital markets in which the plans invest. The average market returns are adjusted, where appropriate, for active asset management returns. The expected return reflects the investment policy target asset mix and considers the historical returns earned for each asset category. | ||
For pension plans with accumulated benefit obligations (ABO) that exceed plan assets, the projected benefit obligation (PBO), ABO and fair value of plan assets of those plans were $1,360 million, $1,263 million and $802 million, respectively, as of September 30, 2006 and $769 million, $695 million and $296 million, respectively, as of September 30, 2005. |
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The Company expects to contribute approximately $103 million in cash to its defined benefit pension plans in fiscal year 2007. Projected benefit payments from the plans as of September 30, 2006 are estimated as follows (in millions): |
2007 |
$ | 120 | ||
2008 |
127 | |||
2009 |
135 | |||
2010 |
143 | |||
2011 |
151 | |||
2012-2016 |
946 |
Savings and Investment Plans | ||
The Company sponsors various defined contribution savings plans primarily in the U.S. that allow employees to contribute a portion of their pre-tax and/or after-tax income in accordance with plan specified guidelines. Under specified conditions, the Company will contribute to certain savings plans based on the employees eligible pay and/or will match a percentage of the employee contributions up to certain limits. Excluding the ESOP, matching contributions charged to expense amounted to $60 million, $42 million and $23 million for the fiscal years ended 2006, 2005 and 2004, respectively. | ||
The Company established an ESOP as part of its savings and investment plans. The Companys annual contributions to the ESOP, when combined with the preferred stock dividends, were of an amount which allowed the ESOP to meet its debt service requirements. This contribution amount was $17 million in 2004. The Companys final ESOP debt payment was made in December 2003 (see Note 13). Compensation expense recorded by the Company related to the ESOP was $26 million in 2004. No compensation expense was recorded by the Company related to the ESOP in 2006 or 2005. | ||
Postretirement Health and Other Benefits | ||
The Company provides certain health care and life insurance benefits for eligible retirees and their dependents primarily in the U.S. Most non-U.S. employees are covered by government sponsored programs, and the cost to the Company is not significant. The U.S. benefits are paid as incurred. No change in the Companys practice of funding these benefits on a pay-as-you-go basis is anticipated. | ||
Eligibility for coverage is based on meeting certain years of service and retirement age qualifications. These benefits may be subject to deductibles, co-payment provisions and other limitations, and the Company has reserved the right to modify these benefits. Effective January 31, 1994, the Company modified certain salaried plans to place a limit on the Companys cost of future annual retiree medical benefits at no more than 150% of the 1993 cost. | ||
The September 30, 2006 accumulated postretirement benefit obligation (APBO) for both pre-65 and post-65 years of age employees was determined using assumed medical care cost trend rates of 9.5% decreasing one half percent each year to an ultimate rate of 5% and prescription drug trend rates of 11.5% decreasing one half percent each year to an ultimate rate of 6%. The September 30, 2005 APBO for both pre-65 and post-65 years of age employees was determined using assumed health care cost trend rates for both medical and prescription drug costs of 10% decreasing 1% each year to an ultimate rate of 5%. The health care cost trend assumption has a significant effect on the amounts reported. To illustrate, a one percentage point increase in the assumed health care cost trend rate would have increased the accumulated benefit obligation by $19 million at September 30, 2006 and the sum of the service and interest costs in fiscal year 2006 by $2 million. A one percentage point decrease in the assumed health care cost trend rate would have decreased the accumulated benefit obligation by $11 million at September 30, 2006 and the sum of the service and interest costs by $1 million. |
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The Company expects to contribute approximately $24 million in cash to its postretirement health and other benefit plans in fiscal year 2007. Projected benefit payments from the plans as of September 30, 2006 are estimated as follows (in millions): |
2007 |
$ | 24 | ||
2008 |
25 | |||
2009 |
26 | |||
2010 |
28 | |||
2011 |
28 | |||
2012-2016 |
150 |
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 $4 million per year over the next ten years. | ||
The table that follows contains the accumulated benefit obligation and reconciliations of the changes in the PBO, the changes in plan assets and the funded status (in millions): |
73
Pension | Postretirement | |||||||||||||||||||||||
U.S. Plans | Non-U.S. Plans | Health and Other | ||||||||||||||||||||||
September 30, | 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | ||||||||||||||||||
Accumulated Benefit Obligation |
$ | 1,810 | $ | 1,494 | $ | 1,232 | $ | 928 | $ | | $ | | ||||||||||||
Change in Projected Benefit Obligation |
||||||||||||||||||||||||
Projected benefit obligation at beginning of year |
1,749 | 1,428 | 1,047 | 827 | 185 | 170 | ||||||||||||||||||
Service cost |
87 | 64 | 38 | 26 | 7 | 5 | ||||||||||||||||||
Interest cost |
112 | 89 | 50 | 40 | 16 | 10 | ||||||||||||||||||
Plan participant contributions |
| | 5 | 5 | | | ||||||||||||||||||
Acquisitions (1) |
423 | | 194 | 81 | 177 | | ||||||||||||||||||
Actuarial loss (gain) |
(287 | ) | 216 | (19 | ) | 119 | (33 | ) | 18 | |||||||||||||||
Amendments made during the year |
13 | 2 | | | | 1 | ||||||||||||||||||
Benefits paid |
(79 | ) | (52 | ) | (38 | ) | (32 | ) | (25 | ) | (21 | ) | ||||||||||||
Special termination benefits |
2 | | | | | | ||||||||||||||||||
Curtailment loss (gain) |
(2 | ) | 2 | | (7 | ) | (2 | ) | | |||||||||||||||
Settlement |
| | | | 1 | | ||||||||||||||||||
Currency translation adjustment |
| | 63 | (12 | ) | 1 | 2 | |||||||||||||||||
Projected benefit obligation at end of year |
$ | 2,018 | $ | 1,749 | $ | 1,340 | $ | 1,047 | $ | 327 | $ | 185 | ||||||||||||
Change in Plan Assets |
||||||||||||||||||||||||
Fair value of plan assets at beginning of year |
$ | 1,453 | $ | 1,180 | $ | 630 | $ | 475 | $ | | $ | | ||||||||||||
Actual return on plan assets |
103 | 138 | 60 | 74 | | | ||||||||||||||||||
Acquisitions |
328 | | 112 | 64 | | | ||||||||||||||||||
Employer and employee contributions |
48 | 187 | 108 | 56 | 25 | 21 | ||||||||||||||||||
Benefits paid |
(79 | ) | (52 | ) | (38 | ) | (32 | ) | (25 | ) | (21 | ) | ||||||||||||
Currency translation adjustment |
| | 42 | (7 | ) | | | |||||||||||||||||
Fair value of plan assets at end of year |
$ | 1,853 | $ | 1,453 | $ | 914 | $ | 630 | $ | | $ | | ||||||||||||
Funded status |
$ | (165 | ) | $ | (296 | ) | $ | (426 | ) | $ | (417 | ) | $ | (327 | ) | $ | (185 | ) | ||||||
Unrecognized net transition obligation |
(2 | ) | (4 | ) | | | | | ||||||||||||||||
Unrecognized net actuarial loss (gain) |
282 | 566 | 155 | 208 | (14 | ) | 21 | |||||||||||||||||
Unrecognized prior service cost |
20 | 9 | (2 | ) | (3 | ) | (6 | ) | (8 | ) | ||||||||||||||
Employer contributions paid between the
measurement date and September 30 |
1 | 1 | 3 | 1 | | | ||||||||||||||||||
Net accrued benefit cost recognized at end of year |
$ | 136 | $ | 276 | $ | (270 | ) | $ | (211 | ) | $ | (347 | ) | $ | (172 | ) | ||||||||
Amounts recognized in the statement of
financial position consist of: |
||||||||||||||||||||||||
Prepaid benefit cost |
$ | 240 | $ | 323 | $ | 20 | $ | 8 | $ | | $ | | ||||||||||||
Accrued benefit liability |
(129 | ) | (68 | ) | (410 | ) | (360 | ) | (347 | ) | (172 | ) | ||||||||||||
Intangible asset |
6 | 2 | 1 | 5 | | | ||||||||||||||||||
Accumulated other comprehensive income |
19 | 19 | 119 | 136 | | | ||||||||||||||||||
Net amount recognized |
$ | 136 | $ | 276 | $ | (270 | ) | $ | (211 | ) | $ | (347 | ) | $ | (172 | ) | ||||||||
Weighted Average Assumptions (2), |
||||||||||||||||||||||||
Discount rate |
6.50 | % | 5.50 | % | 4.60 | % | 4.00 | % | 6.40 | % | 5.50 | % | ||||||||||||
Rate of compensation increase |
3.60 | % | 3.80 | % | 3.30 | % | 2.75 | % | NA | NA |
74
(1) | The acquisitions for the U.S. and non-U.S. pension plans for the year ended September 30, 2006 include $617 million projected benefit obligations, $440 million of plan assets and $177 million of accumulated postretirement benefit obligations primarily related to the York acquisition. | |
(2) | Plan assets and obligations are determined based on a July 31 measurement date at September 30, 2006 and 2005 for U.S. plans and a September 30 measurement date at September 30, 2006 and 2005 for non-U.S. plans, utilizing assumptions as of those dates. |
Pension | Postretirement | |||||||||||||||||||||||||||||||||||
U.S. Plans | Non-U.S. Plans | Health and Other | ||||||||||||||||||||||||||||||||||
Year ended September 30 | 2006 | 2005 | 2004 | 2006 | 2005 | 2004 | 2006 | 2005 | 2004 | |||||||||||||||||||||||||||
Components of Net Periodic
Benefit Cost |
||||||||||||||||||||||||||||||||||||
Service cost |
$ | 87 | $ | 64 | $ | 58 | $ | 38 | $ | 26 | $ | 23 | $ | 7 | $ | 5 | $ | 5 | ||||||||||||||||||
Interest cost |
112 | 89 | 82 | 50 | 40 | 35 | 16 | 10 | 11 | |||||||||||||||||||||||||||
Expected return on plan assets |
(144 | ) | (104 | ) | (104 | ) | (41 | ) | (30 | ) | (26 | ) | | | | |||||||||||||||||||||
Amortization of transitional
obligation |
(2 | ) | (2 | ) | (3 | ) | | | | | | | ||||||||||||||||||||||||
Amortization of net actuarial loss |
36 | 20 | 10 | 9 | 7 | 6 | 2 | 1 | 1 | |||||||||||||||||||||||||||
Amortization of prior service cost |
1 | 2 | 1 | | (1 | ) | | (2 | ) | (2 | ) | (2 | ) | |||||||||||||||||||||||
Special termination benefits |
2 | | | | | | | | | |||||||||||||||||||||||||||
Curtailment loss (gain) |
| 2 | 1 | | (7 | ) | | (2 | ) | | 1 | |||||||||||||||||||||||||
Recognition of unrealized loss
associated with transfer of
Japanese pension obligation |
| | | | | 14 | | | | |||||||||||||||||||||||||||
Net periodic benefit cost |
$ | 92 | $ | 71 | $ | 45 | $ | 56 | $ | 35 | $ | 52 | $ | 21 | $ | 14 | $ | 16 | ||||||||||||||||||
Expense Assumptions |
||||||||||||||||||||||||||||||||||||
Discount rate |
5.50 | % | 6.25 | % | 6.50 | % | 4.00 | % | 4.50 | % | 4.00 | % | 5.50 | % | 6.25 | % | 6.50 | % | ||||||||||||||||||
Expected return on plan assets |
8.75 | % | 8.75 | % | 8.75 | % | 5.90 | % | 5.75 | % | 5.25 | % | NA | NA | NA | |||||||||||||||||||||
Rate of compensation increase |
3.80 | % | 4.00 | % | 4.00 | % | 2.75 | % | 3.00 | % | 3.00 | % | NA | NA | NA |
Japanese Pension Settlement Gain | ||
During fiscal year 2004, the Company recorded a pension gain related to certain of the Companys Japanese pension plans established under the Japanese Welfare Pension Insurance Law. In accordance with amendments to this law, the Company completed the transfer of certain pension obligations and related plan assets to the Japanese government which resulted in a non-cash settlement gain of $84 million, net of $1 million associated with the recognition of unrecognized actuarial losses, recorded within SG&A expenses in the consolidated statement of income. The excess of benefit obligations over plan assets (funded status) of the Companys non-U.S. pension plans decreased $85 million as a result of the transfer. | ||
16. | RESTRUCTURING COSTS | |
As part of its continuing efforts to reduce costs and improve the efficiency of its global operations, the Company committed to a restructuring plan (2006 Plan) in the third quarter of fiscal year 2006 and recorded a $197 million restructuring charge. The 2006 Plan, which primarily includes workforce reductions and plant consolidations in the automotive experience and building efficiency businesses, is expected to be substantially completed by the end of the third quarter of fiscal year 2007. The automotive experience business related restructuring is focused on improving the profitability associated with the manufacturing and supply of instrument panels, headliners and other interior components in North America and increasing the efficiency of seating component operations in Europe. The charges associated with the building efficiency business mostly relate to Europe where the Company has launched a systems |
75
redesign initiative. During the fourth quarter of fiscal year 2006, automotive experience North America increased its 2006 Plan restructuring charge by $8 million for additional employee severance and termination benefits. The Company expects to incur other related and ancillary costs associated with some of these restructuring activities in future periods. These costs are not expected to be material and will be expensed as incurred. | ||
The 2006 Plan includes workforce reductions of approximately 4,700 employees (2,200 for automotive experience North America, 1,400 for automotive experience Europe, 200 for building efficiency - North America, 600 for building efficiency Europe, 280 for building efficiency Rest of World and 20 for power solutions). Restructuring charges associated with employee severance and termination benefits will be paid over the severance period granted to each employee and on a lump sum basis when required in accordance with individual severance agreements. As of September 30, 2006, approximately 350 employees have been separated from the Company. In addition, the 2006 Plan includes 15 plant closures (10 in automotive experience North America, 3 in automotive experience Europe, 1 in building efficiency Europe and 1 in building efficiency Rest of World). The restructuring charge for the impairment of the long-lived assets associated with the plant closures was determined using an undiscounted cash flow analysis. | ||
The following table summarizes the Companys 2006 Plan reserve, included within other current liabilities in the consolidated statement of financial position (in millions): |
Employee | ||||||||||||||||
Severance and | ||||||||||||||||
Termination | Currency | |||||||||||||||
Benefits | Other | Translation | Total | |||||||||||||
Original reserve |
$ | 134 | $ | 63 | $ | | $ | 197 | ||||||||
Additional provision |
8 | | | 8 | ||||||||||||
Utilized Cash |
(17 | ) | | | (17 | ) | ||||||||||
Utilized Noncash |
| (51 | ) | 1 | (50 | ) | ||||||||||
Balance at September 30, 2006 |
$ | 125 | $ | 12 | $ | 1 | $ | 138 | ||||||||
Included within the other category are the write down of long-lived assets, exit costs for terminating supply contracts associated with changes in the Companys manufacturing footprint and strategies, lease termination costs and other direct costs. The write down of long-lived assets includes $47 million related to automotive experience and $4 million related to building efficiency. | ||
In the second quarter of fiscal year 2005, the Company committed to a restructuring plan (2005 Plan) involving cost reduction actions and recorded a $210 million restructuring charge. This restructuring charge included workforce reductions of approximately 3,900 employees. During the fourth quarter of fiscal year 2006, automotive experience Europe reversed $6 million of restructuring reserves from the 2005 Plan that were not expected to be utilized. Restructuring charges associated with employee severance and termination benefits are paid over the severance period granted to each employee and on a lump sum basis when required in accordance with individual severance agreements. As of September 30, 2006, approximately 2,900 employees have separated from the Company pursuant to the 2005 Plan. In addition, the 2005 Plan included 12 plant closures. The charge for the impairment of the long-lived assets associated with the plant closures was determined using an undiscounted cash flow analysis. The closures/restructuring activities are primarily concentrated in Europe and North America. |
76
The following table summarizes the 2005 Plan reserve, included within other current liabilities in the consolidated statement of financial position (in millions): |
Employee | ||||||||||||||||
Severance and | ||||||||||||||||
Termination | Currency | |||||||||||||||
Benefits | Other | Translation | Total | |||||||||||||
Balance at September 30, 2005 |
$ | 88 | $ | 14 | $ | (9 | ) | $ | 93 | |||||||
Utilized Cash |
(55 | ) | (5 | ) | | (60 | ) | |||||||||
Utilized Noncash |
| (1 | ) | 5 | 4 | |||||||||||
Reserve release Noncash |
| (6 | ) | | (6 | ) | ||||||||||
Balance at September 30, 2006 |
$ | 33 | $ | 2 | $ | (4 | ) | $ | 31 | |||||||
Included within the other category were exit costs related to terminating supply contracts associated with changes in the Companys manufacturing footprint and strategies, lease termination costs and other direct costs. The majority of the restructuring activities under the 2005 Plan are expected to be completed by December 2006. | ||
In the second quarter of fiscal year 2004, the Company committed to a restructuring plan (2004 Plan), of which substantially all of the reserves have been utilized. During the fourth quarter of fiscal year 2006, automotive experience Europe released $2 million in remaining reserves not expected to be utilized. | ||
Company management closely monitors its overall cost structure and continually analyzes each of its businesses for opportunities to consolidate current operations, improve operating efficiencies and locate facilities in low cost countries in close proximity to customers. This ongoing analysis includes a review of its manufacturing, engineering, and purchasing operations, as well as the overall global footprint for all its businesses. Because of the importance of new vehicle sales by major automotive manufacturers to operations, the Company is affected by the general business conditions in this industry. Future adverse developments in the automotive industry could impact the Companys liquidity position and/or require additional restructuring of its operations. | ||
17. | INCOME TAXES | |
An analysis of effective income tax rates for continuing operations is shown below: |
Year Ended September 30, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Federal statutory rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
State income taxes, net of federal benefit |
2.7 | 1.5 | 1.4 | |||||||||
Foreign income tax expense at different rates and foreign losses without tax benefits |
(22.5 | ) | (11.6 | ) | (4.5 | ) | ||||||
U.S. tax on foreign income |
(2.6 | ) | (17.6 | ) | (4.8 | ) | ||||||
Reserve and valuation allowance adjustments |
(8.3 | ) | 15.1 | (2.8 | ) | |||||||
Other |
1.2 | (2.0 | ) | (0.8 | ) | |||||||
Effective income tax rate |
5.5 | % | 20.4 | % | 23.5 | % | ||||||
The Companys base effective income tax rate for continuing operations for fiscal year 2006 declined to 21.0% from 25.7% in fiscal year 2005 and 26.0% in fiscal year 2004, primarily due to continuing global tax planning initiatives, increased income in certain foreign jurisdictions with a rate of tax lower than the U.S. statutory tax rate and decreased income in higher tax jurisdictions. The Companys effective tax rates were further reduced as a result of the following discrete items: |
77
Year Ended September 30, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Federal, state and foreign income tax expense
at base effective income tax rate |
$ | 239 | $ | 258 | $ | 278 | ||||||
Restructuring charge |
(19 | ) | | | ||||||||
Valuation allowance adjustments |
(163 | ) | 28 | | ||||||||
Uncertain tax positions |
(10 | ) | | (27 | ) | |||||||
Foreign dividend repatriation |
31 | | | |||||||||
Disposition of a joint venture |
(4 | ) | | | ||||||||
Change in tax status of foreign subsidiaries |
(11 | ) | (81 | ) | | |||||||
Provision for income taxes |
$ | 63 | $ | 205 | $ | 251 | ||||||
Restructuring Charge | ||
In the third quarter of fiscal year 2006, the Company recorded a $19 million discrete period tax benefit related to the third quarter 2006 restructuring charge using a blended statutory tax rate of 30.6%. | ||
Valuation Allowance Adjustments | ||
Based on the Companys cumulative operating results through the six months ended March 31, 2006 and an assessment of expected future profitability in Mexico, the Company concluded that it was more likely than not that the tax benefits of its operating loss and tax credit carryforwards in Mexico would be utilized in the future. During the second quarter of fiscal year 2006, the Company completed a tax reorganization in Mexico which will allow operating loss and tax credit carryforwards to be offset against the future taxable income of the reorganized entities. As such, in the second quarter of fiscal year 2006 the Company reversed a valuation allowance of $32 million attributable to these operating loss and tax credit carryforwards as a credit to income tax expense. | ||
In the third quarter of fiscal year 2006, the Company completed an analysis of its German operations and, based on cumulative income over a 36-month period, an assessment of expected future profitability in Germany and finalization of the 2006 Plan, determined that it was more likely than not that the tax benefits of certain operating loss and tax credit carryforwards in Germany would be utilized in the future. As such, the Company reversed $131 million attributable to these operating loss and tax credit carryforwards in the third quarter as a credit to income tax expense, net of remaining valuation allowances at certain German subsidiaries and tax reserve requirements. | ||
Uncertain Tax Positions | ||
The Companys effective tax rate was reduced in the third quarter of fiscal year 2006 by a $10 million tax benefit related to a favorable tax audit resolution in a foreign jurisdiction. In fiscal year 2004, the Companys effective tax rate was reduced by a $27 million favorable tax settlement. | ||
The Company is subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant 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. Accruals for tax contingencies are provided for in accordance with the requirements of SFAS No. 5 Accounting for Contingencies. The Companys federal income tax returns and certain foreign income tax returns for fiscal years 1997 through 2003 are currently under various stages of audit by the Internal Revenue Service and respective foreign 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, 2006, the Company has 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 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. |
78
Foreign Dividend Repatriation | ||
In October 2004, the President signed the American Jobs Creation Act of 2004 (AJCA). The AJCA created a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85% dividends received deduction for certain dividends from controlled foreign operations. The deduction is subject to a number of limitations. During the quarter ended March 31, 2006, the Company completed its evaluation of its repatriation plans and $674 million of foreign earnings were repatriated to the U.S. pursuant to the provisions of the AJCA. The increase in income tax liability related to the Companys AJCA initiatives totaled $42 million. The Company recorded $31 million of net income tax expense in the second quarter of fiscal year 2006, as $11 million had been previously recorded by York prior to it becoming a subsidiary of the Company in accordance with Yorks approved repatriation plan. | ||
Other Discrete Period Items | ||
The Companys effective tax rate was reduced in the first quarter of fiscal year 2006 by a $4 million tax benefit related to a $9 million gain resulting from the disposition of the Companys interest in a German joint venture. | ||
The Companys effective tax rate was also reduced in the first quarter of fiscal year 2006 by $11 million due to a change in tax status for subsidiaries in Hungary and the Netherlands. In fiscal year 2005, the tax provision decreased as a result of a $12 million and $69 million tax benefit from a change in tax status of subsidiaries in France and Germany, respectively, partially offset by an increase in the tax valuation allowance of $28 million related to restructuring charges for which no tax benefit was received in certain countries (primarily Germany and the U.K.) given the uncertainty of its realization due to restrictive tax loss rules or a lack of sustained profitability in the country at that time. The changes in tax status in each respective period resulted from a voluntary tax election that produced deemed liquidations for U.S. federal income tax purposes. The Company received these tax benefits in the U.S. for the losses from the decrease in value from the original tax bases of these investments. These elections changed the tax status of the respective subsidiaries from controlled foreign corporations (i.e., taxable entities) to branches (i.e., flow through entities similar to a partnership) for U.S. federal income tax purposes and are thereby reported as discrete period tax benefits in accordance with the provisions of SFAS No. 109. | ||
Discontinued Operations | ||
The Company utilized an effective tax rate for discontinued operations of approximately 38%, 39% and 35% for Bristol Compressors, World Services and its engine electronic business, respectively. These effective tax rates approximate the local statutory rate adjusted for permanent differences. | ||
Components of the provision for income taxes on continuing operations were as follows (in millions): |
Year Ended September 30, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Current |
||||||||||||
Federal |
$ | 259 | $ | 171 | $ | 99 | ||||||
State |
67 | 19 | 9 | |||||||||
Foreign |
141 | 40 | 43 | |||||||||
467 | 230 | 151 | ||||||||||
Deferred |
||||||||||||
Federal |
(5 | ) | 34 | 73 | ||||||||
State |
(27 | ) | 2 | 9 | ||||||||
Foreign |
(372 | ) | (61 | ) | 18 | |||||||
(404 | ) | (25 | ) | 100 | ||||||||
Provision for income taxes |
$ | 63 | $ | 205 | $ | 251 | ||||||
79
Consolidated domestic income from continuing operations before income taxes and minority interests for the years ended September 30, 2006, 2005 and 2004 was $754 million, $826 million and $759 million, respectively. Consolidated foreign income from continuing operations before income taxes and minority interests for the years ended September 30, 2006, 2005 and 2004 was $384 million, $177 million and $311 million, respectively. | ||
Income taxes paid for the years ended September 30, 2006, 2005 and 2004 were $156 million, $177 million, and $107 million, respectively. | ||
The Company has not provided additional U.S. income taxes on approximately $960 million of undistributed earnings of consolidated foreign subsidiaries included in stockholders equity. Such earnings could become taxable upon the sale or liquidation of these foreign 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. It is not practicable to estimate the amount of unrecognized withholding taxes and deferred tax liability on such earnings. | ||
Deferred taxes were classified in the consolidated statements of financial position as follows (in millions): |
September 30, | ||||||||
2006 | 2005 | |||||||
Other current assets |
$ | 459 | $ | 238 | ||||
Other noncurrent assets |
964 | 259 | ||||||
Other current liabilities |
(48 | ) | (46 | ) | ||||
Other noncurrent liabilities |
(502 | ) | (400 | ) | ||||
Net deferred tax asset |
$ | 873 | $ | 51 | ||||
Temporary differences and carryforwards which gave rise to deferred tax assets and liabilities included (in millions): |
September 30, | ||||||||
2006 | 2005 | |||||||
Deferred tax assets |
||||||||
Accrued expenses and reserves |
$ | 593 | $ | 314 | ||||
Employee and retiree benefits |
149 | 35 | ||||||
Long-term contracts |
10 | 17 | ||||||
Net operating loss and other carryforwards |
819 | 759 | ||||||
Other |
235 | 39 | ||||||
1,806 | 1,164 | |||||||
Valuation allowances |
(355 | ) | (573 | ) | ||||
1,451 | 591 | |||||||
Deferred tax liabilities |
||||||||
Property, plant and equipment |
81 | 134 | ||||||
Joint ventures |
8 | 11 | ||||||
Intangible assets |
300 | 111 | ||||||
Foreign currency translation adjustments |
189 | 284 | ||||||
578 | 540 | |||||||
Net deferred tax asset |
$ | 873 | $ | 51 | ||||
At September 30, 2006, the Company had available foreign net operating loss carryforwards of approximately $2.0 billion, of which $589 million will expire at various dates between 2007 and 2021, and the remainder have an indefinite carryforward period. The valuation allowance, generally, represents loss carryforwards for which utilization is uncertain because it is unlikely that the losses will be utilized given the lack of sustained profitability and/or limited carryforward periods in certain countries. |
80
SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, establishes the standards for reporting information about operating segments in financial statements. In applying the criteria set forth in SFAS No. 131, the Company has determined that it has ten reportable segments for financial reporting purposes. Certain operating segments are aggregated or combined based on materiality within building efficiency rest of world and power solutions in accordance with the standard. The Companys ten reportable segments are presented in the context of its three primary businesses building efficiency, automotive experience and power solutions. | ||
Building efficiency | ||
North America Systems designs, produces, markets and installs heating, ventilating, and air conditioning equipment (HVAC) and control systems that monitor, automate and integrate critical building operating equipment and conditions including HVAC, fire-safety and security in commercial buildings and in various industrial applications in North America. |
| North America systems designs, produces, markets and installs mechanical equipment that provides heating and cooling in North American non-residential buildings and industrial applications as well as control systems that integrate the operation of this equipment with other critical building systems. | ||
| North America service provides technical services including inspection, scheduled maintenance, repair and replacement of mechanical and control systems in North America, as well as the retrofit and service components of performance contracts and other solutions. | ||
| North America unitary products designs and produces heating and air conditioning solutions for residential and light commercial applications and markets products to the replacement and new construction markets. | ||
| Workplace solutions provides on-site staff for complete real estate services, facility operation and management to improve the comfort, productivity, energy efficiency and cost effectiveness of building systems around the globe. | ||
| Europe provides HVAC and refrigeration systems and technical services to the European marketplace. | ||
| Rest of world provides HVAC and refrigeration systems and technical services to markets in Asia, the Middle East and Latin America. |
Automotive experience | ||
Automotive experience designs and manufactures interior systems and products for passenger cars and light trucks, including vans, pick-up trucks and sport/crossover vehicles in North America, Europe and Asia. Automotive experience systems and products include complete seating systems and components; cockpit systems, including instrument clusters, information displays and body controllers; overhead systems, including headliners and electronic convenience features; floor consoles; and door systems. | ||
Power solutions | ||
Power solutions services both automotive original equipment manufacturers and the battery aftermarket by providing advanced battery technology, coupled with systems engineering, marketing and service expertise. | ||
The accounting policies applicable to the reportable segments are the same as those described in Note 1, Summary of Significant Accounting Policies. Management evaluates the performance of the segments based primarily on operating income, excluding significant restructuring costs and other significant non-recurring gains and losses. Operating revenues and expenses are allocated to business segments in determining segment operating income. Items excluded from the determination of segment operating income include interest income and expense, equity in earnings of partially-owned affiliates, gains and losses from sales of businesses and long-term assets, foreign currency gains and |
81
losses, and other miscellaneous income and expense. Unallocated assets are corporate cash and cash equivalents, investments in partially-owned affiliates and other non-operating assets. Financial information relating to the Companys reportable segments is as follows (in millions): |
Year Ended September 30, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Net Sales |
||||||||||||
Building efficiency |
||||||||||||
North America Systems |
$ | 1,609 | $ | 1,158 | $ | 1,132 | ||||||
North America Service |
1,943 | 1,186 | 987 | |||||||||
North America Unitary Products |
853 | | | |||||||||
Workplace Solutions |
2,046 | 1,863 | 1,753 | |||||||||
Europe |
1,900 | 899 | 866 | |||||||||
Rest of World |
1,894 | 612 | 586 | |||||||||
10,245 | 5,718 | 5,324 | ||||||||||
Automotive experience |
||||||||||||
North America |
8,041 | 8,499 | 8,237 | |||||||||
Europe |
8,774 | 8,935 | 7,677 | |||||||||
Asia |
1,459 | 1,399 | 1,093 | |||||||||
18,274 | 18,833 | 17,007 | ||||||||||
Power solutions |
3,716 | 2,928 | 2,272 | |||||||||
Net Sales |
$ | 32,235 | $ | 27,479 | $ | 24,603 | ||||||
Year Ended September 30, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Operating Income |
||||||||||||
Building efficiency |
||||||||||||
North America Systems (1) |
$ | 132 | $ | 112 | $ | 91 | ||||||
North America Service (2) |
145 | 84 | 52 | |||||||||
North America Unitary Products |
71 | | | |||||||||
Workplace Solutions (3) |
67 | 68 | 59 | |||||||||
Europe (4) |
(7 | ) | (7 | ) | (6 | ) | ||||||
Rest of World (5) |
128 | 38 | 45 | |||||||||
536 | 295 | 241 | ||||||||||
Automotive experience |
||||||||||||
North America (6) |
145 | 350 | 504 | |||||||||
Europe (7) |
383 | 252 | 113 | |||||||||
Asia (8) |
(28 | ) | 30 | 38 | ||||||||
500 | 632 | 655 | ||||||||||
Power solutions (9) |
443 | 349 | 237 | |||||||||
1,479 | 1,276 | 1,133 | ||||||||||
Restructuring costs |
(197 | ) | (210 | ) | (82 | ) | ||||||
Japanese pension gain |
| | 84 | |||||||||
Operating income |
$ | 1,282 | $ | 1,066 | $ | 1,135 | ||||||
82
Year Ended September 30, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Assets |
||||||||||||
Building efficiency |
||||||||||||
North America Systems |
$ | 1,550 | $ | 450 | $ | 323 | ||||||
North America Service |
1,442 | 382 | 325 | |||||||||
North America Unitary Products |
915 | | | |||||||||
Workplace Solutions |
707 | 547 | 654 | |||||||||
Europe |
1,940 | 534 | 421 | |||||||||
Rest of World |
2,036 | 559 | 508 | |||||||||
8,590 | 2,472 | 2,231 | ||||||||||
Automotive experience |
||||||||||||
North America |
3,284 | 4,050 | 3,646 | |||||||||
Europe |
5,224 | 5,260 | 5,186 | |||||||||
Asia |
851 | 866 | 751 | |||||||||
9,359 | 10,176 | 9,583 | ||||||||||
Power solutions |
2,827 | 3,000 | 2,562 | |||||||||
Unallocated |
1,145 | 496 | 382 | |||||||||
Total |
$ | 21,921 | $ | 16,144 | $ | 14,758 | ||||||
Year Ended September 30, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Depreciation/Amortization |
||||||||||||
Building efficiency |
||||||||||||
North America Systems |
$ | 15 | $ | 3 | $ | 3 | ||||||
North America Service |
18 | 13 | 14 | |||||||||
North America Unitary Products |
9 | | | |||||||||
Workplace Solutions |
12 | 8 | 9 | |||||||||
Europe |
30 | 7 | 11 | |||||||||
Rest of World |
30 | 16 | 16 | |||||||||
114 | 47 | 53 | ||||||||||
Automotive experience |
||||||||||||
North America |
201 | 207 | 194 | |||||||||
Europe |
226 | 238 | 235 | |||||||||
Asia |
29 | 25 | 17 | |||||||||
456 | 470 | 446 | ||||||||||
Power solutions |
135 | 122 | 95 | |||||||||
Total |
$ | 705 | $ | 639 | $ | 594 | ||||||
83
Year Ended September 30, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Capital Expenditures |
||||||||||||
Building efficiency |
||||||||||||
North America Systems |
$ | 6 | $ | 7 | $ | 4 | ||||||
North America Service |
13 | 5 | 9 | |||||||||
North America Unitary Products |
13 | | | |||||||||
Workplace Solutions |
14 | 14 | 7 | |||||||||
Europe |
18 | 3 | 4 | |||||||||
Rest of World |
25 | 12 | 9 | |||||||||
89 | 41 | 33 | ||||||||||
Automotive experience |
||||||||||||
North America |
218 | 267 | 306 | |||||||||
Europe |
182 | 203 | 355 | |||||||||
Asia |
25 | 56 | 41 | |||||||||
425 | 526 | 702 | ||||||||||
Power solutions |
197 | 97 | 82 | |||||||||
Total |
$ | 711 | $ | 664 | $ | 817 | ||||||
(1) | Building efficiency North America systems operating income for the years ended September 30, 2005 and 2004 excludes $3 million and $2 million, respectively, of restructuring costs. | |
(2) | Building efficiency North America service operating income for the years ended September 30, 2006 and 2004 excludes $1 million and $2 million, respectively, of restructuring costs. | |
(3) | Building efficiency Workplace solutions operating income for the years ended September 30, 2006 and 2005 excludes $7 million and $13 million, respectively, of restructuring costs. | |
(4) | Building efficiency Europe operating income for the years ended September 30, 2006, 2005 and 2004 excludes $40 million, $8 million and $8 million, respectively, of restructuring costs. | |
(5) | Building efficiency Rest of world operating income for the years ended September 30, 2006, 2005 and 2004 excludes $17 million, $27 million and $1 million, respectively, of restructuring costs. | |
(6) | Automotive experience North America operating income for the years ended September 30, 2006, 2005 and 2004 excludes $75 million, $12 million and $5 million, respectively, of restructuring costs. | |
(7) | Automotive experience Europe operating income for the years ended September 30, 2006, 2005 and 2004 excludes $53 million, $130 million and $51 million, respectively, of restructuring costs. | |
(8) | Automotive experience Asia operating income for the year ended September 30, 2006 excludes $1 million of restructuring costs. Automotive experience Asia operating income for the year ended September 30, 2004 excludes a pension gain of $84 million. | |
(9) | Power solutions operating income for the years ended September 30, 2006, 2005 and 2004 excludes $3 million, $17 million and $13 million, respectively, of restructuring costs. |
In fiscal year 2006, the Company recorded income related to a favorable legal settlement associated with the recovery of previously incurred environmental costs in the power solutions segment ($33 million). The Company also recorded income related to this legal settlement in building efficiency North America systems ($7 million) and other segments ($6 million), which was offset by other unfavorable commercial and legal settlements. |
84
The Company has significant sales to the automotive industry. The following is a summary of the percentages of net sales from major customers: |
Year ended September 30, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
General Motors Corporation |
11 | % | 14 | % | 14 | % | ||||||
DaimlerChrysler AG |
11 | % | 11 | % | 11 | % | ||||||
Ford Motor Company |
10 | % | 11 | % | 14 | % |
Approximately 40% of the Companys 2006 net sales to these customers were in the United States, 43% were European sales and 17% were attributable to sales in other foreign markets. As of September 30, 2006, the Company had accounts receivable totaling approximately $1.4 billion from these customers. | ||
Geographic Segments | ||
Financial information relating to the Companys operations by geographic area is as follows (in millions): |
Year ended September 30, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Net Sales |
||||||||||||
United States |
$ | 12,822 | $ | 11,000 | $ | 10,333 | ||||||
Germany |
3,390 | 3,271 | 2,680 | |||||||||
Other European countries |
9,208 | 8,066 | 7,119 | |||||||||
Other foreign |
6,815 | 5,142 | 4,471 | |||||||||
Total |
$ | 32,235 | $ | 27,479 | $ | 24,603 | ||||||
Long-Lived Assets (Year-end) |
||||||||||||
United States |
$ | 1,563 | $ | 1,355 | $ | 1,222 | ||||||
Germany |
448 | 640 | 640 | |||||||||
Other European countries |
1,044 | 723 | 794 | |||||||||
Other foreign |
&nb |