FORM 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Annual Period Ended September 30, 2008
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For The Transition Period From To
Commission File Number 1-5097
JOHNSON CONTROLS, INC.
(Exact name of registrant as specified in its charter)
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Wisconsin
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39-0380010 |
(State of Incorporation)
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(I.R.S. Employer Identification No.) |
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5757 North Green Bay Avenue
Milwaukee, Wisconsin
(Address of principal executive offices)
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53209
(Zip Code) |
Registrants telephone number, including area code:
(414) 524-1200
Securities Registered Pursuant to Section 12(b) of the Exchange Act:
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Title of Each Class
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Name of Each Exchange on Which Registered |
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Common Stock
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New York Stock Exchange |
Securities Registered Pursuant to Section 12(g) of the Exchange Act: None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer þ |
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Accelerated filer o |
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Non-accelerated filer o
(Do not check if a smaller reporting company) |
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of March 31, 2008, the aggregate market value of the registrants Common Stock held by
non-affiliates of the registrant was approximately $20.1 billion based on the closing sales price
as reported on the New York Stock Exchange. As of October 31, 2008, 594,179,011 shares of the
registrants Common Stock, par value $0.01 7/18 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to shareholders in connection with the
Annual Meeting of Shareholders to be held on January 21, 2009 are incorporated by reference into
Part III.
JOHNSON CONTROLS, INC.
Index to Annual Report on Form 10-K
Year Ended September 30, 2008
CAUTIONARY STATEMENTS FOR FORWARD-LOOKING INFORMATION
Unless otherwise indicated, references to Johnson Controls, the Company, we, our and us
in this Annual Report on Form 10-K refer to Johnson Controls, Inc. and its consolidated
subsidiaries.
Certain statements in this report, other than purely historical information, including estimates,
projections, statements relating to our business plans, objectives and expected operating results,
and the assumptions upon which those statements are based, are forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking
statements generally are identified by the words believe, project, expect, anticipate,
estimate, forecast, outlook, intend, strategy, plan, may, should, will, would,
will be, will continue, will likely result, or the negative thereof or variations thereon or
similar terminology generally intended to identify forward-looking statements. Forward-looking
statements are based on current expectations and assumptions that are subject to risks and
uncertainties which may cause actual results to differ materially from the forward-looking
statements. A detailed discussion of risks and uncertainties that could cause actual results and
events to differ materially from such forward-looking statements is included in the section
entitled Risk Factors (refer to Part I, Item 1A, of this Annual Report on Form 10-K). We
undertake no obligation, and we disclaim any obligation, to update or revise publicly any
forward-looking statements, whether as a result of new information, future events or otherwise.
PART I
ITEM 1 BUSINESS
General
Johnson Controls brings ingenuity to the places where people live, work and travel. By integrating
technologies, products and services, we create smart environments that redefine the relationships
between people and their surroundings. We strive to create a more comfortable, safe and sustainable
world through our products and services for more than 200 million vehicles, 12 million homes and
one million commercial buildings. Johnson Controls provides innovative automotive interiors that
help make driving more comfortable, safe and enjoyable. For buildings, we offer products and
services that optimize energy use and improve comfort and security. We also provide batteries for
automobiles and hybrid electric vehicles, along with related systems engineering, marketing and
service expertise.
Our building efficiency business is a global market leader in designing, producing, marketing and
installing integrated heating, ventilating and air conditioning (HVAC) systems, building management
systems, controls, security and mechanical equipment. In addition, the building efficiency business
provides technical services, energy management consulting and operations of entire real estate
portfolios for the non-residential buildings market. We also provide residential air conditioning
and heating systems.
Our automotive experience business is one of the worlds largest automotive suppliers, providing
interior products and systems to more than 30 million vehicles annually. Our technologies extend
into every area of the interior including seating and overhead systems, door systems, floor
consoles, instrument panels, cockpits and integrated electronics. Customers include virtually every
major automaker in the world.
Our power solutions business is a leading global producer of lead-acid automotive batteries,
serving both automotive original equipment manufacturers and the general vehicle battery
aftermarket. We produce more than 120 million lead-acid batteries annually. We offer Absorbent
Glass Mat (AGM), nickel-metal-hydride and lithium-ion battery technologies to power hybrid
vehicles.
Financial Information About Business Segments
Statement of Financial Accounting Standards (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 SFAS No. 131. The Companys ten
reportable segments are presented in the context of its three primary businesses: building
efficiency, automotive experience and power solutions.
Refer to Note 17, Segment Information, of the notes to the consolidated financial statements in
Item 8 of this report for financial information about business segments.
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For the purpose of the following discussion of the Companys businesses, the six building
efficiency reportable segments and the three automotive experience reportable segments are
presented together due to their similar customers and the similar nature of their products,
production processes and distribution channels.
Products/Systems and Services
Building efficiency
Building efficiency is a global leader in delivering integrated control systems, mechanical
equipment, services and solutions designed to improve the comfort, safety and energy efficiency of
non-residential buildings and residential properties with operations in more than 125 countries.
Revenues come from facilities management, technical services and the replacement and upgrade of
controls and HVAC mechanical equipment in the existing buildings market, where the Companys large
base of current customers leads to repeat business, as well as with installing controls and
equipment during the construction of new buildings. Customer relationships often span entire
building lifecycles.
Building efficiency sells its control systems, mechanical equipment and services primarily through
the Companys extensive global network of sales and service offices. Some types of controls and
mechanical systems are sold to distributors of air-conditioning, refrigeration and commercial
heating systems throughout the world. Approximately 47% of building efficiencys sales are derived
from HVAC products and installed control systems for construction and retrofit markets.
Approximately 53% of its sales originate from its service offerings. In fiscal 2008, building
efficiency accounted for 37% of the Companys consolidated net sales.
The Companys systems include York® chillers, air handlers and other HVAC mechanical equipment that
provide heating and cooling in non-residential buildings. The Metasys® control system monitors and
integrates HVAC equipment with other critical buildings systems to maximize comfort while reducing
energy and operating costs. As one of the largest global suppliers of technical services, building
efficiency supplements or serves as in-house staff to maintain, optimize and repair building
systems made by the Company or by its competitors. The Company offers a wide range of solutions
such as performance contracting under which energy savings are used by the customer to pay a third
party financing source for project costs over a number of years. In addition, the global workplace
solutions segment provides full-time on-site operations staff and real estate consulting services
to help customers, especially multi-national companies, reduce costs and improve the performance of
their facility portfolios. The Companys on-site staff typically performs tasks related to the
comfort and reliability of the facility, and manages subcontractors for functions like foodservice,
cleaning, maintenance and landscaping. Through its North America unitary products business, the
Company produces air conditioning and heating equipment for the residential market.
Automotive experience
Automotive experience designs and manufactures interior products and systems for passenger cars and
light trucks, including vans, pick-up trucks and sport/crossover utility vehicles. The business
produces automotive interior systems for original equipment manufacturers (OEMs) and operates
approximately 185 wholly- and majority-owned manufacturing or assembly plants in 29 countries
worldwide (see Item 2 Properties). Additionally, the business has partially-owned affiliates in
Asia, Europe, North America and South America.
Automotive experience products and systems include complete seating systems and components;
cockpit systems, including instrument panels and clusters, information displays and body
controllers; overhead systems, including headliners and electronic convenience features; floor
consoles; and door systems. In fiscal 2008, automotive experience accounted for 48% of the
Companys consolidated net sales.
The business operates assembly plants that supply automotive OEMs with complete seats on a
just-in-time/in-sequence basis. Seats are assembled to specific order and delivered on a
predetermined schedule directly to an automotive assembly line. Certain of the businesss other
automotive interior systems are also supplied on a just-in-time/in-sequence basis. Foam and metal
seating components, seat covers, seat mechanisms and other components are shipped to these plants
from the businesss production facilities or outside suppliers.
Power solutions
Power solutions services both automotive OEMs and the battery aftermarket by providing advanced
battery technology, coupled with systems engineering, marketing and service expertise. The Company
is the largest producer of lead-acid automotive batteries in the world, producing more than 120 million lead-acid batteries annually in
approximately 60 wholly-
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and majority-owned manufacturing or assembly plants in 20 countries
worldwide (see Item 2 Properties). Investments in new product and process technology have
expanded product offerings to AGM, nickel-metal-hydride and lithium-ion battery technology to power
hybrid vehicles. Approximately 75% of automotive battery sales worldwide in fiscal 2008 were to the
automotive replacement market, with the remaining sales to the OEM market.
Sales of automotive batteries generated 15% of the Companys fiscal 2008 consolidated net sales.
Batteries and plastic battery containers are manufactured at wholly- and majority-owned plants in
North America, South America, Asia and Europe.
Competition
Building efficiency
The building efficiency business conducts certain of its operations through thousands of individual
contracts that are either negotiated or awarded on a competitive basis. Key factors in the award of
contracts include system and service quality, price, design, reputation, technology, efficiency,
acoustics, application engineering capability and construction management expertise. Competitors
for contracts in the residential and non-residential marketplace include many regional, national
and international controls providers; larger competitors include Honeywell International, Inc.;
Siemens Building Technologies, an operating group of Siemens AG; Carrier Corporation, a subsidiary
of United Technologies Corporation; Trane Incorporated, a subsidiary of Ingersoll-Rand Company
Limited; Rheem Manufacturing Company; Lennox International, Inc.; and Goodman Global, Inc. The
services market, including global workplace solutions, is highly fragmented. Sales of services are
largely dependent upon numerous individual contracts with commercial businesses worldwide; the loss
of any individual contract would not have a material adverse effect on the Company.
Automotive experience
The automotive experience business faces competition from other automotive suppliers and, with
respect to certain products, from the automobile OEMs who produce or have the capability to produce
certain products the business supplies. Competition is based on technology, quality, reliability of
delivery and price. Design, engineering and product planning are increasingly important factors.
Independent suppliers that represent the principal automotive experience competitors include Lear
Corporation, Faurecia SA and Magna International Inc.
Power solutions
Power solutions is the principal supplier of batteries to many of the largest merchants in the
battery aftermarket, including Advance Auto Parts, AutoZone, Robert Bosch GmbH, Costco, Interstate
Battery System of America, Pep Boys, Sears, Roebuck & Co. and Wal-Mart stores. Automotive batteries
are sold throughout the world under private label and under the Companys brand names (Optima®,
Varta®, LTH® and Heliar®) to automotive replacement battery retailers and distributors and to
automobile manufacturers as original equipment. The power solutions business competes with a number
of major domestic and international manufacturers and distributors of lead-acid batteries, as well
as a large number of smaller, regional competitors. The power solutions business primarily competes
in the battery market with Exide Technologies, GS Yuasa Corporation, East Penn Manufacturing
Company and Fiamm Group. The North American, European and Asian lead-acid battery markets are
highly competitive. The manufacturers in these markets compete on price, quality, technical
innovation, service and warranty.
Backlog
The Companys backlog relating to the building efficiency business is applicable to its sales of
systems and services. At September 30, 2008, the backlog was $4.7 billion, compared with $4.2
billion as of September 30, 2007, primarily due to continued market share gains. The preceding data
does not include amounts associated with contracts in the global workplace solutions business
because such contracts are typically multi-year service awards, nor does it include unitary
products. The backlog amount outstanding at any given time is not necessarily indicative of the
amount of revenue to be earned in the coming fiscal year.
At September 30, 2008, the Companys automotive experience backlog of net new incremental business
to be executed within the next three fiscal years was approximately $4.5 billion, $1.5 billion of
which relates to fiscal 2009. The backlog as of September 30, 2007 was approximately $3.9 billion.
The increase in backlog is primarily due to market share gains in Europe and higher vehicle
production volumes in Asia. The automotive backlog is generally subject to a number of risks and
uncertainties, such as related vehicle production volumes, the timing of related production
launches and changes in customer development plans.
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Raw Materials
Raw materials used by the businesses in connection with their operations, including lead, steel,
urethane chemicals, copper, sulfuric acid and polypropylene, were readily available during the year
and such availability is expected to continue. In fiscal 2009, the Company expects increases in
steel and chemical costs, while it expects lead, copper and diesel fuel costs to decline. Resin
costs are expected to be relatively stable.
Intellectual Property
Generally, the Company seeks statutory protection for strategic or financially important
intellectual property developed in connection with its business. Certain intellectual property,
where appropriate, is protected by contracts, licenses, confidentiality or other agreements.
The Company owns numerous U.S. and non-U.S. patents (and their respective counterparts), the more
important of which cover those technologies and inventions embodied in current products, or which
are used in the manufacture of those products. While the Company believes patents are important to
its business operations and in the aggregate constitute a valuable asset, no single patent, or
group of patents, is critical to the success of the business. The Company, from time to time,
grants licenses under its patents and technology and receives licenses under patents and technology
of others.
The Companys trademarks, certain of which are material to its business, are registered or
otherwise legally protected in the U.S. and many non-U.S. countries where products and services of
the Company are sold. The Company, from time to time, becomes involved in trademark licensing
transactions.
Most works of authorship produced for the Company, such as computer programs, catalogs and sales
literature, carry appropriate notices indicating the Companys claim to copyright protection under
U.S. law and appropriate international treaties.
Environmental, Health and Safety Matters
Laws addressing the protection of the environment (Environmental Laws) and workers safety and
health (Worker Safety Laws) govern the Companys ongoing global operations. They generally provide
for civil and criminal penalties, as well as injunctive and remedial relief, for noncompliance or
require remediation of sites where Company-related materials have been released into the
environment.
The Company has expended substantial resources globally, both financial and managerial, to comply
with Environmental Laws and Worker Safety Laws and maintains procedures designed to foster and
ensure compliance. Certain of the Companys businesses are or have been engaged in the handling or
use of substances that may impact workplace health and safety or the environment. The Company is
committed to protecting its workers and the environment against the risks associated with these
substances.
The Companys operations and facilities have been, and in the future may become, the subject of
formal or informal enforcement actions or proceedings for noncompliance with such laws or for the
remediation of Company-related substances released into the environment. Such matters typically are
resolved by negotiation with regulatory authorities that result in commitments to compliance,
abatement or remediation programs and, in some cases, payment of penalties. Historically, neither
such commitments nor such penalties have been material. (See Item 3 Legal Proceedings of this
report for a discussion of the Companys potential environmental liabilities.)
Environmental Capital Expenditures
The Companys ongoing environmental compliance program often results in capital expenditures.
Environmental considerations are a part of all significant capital expenditures; however,
expenditures in fiscal 2008 related solely to environmental compliance were not material. It is
managements opinion that the amount of any future capital expenditures related solely to
environmental compliance will not have a material adverse effect on the Companys financial results
or competitive position in any one year.
Employees
As of September 30, 2008, the Company employed approximately 140,000 employees, of whom
approximately 93,000 were hourly and 47,000 were salaried.
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Seasonal Factors
Certain of building efficiencys sales are seasonal as the demand for residential air conditioning
equipment generally increases in the summer months, while the demand for furnaces peaks during the
autumn months. This seasonality is mitigated by the other products and services provided by the
building efficiency business that have no material seasonal effect.
Sales of automotive seating and interior systems and of batteries to automobile OEMs for use as
original equipment are dependent upon the demand for new automobiles. Management believes that
demand for new automobiles generally reflects sensitivity to overall economic conditions with no
material seasonal effect.
The automotive replacement battery market is affected by weather patterns because batteries are
more likely to fail when extremely low temperatures place substantial additional power requirements
upon a vehicles electrical system. Also, battery life is shortened by extremely high temperatures,
which accelerate corrosion rates. Therefore, either mild winter or moderate summer temperatures may
adversely affect automotive replacement battery sales.
Financial Information About Geographic Areas
Refer to Note 17, Segment Information, of the notes to the consolidated financial statements in
Item 8 of this report for financial information about geographic areas.
Research and Development Expenditures
Refer to Note 1, Summary of Significant Accounting Policies, of the notes to the consolidated
financial statements in Item 8 of this report for research and development expenditures.
Available Information
The Companys filings with the U.S. Securities and Exchange Commission (SEC), including annual
reports on Form 10-K, quarterly reports on Form 10-Q, definitive proxy statements on Schedule 14A,
current reports on Form 8-K, and any amendments to those reports filed pursuant to Section 13 or
15(d) of the Exchange Act, are made available free of charge through the Investor Relations section
of the Companys Internet website at http://www.johnsoncontrols.com as soon as reasonably
practicable after the Company electronically files such material with, or furnishes them to, the
SEC. Copies of any materials the Company files with the SEC can also be obtained free of charge
through the SECs website at http://www.sec.gov, at the SECs Public Reference Room at 100 F
Street, N.E., Washington, D.C. 20549, or by calling the SECs Office of Investor Education and
Assistance at 1-800-732-0330. The Company also makes available, free of charge, its Ethics Policy,
Corporate Governance Guidelines, Board of Directors committee charters and other information
related to the Company on the Companys Internet website or in printed form upon request. The
Company is not including the information contained on the Companys website as a part of, or
incorporating it by reference into, this Annual Report on Form 10-K.
ITEM 1A RISK FACTORS
General Risks
We are subject to pricing pressure from our larger customers.
We face significant competitive pressures in all of our business segments. Because of their
purchasing size, our larger customers can influence market participants to compete on price terms.
If we are not able to offset pricing reductions resulting from these pressures by improved
operating efficiencies and reduced expenditures, those pricing reductions may have an adverse
impact on our business.
We are subject to risks associated with our non-U.S. operations which could adversely affect our
results of operations.
We have significant operations in a number of countries outside the U.S., some of which are located
in emerging markets. Long-term economic uncertainty in some of the regions of the world in which we
operate, such as Asia, South America, the
Middle East, Central Europe and other emerging markets, could result in the disruption of markets
and negatively affect cash flows from our operations to cover our capital needs and debt service.
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In addition, as a result of our global presence, a significant portion of our revenues and expenses
are denominated in currencies other than the U.S. dollar. We are therefore subject to foreign
currency risks and foreign exchange exposure. Our primary exposures are to the euro, British pound,
Japanese yen, Czech koruna, Mexican peso, Swiss franc and Polish zloty. While we employ financial
instruments to hedge transactional and foreign exchange exposure, these activities do not insulate
us completely from those exposures.
There are other risks that are inherent in our non-U.S. operations, including the potential for
changes in socio-economic conditions, laws and regulations, including import, export, labor and
environmental laws, and monetary and fiscal policies, protectionist measures that may prohibit
acquisitions or joint ventures, unsettled political conditions and possible terrorist attacks
against American interests.
These and other factors may have a material adverse effect on our non-U.S. operations and therefore
on our business and results of operations.
We are subject to regulation of our international operations that could adversely affect our
business and results of operations.
Due to our global operations, we are subject to many laws governing international relations,
including those that prohibit improper payments to government officials and restrict where we can
do business, what information or products we can supply to certain countries and what information
we can provide to a non-U.S. government, including but not limited to the Foreign Corrupt Practices
Act and the U.S. Export Administration Act. Violations of these laws, which are complex and often
times difficult to interpret and apply, may result in severe criminal penalties or sanctions that
could have a material adverse effect on our business, financial condition and results of
operations.
We are subject to costly requirements relating to environmental regulation and environmental
remediation matters, which could adversely affect our business and results of operations.
Because of uncertainties associated with environmental regulation and environmental remediation
activities at sites where we may be liable, future expenses that we may incur to remediate
identified sites could be considerably higher than the current accrued liability on our balance
sheet, which could have a material adverse effect on our business and results of operations. As of
September 30, 2008, we recorded $44 million for environmental liabilities and $75 million in
related conditional asset retirement obligations.
Negative or unexpected tax consequences could adversely affect our results of operations.
Adverse changes in the underlying profitability and financial outlook of our operations in several
jurisdictions could lead to changes in our valuation allowances against deferred tax assets and
other tax reserves on our statement of financial position that could materially and adversely
affect our results of operations. Additionally, changes in statutory tax rates in the U.S. or in
other countries where the Company has significant operations could materially affect deferred tax
assets and liabilities on our balance sheet.
We are also subject to tax audits by governmental authorities in the U.S. and in non-U.S.
jurisdictions. Negative unexpected results from one or more such tax audits could adversely affect
our results of operations.
Legal proceedings in which we are, or may be, a party may adversely affect us.
We are currently and may in the future become subject to legal proceedings and commercial or
contractual disputes. These are typically claims that arise in the normal course of business
including, without limitation, commercial or contractual disputes with our suppliers, intellectual
property matters and employment claims. There exists the possibility that such claims may have an
adverse impact on our results of operations that is greater than we anticipate.
A downgrade in the ratings of our debt could restrict our ability to access the debt capital
markets.
Changes in the ratings that rating agencies assign to our debt may ultimately impact our access to
the debt capital markets and the costs we incur to borrow funds. If ratings for our debt fall below
investment grade, our access to the debt capital markets would become restricted. The tightening in
the credit markets and the low level of liquidity in many financial
markets due to the current turmoil in the financial and banking industries could also affect our
access to the debt capital markets. As the Company relies on its ability to issue commercial paper
to support its daily operations, a downgrade in our rating or continued volatility in the credit
and financial markets causing limitations to the debt capital markets could have an
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adverse effect
on our business. In the event the Company is unable to issue commercial paper, we would have the
ability to draw on our $2.05 billion revolving credit facility.
Additionally, several of our credit agreements generally include an increase in interest rates if
the ratings for our debt are downgraded. Further, an increase in the level of our indebtedness may
increase our vulnerability to adverse general economic and industry conditions and may affect our
ability to obtain additional financing.
We are subject to potential insolvency of insurance carriers.
The Company purchases occurrence-based excess liability insurance to cover general and products
liability risks. Although currently no claims are expected to result in payments under any of these
insurance policies, the Company is subject to the risk that one or more of the insurers may become
insolvent and would be unable to pay a claim that may be made in the future.
We may be unable to complete or integrate acquisitions effectively, which may adversely affect our
growth, profitability and results of operations.
We expect acquisitions of businesses and assets to play a role in our Companys future growth. We
cannot be certain that we will be able to identify attractive acquisition targets, obtain financing
for acquisitions on satisfactory terms or successfully acquire identified targets. Additionally, we
may not be successful in integrating acquired businesses into our existing operations and achieving
projected synergies. Competition for acquisition opportunities in the various industries in which
we operate may rise, thereby increasing our costs of making acquisitions or causing us to refrain
from making further acquisitions. These and other acquisition-related factors may negatively and
adversely impact our growth, profitability and results of operations.
Building Efficiency Risks
Our building efficiency business relies to a great extent on contracts and business with U.S.
government entities, the loss of which may adversely affect our results of operations.
Our building efficiency business contracts with government entities and is subject to specific
rules, regulations and approvals applicable to government contractors. We are subject to routine
audits by the Defense Contract Audit Agency to assure our compliance with these requirements. Our
failure to comply with these or other laws and regulations could result in contract terminations,
suspension or debarment from contracting with the U.S. federal government, civil fines and damages
and criminal prosecution. In addition, changes in procurement policies, budget considerations,
unexpected U.S. developments, such as terrorist attacks, or similar political developments or
events abroad that may change the U.S. federal governments national security defense posture may
affect sales to government entities.
Increases in commodity prices may adversely affect our results of operations.
Commodity prices increased rapidly in the past year, primarily steel, aluminum, copper and fuel
costs. Increases in commodity costs negatively impacts the profitability of orders in backlog as
prices on those orders are fixed, therefore we can not recover an increase in commodity prices.
Additionally, if we are not able to recover commodity cost increases through price increases to our
customers on new orders, then such increases will have an adverse effect on our results of
operations.
Decline in the residential and commercial new construction markets may adversely affect our results
of operations.
HVAC equipment sales in the residential and commercial new construction markets correlate to the
number of new homes and buildings that are built. A significant decline in the construction of new
commercial buildings requiring interior control systems or further slowdowns in the residential
housing construction market may have an adverse effect on our results of operations and such events
could result in potential liabilities or additional costs, including impairment charges, to the
Company.
A variety of other factors could adversely affect the results of operations of our building
efficiency business.
Any of the following could materially and adversely impact the results of operations of our
building efficiency business: loss of, or changes in, building automation or facility management
supply contracts with our major customers; delays or difficulties in new product development; the
potential introduction of similar or superior technologies; financial instability or market
declines of our major or component suppliers; the unavailability of raw materials, primarily steel,
copper and
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electronic components, necessary for production of HVAC equipment; unseasonable weather
conditions in various parts of the world; changes in energy costs or governmental regulations that
would decrease the incentive for customers to update or improve their interior control systems;
increased energy efficiency legislation requirements worldwide; a decline in the outsourcing of
facility management services; and availability of labor to support growth of our service
businesses.
Automotive Experience Risks
Conditions in the automotive industry may adversely affect our results of operations.
Our financial performance depends, in part, on conditions in the automotive industry. In fiscal
2008, our largest customers globally were automobile manufacturers Ford Motor Company (Ford),
General Motors Corporation (GM) and Daimler AG. For sales originating in the U.S., our largest
customers were Ford, GM and Chrysler LLP (the Detroit 3), and Toyota
Motor Corporation, which
represented approximately 11% of our consolidated net sales in fiscal 2008. The Detroit 3 have
experienced declining market shares in North America and have announced significant restructuring
actions in an effort to improve profitability. The North American automotive manufacturers are also
burdened with substantial structural costs, such as pension and healthcare costs, that have
impacted their profitability and labor relations and may ultimately result in severe financial
difficulty, including bankruptcy. GM recently announced concerns in meeting their minimum liquidity
requirements to continue business operations through June 2009. If GM cannot fund their operations,
or if other major customers reach a similar level of financial distress, we may incur significant
write offs of accounts receivable, incur impairment charges or require additional restructuring
actions beyond our current restructuring plans. Automakers across Europe are also experiencing
difficulties from a weakened economy and tightening credit markets. If our customers reduce their
orders to us, it would adversely impact our results of operations. A prolonged downturn in the
North American or European automotive industries or a significant change in product mix due to
consumer demand could require us to shut down plants or incur impairment charges. Additionally, we
have significant component production for manufacturers of motor vehicles in the U.S., Europe,
South America, Japan and other Asia/Pacific Rim countries. Continued uncertainty relating to the
financial condition of the Detroit 3 and others in the automotive industry would have a negative
impact on our business.
The financial distress of our suppliers could harm our results of operations.
Automotive industry conditions have adversely affected our supplier base. Lower production levels
for some of our key customers, increases in certain raw material, commodity and energy costs and
the global credit market crisis has resulted in severe financial distress among many companies
within the automotive supply base. Several large suppliers have filed for bankruptcy protection or
ceased operations. The continuation of financial distress within the supplier base may lead to
commercial disputes and possible supply chain interruptions. In addition, the adverse industry
environment may require us to provide financial support to distressed suppliers or take other
measures to ensure uninterrupted production. The continuation or worsening of these industry
conditions would have a negative impact on our business.
Change in consumer demand may adversely affect our results of operations.
Recent increases in energy costs that consumers incur have resulted, and future increases will
result, in shifts in consumer demand away from motor vehicles that typically have higher content
that we supply, such as light trucks, cross-over vehicles, minivans and SUVs, to smaller vehicles
that have lower content that we supply. The loss of business with respect to, or a lack of
commercial success of, one or more particular vehicle models for which we are a significant
supplier could reduce our sales and harm our profitability, thereby adversely affecting our results
of operations.
We may not be able to successfully negotiate pricing terms with our customers in the automotive
experience business, which may adversely affect our results of operations.
We negotiate sales prices annually with our automotive seating and interiors customers.
Cost-cutting initiatives that our customers have adopted generally result in increased downward
pressure on pricing. Our customer supply agreements generally require reductions in component
pricing over the period of production. Pricing pressures may further intensify, particularly in
North America, as the Detroit 3 pursue restructuring and cost cutting initiatives to better
compete. If we are unable to generate sufficient production cost savings in the future to offset
price reductions, our results of operations may be adversely affected.
Increases in commodity prices may adversely affect our results of operations.
Commodity prices increased rapidly in the past year. In our two largest markets, North America and
Europe, the cost of commodities, primarily steel, fuel, resin and chemicals, increased (net of
recoveries through price increases to customers). If
8
commodity prices continue to rise, and if we
are not able to recover these cost increases through price increases to our customers, then such
increases will have an adverse effect on our results of operations.
The cyclicality of original equipment automobile production rates may adversely affect the results
of operations in our automotive experience business.
Our automotive experience business is directly related to automotive sales and automotive
production by our customers. Automotive production and sales are highly cyclical and depend on
general economic conditions and other factors, including consumer spending and preferences. Further
economic decline that results in a reduction in automotive production and sales by our automotive
experience customers may have a material adverse impact on our results of operations.
A variety of other factors could adversely affect the results of operations of our automotive
experience business.
Any of the following could materially and adversely impact the results of operations of our
automotive experience business: the loss of, or changes in, automobile seating and interiors supply
contracts or sourcing strategies with our major customers or suppliers; start-up expenses
associated with new vehicle programs or delays or cancellations of such programs; underutilization
of our manufacturing facilities, which are generally located near, and devoted to, a particular
customers facility; inability to recover engineering and tooling costs; market and financial
consequences of any recalls that may be required on products that we have supplied; delays or
difficulties in new product development; the potential introduction of similar or superior
technologies; and global overcapacity and vehicle platform proliferation.
Power Solutions Risks
We face increasing competition and pricing pressure from other companies in the power solutions
business.
The power solutions business competes with a number of major domestic and international
manufacturers and distributors of lead-acid batteries, as well as a large number of smaller,
regional competitors. The North American, European and Asian lead-acid battery markets are highly
competitive. The manufacturers in these markets compete on price, quality, technical innovation,
service and warranty. If we are unable to remain competitive and maintain market share in the
regions and markets we serve, our results of operations may be adversely affected.
Increases in commodity prices may adversely affect our results of operations.
Lead is a major component of our lead acid batteries. The price of lead has been volatile. We
manage the impact of changing lead prices through commercial terms with our customers and commodity
hedging strategies. Our ability to mitigate the impact of lead price changes can be impacted by
many factors, including customer negotiations, inventory level fluctuations and sales volume/mix
changes, any of which could have an adverse effect on our results of operations.
Additionally, other commodity prices increased rapidly in the past year, primarily fuel, acid and
resin. If other commodity prices continue to rise, and if we are not able to recover these cost
increases through price increases to our customers, then such increases will have an adverse effect
on our results of operations.
Decreased demand from our customers in the automotive industry may adversely affect our results of
operations.
Our financial performance in the power solutions business depends, in part, on conditions in the
automotive industry. Sales to OEMs accounted for approximately 25% of the total net sales of the
power solutions business. Significant declines in the North American or European automotive
production levels could reduce our sales and harm our profitability, thereby adversely affecting
our results of operations.
A variety of other factors could adversely affect the results of operations of our power solutions
business.
Any of the following could materially and adversely impact the results of operations of our power
solutions business: loss of or changes in automobile battery supply contracts with our large
original equipment and aftermarket customers; the increasing quality and useful life of batteries
or use of alternative battery technologies, both of which may contribute to a
growth slowdown in the lead-acid battery market; delays or cancellations of new vehicle programs;
market and financial consequences of any recalls that may be required on our products; delays or
difficulties in new product development, including nickel-metal-hydride/lithium-ion technology;
financial instability or market declines of our customers or suppliers; the increasing global
environmental regulation related to the manufacture of lead-acid batteries; and the lack of the
development of a market for hybrid vehicles.
9
ITEM 1B UNRESOLVED STAFF COMMENTS
The Company has received no written comments regarding its periodic or current reports from the
staff of the SEC that were issued 180 days or more preceding the end of our fiscal 2008 that remain
unresolved.
ITEM 2 PROPERTIES
At September 30, 2008, the Company conducted its operations in 65 countries throughout the world,
with its world headquarters located in Milwaukee, Wisconsin. The Companys wholly- and
majority-owned facilities, which are listed in the table on the following pages by business and
location, totaled approximately 95 million square feet of floor space and are owned by the Company
except as noted. The facilities primarily consisted of manufacturing, assembly and/or warehouse
space. The Company considers its facilities to be suitable and adequate for their current uses. The
majority of the facilities are operating at normal levels based on capacity.
|
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Building Efficiency |
Florida
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Largo (1),(3)
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France
|
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Amiens Glisy (3) |
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Medley (1), (4)
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|
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Colombes (1),(3) |
Illinois
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Dixon (3)
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Carquefou (2),(3) |
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Wheeling (1)
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Nantes (1) |
Kansas
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Wichita (2), (3)
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Saint Quentin Fallavier (1),(3) |
Kentucky
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Erlanger (1)
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Germany
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Essen (2),(3) |
Maryland
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Baltimore (1)
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Kempen (1),(3) |
Mississippi
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Hattiesburg (1)
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Mannheim (1) |
Missouri
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Albany (1)
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|
Hong Kong
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Hong Kong (1) |
Oklahoma
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|
Norman (3)
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Italy
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Milan (1),(4) |
Pennsylvania
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York (1), (3)
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India
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Chakan (1),(3) |
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Waynesboro (3)
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Pune (1),(3) |
Texas
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San Antonio
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Japan
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Tokyo (1),(4) |
Virginia
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Roanoke
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|
Mexico
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Cienega de Flores (1) |
Wisconsin
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Milwaukee (2),(4)
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Durango (1) |
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Monterrey (1) |
Austria
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Graz (4)
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Poland
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Warsaw (1),(3) |
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Vienna (4)
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Puerto Rico
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Carolina (1),(4) |
Brazil
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Pinhais
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Russia
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Moscow (1),(3) |
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São Paulo
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South Africa
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Johannesburg (1),(3) |
Belgium
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Diegem (1),(4)
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Spain
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Sabadell (1),(3) |
Canada
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Ajax (1),(3)
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Taiwan
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Taipei (1),(4) |
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Victoria (1),(4)
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Turkey
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Istanbul (1),(4) |
China
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Qingyuan (2),(3)
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Izmir (1),(3) |
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Wuxi (1),(3)
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United Arab Emirates
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Dubai (2),(3) |
Denmark
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Aarhus (3)
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United Kingdom
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Essex (1),(4) |
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Hornslet (2),(4) |
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Viby (2),(3) |
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10
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Automotive Experience |
Argentina
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Buenos Aires (1)
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Italy
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Cicerale (3) |
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Rosario
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Grugliasco (1),(3) |
Australia
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Adelaide (1)
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Melfi (1),(3) |
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Melbourne
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Rocca DEvandro (1) |
Austria
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Graz (1),(3)
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Japan
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Ayase (3) |
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Mandling (3)
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Hamakita (3) |
Belgium
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Geel (3)
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Mouka (3) |
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Gent (1),(3)
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Toyotsucho (2),(3) |
Brazil
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Gravatai
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Yokosuka (2),(3) |
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Pouso Alegre
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Korea
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Ansan (1),(4) |
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San Bernardo do Campo (1),(3)
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Asan (3) |
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Santo Andre
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Dangjin (3) |
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Sao Jose dos Campos
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Namsa (1) |
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Sao Jose dos Pinhais (1)
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Pusan (1),(3) |
Canada
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Milton (1)
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Malaysia
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Alor Gajah (1) |
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Mississauga (1),(3)
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Mukin Hulu Bernam |
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Orangeville
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Peramu Jaya (1) |
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Saint Marys
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Persiaran Sabak Bernam |
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Tecumseh
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Mexico
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Monclova (3) |
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Tilsonburg
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Naucalpan de Juarez |
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Whitby
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Puebla (1) |
China
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Beijing (3)
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Ramos Arizpe (2) |
Czech Republic
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Benatky nad Jizerou (1),(3)
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Tlaxcala |
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Ceska Lipa (3)
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Tlazala (1) |
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Mlada Boleslav (1),(3)
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Poland
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Siemianowice |
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Ni Ebohy (1)
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Tychy (3) |
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Roudnice (3)
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Zory (3) |
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Rychnov nad Kneznou (1),(3)
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Romania
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Mioveni (1),(3) |
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Straz pod Ralskem (3)
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Ploiesti (3) |
France
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Brioude (1),(3)
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Russia
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St. Petersburg (1),(3) |
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Compagnie (3)
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Togliatti (1) |
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Conflans (3)
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Slovak Republic
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Bratislava (1),(3) |
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Happich (2),(3)
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Kostany nad Turcom (3) |
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La Ferte Bernard (1),(3)
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Namestovo (1),(3) |
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Rosny (1),(3)
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Trencin (1),(4) |
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Strasbourg (3)
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Slovenia
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Slovenj Gradec (1),(3) |
Germany
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Boblingen (1),(3)
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South Africa
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East London (1) |
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Bochum (1),(3)
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Pretoria (2),(3) |
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Bremen (1),(3)
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Uitenhage (1) |
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Burscheid (2),(3)
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Spain
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Abrera (3) |
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Espelkamp (3)
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Alagon (3) |
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Grefrath (1),(3)
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Madrid (1),(3) |
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Hannover (1),(3)
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Prat de Llobregat |
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Holzgerlingen (1),(3)
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Valencia (2),(3) |
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Karlsruhe (4)
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Valladolid |
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Lahnwerk (2),(3)
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Zaragoza (3) |
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Luneburg
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Thailand
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Rayong (3) |
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Neustadt (3)
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Tunisia
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Bir al Bay (3) |
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Rastatt (1),(3)
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United Kingdom
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Burton-Upon-Trent (2),(3) |
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Remchingen (3)
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Essex (1),(3) |
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Saarlouis (1)
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Leamington Spa (1),(3) |
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Uberherrn (1),(3)
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Redditch (1) |
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Unterriexingen (2),(3)
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Speke (3) |
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Waghausel (3)
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Sunderland |
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Wuppertal (2),(3)
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Telford (2),(3) |
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Zwickau (3)
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Wednesbury (3) |
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Vietnam
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Binh Duog Province (1),(3) |
11
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Automotive Experience (continued) |
Alabama
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Cottondale (1)
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Michigan
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Plymouth (2),(3) |
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McCalla (1)
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Taylor (1),(3) |
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Montgomery (1)
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Warren (3) |
California
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Livermore
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Mississippi
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Madison |
Georgia
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Suwanee (1)
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Missouri
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Earth City (1) |
Illinois
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Chicago (1)
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Jefferson City |
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Sycamore
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Kansas City (1),(3) |
Indiana
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Kendallville
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Ohio
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Bryan |
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Princeton (1)
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Greenfield |
Kentucky
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Bardstown
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Northwood |
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Cadiz
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Wauseon |
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Georgetown
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Tennessee
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Athens (2) |
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Louisville (1)
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Columbia (1) |
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Owensboro (1)
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Lexington |
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Shelbyville (1)
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Murfreesboro (2) |
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Winchester (1)
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Pulaski (2) |
Louisiana
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Shreveport
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Texas
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El Paso (1) |
Michigan
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Battle Creek
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McAllen (1) |
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Detroit (3)
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San Antonio |
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Holland (2),(3)
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Wisconsin
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Hudson (1) |
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Lansing (3) |
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Power Solutions |
Arizona |
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Yuma (2),(3) |
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Austria |
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Graz (1),(3) |
Colorado
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Aurora (2),(3)
|
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Vienna (1),(3) |
Delaware
|
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Middletown (2),(3)
|
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Brazil
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Sorocaba (3) |
Florida
|
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Tampa (2),(3)
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China
|
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Shanghai (3) |
Illinois
|
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Geneva (3)
|
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Czech Republic
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Ceska Lipa (3) |
Indiana
|
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Ft. Wayne (3)
|
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France
|
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Rouen |
Iowa
|
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Red Oak (3)
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Sarreguemines (3) |
Kentucky
|
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Florence (3)
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Germany
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Hannover (3) |
Missouri
|
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St. Joseph (2),(3)
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Krautscheid (3) |
North Carolina
|
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Winston-Salem (3)
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Zwickau (2),(3) |
Ohio
|
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Toledo (3)
|
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Mexico
|
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Celaya |
Oregon
|
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Portland (3)
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Cienega de Flores (2) |
South Carolina
|
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Florence (3)
|
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|
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Escobedo |
|
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Oconee (2),(3)
|
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Monterrey (2),(3) |
Texas
|
|
San Antonio (3)
|
|
|
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Torreon |
Wisconsin
|
|
Milwaukee (4)
|
|
Spain
|
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Burgos (3) |
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Guadamar del Segura |
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Guadalajara |
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Corporate |
Wisconsin
|
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Milwaukee (4) |
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(1) |
|
Leased facility |
|
(2) |
|
Includes both leased and owned facilities |
|
(3) |
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Includes both administrative and manufacturing facilities |
|
(4) |
|
Administrative facility only |
12
In addition to the above listing, which identifies large properties (greater than 25,000 square
feet), there are approximately 645 building efficiency branch offices and other administrative
offices located in major cities throughout the world. These offices vary in size in proportion to
the volume of business in the particular locality.
ITEM 3 LEGAL PROCEEDINGS
As noted in Item 1, liabilities potentially arise globally under various Environmental Laws and
Worker Safety Laws for activities that are not in compliance with such laws and for the cleanup of
sites where Company-related substances have been released into the environment.
Currently, the Company is responding to allegations that it is responsible for performing
environmental remediation, or for the repayment of costs spent by governmental entities or others
performing remediation, at approximately 60 sites in the U.S. Many of these sites are landfills
used by the Company in the past for the disposal of waste materials; others are secondary lead
smelters and lead recycling sites where the Company returned lead-containing materials for
recycling; a few involve the cleanup of Company manufacturing facilities; and the remaining fall
into miscellaneous categories. The Company may face similar claims of liability at additional sites
in the future. Where potential liabilities are alleged, the Company pursues a course of action
intended to mitigate them.
The Company accrues for potential environmental losses in a manner consistent with accounting
principles generally accepted in the United States; that is, when it is probable a loss has been
incurred and the amount of the loss is reasonably estimable. Reserves for environmental costs
totaled $44 million and $41 million at September 30, 2008 and 2007, respectively. The Company
reviews the status of its environmental sites on a quarterly basis and adjusts its reserves
accordingly. Such potential liabilities accrued by the Company do not take into consideration
possible recoveries of future insurance proceeds. They do, however, take into account the likely
share other parties will bear at remediation sites. It is difficult to estimate the Companys
ultimate level of liability at many remediation sites due to the large number of other parties that
may be involved, the complexity of determining the relative liability among those parties, the
uncertainty as to the nature and scope of the investigations and remediation to be conducted, the
uncertainty in the application of law and risk
assessment, the various choices and costs associated with diverse technologies that may be used in
corrective actions at the sites, and the often quite lengthy periods over which eventual
remediation may occur. Nevertheless, the Company has no reason to believe at the present time that
any claims, penalties or costs in connection with known environmental matters will have a material
adverse effect on the Companys financial position, results of operations or cash flows.
The Company is involved in a number of product liability and various other lawsuits incident to the
operation of its businesses. Insurance coverages are maintained and estimated costs are recorded
for claims and lawsuits of this nature. It is managements opinion that none of these will have a
material adverse effect on the Companys financial position, results of operations or cash flows.
Costs related to such matters were not material to the periods presented.
As previously reported, following allegations in a U.N. Oil-For-Food Inquiry Report that, prior to
the Companys acquisition of York International Corporation (York), York had made improper payments
to the Iraqi regime, York and the Company jointly undertook to investigate the allegations and
offered the companies cooperation to the United States Department of Justice (DOJ) and the SEC.
After completing the York acquisition, the Company continued the internal inquiry and expanded its
scope to include other aspects of Yorks Middle East operations, including a review of Yorks use
of agents, consultants and other third parties, Yorks compliance with the Office of Foreign Assets
Control licensing requirements, and Yorks compliance with other potentially applicable trade laws.
The Company also reviewed certain of Yorks sales practices in other markets. In October 2007, York
reached settlements relating to the SEC and DOJ investigations regarding payments made by York and
its subsidiaries in connection with the United Nations Oil-for-Food Program and other payments
unrelated to the Oil-for-Food Program. Specifically, York entered into an agreement with the SEC
under which York consented to the entry of a civil injunction proscribing future violations of law.
York also entered into an agreement with the DOJ under which the DOJ agreed to defer prosecuting
York for three criminal charges. The DOJ will not pursue the charges if York complies with the
agreement for its three-year term. The Company has retained an independent compliance monitor for
three years in accordance with the agreements with both the SEC and DOJ. York paid an aggregate of
approximately $22 million to the SEC and the DOJ pursuant to these settlements, which payments were
characterized as disgorgement of profits, criminal and civil penalties and interest. The Company
had adequately reserved for this amount as part of the York acquisition. The Company is offering
continued cooperation to the relevant authorities in the U.S. Department of Commerce and has been
in discussions with that agency to explore how these matters may be resolved and expects that any
additional sanctions will not be material. The Company is in the process of evaluating and
implementing various remedial measures with respect to York operations.
13
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal
year covered by this report.
EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3) of Form 10-K, the following list of executive officers of the
Company as of November 15, 2008 is included as an unnumbered Item in Part I of this report in lieu
of being included in the Companys fiscal 2008 Proxy Statement.
Stephen A. Roell, 58, was elected Chief Executive Officer effective in October 2007 and
Chairman effective in January 2008. He was first elected to the Board of Directors in October
2004 and served as Executive Vice President from October 2004 through September 2007. Mr. Roell
previously served as Chief Financial Officer between 1991 and May 2005, Senior Vice President
from September 1998 to October 2004 and Vice President from 1991 to September 1998. Mr. Roell
joined the Company in 1982.
Keith E. Wandell, 58, was elected President and Chief Operating Officer in July 2006. He
previously served as Executive Vice President from May 2005 to July 2006, Corporate Vice
President from January 1997 to May 2005, President of automotive experience from August 2003 to
July 2006 and President of power solutions from October 1998 to August 2003. Mr. Wandell joined
the Company in 1988.
Susan F. Davis, 55, was elected Executive Vice President of Human Resources in September
2006. She previously served as Vice President of Human Resources from May 1994 to September 2006
and as Vice President of Organizational Development for automotive experience from August 1993 to
April 1994. Ms. Davis joined the Company in 1983.
R. Bruce McDonald, 48, was elected Executive Vice President in September 2006 and Chief
Financial Officer in May 2005. He previously served as Corporate Vice President from January 2002
to September 2006, Assistant Chief Financial Officer from October 2004 to May 2005 and Corporate
Controller from November 2001 to October 2004. Mr. McDonald joined the Company in 2001.
Beda Bolzenius, 52, was elected a Corporate Vice President in November 2005 and serves as
President of the automotive experience business. He previously served as Executive Vice President
and General Manager Europe, Africa and South America for automotive experience from November 2004
to November 2005. Dr. Bolzenius joined the Company in November 2004 from Robert Bosch GmbH, a
global manufacturer of automotive and industrial technology, consumer goods and building
technology, where he most recently served as the president of Boschs Body Electronics division.
Alex A. Molinaroli, 49, was elected a Corporate Vice President in May 2004 and has served as
President of the power solutions business since January 2007. Previously, Mr. Molinaroli served
as Vice President and General Manager for North America Systems & the Middle East for the
building efficiency business and has held increasing levels of responsibility for controls
systems and services sales and operations. Mr. Molinaroli joined the Company in 1983.
C. David Myers, 45, was elected a Corporate Vice President and President of the building
efficiency business in December 2005, when he joined the Company in connection with the
acquisition of York. At York, Mr. Myers served as Chief Executive Officer from February 2004 to
December 2005, President from June 2003 to December 2005, Executive Vice President and Chief
Financial Officer from January 2003 to June 2003 and Vice President and Chief Financial Officer
from February 2000 to January 2003.
Jeffrey G. Augustin, 46, was elected a Corporate Vice President in March 2005 and has served
as Vice President of Finance for the building efficiency business since December 2005.
Previously, Mr. Augustin served as Corporate Controller from March 2005 to March 2007. From 2001
to March 2005, Mr. Augustin was Vice President of Finance and Corporate Controller of Gateway,
Inc.
Jeffrey S. Edwards, 46, was elected a Corporate Vice President in May 2004 and serves as
Group Vice President and General Manager for Japan and Asia Pacific for the automotive experience
business. He previously served as Group Vice President and General Manager for automotive
experience North America from August 2002 to May 2004 and Group Vice President and General
Manager for product and business development. Mr. Edwards joined the Company in 1984.
14
Charles A. Harvey, 56, was elected Corporate Vice President of Diversity and Public Affairs
in November 2005. He previously served as Vice President of Human Resources for the automotive
experience business and in other human resources leadership positions. Mr. Harvey joined the
Company in 1991.
Susan M. Kreh, 46, was elected Corporate Vice President and Corporate Controller in March
2007 and serves as the Companys Principal Accounting Officer. Prior to joining the Company, Ms.
Kreh served 22 years at PPG Industries, Inc., including as Corporate Treasurer from January 2002
until March 2007.
Jerome D. Okarma, 56, was elected Vice President, Secretary and General Counsel in November
2004 and was named a Corporate Vice President in September 2003. He previously served as
Assistant Secretary from 1990 to November 2004 and as Deputy General Counsel from June 2000 to
November 2004. Mr. Okarma joined the Company in 1989.
Subhash Sam S. Valanju, 65, was elected a Corporate Vice President in 1999 and has served
as Chief Information Officer since joining the Company in 1996. In September 2008, the Company
announced that Mr. Valanju would retire as Corporate Vice President on April 1, 2009.
Colin Boyd, 49, was elected Vice President, Information Technology and Chief Information
Officer in October 2008. Mr. Boyd previously served as Chief Information Officer and Corporate
Vice President of Sony Ericsson from 2002 to 2008.
Frank A. Voltolina, 48, was elected a Corporate Vice President and Corporate Treasurer in
July 2003 when he joined the Company. Prior to joining the Company, Mr. Voltolina was Vice
President and Treasurer at ArvinMeritor, Inc.
Denise M. Zutz, 57, was elected Corporate Vice President of Strategy, Investor Relations and
Communication in November 2004. She previously served as Vice President, Corporate Communication
from 1991 to November 2004. Ms.
Zutz joined the Company in 1973. In September 2008, the Company announced that Ms. Zutz
would retire as Vice President of Strategy, Investor Relations and Communication effective
January 1, 2009.
Jacqueline Strayer, 54, was elected Vice President, Corporate Communication in September
2008. She previously served as Vice President, Corporate Communications, for Arrow Electronics,
Inc. from 2004 to 2008. Prior to that, she held communication leadership positions at United
Technologies Corporation and GE Capital Corporation.
There are no family relationships, as defined by the instructions to this item, among the Companys
executive officers.
All officers are elected for terms that expire on the date of the meeting of the Board of Directors
following the Annual Meeting of Shareholders or until their successors are elected and qualified.
PART II
ITEM 5 MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Companys shares of common stock are traded on the New York Stock Exchange under the symbol
JCI.
|
|
|
|
|
Number of Record Holders |
Title of Class |
|
as of September 30, 2008 |
Common Stock, $0.01 7/18 par value
|
|
47,543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Price Range |
|
|
Dividends |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
First Quarter |
|
$ |
35.15-44.46 |
|
|
$ |
23.84-29.48 |
|
|
$ |
0.13 |
|
|
$ |
0.11 |
|
Second Quarter |
|
|
29.47-36.52 |
|
|
|
28.09-33.22 |
|
|
|
0.13 |
|
|
|
0.11 |
|
Third Quarter |
|
|
28.57-36.49 |
|
|
|
31.35-39.25 |
|
|
|
0.13 |
|
|
|
0.11 |
|
Fourth Quarter |
|
|
26.00-36.00 |
|
|
|
33.17-43.07 |
|
|
|
0.13 |
|
|
|
0.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year |
|
$ |
26.00-44.46 |
|
|
$ |
23.84-43.07 |
|
|
$ |
0.52 |
|
|
$ |
0.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
On July 25, 2007, the Companys Board of Directors declared a three-for-one stock split of the
common stock payable October 2, 2007 to shareholders of record on September 14, 2007. This stock
split resulted in an increase of approximately 396 million in the outstanding shares of common
stock. All share or per share data in this Form 10-K have been restated to reflect the
three-for-one stock split.
In September 2006, the Companys Board of Directors authorized a stock repurchase program to
acquire up to $200 million of the Companys outstanding common stock. Stock repurchases under this
program may be made through open market, privately negotiated transactions or otherwise at times
and in such amounts as Company management deems appropriate. The stock repurchase program does not
have an expiration date and may be limited or terminated by the Board of Directors at any time
without prior notice. There were $69 million in common stock repurchases made under the stock
repurchase program in the fiscal year ended September 30, 2008.
The Company entered into an Equity Swap Agreement, dated March 18, 2004 and amended March 3, 2006
and May 16, 2006 (Swap Agreement), with Citibank, N.A. (Citibank). The Company selectively uses
equity swaps to reduce market risk associated with its stock-based compensation plans, such as its
deferred compensation plans 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.
Citibank has advised the Company that, in connection with the Swap Agreement, Citibank 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. The Company disclaims that
Citibank is an affiliated purchaser of the Company as such term is defined in Rule 10b-18(a)(3)
under the Securities Exchange Act or that Citibank is purchasing any shares for the Company.
Although the Swap Agreement has a stated expiration date, the Companys intention is to continually
renew the Swap Agreement with Citibanks consent. The net effect of the change in fair value of the
Swap Agreement and the change
in equity compensation liabilities was not material to the Companys earnings for the fiscal years
ended September 30, 2008 and 2007. In the three months ended December 31, 2007 and in the three
months ended June 30, 2008, Citibank reduced its holding of Company stock by 500,000 shares and
200,000 shares, respectively, in connection with the Swap Agreement and Citibank maintained this
reduced holding through September 30, 2008.
The following information in Item 5 is not deemed to be soliciting material or the be filed
with the SEC or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934
(Exchange Act) or to the liabilities of Section 18 of the Exchange Act, and will not be deemed to
be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act,
except to the extent the Company specifically incorporates it by reference into such a filing:
The line graph below compares the cumulative total shareholder return on our Common Stock with the
cumulative total return of companies on the Standard & Poors (S&Ps) 500 Stock Index and companies
formerly on the S&Ps Manufacturers (Diversified Industrials) Index.* This graph assumes the
investment of $100 on September 1, 2003 and the reinvestment of all dividends since that date.
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPANY/INDEX |
|
|
Sep 03 |
|
|
Sep 04 |
|
|
Sep 05 |
|
|
Sep 06 |
|
|
Sep 07 |
|
|
Sep 08 |
|
|
Johnson Controls, Inc. |
|
|
|
100 |
|
|
|
|
122.06 |
|
|
|
|
135.59 |
|
|
|
|
159.14 |
|
|
|
|
265.57 |
|
|
|
|
207.85 |
|
|
|
Manufacturers (Diversified Industrials) * |
|
|
|
100 |
|
|
|
|
131.94 |
|
|
|
|
132.61 |
|
|
|
|
149.51 |
|
|
|
|
194.91 |
|
|
|
|
149.24 |
|
|
|
S&P 500 Comp-Ltd. |
|
|
|
100 |
|
|
|
|
111.91 |
|
|
|
|
123.38 |
|
|
|
|
136.69 |
|
|
|
|
159.16 |
|
|
|
|
124.18 |
|
|
|
|
|
|
* |
|
The Manufacturers (Diversified Industrials) index was discontinued as a formal index of
Standard & Poors effective December 31, 2001. The company has replicated the index using return
data for the fourteen companies that comprised the Manufacturers (Diversified Industrials) as of
that date. |
The Company has filed as exhibits to this Annual Report on Form 10-K the CEO and CFO certifications
required by Section 302 of the Sarbanes-Oxley Act of 2002. The Company also submitted the Annual
CEO certification to the New York Stock Exchange.
The Companys transfer agents contact information is as follows:
Wells Fargo Bank Minnesota, N.A.
Shareowner Services Department
P.O. Box 64856
St. Paul, MN 55164-0856
(877) 602-7397
17
ITEM 6 SELECTED FINANCIAL DATA
The following selected financial data reflects the results of operations, balance sheet data, and
common share information for the fiscal years ended September 30, 2004 through September 30, 2008
(in millions, except per share data and number of employees and shareholders).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30, |
|
|
2008 |
|
2007 |
|
2006 (2) |
|
2005 |
|
2004 |
OPERATING RESULTS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
38,062 |
|
|
$ |
34,624 |
|
|
$ |
32,235 |
|
|
$ |
27,479 |
|
|
$ |
24,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income (3) |
|
|
2,077 |
|
|
|
1,884 |
|
|
|
1,608 |
|
|
|
1,326 |
|
|
|
1,168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
979 |
|
|
|
1,295 |
|
|
|
1,033 |
|
|
|
757 |
|
|
|
767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
979 |
|
|
|
1,252 |
|
|
|
1,028 |
|
|
|
909 |
|
|
|
818 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share from continuing operations (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.65 |
|
|
$ |
2.19 |
|
|
$ |
1.77 |
|
|
$ |
1.32 |
|
|
$ |
1.36 |
|
Diluted |
|
|
1.63 |
|
|
|
2.16 |
|
|
|
1.75 |
|
|
|
1.30 |
|
|
|
1.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.65 |
|
|
$ |
2.12 |
|
|
$ |
1.76 |
|
|
$ |
1.58 |
|
|
$ |
1.45 |
|
Diluted |
|
|
1.63 |
|
|
|
2.09 |
|
|
|
1.74 |
|
|
|
1.56 |
|
|
|
1.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average shareholders equity (4) |
|
|
11 |
% |
|
|
16 |
% |
|
|
15 |
% |
|
|
13 |
% |
|
|
16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
807 |
|
|
$ |
828 |
|
|
$ |
711 |
|
|
$ |
664 |
|
|
$ |
817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
783 |
|
|
|
732 |
|
|
|
705 |
|
|
|
639 |
|
|
|
594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of employees |
|
|
140,000 |
|
|
|
140,000 |
|
|
|
136,000 |
|
|
|
114,000 |
|
|
|
113,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL POSITION |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital (5) |
|
$ |
1,225 |
|
|
$ |
1,441 |
|
|
$ |
1,357 |
|
|
$ |
892 |
|
|
$ |
520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
24,987 |
|
|
|
24,105 |
|
|
|
21,921 |
|
|
|
16,144 |
|
|
|
14,758 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
3,201 |
|
|
|
3,255 |
|
|
|
4,166 |
|
|
|
1,577 |
|
|
|
1,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt |
|
|
3,944 |
|
|
|
4,418 |
|
|
|
4,743 |
|
|
|
2,342 |
|
|
|
2,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
9,424 |
|
|
|
8,907 |
|
|
|
7,355 |
|
|
|
6,058 |
|
|
|
5,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt to total capitalization |
|
|
30 |
% |
|
|
33 |
% |
|
|
39 |
% |
|
|
28 |
% |
|
|
34 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value per share (1) |
|
$ |
15.86 |
|
|
$ |
15.00 |
|
|
$ |
12.52 |
|
|
$ |
10.47 |
|
|
$ |
9.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMON SHARE INFORMATION (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per share |
|
$ |
0.52 |
|
|
$ |
0.44 |
|
|
$ |
0.37 |
|
|
$ |
0.33 |
|
|
$ |
0.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market prices |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
$ |
44.46 |
|
|
$ |
43.07 |
|
|
$ |
30.00 |
|
|
$ |
21.33 |
|
|
$ |
20.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Low |
|
|
26.00 |
|
|
|
23.84 |
|
|
|
20.09 |
|
|
|
17.52 |
|
|
|
15.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares (in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
593.1 |
|
|
|
590.6 |
|
|
|
583.5 |
|
|
|
575.4 |
|
|
|
563.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
601.4 |
|
|
|
599.2 |
|
|
|
589.9 |
|
|
|
582.9 |
|
|
|
577.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shareholders |
|
|
47,543 |
|
|
|
47,810 |
|
|
|
51,240 |
|
|
|
52,964 |
|
|
|
55,460 |
|
|
|
|
(1) |
|
All share and per share amounts reflect a three-for-one common stock split payable October 2,
2007 to shareholders of record on September 14, 2007. |
18
|
|
|
(2) |
|
In December 2005, the Company acquired York International Corporation, significantly
expanding the building efficiency business. See Items 7 and 8 for additional details related
to the acquisition. |
|
(3) |
|
Segment income is calculated as income from continuing operations before income taxes and
minority interests excluding net financing charges, restructuring costs and Japanese pension
gain (fiscal 2004 only). |
|
(4) |
|
Return on average shareholders equity (ROE) represents income from continuing operations
divided by average equity. Income from continuing operations includes $495 million, $197
million, $210 million and $82 million of restructuring costs in fiscal years 2008, 2006, 2005
and 2004, respectively. Additionally, fiscal 2004 includes an $84 million Japanese pension
gain. |
|
(5) |
|
Working capital is defined as current assets less current liabilities, excluding cash,
short-term debt, the current portion of long-term debt and net assets of discontinued
operations. |
ITEM 7 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company operates in three primary businesses: building efficiency, automotive experience and
power solutions. Building efficiency provides facility systems, services and workplace solutions
including comfort, energy and security management for the residential and non-residential buildings
markets. Automotive experience designs and manufactures interior systems and products for passenger
cars and light trucks, including vans, pick-up trucks and sport/crossover utility vehicles. Power
solutions designs and manufactures automotive batteries for the replacement and original equipment
markets.
On December 9, 2005, the Company acquired York International Corporation (York), a leading global
provider of heating, ventilating, air conditioning (HVAC) equipment and services. The results of
Yorks operations are included in the Companys consolidated financial statements from the date of
acquisition. As part of the York integration, the Company reorganized its building efficiency
business to maximize the synergies related to the York and legacy Johnson Controls operations. The
new building efficiency structure is organized by product, service and/or region, with both York
and Johnson Controls operations integrated within these segments as applicable.
This discussion summarizes the significant factors affecting the consolidated operating results,
financial condition and liquidity of the Company for the three-year period ended September 30,
2008. This discussion should be read in conjunction with Item 8, the consolidated financial
statements and notes to the consolidated financial statements.
Executive Overview
In fiscal 2008, the Company recorded record net sales of $38.1 billion, a 10% increase over the
prior year. Net income was $979 million which included a fourth quarter restructuring charge of
$495 million ($434 million, net of tax). Excluding the restructuring charge, net income was $1.4
billion, a 12% increase over the prior year, with such increases primarily due to the Companys
increased share in its global markets in the building efficiency and power solutions segments and
increased operational efficiencies. The Company continues to introduce new and enhanced technology
applications in all businesses and markets served, while at the same time improving the quality of
its products.
Building efficiency business net sales and segment income increased 11% and 13%, respectively, over
the prior year, primarily due to increased commercial market share gains, expansion into emerging
markets, revenue synergies and the favorable impact of foreign currency translation. Improvements
in cost structure and productivity have resulted in higher operating margins and a platform for
future growth.
The automotive experience business was unfavorably impacted by lower automobile production in North
America and Europe; however, that was offset by the favorable impact of foreign currency
translation. Net sales and segment income increased 3% and 12%, respectively, from the prior year.
Net sales and segment income for the power solutions business increased by 35% and 5%,
respectively, over the prior year, primarily due to a higher unit prices resulting from significant
increases in the cost of lead and the favorable impact of foreign currency translation.
19
Since September 30, 2007, the Company has reduced its overall debt, exclusive of the impacts of
foreign currency, by $522 million, decreasing its total debt to capitalization ratio to 30% at
September 30, 2008 from 33% at September 30, 2007.
Outlook
The Company previously announced fiscal year 2009 guidance in its press release dated October 14,
2008 and first quarter guidance in its press release dated October 23, 2008. This forecasted
information was largely based on assumptions regarding the automotive industry, commodity prices,
foreign currency exchange rates and overall global economic conditions, which the Company disclosed
when it released its guidance. The Companys key 2009 assumptions include:
|
|
|
North American auto production of 12.3 million vehicles |
|
|
|
|
European production of 21.2 million vehicles |
|
|
|
|
North American institutional building construction spending up 3% |
|
|
|
|
International non-residential construction spending up 5% |
|
|
|
|
Flat North American residential HVAC market |
|
|
|
|
Relatively stable global demand for its aftermarket products and services |
|
|
|
|
Increase in commodity costs such as steel, chemical and resin |
|
|
|
|
Decrease in commodity costs such as lead, copper and diesel fuel |
|
|
|
|
Euro to U.S. dollar exchange rate of $1.40 |
There have been a number of events that have negatively impacted the global economic environment
that make it likely that actual general economic conditions in 2009 will not match key assumptions
on which the Company based its guidance. For example, commodity prices have been extremely volatile
making it difficult to manage those costs, global credit markets have continued to deteriorate
which has adversely affected business and consumer confidence and automotive sales have declined
significantly. In addition, certain U.S. automakers have warned of their inability to meet their
financial obligations in the short term without financial intervention from the U.S. government. To
the extent actual general economic conditions in 2009 ultimately do not match key assumptions on
which we based the October guidance, our actual results could differ, materially, from the
financial guidance we have provided.
Segment Analysis
Management historically evaluated the performance of its operating segments based primarily on
operating income, excluding restructuring costs and other significant gains and losses. For this
purpose, consolidated operating income also excluded interest income and expense, equity in
earnings of partially-owned affiliates, gains and losses from sales of businesses, foreign currency
gains and losses, and certain miscellaneous revenues and expenses.
Beginning in fiscal 2007, Company management, including the chief operating decision maker,
adjusted their measurement of business unit performance, changing from operating income to segment
income, which represents income from continuing operations before income taxes and minority
interests excluding net financing charges and restructuring costs. The primary reason for the
modification was to reflect equity income in earnings for each business operation given its growing
significance to the Companys global business strategies.
FISCAL YEAR 2008 COMPARED TO FISCAL YEAR 2007
Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
September 30, |
|
|
(in millions) |
|
2008 |
|
2007 |
|
Change |
Net sales |
|
$ |
38,062 |
|
|
$ |
34,624 |
|
|
|
10 |
% |
Segment income |
|
|
2,077 |
|
|
|
1,884 |
|
|
|
10 |
% |
|
|
|
Net sales increased $3.4 billion, primarily due to higher net sales in the power
solutions business ($1.2 billion) related to higher unit prices resulting from significant
increases in the cost of lead during the year, higher building efficiency net sales ($0.8
billion) and the favorable impact of foreign currency translation ($1.9 billion),
partially offset by lower sales in the automotive experience business ($0.5 billion)
reflecting weaker North American and European automotive markets. |
20
|
|
|
Excluding the favorable effects of foreign currency translation, consolidated net sales
increased 4% as compared to the prior year. |
|
|
|
|
Segment income increased $193 million, primarily due to higher volumes and margins in
the building efficiency business ($74 million), a favorable product mix in the power
solutions segment despite increased lead costs ($12 million) and the favorable impact of
foreign currency translation ($132 million), partially offset by the impact of lower North
American and European automobile production ($25 million). |
|
|
|
|
Excluding the favorable effects of foreign currency translation, consolidated segment
income increased 3% as compared to the prior year. |
Building Efficiency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
|
|
|
|
|
Segment Income |
|
|
|
|
|
|
for the Year Ended |
|
|
|
|
|
|
for the Year Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
September 30, |
|
|
|
|
(in millions) |
|
2008 |
|
|
2007 |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
Change |
|
North America systems |
|
$ |
2,282 |
|
|
$ |
2,027 |
|
|
|
13 |
% |
|
$ |
256 |
|
|
$ |
216 |
|
|
|
19 |
% |
North America service |
|
|
2,409 |
|
|
|
2,273 |
|
|
|
6 |
% |
|
|
224 |
|
|
|
197 |
|
|
|
14 |
% |
North America unitary products |
|
|
810 |
|
|
|
953 |
|
|
|
-15 |
% |
|
|
2 |
|
|
|
65 |
|
|
|
-97 |
% |
Global workplace solutions |
|
|
3,197 |
|
|
|
2,677 |
|
|
|
19 |
% |
|
|
59 |
|
|
|
79 |
|
|
|
-25 |
% |
Europe |
|
|
2,710 |
|
|
|
2,406 |
|
|
|
13 |
% |
|
|
114 |
|
|
|
77 |
|
|
|
48 |
% |
Rest of world |
|
|
2,713 |
|
|
|
2,401 |
|
|
|
13 |
% |
|
|
302 |
|
|
|
216 |
|
|
|
40 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
14,121 |
|
|
$ |
12,737 |
|
|
|
11 |
% |
|
$ |
957 |
|
|
$ |
850 |
|
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales:
|
|
|
The increase in North America systems was primarily due to higher systems product and
equipment commercial volumes in the construction and replacement markets ($231 million),
the impact of current year acquisitions ($10 million) and the favorable impact of foreign
currency translation ($14 million). |
|
|
|
|
The increase in North America service was primarily due to growth in the truck-based and
energy performance contracting businesses ($77 million), the impact of current year
acquisitions ($42 million) and the favorable impact of foreign currency translation ($17
million). |
|
|
|
|
The decrease in North America unitary products was primarily due to a depressed U.S.
residential market which has and continues to impact the need for HVAC equipment in new
construction housing starts. |
|
|
|
|
The increase in global workplace solutions primarily reflects a higher volume of global
pass-through contracts ($62 million), a net increase in services to existing customers
($283 million), new business ($12 million) and the favorable impact of foreign currency
translation ($163 million). |
|
|
|
|
The increase in Europe reflects the favorable impact of foreign currency translation
($271 million) and market and penetration growth ($33 million). |
|
|
|
|
The increase in rest of world is due to volume increases mainly in Latin America, Asia
and the Middle East ($183 million) and the favorable impact of foreign currency translation
($129 million). |
Segment Income:
|
|
|
The increases in North America systems and North America service were primarily due to
higher sales volumes and improving gross margins through pricing and operational
efficiencies net of increased commodities costs ($118 million), partially offset by
additional SG&A expenses to support business growth initiatives ($45 million) and a
nonrecurring contract benefit received in the prior year ($6 million). |
|
|
|
|
The decrease in North America unitary products was primarily due to the decline in sales
volumes and increased commodities costs partially offset by pricing ($60 million) and
purchase accounting adjustments related to a September 2007 equity investment in a joint
venture ($3 million). |
|
|
|
|
The decrease in global workplace solutions was primarily due to less favorable margins
and mix in North American contracts. |
|
|
|
|
The increase in Europe was primarily due to the favorable impact of foreign currency
translation ($16 million) and continuing benefit from prior restructuring plans, branch
office redesign and manufacturing footprint changes ($51 |
21
|
|
|
million), partially offset by
increased SG&A expenses to support business growth and system implementations ($30
million). |
|
|
|
|
The increase in rest of world was primarily due to higher sales volumes and margin
improvements in Asia, Latin America and the Middle East ($69 million) and the favorable
impact of foreign currency translation ($17 million). |
Automotive Experience
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
|
|
|
|
|
Segment Income |
|
|
|
|
|
|
for the Year Ended |
|
|
|
|
|
|
for the Year Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
September 30, |
|
|
|
|
(in millions) |
|
2008 |
|
|
2007 |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
Change |
|
North America |
|
$ |
6,723 |
|
|
$ |
7,276 |
|
|
|
-8 |
% |
|
$ |
79 |
|
|
$ |
72 |
|
|
|
10 |
% |
Europe |
|
|
9,854 |
|
|
|
8,878 |
|
|
|
11 |
% |
|
|
464 |
|
|
|
445 |
|
|
|
4 |
% |
Asia |
|
|
1,514 |
|
|
|
1,398 |
|
|
|
8 |
% |
|
|
36 |
|
|
|
2 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
18,091 |
|
|
$ |
17,552 |
|
|
|
3 |
% |
|
$ |
579 |
|
|
$ |
519 |
|
|
|
12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Measure not meaningful. |
Net Sales:
|
|
|
The decrease in North America was primarily due to volume reductions with Ford Motor
Company, General Motors Corporation, Chrysler LLP, Nissan Motor Company and Toyota Motor
Corporation. Additionally, a strike at a U.S. supplier to one of our major customers had an
unfavorable impact on net sales of $103 million. This was partially offset by the
acquisition of the interior product assets of Plastech Engineered Products, Inc., in July
2008, which had a favorable impact of $85 million. |
|
|
|
|
The increase in Europe was primarily due to the favorable impact of foreign currency
translation ($1.1 billion), partially offset by annual pricing adjustments ($113 million). |
|
|
|
|
The increase in Asia was primarily due to higher volumes with Nissan Motor Company in
Japan and a consolidated joint venture in Korea ($155 million), partially offset by the
unfavorable impact of foreign currency translation ($39 million). |
Segment Income:
|
|
|
The increase in North America was primarily due to favorable gross margins from
purchasing savings ($57 million), operational efficiencies ($49 million) and commercial
recoveries ($44 million), partially offset by lower production volumes ($98 million), a
strike at a U.S. supplier to one of our major customers ($30 million) and the unfavorable
impact of the acquisition of the interior product assets of Plastech Engineered Products,
Inc., in July 2008 ($15 million). |
|
|
|
|
The increase in Europe was primarily due to the favorable impact of foreign currency
translation ($85 million) and purchasing savings ($110 million), partially offset by lower
platform pricing adjustments and lower economic recoveries of material cost increases ($142
million) and lower sales volumes ($34 million). |
|
|
|
|
The increase in Asia was primarily due to higher volumes ($31 million), purchasing
savings ($9 million) and higher equity income from joint ventures in China ($14 million),
partially offset by higher employee expenses to support market expansion ($20 million). |
Power Solutions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
September 30, |
|
|
(in millions) |
|
2008 |
|
2007 |
|
Change |
Net sales |
|
$ |
5,850 |
|
|
$ |
4,335 |
|
|
|
35 |
% |
Segment income |
|
|
541 |
|
|
|
515 |
|
|
|
5 |
% |
|
|
|
Net sales increased primarily due to the impact of higher lead costs on pricing ($863
million), improved price/product mix ($358 million), the favorable impact of foreign
currency translation ($262 million) and higher sales volumes ($32 million). |
22
|
|
|
Segment income increased due to higher volumes and operational efficiencies ($44
million), higher equity income from joint ventures mainly in Asia ($19 million) and the
favorable impact of foreign currency translation ($14 million), partially offset by higher
lead costs not recovered through pricing ($51 million). |
Restructuring Costs
To better align the Companys resources with its growth strategies while reducing the cost
structure of its global operations, the Company committed to a restructuring plan (2008 Plan) in
the fourth quarter of fiscal 2008 and recorded a $495 million restructuring charge. The
restructuring charge relates to cost reduction initiatives in its automotive experience, building
efficiency and power solutions businesses and includes workforce reductions and plant
consolidations. The Company expects to substantially complete the initiative by early 2010. The
automotive-related restructuring is in response to the fundamentals of the European and North
American automotive markets. The actions target reductions in the Companys cost base by
decreasing excess manufacturing capacity due to lower industry production and the continued
movement of vehicle production to low-cost countries, especially in Europe. The restructuring
actions in building efficiency are primarily in Europe where the Company is centralizing certain
functions and rebalancing its resources to target the geographic markets with the greatest
potential growth. Power solutions actions are focused on optimizing its regional manufacturing
capacity.
The 2008 Plan included workforce reductions of approximately 9,400 employees (3,700 for automotive
experience North America, 3,400 for automotive experience Europe, 300 for building efficiency
North America, 900 for building efficiency Europe, 600 for building efficiency rest of
world, and 500 for power solutions). 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, 2008,
approximately 750 of the employees have been separated from the Company pursuant to the 2008 Plan.
In addition, the 2008 Plan includes 21 plant closures (9 for automotive experience North
America, 9 for automotive experience Europe, 1 for building efficiency North America, and 2
for power solutions). As of September 30, 2008, none of the plants have been closed. The
restructuring charge for the impairment of long-lived assets associated with the plant closures
was determined using fair value based on a discounted cash flow analysis.
Net Financing Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
September 30, |
|
|
(in millions) |
|
2008 |
|
2007 |
|
Change |
Net financing charges |
|
$ |
258 |
|
|
$ |
277 |
|
|
|
-7 |
% |
|
|
|
Net financing charges decreased slightly primarily due to lower borrowing levels during
fiscal 2008. |
Provision for Income Taxes
The Companys base effective income tax rate for continuing operations for fiscal 2008 and 2007
was 21.0% (prior to certain discrete period items as outlined below).
The Companys base effective tax rate for fiscal 2008 increased due to the fourth quarter
restructuring charge, which was recorded using a blended statutory rate of 12.4% resulting in a
$43 million discrete period tax adjustment.
The Companys base effective tax rate for fiscal 2007 was reduced as a result of the favorable
resolution of certain tax audits ($28 million), a change in tax status of an automotive experience
subsidiary in the Netherlands ($22 million) and a nonrecurring tax benefit related to the use of a
portion of the Companys capital loss carryforward valuation allowance ($7 million), partially
offset by the impact from the reduction in the German federal income tax rate ($20 million).
Valuation Allowance Adjustments
The Company reviews its deferred tax asset valuation allowances on a quarterly basis, or whenever
events or changes in circumstances indicate that a review is required. In determining the
requirement for a valuation allowance, the historical and projected financial results of the legal
entity or consolidated group recording the net deferred tax asset are considered, along with any
other positive or negative evidence. Since future financial results may differ from previous
estimates, periodic adjustments to the Companys valuation allowances may be necessary.
In the fourth quarter of fiscal 2007, the tax provision decreased $7 million due to a nonrecurring
tax benefit related to the use of a portion of the Companys capital loss carryforward valuation
allowance.
23
Uncertain Tax Positions
The Company is subject to income taxes in the U.S. and numerous non-U.S. 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. In June 2006, the Financial Accounting
Standards Board (FASB) issued FASB Interpretation No. (FIN) 48, Accounting for Uncertainty in
Income Taxes an interpretation of FASB Statement No. 109, which prescribes a comprehensive
model for how a company should recognize, measure, present and disclose in its financial
statements uncertain tax positions that a company has taken or expects to take on a tax return.
The Company adopted FIN 48 as of October 1, 2007. As such, accruals for tax contingencies are
provided for in accordance with the requirements of FIN 48.
In the second and fourth quarters of fiscal 2007, the Company reduced its income tax liability by
$15 million and $13 million, respectively, due to the favorable resolution of certain tax audits.
The Companys federal income tax returns and certain non-U.S. income tax returns for various
fiscal years remain under various stages of audit by the Internal Revenue Service and respective
non-U.S. tax authorities. Although the outcome of tax audits is always uncertain, management
believes that it has appropriate support for the positions taken on its tax returns and that its
annual tax provisions included amounts sufficient to pay assessments, if any, which may be
proposed by the taxing authorities. At September 30, 2008, the Company had recorded a liability
for its best estimate of the probable loss on certain of its tax positions, the majority of which
is included in other noncurrent liabilities in the consolidated statements of financial position.
Nonetheless, the amounts ultimately paid, if any, upon resolution of the issues raised by the
taxing authorities, may differ materially from the amounts accrued for each year.
Change in Statutory Tax Rates
In December 2007, Canada enacted a new tax law which effectively reduced the income tax rates from
35% to 32%. A Business Flat Tax (IETU) was enacted on October 1, 2007, in Mexico that provides for
a tax rate of 16.5% to 17.5% on a modified tax base with a credit for corporate income tax paid.
On December 28, 2007, Italy enacted reductions in regional taxes from 4.25% to 3.9% effective
January 1, 2008. These tax law changes did not have a material impact on the Companys
consolidated financial condition, results of operations or cash flows.
The German Corporate Tax Reform Act was enacted on August 14, 2007, and resulted in a decrease of
the combined Corporate Income Tax and Trade Tax rates. The new rates will apply to the Companys
German entities effective October 1, 2007. The Companys tax provision increased $20 million in
the fourth quarter of fiscal 2007 as a result of this German tax law change.
In March 2007, the Peoples National Congress in the Peoples Republic of China approved a new tax
reform law to align the tax regime applicable to non-U.S.-owned Chinese enterprises with those
applicable to domestically-owned Chinese enterprises. The new law was effective on January 1,
2008. The tax reform law did not have a material impact on the Companys consolidated financial
condition, results of operations or cash flows.
On July 19, 2007, the U.K. enacted a new tax law, which reduced the main corporate income tax rate
from 30% to 28%. The reduction went into effect on April 1, 2008. The U.K. tax rate change did not
have a material impact on the Companys consolidated financial condition, results of operations or
cash flows.
Change in Tax Status of Non-U.S. Subsidiary
In the second quarter of fiscal 2007, the tax provision decreased as a result of a $22 million tax
benefit realized by a change in tax status of an automotive experience subsidiary in the
Netherlands.
The change in tax status resulted from a voluntary tax election that produced a deemed liquidation
for U.S. federal income tax purposes. The Company received a tax benefit in the U.S. for the loss
from the decrease in value from the original tax basis of this investment. This election changed
the tax status of the subsidiary from a controlled non-U.S. corporation (i.e., taxable entity) to
a branch (i.e., flow through entity similar to a partnership) for U.S. federal income tax purposes
and is thereby reported as a discrete period tax benefit in accordance with the provisions of SFAS
No. 109.
24
Discontinued Operations
In fiscal 2007, the Company utilized an effective tax rate for discontinued operations of
approximately 38% for Bristol Compressors and 35% for its engine electronics business, which
approximates the local statutory rate adjusted for permanent differences.
Minority Interests in Net Earnings of Subsidiaries
Minority interests in net earnings of subsidiaries were $24 million in fiscal 2008 compared with
$12 million in the prior year primarily due to higher earnings at a power solutions joint venture,
offset by losses at certain automotive experience North America joint ventures because of the
decline in the North American automotive industry.
Net Income
Net income for fiscal 2008 was $979 million, 25% below the prior years $1.3 billion, primarily due
to a restructuring charge recorded in the fourth quarter ($434, net of tax) and lower volumes in
automotive experience North America and Europe, partially offset by higher volumes and improved
margins in the building efficiency and power solutions businesses. Fiscal 2008 diluted earnings per
share from continuing operations were $1.63, a 25% decrease from the prior years $2.16. Excluding
the restructuring charge, net income for fiscal 2008 was $1.4 billion, 12% above the prior years
net income and diluted earnings per share from continuing operations were $2.33, an 8% increase
from the prior year.
FISCAL YEAR 2007 COMPARED TO FISCAL YEAR 2006
Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
September 30, |
|
|
(in millions) |
|
2007 |
|
2006 |
|
Change |
Net sales |
|
$ |
34,624 |
|
|
$ |
32,235 |
|
|
|
7 |
% |
Segment income |
|
|
1,884 |
|
|
|
1,608 |
|
|
|
17 |
% |
|
|
|
Net sales increased $2.4 billion, primarily due to growth in the building efficiency
business ($2.0 billion) resulting from increased commercial market share gains, expansion
into emerging markets, revenue synergies and the full year impact of the December 2005
York acquisition, the favorable impact of foreign currency translation ($1.5 billion) and
higher power solutions net sales ($0.5 billion) related to higher unit prices resulting
from significant increases in the cost of lead, partially offset by lower sales in the
automotive experience business ($1.6 billion) reflecting weaker North American and
European automotive markets. |
|
|
|
|
Excluding the favorable effects of foreign currency translation, consolidated net sales
increased 3% as compared to the prior year. |
|
|
|
|
Segment income increased $276 million, primarily due to higher volumes and margins in
the building efficiency business ($272 million) a favorable product mix in the power
solutions segment despite increased lead costs ($81 million) and the favorable impact of
foreign currency translation ($80 million), partially offset by the impact of lower North
American and European automobile production ($148 million). |
|
|
|
|
Excluding the favorable effects of foreign currency translation, consolidated segment
income increased 12% as compared to the prior year. |
25
Building Efficiency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
|
|
|
|
|
Segment Income |
|
|
|
|
|
|
for the Year Ended |
|
|
|
|
|
|
for the Year Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
September 30, |
|
|
|
|
(in millions) |
|
2007 |
|
|
2006 |
|
|
Change |
|
|
2007 |
|
|
2006 |
|
|
Change |
|
North America systems |
|
$ |
2,027 |
|
|
$ |
1,609 |
|
|
|
26 |
% |
|
$ |
216 |
|
|
$ |
131 |
|
|
|
65 |
% |
North America service |
|
|
2,273 |
|
|
|
1,943 |
|
|
|
17 |
% |
|
|
197 |
|
|
|
146 |
|
|
|
35 |
% |
North America unitary products |
|
|
953 |
|
|
|
853 |
|
|
|
12 |
% |
|
|
65 |
|
|
|
62 |
|
|
|
5 |
% |
Global workplace solutions |
|
|
2,677 |
|
|
|
2,046 |
|
|
|
31 |
% |
|
|
79 |
|
|
|
67 |
|
|
|
18 |
% |
Europe |
|
|
2,406 |
|
|
|
1,900 |
|
|
|
27 |
% |
|
|
77 |
|
|
|
2 |
|
|
|
|
* |
Rest of world |
|
|
2,401 |
|
|
|
1,894 |
|
|
|
27 |
% |
|
|
216 |
|
|
|
136 |
|
|
|
59 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,737 |
|
|
$ |
10,245 |
|
|
|
24 |
% |
|
$ |
850 |
|
|
$ |
544 |
|
|
|
56 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales:
|
|
|
Europe, global workplace solutions and rest of world were favorably impacted from the
strengthening of foreign currencies against the U.S. dollar by approximately $220 million,
$150 million and $80 million, respectively. |
|
|
|
|
North America systems, North America service, Europe and rest of world increased
primarily due to higher volumes, expanded cross-selling opportunities and the full year
impact of the December 2005 York acquisition. |
|
|
|
|
North America unitary products increased primarily due to the full year impact of the
York acquisition and higher unit selling prices associated with the change over to SEER 13
technology, partially offset by lower unit volumes due to a continued decline in new home
construction. |
|
|
|
|
In addition to favorable foreign currency exchange, global workplace solutions increased
primarily due to new and expanded commercial contracts in North America and Europe,
including France Telecom, Deloitte Touche Tohmatsu, British Broadcasting Corporation and
the full year impact of Royal Dutch Shell plc. |
Segment Income:
|
|
|
For all building efficiency segments, except global workplace solutions, the current
period includes two additional months of segment income related to the December 2005 York
acquisition. The prior year period also included $53 million of expense related to the York
acquisition for the amortization of the write-up of inventory ($5 million for North America
systems, $7 million for North America service, $14 million for North America unitary
products, $16 million for Europe and $11 million for rest of world). |
|
|
|
|
North America systems also increased primarily due to higher equipment and branch and
product sales volumes, improved pricing, higher margins and realization of synergies from
the York acquisition and the effect on prior year results of non-recurring York integration
costs, partially offset by higher operating costs to support the business growth. |
|
|
|
|
North America service, Europe and rest of world also increased primarily due to higher
volumes, realization of synergies from the York acquisition and the effect on prior year
results of non-recurring York integration costs and operational efficiencies from the
branch office redesign efforts in Europe in the prior year, partially offset by higher SG&A
expenses to support the business growth. |
|
|
|
|
North America unitary products increased due to the full year impact of the York
acquisition, partially offset by lower production volumes. |
|
|
|
|
Global workplace solutions increased primarily due to higher volumes and expansion of
services. |
26
Automotive Experience
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
|
|
|
|
|
Segment Income |
|
|
|
|
|
|
for the Year Ended |
|
|
|
|
|
|
for the Year Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
September 30, |
|
|
|
|
(in millions) |
|
2007 |
|
|
2006 |
|
|
Change |
|
|
2007 |
|
|
2006 |
|
|
Change |
|
North America |
|
$ |
7,276 |
|
|
$ |
8,041 |
|
|
|
-10 |
% |
|
$ |
72 |
|
|
$ |
188 |
|
|
|
-62 |
% |
Europe |
|
|
8,878 |
|
|
|
8,774 |
|
|
|
1 |
% |
|
|
445 |
|
|
|
405 |
|
|
|
10 |
% |
Asia |
|
|
1,398 |
|
|
|
1,459 |
|
|
|
-4 |
% |
|
|
2 |
|
|
|
12 |
|
|
|
-83 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
17,552 |
|
|
$ |
18,274 |
|
|
|
-4 |
% |
|
$ |
519 |
|
|
$ |
605 |
|
|
|
-14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales:
|
|
|
North America decreased primarily due to volume reductions with all major U.S.
automakers, mainly in the full-size pick-up truck, minivan and sport utility vehicle
platforms. |
|
|
|
|
Europe improved slightly due to the favorable impact of foreign currency translation
($810 million) offset by lower volumes with all major customer platforms ($700 million). |
|
|
|
|
Asia decreased primarily due to lower volumes in Japan, partially offset by the
favorable impact of foreign currency translation ($40 million). |
Segment Income:
|
|
|
North America decreased primarily due to lower sales volume ($165 million), partially
offset by lower net engineering expenses and cost reduction programs, purchasing savings,
the benefit of restructuring activities and other operational efficiencies. |
|
|
|
|
Europe increased primarily due to the favorable impact of foreign currency translation
($53 million), cost reduction programs, purchasing savings, the benefit of restructuring
activities and other operational efficiencies ($100 million), partially offset by lower
volume and unfavorable vehicle sales mix ($53 million) and higher net engineering costs
($20 million) to support new business. |
|
|
|
|
Asia decreased primarily due to lower volumes ($30 million), mainly in Japan and
Malaysia, partially offset by operational efficiencies ($20 million), mainly in Japan and
Korea. |
Power Solutions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
September 30, |
|
|
(in millions) |
|
2007 |
|
2006 |
|
Change |
Net sales |
|
$ |
4,335 |
|
|
$ |
3,716 |
|
|
|
17 |
% |
Segment income |
|
|
515 |
|
|
|
459 |
|
|
|
12 |
% |
|
|
|
Net sales increased primarily due to higher unit prices resulting from significant
increases in the cost of lead ($375 million), favorable price/mix in North America and Asia
($160 million), and the favorable impact of foreign currency translation ($115 million).
Unit sales of automotive batteries were consistent with prior year levels. |
|
|
|
|
Segment income increased primarily due to favorable price/mix, operational performance
and integration benefits associated with the fiscal 2005 acquisition of Delphis battery
business, as well as the favorable impact of foreign currency translation ($10 million),
partially offset by the impact of higher lead costs ($55 million) and higher SG&A
costs in North America ($15 million) mainly resulting from a favorable prior year legal
settlement associated with the recovery of previously incurred environmental costs. |
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 2006 and recorded a $197 million restructuring charge. The 2006 Plan primarily included
workforce reductions and plant consolidations in the automotive experience and building efficiency
businesses. The automotive experience business related restructuring was 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 primarily
related to Europe where the Company launched a systems redesign initiative. During the fourth
27
quarter of fiscal 2006, automotive experience North America recorded an additional $8 million
for employee severance and termination benefits.
The 2006 Plan included workforce reductions of approximately 5,000 employees (2,500 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 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, 2007,
approximately 4,400 employees have been separated from the Company pursuant to the 2006 Plan. 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). As of September 30, 2008, 14 of the 15 plants had been closed. The charge for
the impairment of the long-lived assets associated with the plant closures was determined using an
undiscounted cash flow analysis.
Net Financing Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
September 30, |
|
|
(in millions) |
|
2007 |
|
2006 |
|
Change |
Net financing charges |
|
$ |
277 |
|
|
$ |
273 |
|
|
|
1 |
% |
|
|
|
Net financing charges increased slightly primarily due to higher average debt levels
throughout fiscal 2007. |
Provision for Income Taxes
The Companys base effective income tax rate for continuing operations for fiscal 2007 and 2006
was 21.0% (prior to certain discrete period items as outlined below).
The Companys base effective tax rate for fiscal 2007 was further reduced as a result of the
favorable resolution of certain tax audits ($28 million), a change in tax status of an automotive
experience subsidiary in the Netherlands ($22 million) and a nonrecurring tax benefit related to
the use of a portion of the Companys capital loss carryforward valuation allowance ($7 million),
partially offset by the impact from the reduction in the German federal income tax rate ($20
million).
The Companys base effective tax rate for fiscal 2006 was further reduced as a result of a
reversal of valuation allowances at certain Mexican and German subsidiaries of $32 million and
$131 million, respectively, a $19 million discrete period tax benefit related to the third quarter
2006 restructuring charge using a blended statutory tax rate of 30.6%, a $10 million tax benefit
related to a favorable tax audit resolution in a non-U.S. country, an $11 million tax benefit
related to a change in tax status for subsidiaries in Hungary and the Netherlands and a $4 million
tax benefit related to the disposition of an interest in a German joint venture, partially offset
by $31 million of tax expense related to the repatriation of non-U.S. earnings.
Restructuring Charge
In the third quarter of fiscal 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
The Company reviews its deferred tax asset valuation allowances on a quarterly basis, or whenever
events or changes in circumstances indicate that a review is required. In determining the
requirement for a valuation allowance, the historical and projected financial results of the legal
entity or consolidated group recording the net deferred tax asset are considered, along with any
other positive or negative evidence. Since future financial results may differ from previous
estimates, periodic adjustments to the Companys valuation allowances may be necessary.
In the fourth quarter of fiscal 2007, the tax provision decreased $7 million due to a nonrecurring
tax benefit related to the use of a portion of the Companys capital loss carryforward valuation
allowance.
In the third quarter of fiscal 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
28
and tax credit carryforwards in the quarter ended June 30, 2006 as a credit to
income tax expense, net of remaining valuation allowances at certain German subsidiaries and tax
reserve requirements.
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 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 quarter ended March 31, 2006, the Company reversed the valuation allowance of $32 million
attributable to these operating loss and tax credit carryforwards as a credit to income tax
expense.
Uncertain Tax Positions
The Company is subject to income taxes in the U.S. and numerous non-U.S. 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 were
provided for in accordance with the requirements of SFAS No. 5 Accounting for Contingencies.
In the second and fourth quarters of fiscal 2007, the Company reduced its income tax liability by
$15 million and $13 million, respectively, due to the favorable resolution of certain tax audits.
In the third quarter of fiscal 2006, the Company recorded a $10 million tax benefit related to a
favorable tax audit resolution in a non-U.S. jurisdiction.
The Companys federal income tax returns and certain non-U.S. income tax returns for various
fiscal years remain under various stages of audit by the Internal Revenue Service and respective
non-U.S. tax authorities. Although the outcome of tax audits are 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, 2007, the Company had recorded a liability
for its best estimate of the probable loss on certain of its tax positions, the majority of which
is included in other noncurrent liabilities in the consolidated statements of financial position.
Nonetheless, the amounts ultimately paid, if any, upon resolution of the issues raised by the
taxing authorities, may differ materially from the amounts accrued for each year.
Change in Statutory Tax Rates
The German Corporate Tax Reform Act was enacted on August 14, 2007, and resulted in a decrease of
the combined Corporate Income Tax and Trade Tax rates. The new rates apply to the Companys German
entities effective October 1, 2007. The Companys tax provision increased $20 million in the
fourth quarter of fiscal 2007 as a result of this German tax law change.
In March 2007, the Peoples National Congress in the Peoples Republic of China approved a new tax
reform law to align the tax regime applicable to non-U.S.-owned Chinese enterprises with those
applicable to domestically-owned Chinese enterprises. The new law became effective on January 1,
2008. The tax reform law does not have a material impact on the Companys consolidated financial
condition, results of operations or cash flows.
On July 19, 2007, the U.K. enacted a new tax law, which reduces the main corporate income tax rate
from 30% to 28%. The reduction went into effect on April 1, 2008. The U.K. tax rate change did not
have a material impact on the companys consolidated financial condition, results of operations or
cash flows.
Foreign Dividend Repatriation
In October 2004, the U.S. 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 non-U.S.
operations. The deduction was subject to a number of limitations. During the quarter ended March
31, 2006, the Company completed its evaluation of its repatriation plans and approximately $674
million of non-U.S. earnings were designated for repatriation 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
quarter ended March 31, 2006, as $11 million had been previously recorded by York prior to the
acquisition in accordance with Yorks approved repatriation plan.
29
Disposition of a Joint Venture
In the first quarter of fiscal 2006, the tax provision decreased due to a $4 million nonrecurring
tax benefit related to a $9 million gain from the disposition of the Companys interest in a German
joint venture.
Change in Tax Status of Non-U.S. Subsidiary
In the second quarter of fiscal 2007, the tax provision decreased as a result of a $22 million tax
benefit realized by a change in tax status of an automotive experience subsidiary in the
Netherlands. In the first quarter of fiscal 2006, the tax provision decreased as a result of an
$11 million tax benefit realized by a change in tax status of an automotive experience subsidiary
in Hungary and a building efficiency subsidiary in the Netherlands.
The change in tax status in each respective period resulted from a voluntary tax election that
produced a deemed liquidation for U.S. federal income tax purposes. The Company received a tax
benefit in the U.S. for the loss from the decrease in value from the original tax basis of these
investments. This election changed the tax status of the respective subsidiaries from controlled
non-U.S. corporations (i.e., taxable entities) to branches (i.e., flow through entities similar to
a partnership) for U.S. federal income tax purposes and is thereby reported as a discrete period
tax benefit in accordance with the provisions of SFAS No. 109.
Discontinued Operations
The Company utilized an effective tax rate for discontinued operations of approximately 38% for
Bristol Compressors and 35% for its engine electronic business, which approximates the local
statutory rate adjusted for permanent differences.
Minority Interests in Net Earnings of Subsidiaries
Minority interests in net earnings of subsidiaries were $12 million in fiscal 2007 compared with
$42 million in the prior year primarily due to losses at an automotive experience North America
start-up joint venture and lower earnings at certain automotive experience Asian joint ventures
because of start-up and engineering costs associated with new programs.
Net Income
Net income for fiscal 2007 was $1.3 billion, 30% above the prior years $1.0 billion, primarily due
to higher volumes and improved margins in the building efficiency and power solutions businesses,
prior year restructuring costs ($197 million pre-tax) and the full year impact of the York
acquisition, partially offset by increased losses from discontinued operations ($45 million),
primarily from the sale of the Bristol Compressor business in March 2007, and lower volumes in
automotive experience North America and Europe. Fiscal 2007 diluted earnings per share from
continuing operations were $2.16, a 23% increase from the prior years $1.75.
GOODWILL AND OTHER INVESTMENTS
Goodwill at September 30, 2008 was $6.5 billion, $382 million higher than the prior year. The
increase was primarily due to the impact of current year acquisitions and foreign currency
translation adjustments. The impairment testing performed by the Company at September 30, 2008,
indicated that the estimated fair value of each reporting unit exceeded its corresponding
carrying amount, including recorded goodwill, and as such, no impairment existed at that time.
(Refer to Goodwill and Other Intangible Assets below in the Critical Accounting Estimates and
Policies section for the Companys policy on impairment testing.)
Investments in partially-owned affiliates at September 30, 2008 were $863 million, $68 million more
than the prior year. The increase was primarily due to positive earnings and increased advances to
certain automotive experience and power solutions joint ventures primarily in Asia.
30
LIQUIDITY AND CAPITAL RESOURCES
Working Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
September 30, |
|
|
(in millions) |
|
2008 |
|
2007 |
|
Change |
Working capital |
|
$ |
1,225 |
|
|
$ |
1,441 |
|
|
|
-15 |
% |
|
Accounts receivable |
|
|
6,472 |
|
|
|
6,600 |
|
|
|
-2 |
% |
Inventories |
|
|
2,099 |
|
|
|
1,968 |
|
|
|
7 |
% |
Accounts payable |
|
|
5,225 |
|
|
|
5,365 |
|
|
|
-3 |
% |
|
|
|
The Company defines working capital as current assets less current liabilities,
excluding cash, short-term debt, the current portion of long-term debt and net assets of
discontinued operations. Management believes that this measure of working capital, which
excludes financing-related items and discontinued activities, provides a more useful
measurement of the Companys operating performance. |
|
|
|
|
The decrease in working capital at September 30, 2008 as compared to the prior year is
primarily due to lower accounts receivable and accounts payable and the restructuring
reserve recorded in the current year. |
|
|
|
|
The Companys days sales in accounts receivable (DSO) at September 30, 2008 were 58,
consistent with the prior year. The decrease in accounts receivable compared to September
30, 2007 is due to a decrease in sales in automotive experience in the current year fourth
quarter as compared to the same quarter in the prior year. There has been no significant
deterioration in the level of overdue receivables or material changes in revenue
recognition methods. |
|
|
|
|
The Companys inventory turns at September 30, 2008 were slightly higher than those at
September 30, 2007 mainly due to improvements in inventory management. |
|
|
|
|
Days payable at September 30, 2008 increased to 73 days from 71 days in the prior year
due to the timing of supplier payments. |
Cash Flow
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, |
(in millions) |
|
2008 |
|
2007 |
Cash provided by operating activities |
|
$ |
1,928 |
|
|
$ |
1,913 |
|
Cash used by investing activities |
|
|
1,270 |
|
|
|
1,051 |
|
Cash used by financing activities |
|
|
895 |
|
|
|
542 |
|
Capital expenditures |
|
|
807 |
|
|
|
828 |
|
|
|
|
The increase in cash provided by operating activities primarily reflects favorable
working capital changes in accounts receivable and other current assets, partially offset
by unfavorable working capital changes in accounts payable and accrued liabilities. |
|
|
|
|
The increase in cash used in investing activities is primarily due to higher acquisition
costs in the current fiscal year. |
|
|
|
|
The increase in cash used by financing activities is primarily due to higher debt
repayments and dividends in the current fiscal year. |
|
|
|
|
The majority of the capital spending for property, plan and equipment for fiscal 2008
was for investments within the automotive experience business. |
Long-Lived Assets
The Company has certain subsidiaries, mainly located in Brazil, Italy, the United Kingdom and the
U.S., which have generated operating and capital losses and, in certain circumstances, have limited
loss carryforward periods. As a result, the Company has recorded valuation allowances against tax
assets for certain of these subsidiaries in accordance with SFAS No. 109. SFAS No. 109 requires the
Company to record a valuation allowance for each legal entity or consolidated group based on the
tax rules in the applicable jurisdiction and evaluate both positive and negative historical
evidences as well as expected future events.
The Company reviews long-lived assets for impairment whenever events or changes in circumstances
indicate that its carrying amount may not be recoverable. The Company conducts its long-lived asset
impairment analyses in accordance with
31
SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No. 144 requires the Company to group assets and liabilities at the lowest
level for which identifiable cash flows are largely independent of the cash flows of other assets
and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows.
At September 30, 2008, the Company recorded a $43 million impairment charge as part of its 2008
restructuring plan (refer to Note 15, Restructuring Costs of the notes to the consolidated
financial statements in Item 8 of this report). The Company concluded there were no other
impairments at September 30, 2008. The Company will continue to monitor developments in the
automotive industry.
Capitalization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
|
(in millions) |
|
2008 |
|
|
2007 |
|
|
Change |
|
Total debt |
|
$ |
3,944 |
|
|
$ |
4,418 |
|
|
|
-11 |
% |
Shareholders equity |
|
|
9,424 |
|
|
|
8,907 |
|
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total capitalization |
|
$ |
13,368 |
|
|
$ |
13,325 |
|
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt as a % of
total capitalization |
|
|
30 |
% |
|
|
33 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On June 1, 2008, the Company retired $200 million of York International Corporation
fixed rate bonds that matured. The Company used proceeds from commercial paper issuances to
repay the bonds. |
|
|
|
|
In fiscal 2008, the Company entered into new revolving credit facilities totaling 350
million euro with 100 million euro expiring in May 2009, 150 million euro expiring in May
2011 and 100 million euro expiring in August 2011. At September 30, 2008, the Company had
drawn 150 million euro on the credit facility expiring in May 2011. |
|
|
|
|
In December 2007, the Company entered into a 25 billion yen ($220 million), three year,
floating rate loan agreement. The Company borrowed the 25 billion yen on January 15, 2008. |
|
|
|
|
On January 17, 2008 and February 1, 2008, the Company retired $500 million and $175
million, respectively, in floating rate notes and fixed rate bonds at maturity. The Company
used a combination of cash, proceeds from commercial paper issuances and proceeds under the
new three year, floating rate yen loan to repay the notes and bonds. |
|
|
|
|
In fiscal 2007, the Company entered into a five-year, $2.05 billion revolving credit
facility which expires in December 2011. This facility replaced a five-year $1.6 billion
revolving credit facility that would have expired in October 2010 and serves as the
commercial paper backup facility. There were no draws on the committed credit line as of
September 30, 2008. |
|
|
|
|
In December 2006, the Company entered into a 12 billion yen ($104 million), three year,
floating rate loan. The net proceeds of the bank loan were used to repay unsecured
commercial paper obligations. |
|
|
|
|
In November 2006, the Company issued commercial paper to repay a $350 million note that
matured. |
|
|
|
|
The Company also selectively makes use of short-term credit lines in both U.S. dollars
and euros. The Company estimates that, as of September 30, 2008, it could borrow up to $1.0
billion at its current debt ratings on committed and uncommitted credit lines. |
|
|
|
|
The Company is in compliance with all covenants and other requirements set forth in its
credit agreements and indentures and expects to be in compliance in the foreseeable future.
None of the Companys debt agreements requires accelerated repayment in the event of a
decrease in credit ratings. |
|
|
|
|
The Company believes its capital resources and liquidity position at September 30, 2008,
are adequate to meet projected needs. The Company believes requirements for working
capital, capital expenditures, dividends, pension contributions, debt maturities and any
potential acquisitions in fiscal 2009 will continue to be funded from operations,
supplemented by short- and long-term borrowings, if required. The Company does not have any
significant debt maturities until fiscal 2011. As such, the Company believes it has
sufficient financial resources to fund operations and meet its obligations for the
long-term.
|
32
A summary of the Companys significant contractual obligations as of September 30, 2008 is as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
|
|
Total |
|
|
2009 |
|
|
2010-2011 |
|
|
2012-2013 |
|
|
and Beyond |
|
Contractual Obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt (including capital lease
obligations)* |
|
$ |
3,488 |
|
|
$ |
287 |
|
|
$ |
1,163 |
|
|
$ |
405 |
|
|
$ |
1,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on long-term debt (including
capital lease obligations)* |
|
|
1,680 |
|
|
|
167 |
|
|
|
297 |
|
|
|
231 |
|
|
|
985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases |
|
|
911 |
|
|
|
257 |
|
|
|
349 |
|
|
|
164 |
|
|
|
141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase obligations |
|
|
2,686 |
|
|
|
1,709 |
|
|
|
644 |
|
|
|
238 |
|
|
|
95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and postretirement contributions |
|
|
480 |
|
|
|
44 |
|
|
|
94 |
|
|
|
95 |
|
|
|
247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations |
|
$ |
9,245 |
|
|
$ |
2,464 |
|
|
$ |
2,547 |
|
|
$ |
1,133 |
|
|
$ |
3,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
See Capitalization for additional information related to the Companys long-term debt. |
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
The Company prepares its consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America (U.S. GAAP). This requires management to make
estimates and assumptions that affect reported amounts and related disclosures. Actual results
could differ from those estimates. The following policies are considered by management to be the
most critical in understanding the judgments that are involved in the preparation of the Companys
consolidated financial statements and the uncertainties that could impact the Companys results of
operations, financial position and cash flows.
Revenue Recognition
The Company recognizes revenue from long-term systems installation contracts of the building
efficiency business over the contractual period under the percentage-of-completion (POC) 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 the completion of the
contract. Recognized revenues that will not be billed under the terms of the contract until a later
date are recorded in unbilled accounts receivable. Likewise, contracts where billings to date have
exceeded recognized revenues are recorded in other current liabilities. Changes to the original
estimates may be required during the life of the contract and
such estimates are reviewed monthly. Sales and gross profit are adjusted using the cumulative
catch-up method for revisions in estimated total contract costs and contract values. Estimated
losses are recorded when identified. Claims against customers are recognized as revenue upon
settlement. The use of the POC method of accounting involves considerable use of estimates in
determining revenues, costs and profits and in assigning the amounts to accounting periods. The
reviews have not resulted in adjustments that were significant to the Companys results of
operations. The Company continually evaluates all of the assumptions, risks and uncertainties
inherent with the application of the POC method of accounting.
The building efficiency business enters into extended warranties and long-term service and
maintenance agreements with certain customers. For these arrangements, revenue is recognized on a
straight-line basis over the respective contract term.
The Companys building efficiency business also sells certain 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.
Goodwill and Other Intangible Assets
In conformity with U.S. GAAP, goodwill is tested for impairment annually or more frequently if
events or changes in circumstances indicate that the asset might be impaired. The Company performs
impairment reviews for its reporting units,
33
which have been determined to be the Companys
reportable segments, using a fair-value method based on managements judgments and assumptions or
third party valuations. The fair value represents the amount at which a reporting unit could be
bought or sold in a current transaction between willing parties on an arms-length basis. In
estimating the fair value, the Company uses multiples of earnings based on the average of
historical, published multiples of earnings of comparable entities with similar operations and
economic characteristics. 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 at September 30, 2008, indicated that the estimated fair value of each
reporting unit exceeded its corresponding carrying amount, including recorded goodwill and as such,
no impairment existed at that time. Other intangible assets with definite lives continue to be
amortized over their estimated useful lives and are subject to impairment testing if events or
changes in circumstances indicate that the asset might be impaired. Indefinite lived intangible
assets are also subject to impairment testing on at least an annual basis. A considerable amount of
management judgment and assumptions are required in performing the impairment tests, principally in
determining the fair value of each reporting unit. While the Company believes its judgments and
assumptions were reasonable, different assumptions could change the estimated fair values and,
therefore, impairment charges could be required.
Employee Benefit Plans
The Company provides a range of benefits to its employees and retired employees, including pensions
and postretirement health care. Plan assets and obligations are recorded annually, or more
frequently if there is a remeasurement event, based on the Companys measurement date utilizing
various actuarial assumptions such as discount rates, assumed rates of return, compensation
increases, turnover rates and health care cost trend rates as of that date. Measurements of net
periodic benefit cost are based on the assumptions used for the previous year-end measurements of
assets and obligations. The Company reviews its actuarial assumptions on an annual basis and makes
modifications to the assumptions based on current rates and trends when appropriate. As required by
U.S. GAAP, the effects of the modifications are recorded currently or amortized over future
periods.
In the fourth quarter of fiscal 2007, the Company adopted all of the provisions of 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 companies recognize in its
statement of financial position a liability for defined benefit pension and postretirement plans
that are underfunded or unfunded, or an asset for defined benefit pension and postretirement
benefit plans that are overfunded. SFAS No. 158 also requires that companies measure the benefit
obligations and fair value of plan assets that determine a postretirement benefit plans funded
status as of the date of the employers fiscal year-end by no later than their fiscal year ending
after December 15, 2008. Adjustments relating to this change in measurement date for the period
between the early measurement date and the end of the year are made to retained earnings, net of
tax. In connection with the Companys adoption of SFAS No. 158, at September 30, 2007, the Company
recorded an asset of $117
million for its defined benefit pension plans that are in overfunded positions and a liability of
$629 million for its defined benefit pension plans that are in underfunded positions. In addition,
a liability of $280 million was recorded for the Companys health and other postretirement plans
that were in underfunded positions at September 30, 2007. The Company also early adopted the change
in measurement date provisions at September 30, 2007 for its U.S. pension and health and other
postretirement plans, which resulted in a $9 million adjustment, net of tax, to retained earnings.
The discount rate used by the Company is based on the interest rate of non-callable high-quality
corporate bonds, with appropriate consideration of the Companys pension plans participants
demographics and benefit payment terms. The Companys discount rate on U.S. plans was 7.50% and
6.50% at September 30, 2008 and 2007, respectively.
In estimating the expected return on plan assets, the Company considers the historical returns on
plan assets, adjusted for forward-looking considerations, inflation assumptions and the impact of
the active management of the plans invested assets. Reflecting the relatively long-term nature of
the plans obligations, approximately 50% to 60% of the plans assets were invested in equities,
with the balance primarily invested in fixed income instruments. At both September 30, 2008 and
2007, the Companys expected long-term return on U.S. plan
assets was 8.50%. If actual returns on plan assets are less than our
expectations, additional contributions may be required.
For purposes of expense recognition, the Company uses a market-related value of assets that
recognizes the difference between the expected return and the actual return on plan assets over a
three-year period. As of September 30, 2008, the Company had approximately $254 million of
unrecognized asset losses associated with its U.S. pension plans, which will be recognized in the
calculation of the market-related value of assets and subject to amortization in future periods.
Based on information provided by its independent actuaries and other relevant sources, the Company
believes that the assumptions used are reasonable; however, changes in these assumptions could
impact the Companys financial position, results of operations or cash flows.
34
Product Warranties
The Company offers warranties to its customers depending upon the specific product and terms of the
customer purchase agreement. A typical warranty program requires that the Company replace defective
products within a specified time period from the date of sale. The Company records an estimate of
future warranty-related costs based on actual historical return rates. At September 30, 2008, the
Company had recorded $204 million of warranty reserves based on an analysis of return rates and
other factors. While the Companys warranty costs have historically been within its calculated
estimates, it is possible that future warranty costs could differ significantly from those
estimates.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between
financial statement carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and other loss carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The Company records a valuation
allowance that primarily represents non-U.S. operating and other loss carryforwards for which
utilization is uncertain. Management judgment is required in determining the Companys provision
for income taxes, deferred tax assets and liabilities and the valuation allowance recorded against
the Companys net deferred tax assets. In calculating the provision for income taxes on an interim
basis, the Company uses an estimate of the annual effective tax rate based upon the facts and
circumstances known at each interim period. On a quarterly basis, the actual effective tax rate is
adjusted as appropriate based upon the actual results as compared to those forecasted at the
beginning of the fiscal year. In determining the need for a valuation allowance, the historical and
projected financial performance of the operation recording the net deferred tax asset is considered
along with any other pertinent information. Since future financial results may differ from previous
estimates, periodic adjustments to the Companys valuation allowance may be necessary. At September
30, 2008, the Company had a valuation allowance of $373 million, of which $294 million relates to
net operating loss carryforwards primarily in Brazil, Italy, and the United Kingdom, for which
sustainable taxable income has not been demonstrated; $45 million relates to net capital loss
carryforwards, primarily in the U.S., for which future capital gains are not assured; and $34
million for other deferred tax assets. The Company does not provide additional U.S. income taxes on
undistributed earnings of consolidated non-U.S. subsidiaries included in shareholders equity. Such
earnings could become taxable upon the sale or liquidation of these non-U.S. subsidiaries or upon
dividend repatriation. The Companys intent is for such earnings to be reinvested by the
subsidiaries or to be repatriated only when it would be tax effective through the utilization of
foreign tax credits.
NEW ACCOUNTING PRONOUNCEMENTS
In May 2008, the Financial Accounting Standards Board (FASB) issued SFAS No. 162, The Hierarchy of
Generally Accepted Accounting Principles. SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the accounting principles to be used in the preparation
of financial statements presented in conformity with generally accepted accounting principles in
the United States. This statement is effective sixty days after approval by the Securities and
Exchange Commission. The Company does not expect the effects of adopting SFAS No. 162 to be
significant.
In March 2008, FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities an amendment of FASB Statement No. 133. SFAS No. 161 enhances required disclosures
regarding derivatives and hedging activities, including how an entity uses derivative instruments,
how derivative instruments and related hedged items are accounted for under SFAS No. 133 and how
derivative instruments and related hedged items affect an entitys financial position, financial
performance and cash flows. SFAS No. 161 is effective for the Company beginning in the second
quarter of fiscal 2009 (January 1, 2009). The Company has determined that the adoption of SFAS No.
161 will not be material to its consolidated financial condition and results of operations.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations. SFAS
No. 141(R) changes the accounting for business combinations in a number of areas including the
treatment of contingent consideration, preacquisition contingencies, transaction costs, in-process
research and development and restructuring costs. In addition, under SFAS No. 141(R), changes in an
acquired entitys deferred tax assets and uncertain tax positions after the measurement period will
impact income tax expense. SFAS No. 141(R) will be effective for the Company beginning in the first
quarter of fiscal 2010 (October 1, 2009). This standard, when adopted, will change the Companys
accounting treatment for business combinations on a prospective basis.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51. SFAS No. 160 changes the accounting and reporting for
minority interests, which will be recharacterized as noncontrolling interests and classified as a
component of equity. This new consolidation method changes
35
the accounting for transactions with
minority interest holders. SFAS No. 160 is effective for fiscal years beginning after December 15,
2008. SFAS No. 160 will be effective for the Company beginning in the first quarter of fiscal 2010
(October 1, 2009). The Company is assessing the potential impact that the adoption of SFAS No. 160
will have on its consolidated financial condition and results of operations.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities including an amendment to FASB Statement No. 115. SFAS No. 159 permits
entities to measure certain financial instruments and certain other items at fair value that are
not currently required to be measured at fair value. The objective is to improve financial
reporting by providing entities with the opportunity to mitigate volatility in reported earnings
caused by measuring related assets and liabilities differently without having to apply complex
hedge accounting provisions. SFAS No. 159 will be effective for the Company beginning in the first
quarter of fiscal 2009 (October 1, 2008). The Company is assessing the potential impact that the
adoption of SFAS No. 159 will have on its consolidated financial condition and results of
operations.
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 the Company beginning in the first quarter of fiscal 2009 (October 1, 2008). The
Company has determined that the adoption of SFAS No. 157 will not be material to its consolidated
financial condition and results of operations.
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. See Note 16 for the impact of the Companys adoption of FIN 48 as of October 1,
2007.
RISK MANAGEMENT
The Company selectively uses derivative instruments to reduce market risk associated with changes
in foreign currency, commodities, compensation expense and interest rates. All hedging transactions
are authorized and executed pursuant to clearly defined policies and procedures, which strictly
prohibit the use of financial instruments for speculative purposes. At
the inception of the hedge, the Company assesses the effectiveness of the hedge instrument and
designates the hedge instrument as either (1) a hedge of a recognized asset or liability or of a
recognized firm commitment (a fair value hedge), (2) a hedge of a forecasted transaction or of the
variability of cash flows to be received or paid related to an unrecognized asset or liability (a
cash flow hedge) or (3) a hedge of a net investment in a non-U.S. operation (a net investment
hedge). The Company performs hedge effectiveness testing on an ongoing basis depending on the type
of hedging instrument used.
For all foreign currency derivative instruments designated as cash flow hedges, retrospective
effectiveness is tested on a monthly basis using a cumulative dollar offset test. The fair value of
the hedged exposures and the fair value of the hedge instruments are revalued and the ratio of the
cumulative sum of the periodic changes in the value of the hedge instruments to the cumulative sum
of the periodic changes in the value of the hedge is calculated. The hedge is deemed as highly
effective if the ratio is between 80% and 125%. For commodity derivative contracts designated as
cash flow hedges, effectiveness is tested using a regression calculation. Ineffectiveness is
minimal as the Company aligns most of the critical terms of its derivatives with the supply
contracts.
For net investment hedges, the Company assesses its net investment positions in the non-U.S.
operations and compares it with the outstanding net investment hedges on a quarterly basis. The
hedge is deemed effective if the aggregate outstanding principal of the hedge instruments
designated as the net investment hedge in a non-U.S. operation does not exceed the Companys net
investment positions in the respective non-U.S. operation.
For interest hedges such as interest rate swaps, the Company utilizes the long haul method and
assesses retrospective and prospective effectiveness and measures ineffectiveness on a quarterly
basis.
A discussion of the Companys accounting policies for derivative financial instruments is included
in Note 1, Summary of Significant Accounting Policies, in the notes to consolidated financial
statements, and further disclosure relating to financial instruments is included in Note 11 to the
consolidated financial statements.
36
Foreign Exchange
The Company has manufacturing, sales and distribution facilities around the world and thus makes
investments and enters into transactions denominated in various foreign currencies. In order to
maintain strict control and achieve the benefits of the Companys global diversification, foreign
exchange exposures for each currency are netted internally so that only its net foreign exchange
exposures are, as appropriate, hedged with financial instruments.
The Company hedges 70% to 90% of the nominal amount of each of its known foreign exchange
transactional exposures. The Company primarily enters into foreign currency exchange contracts to
reduce the earnings and cash flow impact of the variation of non-functional currency denominated
receivables and payables. Gains and losses resulting from hedging instruments offset the foreign
exchange gains or losses on the underlying assets and liabilities being hedged. The maturities of
the forward exchange contracts generally coincide with the settlement dates of the related
transactions. Realized and unrealized gains and losses on these contracts are recognized in the
same period as gains and losses on the hedged items. The Company also selectively hedges
anticipated transactions that are subject to foreign exchange exposure, primarily with foreign
currency exchange contracts, which are designated as cash flow hedges in accordance with SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137,
SFAS No. 138, and SFAS No. 149.
The Company selectively finances its foreign operations with local, non-U.S. dollar debt. In those
instances, the foreign currency denominated debt serves as a natural hedge of the foreign
operations net asset positions. The Company has also entered into foreign currency denominated
debt obligations to selectively hedge portions of its net investment in Japan. The currency effects
of the debt obligations are reflected in the accumulated other comprehensive income (OCI) account
within shareholders equity where they offset gains and losses recorded on the Companys net
investment in Japan.
The Company also selectively uses cross-currency interest rate swaps to hedge the foreign currency
exposure associated with its net investment in certain non-U.S. operations. 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 euros, respectively. 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 currency exchange rates
recorded in the foreign currency translation adjustments component of accumulated OCI. During the
course of the fiscal year 2008, the Company settled all of its euro cross-currency interest rate
swaps. In addition, during fiscal 2008, the Company entered into a yen cross-currency interest rate
swap to hedge a three-year 18 billion yen denominated bank borrowing back to U.S. dollars. The
currency
effects of the swap and translation of the debt obligation are reflected in the income statement
and the change in value of the swap and debt obligation offset.
Sensitivity Analysis
The following table indicates the total U.S. dollar equivalents of net foreign exchange contracts
(hedging transactional exposure) and non-U.S. dollar denominated cash, debt and cross-currency
interest rate swaps (hedging translation exposure) outstanding by currency and the corresponding
impact on the value of these instruments assuming a 10% appreciation/depreciation of the U.S.
dollar relative to all other currencies on September 30, 2008.
As previously noted, the Companys policy prohibits the trading of financial instruments for
speculative purposes. It is important to note that gains and losses indicated in the sensitivity
analysis would largely be offset by gains and losses on the underlying receivables, payables and
net investments in non-U.S. subsidiaries described above (in millions, in U.S. dollar equivalent):
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
|
Non-U.S. dollar |
|
|
|
|
|
|
|
|
|
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 U.S. Dollar |
|
|
of U.S. Dollar |
|
British pound |
|
$ |
(97 |
) |
|
$ |
(171 |
) |
|
$ |
(268 |
) |
|
$ |
27 |
|
|
$ |
(27 |
) |
Canadian dollar |
|
|
(106 |
) |
|
|
31 |
|
|
|
(75 |
) |
|
|
8 |
|
|
|
(8 |
) |
Chinese renminbi |
|
|
17 |
|
|
|
|
|
|
|
17 |
|
|
|
(2 |
) |
|
|
2 |
|
Czech koruna |
|
|
(7 |
) |
|
|
301 |
|
|
|
294 |
|
|
|
(29 |
) |
|
|
29 |
|
Danish krone |
|
|
46 |
|
|
|
(12 |
) |
|
|
34 |
|
|
|
(3 |
) |
|
|
3 |
|
Euro |
|
|
(241 |
) |
|
|
858 |
|
|
|
617 |
|
|
|
(62 |
) |
|
|
62 |
|
Japanese yen |
|
|
34 |
|
|
|
437 |
|
|
|
471 |
|
|
|
(47 |
) |
|
|
47 |
|
Mexican peso |
|
|
79 |
|
|
|
31 |
|
|
|
110 |
|
|
|
(11 |
) |
|
|
11 |
|
Polish zloty |
|
|
(70 |
) |
|
|
(105 |
) |
|
|
(175 |
) |
|
|
18 |
|
|
|
(18 |
) |
Swedish krona |
|
|
19 |
|
|
|
13 |
|
|
|
32 |
|
|
|
(3 |
) |
|
|
3 |
|
Swiss franc |
|
|
56 |
|
|
|
64 |
|
|
|
120 |
|
|
|
(12 |
) |
|
|
12 |
|
Other |
|
|
(13 |
) |
|
|
216 |
|
|
|
203 |
|
|
|
(20 |
) |
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(283 |
) |
|
$ |
1,663 |
|
|
$ |
1,380 |
|
|
$ |
(136 |
) |
|
$ |
136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rates
The Companys earnings exposure related to adverse movements in interest rates is primarily derived
from outstanding floating rate debt and financial instruments that are indexed to short-term market
rates. The Company will use interest rate swaps to offset its exposure to interest rate movements.
In accordance with SFAS No. 133, the existing swaps qualify and are designated as fair value
hedges. A 10% increase or decrease in the average cost of the Companys variable rate debt,
including outstanding swaps, would result in a change in pre-tax interest expense of approximately
$7 million.
Commodities
The Company uses commodity contracts in the financial derivatives market in cases where commodity
price risk cannot be naturally offset or hedged through supply base fixed price contracts.
Commodity risks are systematically managed pursuant to policy guidelines. As a cash flow hedge,
gains and losses resulting from the hedging instruments offset the gains or losses upon purchase of
the underlying commodities that will be used in the business. The maturities of the commodity
contracts coincide with the expected purchase of the commodities.
ENVIRONMENTAL, HEALTH AND SAFETY AND OTHER MATTERS
The Companys global operations are governed by Environmental Laws and Worker Safety Laws. Under
various circumstances, these laws impose civil and criminal penalties and fines, as well as
injunctive and remedial relief, for noncompliance and require remediation at sites where
Company-related substances have been released into the environment.
The Company has expended substantial resources globally, both financial and managerial, to comply
with applicable Environmental Laws and Worker Safety Laws, and to protect the environment and
workers. The Company believes it is in substantial compliance with such laws and maintains
procedures designed to foster and ensure compliance. However, the Company has been, and in the
future may become, the subject of formal or informal enforcement actions or proceedings regarding
noncompliance with such laws or the remediation of Company-related substances released into the
environment. Such matters typically are resolved by negotiation with regulatory authorities
resulting in commitments to compliance, abatement or remediation programs and in some cases payment
of penalties. Historically, neither such commitments nor penalties imposed on the Company have been
material.
Environmental considerations are a part of all significant capital expenditure decisions; however,
expenditures in fiscal 2008 related solely to environmental compliance were not material. At
September 30, 2008 and 2007, the Company recorded environmental liabilities of $44 million and $41
million, respectively. A charge to income is recorded when it is probable that
38
a liability has been
incurred and the cost can be reasonably estimated. The Companys environmental liabilities do not
take into consideration any possible recoveries of future insurance proceeds. Because of the
uncertainties associated with environmental remediation activities at sites where the Company may
be potentially liable, future expenses to remediate identified sites could be considerably higher
than the accrued liability. However, while neither the timing nor the amount of ultimate costs
associated with known environmental remediation matters can be determined at this time, the Company
does not expect that these matters will have a material adverse effect on its financial position,
results of operations or cash flows. In addition, the Company has identified asset retirement
obligations for environmental matters that are expected to be addressed at the retirement,
disposal, removal or abandonment of existing owned facilities, primarily in the power solutions
business. At September 30, 2008 and 2007, the Company recorded conditional asset retirement
obligations of $75 million and $81 million, respectively.
Additionally, the Company is involved in a number of product liability and various other suits
incident to the operation of its businesses. Insurance coverages are maintained and estimated costs
are recorded for claims and suits of this nature. It is managements opinion that none of these
will have a materially adverse effect on the Companys financial position, results of operations or
cash flows (see Note 18 to the consolidated financial statements). Costs related to such matters
were not material to the periods presented.
QUARTERLY FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except per share data) |
|
First |
|
Second |
|
Third |
|
Fourth |
|
Full |
(unaudited) |
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
Year |
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
9,484 |
|
|
$ |
9,406 |
|
|
$ |
9,865 |
|
|
$ |
9,307 |
|
|
$ |
38,062 |
|
Gross profit |
|
|
1,307 |
|
|
|
1,310 |
|
|
|
1,485 |
|
|
|
1,424 |
|
|
|
5,526 |
|
Income before the cumulative effect of
a change in accounting principle |
|
|
235 |
|
|
|
289 |
|
|
|
439 |
|
|
|
16 |
|
|
|
979 |
|
Net income |
|
|
235 |
|
|
|
289 |
|
|
|
439 |
|
|
|
16 |
|
|
|
979 |
|
Earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic* |
|
|
0.40 |
|
|
|
0.49 |
|
|
|
0.74 |
|
|
|
0.03 |
|
|
|
1.65 |
|
Diluted* |
|
|
0.39 |
|
|
|
0.48 |
|
|
|
0.73 |
|
|
|
0.03 |
|
|
|
1.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
8,210 |
|
|
$ |
8,492 |
|
|
$ |
8,911 |
|
|
$ |
9,011 |
|
|
$ |
34,624 |
|
Gross profit |
|
|
1,074 |
|
|
|
1,193 |
|
|
|
1,384 |
|
|
|
1,425 |
|
|
|
5,076 |
|
Income before the cumulative effect of
a change in accounting principle |
|
|
162 |
|
|
|
228 |
|
|
|
396 |
|
|
|
466 |
|
|
|
1,252 |
|
Net income |
|
|
162 |
|
|
|
228 |
|
|
|
396 |
|
|
|
466 |
|
|
|
1,252 |
|
Earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic* |
|
|
0.28 |
|
|
|
0.39 |
|
|
|
0.67 |
|
|
|
0.79 |
|
|
|
2.12 |
|
Diluted* |
|
|
0.27 |
|
|
|
0.38 |
|
|
|
0.66 |
|
|
|
0.77 |
|
|
|
2.09 |
|
|
|
|
* |
|
Due to the use of the weighted-average shares outstanding for each quarter for computing earnings per
share,
the sum of the quarterly per share amounts may not equal the per share amount for the year. |
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Risk Management included in Item 7 Managements Discussion and Analysis of Financial
Condition and Results of Operations.
39
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
|
|
|
|
|
|
|
Page |
|
|
|
41 |
|
|
|
|
|
|
|
|
|
42 |
|
|
|
|
|
|
|
|
|
43 |
|
|
|
|
|
|
|
|
|
44 |
|
|
|
|
|
|
|
|
|
45 |
|
|
|
|
|
|
|
|
|
46 |
|
|
|
|
|
|
|
|
|
79 |
|
40
|
PricewaterhouseCoopers LLP |
100 E. Wisconsin Ave., Suite 1800 |
Milwaukee WI 53202 |
Telephone (414) 212 1600 |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Johnson Controls, Inc.
In our opinion, the consolidated financial statements listed in the accompanying index present
fairly, in all material respects, the financial position of Johnson Controls, Inc. and its
subsidiaries at September 30, 2008 and 2007, and the results of their operations and their cash
flows for each of the three years in the period ended September 30, 2008 in conformity with
accounting principles generally accepted in the United States of America. In addition, in our
opinion, the financial statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth therein when read in conjunction with
the related consolidated financial statements. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of September 30, 2008,
based on criteria established in Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is
responsible for these financial statements and financial statement schedule, for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in Managements Report on Internal Control Over
Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these
financial statements, on the financial statement schedule, and on the Companys internal control
over financial reporting based on our integrated audits. We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and whether effective internal control
over financial reporting was maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and significant estimates made
by management, and evaluating the overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed risk. Our audits
also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinions.
As discussed in Notes 1 and 16 to the consolidated financial statements, the Company adopted FASB
Interpretation Number (FIN) 48, Accounting for Uncertainty in Income Taxes an interpretation of
FASB Statement No. 109, effective October 1, 2007. In addition, as discussed in Note 14 to the
consolidated financial statements, the Company adopted Statement of Financial Accounting Standards
No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans an
amendment of FASB Statements No. 87, 88, 106 and 132(R), effective September 30, 2007.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the companys assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
November 25, 2008
41
Johnson Controls, Inc.
Consolidated Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30, |
|
(in millions, except per share data) |
|
2008 |
|
|
2007 |
|
|
2006 |
|
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
Products and systems* |
|
$ |
30,568 |
|
|
$ |
27,848 |
|
|
$ |
27,108 |
|
Services* |
|
|
7,494 |
|
|
|
6,776 |
|
|
|
5,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,062 |
|
|
|
34,624 |
|
|
|
32,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
|
|
|
|
|
|
|
|
|
|
Products and systems |
|
|
26,492 |
|
|
|
24,107 |
|
|
|
23,861 |
|
Services |
|
|
6,044 |
|
|
|
5,441 |
|
|
|
3,945 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,536 |
|
|
|
29,548 |
|
|
|
27,806 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
5,526 |
|
|
|
5,076 |
|
|
|
4,429 |
|
Selling, general and administrative expenses |
|
|
(3,565 |
) |
|
|
(3,281 |
) |
|
|
(2,933 |
) |
Restructuring costs |
|
|
(495 |
) |
|
|
|
|
|
|
(197 |
) |
Net financing charges |
|
|
(258 |
) |
|
|
(277 |
) |
|
|
(273 |
) |
Equity income |
|
|
116 |
|
|
|
89 |
|
|
|
112 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interests |
|
|
1,324 |
|
|
|
1,607 |
|
|
|
1,138 |
|
Provision for income taxes |
|
|
321 |
|
|
|
300 |
|
|
|
63 |
|
Minority interests in net earnings of subsidiaries |
|
|
24 |
|
|
|
12 |
|
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
979 |
|
|
|
1,295 |
|
|
|
1,033 |
|
Income (loss) from discontinued operations, net of income taxes |
|
|
|
|
|
|
(10 |
) |
|
|
2 |
|
Loss on sale of discontinued operations, net of income taxes |
|
|
|
|
|
|
(33 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before the cumulative effect of a change in
accounting principle |
|
|
979 |
|
|
|
1,252 |
|
|
|
1,035 |
|
Cumulative effect of a change in accounting principle, net
of income taxes |
|
|
|
|
|
|
|
|
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
979 |
|
|
$ |
1,252 |
|
|
$ |
1,028 |
|
|
|
|
|
|
|
|
|
|
|
Earnings available for common shareholders |
|
$ |
979 |
|
|
$ |
1,252 |
|
|
$ |
1,028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.65 |
|
|
$ |
2.19 |
|
|
$ |
1.77 |
|
Diluted |
|
$ |
1.63 |
|
|
$ |
2.16 |
|
|
$ |
1.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share before the cumulative effect of a
change in accounting principle |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.65 |
|
|
$ |
2.12 |
|
|
$ |
1.77 |
|
Diluted |
|
$ |
1.63 |
|
|
$ |
2.09 |
|
|
$ |
1.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.65 |
|
|
$ |
2.12 |
|
|
$ |
1.76 |
|
Diluted |
|
$ |
1.63 |
|
|
$ |
2.09 |
|
|
$ |
1.74 |
|
|
|
|
* |
|
Products and systems consist of automotive experience and power solutions products and
systems and building efficiency installed systems. Services are building efficiency technical
and global workplace solutions. |
The accompanying notes are an integral part of the financial statements.
42
Johnson Controls, Inc.
Consolidated Statements of Financial Position
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
(in millions, except par value and share data) |
|
2008 |
|
|
2007 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
384 |
|
|
$ |
674 |
|
Accounts receivable, less allowance for doubtful
accounts of $87 and $75, respectively |
|
|
6,472 |
|
|
|
6,600 |
|
Inventories |
|
|
2,099 |
|
|
|
1,968 |
|
Other current assets |
|
|
1,721 |
|
|
|
1,630 |
|
|
|
|
|
|
|
|
Current assets |
|
|
10,676 |
|
|
|
10,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment net |
|
|
4,389 |
|
|
|
4,208 |
|
Goodwill |
|
|
6,513 |
|
|
|
6,131 |
|
Other intangible assets net |
|
|
769 |
|
|
|
773 |
|
Investments in partially-owned affiliates |
|
|
863 |
|
|
|
795 |
|
Other noncurrent assets |
|
|
1,777 |
|
|
|
1,326 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
24,987 |
|
|
$ |
24,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt |
|
$ |
456 |
|
|
$ |
264 |
|
Current portion of long-term debt |
|
|
287 |
|
|
|
899 |
|
Accounts payable |
|
|
5,225 |
|
|
|
5,365 |
|
Accrued compensation and benefits |
|
|
1,024 |
|
|
|
978 |
|
Accrued income taxes |
|
|
117 |
|
|
|
97 |
|
Other current liabilities |
|
|
2,701 |
|
|
|
2,317 |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
9,810 |
|
|
|
9,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
3,201 |
|
|
|
3,255 |
|
Postretirement health and other benefits |
|
|
236 |
|
|
|
256 |
|
Other noncurrent liabilities |
|
|
2,080 |
|
|
|
1,639 |
|
|
|
|
|
|
|
|
Long-term liabilities |
|
|
5,517 |
|
|
|
5,150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 18) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests in equity of subsidiaries |
|
|
236 |
|
|
|
128 |
|
|
|
|
|
|
|
|
|
|
Common stock, $.01 7/18 par value
shares authorized: 1,800,000,000
shares issued: 2008 594,169,139; 2007 595,384,212 |
|
|
8 |
|
|
|
8 |
|
Capital in excess of par value |
|
|
1,547 |
|
|
|
1,452 |
|
Retained earnings |
|
|
7,300 |
|
|
|
6,698 |
|
Treasury stock, at cost (2008 3,372,332 shares;
2007 1,617,978 shares) |
|
|
(102 |
) |
|
|
(33 |
) |
Accumulated other comprehensive income |
|
|
671 |
|
|
|
782 |
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
9,424 |
|
|
|
8,907 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
24,987 |
|
|
$ |
24,105 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the financial statements.
43
Johnson Controls, Inc.
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
(in millions) |
|
2008 |
|
|
2007 |
|
|
2006 |
|
Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
979 |
|
|
$ |
1,252 |
|
|
$ |
1,028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to cash provided by operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
745 |
|
|
|
687 |
|
|
|
661 |
|
Amortization of intangibles |
|
|
38 |
|
|
|
45 |
|
|
|
44 |
|
Equity in earnings of partially-owned affiliates, net of dividends received |
|
|
(15 |
) |
|
|
(1 |
) |
|
|
(15 |
) |
Deferred income taxes |
|
|
(40 |
) |
|
|
(63 |
) |
|
|
(404 |
) |
Minority interests in net earnings of subsidiaries |
|
|
24 |
|
|
|
12 |
|
|
|
42 |
|
Non-cash restructuring costs |
|
|
43 |
|
|
|
|
|
|
|
51 |
|
Loss on sale of discontinued operations |
|
|
|
|
|
|
33 |
|
|
|
|
|
Equity-based compensation |
|
|
48 |
|
|
|
48 |
|
|
|
61 |
|
Other |
|
|
48 |
|
|
|
25 |
|
|
|
18 |
|
Changes in working capital, excluding acquisitions and divestitures of businesses |
|
|
|
|
|
|
|
|
|
|
|
|
Receivables |
|
|
281 |
|
|
|
(617 |
) |
|
|
244 |
|
Inventories |
|
|
(49 |
) |
|
|
(150 |
) |
|
|
(77 |
) |
Other current assets |
|
|
88 |
|
|
|
(262 |
) |
|
|
(32 |
) |
Restructuring reserves |
|
|
388 |
|
|
|
(161 |
) |
|
|
59 |
|
Accounts payable and accrued liabilities |
|
|
(694 |
) |
|
|
1,052 |
|
|
|
(379 |
) |
Accrued income taxes |
|
|
44 |
|
|
|
13 |
|
|
|
116 |
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities |
|
|
1,928 |
|
|
|
1,913 |
|
|
|
1,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(807 |
) |
|
|
(828 |
) |
|
|
(711 |
) |
Sale of property, plant and equipment |
|
|
52 |
|
|
|
83 |
|
|
|
90 |
|
Acquisition of businesses, net of cash acquired |
|
|
(277 |
) |
|
|
(17 |
) |
|
|
(2,629 |
) |
Business divestitures |
|
|
|
|
|
|
89 |
|
|
|
|
|
Settlement of cross-currency interest rate swaps |
|
|
(160 |
) |
|
|
(145 |
) |
|
|
66 |
|
Changes in long-term investments |
|
|
(78 |
) |
|
|
(233 |
) |
|
|
108 |
|
|
|
|
|
|
|
|
|
|
|
Cash used by investing activities |
|
|
(1,270 |
) |
|
|
(1,051 |
) |
|
|
(3,076 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in short-term debt net |
|
|
173 |
|
|
|
(43 |
) |
|
|
(531 |
) |
Increase in long-term debt |
|
|
240 |
|
|
|
115 |
|
|
|
2,739 |
|
Repayment of long-term debt |
|
|
(935 |
) |
|
|
(505 |
) |
|
|
(359 |
) |
Payment of cash dividends |
|
|
(297 |
) |
|
|
(195 |
) |
|
|
(218 |
) |
Proceeds from the exercise of stock options |
|
|
34 |
|
|
|
104 |
|
|
|
97 |
|
Purchases of treasury stock |
|
|
(69 |
) |
|
|
(26 |
) |
|
|
|
|
Other |
|
|
(41 |
) |
|
|
8 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
Cash provided (used) by financing activities |
|
|
(895 |
) |
|
|
(542 |
) |
|
|
1,741 |
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(53 |
) |
|
|
61 |
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
$ |
(290 |
) |
|
$ |
381 |
|
|
$ |
122 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the financial statements.
44
Johnson Controls, Inc.
Consolidated Statements of Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
Capital in |
|
|
|
|
|
|
Treasury |
|
|
Other |
|
|
|
|
|
|
|
Common |
|
|
Excess of |
|
|
Retained |
|
|
Stock, |
|
|
Comprehensive |
|
(in millions, except per share data) |
|
Total |
|
|
Stock |
|
|
Par Value |
|
|
Earnings |
|
|
at Cost |
|
|
Income (Loss) |
|
|
At September 30, 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 on
derivatives |
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20 |
|
Minimum pension liability adjustment |
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 |
|
Other comprehensive income |
|
|
306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
1,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common ($0.37 per share) |
|
|
(218 |
) |
|
|
|
|
|
|
|
|
|
|
(218 |
) |
|
|
|
|
|
|
|
|
Other, including options exercised |
|
|
181 |
|
|
|
|
|
|
|
181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2006 |
|
|
7,355 |
|
|
|
8 |
|
|
|
1,273 |
|
|
|
5,715 |
|
|
|
(7 |
) |
|
|
366 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
1,252 |
|
|
|
|
|
|
|
|
|
|
|
1,252 |
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
479 |
|
Realized and unrealized losses on
derivatives |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4 |
) |
Minimum pension liability adjustment |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
|
476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
1,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to initially adopt SFAS No. 158,
net of tax |
|
|
(60 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(60 |
) |
Adjustment for the change in measurement
date due to the adoption
of SFAS No. 158, net of tax |
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
(9 |
) |
|
|
|
|
|
|
|
|
Cash dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common ($0.44 per share) |
|
|
(260 |
) |
|
|
|
|
|
|
|
|
|
|
(260 |
) |
|
|
|
|
|
|
|
|
Other, including options exercised |
|
|
153 |
|
|
|
|
|
|
|
179 |
|
|
|
|
|
|
|
(26 |
) |
|
|
|
|
|
At September 30, 2007 |
|
|
8,907 |
|
|
|
8 |
|
|
|
1,452 |
|
|
|
6,698 |
|
|
|
(33 |
) |
|
|
782 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
979 |
|
|
|
|
|
|
|
|
|
|
|
979 |
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
170 |
|
Realized and unrealized losses on
derivatives |
|
|
(93 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(93 |
) |
Employee retirement plans |
|
|
(188 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(188 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
|
(111 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to initially adopt FIN 48, net
of tax |
|
|
(68 |
) |
|
|
|
|
|
|
|
|
|
|
(68 |
) |
|
|
|
|
|
|
|
|
Cash dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common ($0.52 per share) |
|
|
(309 |
) |
|
|
|
|
|
|
|
|
|
|
(309 |
) |
|
|
|
|
|
|
|
|
Other, including options exercised |
|
|
26 |
|
|
|
|
|
|
|
95 |
|
|
|
|
|
|
|
(69 |
) |
|
|
|
|
|
At September 30, 2008 |
|
$ |
9,424 |
|
|
$ |
8 |
|
|
$ |
1,547 |
|
|
$ |
7,300 |
|
|
$ |
(102 |
) |
|
$ |
671 |
|
|
The accompanying notes are an integral part of the financial statements.
45
Johnson Controls, Inc.
Notes to Consolidated Financial Statements
September 30, 2008
1. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Principles of Consolidation
The consolidated financial statements include the accounts of Johnson Controls, Inc. and its
domestic and non-U.S. subsidiaries that are consolidated in conformity with accounting principles
generally accepted in the United States of America (U.S. GAAP). All significant intercompany
transactions have been eliminated. Investments in partially-owned affiliates are accounted for by
the equity method when the Companys interest exceeds 20% and the Company does not have a
controlling interest. 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 $3.3 billion
and $4.0 billion at September 30, 2008 and 2007, 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.
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
46
Johnson Controls, Inc.
Notes to Consolidated Financial Statements
foregoing policy are periodically reviewed for impairment whenever events or changes in
circumstances indicate that its carrying amount may not be recoverable. At September 30, 2008 and
2007, approximately $158 million and $215 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, 2008 and 2007, the Company recorded within other
current assets approximately $192 million and $171 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 reporting
units 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 or third party valuations. The fair value represents the amount at which
a reporting unit 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 2008 indicated that the estimated
fair value of each reporting unit 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, 2008.
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, 2008, the Company recorded a $43
million impairment charge as part of its 2008 restructuring plan (see Note 15). The Company
concluded there were no other impairments at September 30, 2008. The Company will continue to
monitor developments in the automotive industry.
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 $670 million and $633 million at September 30, 2008 and 2007, respectively. Amounts included
within other current liabilities were $654 million and $538 million at September 30, 2008 and
2007, respectively.
47
Johnson Controls, Inc.
Notes to Consolidated Financial Statements
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 using the cumulative catch-up method for revisions in estimated total contract
costs and contract values. Estimated losses are recorded when identified. Claims against customers
are recognized as revenue upon settlement. The amount of accounts receivable due after one year is
not significant.
The building efficiency business enters into extended warranties and long-term service and
maintenance agreements with certain customers. For these arrangements, revenue is recognized on a
straight-line basis over the respective contract term.
The Companys building efficiency business also sells certain heating, ventilating and air
conditioning (HVAC) products and services in bundled arrangements, where multiple products and/or
services are involved. In accordance with 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, 2008, 2007
and 2006 were $829 million, $767 million and $743 million, respectively.
A portion of the costs associated with these activities is reimbursed by customers and, for the
fiscal years ended September 30, 2008, 2007 and 2006, were $405 million, $276 million and $323
million, respectively.
Earnings Per Share
Basic earnings per share are computed by dividing net income by the weighted average number of
common shares outstanding. Diluted earnings per share are computed by dividing net income by
diluted weighted average shares outstanding. Diluted weighted average shares include the dilutive
effect of common stock equivalents that would arise from the exercise of stock options (see Note 13
regarding stock split).
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.
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, |
|
|
|
2008 |
|
|
2007 |
|
Foreign currency translation adjustments |
|
$ |
1,052 |
|
|
$ |
882 |
|
Realized and unrealized gains/losses on derivatives |
|
|
(34 |
) |
|
|
59 |
|
Employee retirement plans |
|
|
(347 |
) |
|
|
(159 |
) |
|
|
|
|
|
|
|
Accumulated other comprehensive income |
|
$ |
671 |
|
|
$ |
782 |
|
|
|
|
|
|
|
|
48
Johnson Controls, Inc.
Notes to Consolidated Financial Statements
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 net 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 underlying exposure. Gains and losses on these
contracts are recorded in cost of sales 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.
For the fiscal years ended September 30, 2008, 2007 and 2006, the net amounts recognized in
earnings due to ineffectiveness were not material. The amount reported as unrealized gains/losses
on derivatives in the accumulated OCI account within shareholders equity represents the deferred
amount of net gain/loss on derivatives designated as cash flow hedges.
Fair Value Hedges The Company had two interest rate swaps outstanding at September 30, 2008 and
one interest rate swap outstanding at September 30, 2007, 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 offsets the change in fair value of the hedged debt. For the fiscal years ended September 30,
2008, 2007 and 2006, the net amounts recognized in earnings due to ineffectiveness were not
material.
Net Investment
Hedges - The Company has entered into foreign currency denominated debt obligations
to selectively hedge portions of its net investment in Japan. The currency effects of the debt
obligations are reflected in the foreign currency translation
adjustments component of accumulated OCI account within shareholders equity where they
offset gains and losses recorded on the Companys net investment in Japan. During fiscal 2008, the
Company entered into a yen cross-currency interest rate swap to hedge a three-year 18 billion yen
denominated bank borrowing back to U.S. dollars. The currency effects of the swap and translation
of the debt obligation are reflected in the income statement and the change in value of the swap
and debt obligation offset. Net interest payments or receipts from the interest rate swaps are
recorded as adjustments to interest expense in earnings on a current basis.
The Company also selectively uses cross-currency interest rate swaps to hedge the foreign currency
exposure associated with its net investment in certain non-U.S. operations. 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 euros, respectively. 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 currency exchange rates
recorded in the foreign currency translation adjustments component of accumulated OCI. During the
course of the fiscal year 2008, the Company settled all of its euro cross-currency interest rate
swaps.
Net losses of approximately $18 million and $38 million associated with hedges of net investments
in foreign operations were recorded in the foreign currency translation
adjustments component of accumulated OCI account for the periods ended September
30, 2008 and 2007, respectively.
49
Johnson Controls, Inc.
Notes to Consolidated Financial Statements
New Accounting Pronouncements
In May 2008, the Financial Accounting Standards Board (FASB) issued SFAS No. 162, The Hierarchy of
Generally Accepted Accounting Principles. SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the accounting principles to be used in the preparation
of financial statement presented in conformity with generally accepted accounting principles in the
United States. This statement is effective sixty days after approval by the Securities and Exchange
Commission. The Company does not expect the effects of adopting SFAS No. 162 to be significant.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities an amendment of FASB Statement No. 133. SFAS No. 161 enhances required disclosures
regarding derivatives and hedging activities, including how an entity uses derivative instruments,
how derivative instruments and related hedged items are accounted for under SFAS No. 133 and how
derivative instruments and related hedged items affect an entitys financial position, financial
performance and cash flows. SFAS No. 161 is effective for the Company beginning in the second
quarter of fiscal 2009 (January 1, 2009). The Company has determined that the adoption of SFAS No.
161 will not be material to its consolidated financial condition and results of operations.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations. SFAS
No. 141(R) changes the accounting for business combinations in a number of areas including the
treatment of contingent consideration, preacquisition contingencies, transaction costs, in-process
research and development and restructuring costs. In addition, under SFAS No. 141(R), changes in an
acquired entitys deferred tax assets and uncertain tax positions after the measurement period will
impact income tax expense. SFAS No. 141(R) will be effective for the Company beginning in the first
quarter of fiscal 2010 (October 1, 2009). This standard, when adopted, will change the Companys
accounting treatment for business combinations on a prospective basis.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51. SFAS No. 160 changes the accounting and reporting for
minority interests, which will be recharacterized as noncontrolling interests and classified as a
component of equity. This new consolidation method changes the accounting for transactions with
minority interest holders. SFAS No. 160 is effective for fiscal years beginning after December 15,
2008. SFAS No. 160 will be effective for the Company beginning in the first quarter of fiscal 2010
(October 1, 2009). The Company is assessing the potential impact that the adoption of SFAS No. 160
will have on its consolidated financial condition and results of operations.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities including an amendment to FASB Statement No. 115. SFAS No. 159 permits
entities to measure certain financial instruments and certain other items at fair value that are
not currently required to be measured at fair value. The objective is to improve financial
reporting by providing entities with the opportunity to mitigate volatility in reported earnings
caused by measuring related assets and liabilities differently without having to apply complex
hedge accounting provisions. SFAS No. 159 will be effective for the Company beginning in the first
quarter of fiscal 2009 (October 1, 2008). The Company is assessing the potential impact that the
adoption of SFAS No. 159 will have on its consolidated financial condition and results of
operations.
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 the Company beginning in the first quarter of fiscal 2009 (October 1, 2008). The
Company has determined that the adoption of SFAS No. 157 will not be material to its consolidated
financial condition and results of operations.
In June 2006, the FASB issued FASB Interpretation Number (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. See Note 16 for the impact of the Companys adoption of FIN 48 as of October 1,
2007.
50
Johnson Controls, Inc.
Notes to Consolidated Financial Statements
Reclassification
Certain prior year amounts have been revised to conform to the current years
presentation. Prior
year net sales and cost of sales amounts between Products and systems and Services have been
reclassified.
In July 2008, the Company formed a joint venture to acquire the interior product assets of Plastech
Engineered Products, Inc. (Plastech). Plastech filed for bankruptcy in February 2008. The Company
owns 70% of the newly formed entity and certain Plastech term lenders hold the minority position.
The Company contributed cash and injection molding plants to the new entity with a fair value of
$262 million. The lenders contributed their rights to receive
Plastechs interiors business obtained
in exchange for certain Plastech debt. The combined equity in the new entity was approximately $375
million. Goodwill of approximately $178 million was preliminarily recorded as part of the
transaction. The purchase accounting will be completed in fiscal 2009 after third party valuations
of acquired assets are complete.
Also in fiscal 2008, the Company completed seven additional acquisitions for a combined purchase
price of $108 million, none of which were material to the Companys consolidated financial
statements. In connection with these acquisitions, the Company recorded goodwill of $66 million.
In September 2007, the Company recorded a $200 million equity investment in a 48%-owned joint
venture with U.S. Airconditioning Distributors, Inc., a California based, privately-owned HVAC
distributor serving five western U.S. states, in order to enhance the distribution of residential
and light-commercial products in that geography. This investment is accounted for under the equity
method as the Company does not have a controlling interest, but does have significant influence.
In December 2005, the Company completed its acquisition of York International Corporation (York).
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 in January 2006. Yorks results of operations have
been included in the Companys 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 HVAC equipment, controls, fire and security capabilities and
positioned the Company in a strategic leadership position in the global building environment
industry which the Company believes offers significant growth potential.
During the first quarter of fiscal 2007, the Company completed its York purchase price allocation.
The adjustments to the initial purchase price allocation were primarily related to the finalization
of the restructuring plans, fixed asset valuations and other immaterial adjustments.
The following table summarizes the fair values of the York assets acquired and liabilities assumed
at the date of acquisition (in millions):
|
|
|
|
|
Current assets, net of cash acquired |
|
$ |
1,919 |
|
Property, plant and equipment |
|
|
390 |
|
Goodwill |
|
|
2,075 |
|
Other intangible assets |
|
|
507 |
|
Other noncurrent assets |
|
|
381 |
|
|
|
|
|
Total assets |
|
|
5,272 |
|
|
|
|
|
|
Current liabilities |
|
|
1,379 |
|
Noncurrent liabilities |
|
|
1,360 |
|
|
|
|
|
Total liabilities |
|
|
2,739 |
|
|
|
|
|
|
|
|
|
|
Net assets acquired |
|
$ |
2,533 |
|
|
|
|
|
51
Johnson Controls, Inc.
Notes to Consolidated Financial Statements
In conjunction with the York acquisition, the Company recorded goodwill of approximately $2.1
billion, none of which is tax deductible, with allocation to the building efficiency business
reporting segments as follows: $427 million to North America systems; $602 million to North America
service; $480 million to North America unitary products; $149 million to Europe; and $417 million
to rest of world. In addition, intangible assets subject to amortization were valued at $251
million with useful lives between 1.5 and 30 years, of which $199 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.
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.
3. |
|
DISCONTINUED OPERATIONS |
In March 2007, the Company completed the sale of the Bristol Compressor business, which was
acquired in December 2005 as part of the York transaction (see Note 2) for approximately $40
million, of which $35 million was received in cash in the three months ended March 31, 2007 and $5
million was received in cash in the three months ended September 30, 2007 after final purchase
price adjustments. The sale of the Bristol Compressor business resulted in a loss of approximately
$49 million ($30 million after-tax), including related costs.
Net assets of the Bristol Compressor business at the disposal date totaled approximately $86
million, which consisted of current assets of $97 million, fixed assets of $6 million and
liabilities of $17 million.
In the second quarter of fiscal 2007, the Company settled a claim related to the February 2005
sale of the engine electronics business that resulted in a loss of approximately $4 million ($3
million after-tax).
The following table summarizes the net sales, income (loss) before income taxes and minority
interests, and loss per share from discontinued operations amounts for the fiscal years ended
September 30, 2007 and 2006 (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
Net sales |
|
$ |
54 |
|
|
$ |
178 |
|
Income (loss) before income taxes
and minority interests |
|
|
(16 |
) |
|
|
3 |
|
Loss per share from discontinued operations |
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.02 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(0.02 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share on sale of discontinued operations |
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.06 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(0.06 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
Inventories consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
Raw materials and supplies |
|
$ |
902 |
|
|
$ |
774 |
|
Work-in-process |
|
|
324 |
|
|
|
329 |
|
Finished goods |
|
|
985 |
|
|
|
930 |
|
|
|
|
|
|
|
|
FIFO inventories |
|
|
2,211 |
|
|
|
2,033 |
|
LIFO reserve |
|
|
(112 |
) |
|
|
(65 |
) |
|
|
|
|
|
|
|
Inventories |
|
$ |
2,099 |
|
|
$ |
1,968 |
|
|
|
|
|
|
|
|
52
Johnson Controls, Inc.
Notes to Consolidated Financial Statements
Inventories valued by the LIFO method of accounting were approximately 20% and 25% of total
inventories at September 30, 2008 and 2007, respectively.
5. |
|
PROPERTY, PLANT AND EQUIPMENT |
Property, plant and equipment consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
Buildings and improvements |
|
$ |
2,243 |
|
|
$ |
2,159 |
|
Machinery and equipment |
|
|
6,555 |
|
|
|
6,026 |
|
Construction in progress |
|
|
595 |
|
|
|
536 |
|
Land |
|
|
340 |
|
|
|
322 |
|
|
|
|
|
|
|
|
Total property, plant and equipment |
|
|
9,733 |
|
|
|
9,043 |
|
Less accumulated depreciation |
|
|
(5,344 |
) |
|
|
(4,835 |
) |
|
|
|
|
|
|
|
Property, plant and equipment net |
|
$ |
4,389 |
|
|
$ |
4,208 |
|
|
|
|
|
|
|
|
Interest costs capitalized during the fiscal years ended September 30, 2008, 2007, and 2006 were
$12 million, $13 million and $21 million, respectively.
6. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill in each of the Companys reporting segments for the
fiscal years ended September 30, 2008 and 2007 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency |
|
|
|
|
|
|
September 30, |
|
|
Business |
|
|
Translation and |
|
|
September 30, |
|
|
|
2006 |
|
|
Acquisitions |
|
|
Other |
|
|
2007 |
|
Building efficiency |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America systems |
|
$ |
496 |
|
|
$ |
|
|
|
$ |
1 |
|
|
$ |
497 |
|
North America service |
|
|
615 |
|
|
|
1 |
|
|
|
6 |
|
|
|
622 |
|
North America unitary products |
|
|
473 |
|
|
|
|
|
|
|
8 |
|
|
|
481 |
|
Global workplace solutions |
|
|
166 |
|
|
|
8 |
|
|
|
7 |
|
|
|
181 |
|
Europe |
|
|
370 |
|
|
|
|
|
|
|
22 |
|
|
|
392 |
|
Rest of world |
|
|
487 |
|
|
|
1 |
|
|
|
40 |
|
|
|
528 |
|
Automotive experience |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
|
1,176 |
|
|
|
|
|
|
|
1 |
|
|
|
1,177 |
|
Europe |
|
|
1,066 |
|
|
|
12 |
|
|
|
89 |
|
|
|
1,167 |
|
Asia |
|
|
200 |
|
|
|
|
|
|
|
5 |
|
|
|
205 |
|
Power solutions |
|
|
861 |
|
|
|
|
|
|
|
20 |
|
|
|
881 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,910 |
|
|
$ |
22 |
|
|
$ |
199 |
|
|
$ |
6,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency |
|
|
|
|
|
|
September 30, |
|
|
Business |
|
|
Translation and |
|
|
September 30, |
|
|
|
2007 |
|
|
Acquisitions |
|
|
Other |
|
|
2008 |
|
Building efficiency |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America systems |
|
$ |
497 |
|
|
$ |
18 |
|
|
$ |
|
|
|
$ |
515 |
|
North America service |
|
|
622 |
|
|
|
35 |
|
|
|
|
|
|
|
657 |
|
North America unitary products |
|
|
481 |
|
|
|
|
|
|
|
|
|
|
|
481 |
|
Global workplace solutions |
|
|
181 |
|
|
|
6 |
|
|
|
(9 |
) |
|
|
178 |
|
Europe |
|
|
392 |
|
|
|
|
|
|
|
36 |
|
|
|
428 |
|
Rest of world |
|
|
528 |
|
|
|
|
|
|
|
46 |
|
|
|
574 |
|
Automotive experience |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
|
1,177 |
|
|
|
178 |
|
|
|
1 |
|
|
|
1,356 |
|
Europe |
|
|
1,167 |
|
|
|
7 |
|
|
|
45 |
|
|
|
1,219 |
|
Asia |
|
|
205 |
|
|
|
|
|
|
|
(5 |
) |
|
|
200 |
|
Power solutions |
|
|
881 |
|
|
|
|
|
|
|
24 |
|
|
|
905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,131 |
|
|
$ |
244 |
|
|
$ |
138 |
|
|
$ |
6,513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
Johnson Controls, Inc.
Notes to Consolidated Financial Statements
The Companys other intangible assets, primarily from business acquisitions, are valued based on
independent appraisals and consisted of (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
September 30, 2007 |
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
Carrying |
|
|
Accumulated |
|
|
|
|
|
|
Carrying |
|
|
Accumulated |
|
|
|
|
|
|
Amount |
|
|
Amortization |
|
|
Net |
|
|
Amount |
|
|
Amortization |
|
|
Net |
|
|
|
|
|
|
Amortized intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patented technology |
|
$ |
302 |
|
|
$ |
(168 |
) |
|
$ |
134 |
|
|
$ |
315 |
|
|
$ |
(147 |
) |
|
$ |
168 |
|
Unpatented technology |
|
|
25 |
|
|
|
(11 |
) |
|
|
14 |
|
|
|
21 |
|
|
|
(8 |
) |
|
|
13 |
|
Customer relationships |
|
|
344 |
|
|
|
(42 |
) |
|
|
302 |
|
|
|
306 |
|
|
|
(24 |
) |
|
|
282 |
|
Miscellaneous |
|
|
35 |
|
|
|
(13 |
) |
|
|
22 |
|
|
|
47 |
|
|
|
(32 |
) |
|
|
15 |
|
|
|
|
|
|
Total amortized
intangible assets |
|
|
706 |
|
|
|
(234 |
) |
|
|
472 |
|
|
|
689 |
|
|
|
(211 |
) |
|
|
478 |
|
Unamortized intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks |
|
|
297 |
|
|
|
|
|
|
|
297 |
|
|
|
295 |
|
|
|
|
|
|
|
295 |
|
|
|
|
|
|
Total intangible assets |
|
$ |
1,003 |
|
|
$ |
(234 |
) |
|
$ |
769 |
|
|
$ |
984 |
|
|
$ |
(211 |
) |
|
$ |
773 |
|
|
|
|
|
|
Amortization of other intangible assets for the fiscal years ended September 30, 2008 and 2007 was
$38 million and $45 million, respectively. Excluding the impact of any future acquisitions, the
Company anticipates amortization of other intangible assets will average approximately $34 million
per year over the next five years.
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 condensed consolidated
statement of financial position.
The changes in the carrying amount of the Companys total product warranty liability for the fiscal
years ended September 30, 2008 and 2007 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
Beginning balance |
|
$ |
186 |
|
|
$ |
189 |
|
Accruals for warranties issued during the period |
|
|
183 |
|
|
|
126 |
|
Accruals from acquisitions |
|
|
|
|
|
|
5 |
|
Accruals related to pre-existing warranties (including
changes in estimates) |
|
|
(1 |
) |
|
|
(4 |
) |
Settlements made (in cash or in kind) during the period |
|
|
(167 |
) |
|
|
(136 |
) |
Currency translation |
|
|
3 |
|
|
|
6 |
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
204 |
|
|
$ |
186 |
|
|
|
|
|
|
|
|
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 $40 million and $60 million at September 30, 2008 and 2007, respectively.
54
Johnson Controls, Inc.
Notes to Consolidated Financial Statements
Other facilities and equipment are leased under arrangements that are accounted for as operating
leases. Total rental expense for the fiscal years ended September 30, 2008, 2007 and 2006 was $399
million, $336 million and $288 million, respectively.
Future minimum capital and operating lease payments and the related present value of capital lease
payments at September 30, 2008 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
Capital |
|
|
Operating |
|
|
|
Leases |
|
|
Leases |
|
2009 |
|
$ |
50 |
|
|
$ |
257 |
|
2010 |
|
|
7 |
|
|
|
200 |
|
2011 |
|
|
5 |
|
|
|
149 |
|
2012 |
|
|
4 |
|
|
|
95 |
|
2013 |
|
|
3 |
|
|
|
69 |
|
After 2013 |
|
|
10 |
|
|
|
141 |
|
|
|
|
|
|
|
|
Total minimum lease payments |
|
|
79 |
|
|
$ |
911 |
|
|
|
|
|
|
|
|
|
Interest |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Present value of net minimum lease payments |
|
$ |
71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
9. |
|
SHORT-TERM DEBT AND CREDIT AGREEMENTS |
Short-term debt consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
2008 |
|
2007 |
Bank borrowings and commercial paper |
|
$ |
456 |
|
|
$ |
264 |
|
|
|
|
|
|
|
|
|
|
Weighted average interest rate on short-term
debt outstanding |
|
|
6.6 |
% |
|
|
5.0 |
% |
The Company has a $2.05 billion committed five-year credit facility to support its outstanding
commercial paper. The facility expires in December 2011. There were no draws against the committed
credit facility during the year ended September 30, 2008. Average outstanding commercial paper for
the fiscal year ended September 30, 2008 was $583 million, and $50 million was outstanding at
September 30, 2008.
The Company has three revolving credit facilities totaling 350 million euro with 100 million euro
expiring in May 2009, 150 million euro expiring in May 2011 and 100 million euro expiring in August
2011. At September 30, 2008, the Company had drawn 150 million euro on the credit facility expiring
in May 2011.
Long-term debt consisted of the following (in millions; due dates by fiscal year):
55
Johnson Controls, Inc.
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
Unsecured notes |
|
|
|
|
|
|
|
|
6.3% due in 2008 ($175 million par value) |
|
$ |
|
|
|
$ |
173 |
|
6.7% due in 2008 ($200 million par value) |
|
|
|
|
|
|
202 |
|
5.25% due in 2011 ($800 million par value) |
|
|
800 |
|
|
|
800 |
|
5.8% due in 2013 ($100 million par value) |
|
|
100 |
|
|
|
100 |
|
4.875% due in 2013 ($300 million par value) |
|
|
299 |
|
|
|
299 |
|
7.7% due in 2015 ($125 million par value) |
|
|
125 |
|
|
|
125 |
|
5.5% due in 2016 ($800 million par value) |
|
|
799 |
|
|
|
799 |
|
7.125% due in 2017 ($150 million par value) |
|
|
150 |
|
|
|
150 |
|
6.0% due in 2036 ($400 million par value) |
|
|
395 |
|
|
|
395 |
|
6.95% due in 2046 ($125 million par value) |
|
|
125 |
|
|
|
125 |
|
Floating rate notes due in 2008 ($500 million par value) |
|
|
|
|
|
|
500 |
|
Capital lease obligations |
|
|
71 |
|
|
|
88 |
|
Foreign-denominated debt |
|
|
|
|
|
|
|
|
Euro |
|
|
42 |
|
|
|
86 |
|
Japanese yen |
|
|
576 |
|
|
|
312 |
|
Other |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross long-term debt |
|
|
3,488 |
|
|
|
4,154 |
|
Less: current portion |
|
|
287 |
|
|
|
899 |
|
|
|
|
|
|
|
|
Net long-term debt |
|
$ |
3,201 |
|
|
$ |
3,255 |
|
|
|
|
|
|
|
|
At September 30, 2008, the Companys euro-denominated long-term debt was at fixed rates with a
weighted-average interest rate of 5.3% and the Companys yen-denominated debt was at floating rates
with a weighted average interest rate of 1.3%.
The installments of long-term debt maturing in subsequent fiscal years are: 2009 $287 million;
2010 $123 million; 2011 $1,040 million; 2012 $3 million, 2013 $402 million; 2014 and
thereafter $1,633 million. The Companys long-term debt includes various financial covenants,
none of which are expected to restrict future operations.
Total interest paid on both short and long-term debt for the fiscal years ended September 30, 2008,
2007 and 2006 was $288 million, $273 million, and $234 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.
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 (fair value hedges). In February 2008, the Company entered into a nine-year and
five-month interest rate swap to hedge the Companys 7.125% note maturing in July 2017 ($150
million). Under the swap, the Company receives interest based on a fixed U.S. dollar rate of
7.125% and pays interest based on a floating six-month U.S. dollar LIBOR rate plus 290.9 basis
points. A second interest rate swap was entered into June 2008 to hedge the Companys 4.875% note
maturing in September 2013 ($300 million). Under the swap, the Company receives interest based on
a fixed U.S. dollar rate of 4.875% and pays interest based on a floating six-month U.S. dollar
LIBOR rate plus 52.5 basis points. A third swap that was outstanding as of September 30, 2007,
matured in conjunction with the maturity of the underlying debt in February 2008.
56
Johnson Controls, Inc.
Notes to Consolidated Financial Statements
The Company selectively uses cross-currency interest rate swaps to hedge the foreign currency
exposure associated with its net investment in certain non-U.S. operations. 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 euros, respectively. 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 currency exchange
rates recorded in the foreign currency translation adjustments component of accumulated OCI.
During the course of the fiscal year 2008, the Company settled all of its euro cross-currency
interest rate swaps. In addition, during fiscal 2008, the Company entered into a yen
cross-currency
interest rate swap to hedge a three-year 18 billion yen denominated bank borrowing back to U.S.
dollars. The currency effects of the swap and related debt obligation are reflected in the income
statement and the change in value of the swap and debt obligation offset.
In addition, the Company selectively uses equity swaps to reduce market risk associated with
certain of its stock-based compensation plans, such as its deferred compensation plans 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 the counterpartys 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 fiscal years ended September 30, 2008 or 2007. The Company does not apply hedge
accounting for this particular hedge.
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 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 sales.
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, |
|
|
2008 |
|
2007 |
|
|
Notional |
|
Fair Value |
|
Notional |
|
Fair Value |
|
|
Amount |
|
Asset (Liability) |
|
Amount |
|
Asset (Liability) |
Other current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity swap |
|
$ |
124 |
|
|
$ |
6 |
|
|
$ |
189 |
|
|
$ |
37 |
|
Commodity contracts |
|
|
|
|
|
|
|
|
|
|
333 |
|
|
|
64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts |
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
17 |
|
Cross-currency interest rate swap |
|
|
167 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
|
450 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts |
|
|
242 |
|
|
|
(42 |
) |
|
|
|
|
|
|
|
|
Cross-currency interest rate swaps |
|
|
|
|
|
|
|
|
|
|
1,301 |
|
|
|
(63 |
) |
Interest rate swap |
|
|
|
|
|
|
|
|
|
|
175 |
|
|
|
(2 |
) |
Foreign currency exchange contracts |
|
|
1,509 |
|
|
|
(17 |
) |
|
|
1,634 |
|
|
|
(3 |
) |
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 non-U.S. subsidiaries. Similarly,
implied gains/losses associated with interest rate swaps offset changes in interest rates and the
fair value of long-term debt. The Company does not enter into any derivative for speculative
purposes.
57
Johnson Controls, Inc.
Notes to Consolidated Financial Statements
The fair values of cross-currency, interest rate swaps and foreign currency exchange contracts
were determined using the Companys treasury management system, which is based on market exchange
rates.
12. |
|
STOCK-BASED COMPENSATION |
Effective October 1, 2005, the Company adopted SFAS No. 123(R), Share-Based Payment, 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. 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.
The Company has three share-based compensation plans, which are described below. The compensation
cost charged against income for those plans was approximately $29 million, $82 million and $67
million for the fiscal years ended September 30, 2008, 2007 and 2006, respectively. The total
income tax benefit recognized in the income statement for share-based compensation arrangements
was approximately $11 million, $32 million and $27 million for the fiscal years ended September
30, 2008, 2007 and 2006, 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 $2 million, $8 million and $11 million
reduction of pre-tax compensation cost would have been recognized for the fiscal years ended
September 30, 2008, 2007 and 2006, respectively.
Stock Option Plan
Stock Options
The Companys 2007 Stock Option Plan, as amended (the Plan), which is shareholder-approved,
permits the grant of stock options to its employees for up to approximately 38 million shares of
new common stock. Option awards are granted with an exercise price equal to the market price of
the Companys stock at the date of grant; those option awards vest between two and three years
after the grant date and expire ten years from the grant date (approximately 34 million shares of
common stock remain available to be granted at September 30, 2008).
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, |
|
|
2008* |
|
2007 |
|
2006 |
Expected life of option (years) |
|
|
4.5 - 5.25 |
|
|
|
4.75 |
|
|
|
4.75 |
|
Risk-free interest rate |
|
|
4.06% - 4.23 |
% |
|
|
4.56 |
% |
|
|
4.46 |
% |
Expected volatility of the
Companys stock |
|
|
22.00 |
% |
|
|
22.00 |
% |
|
|
22.00 |
% |
Expected dividend yield on the
Companys stock |
|
|
1.55 |
% |
|
|
1.60 |
% |
|
|
1.70 |
% |
|
|
|
* |
|
In 2008, the assumptions used varied based on groupings of optionees. |
58
Johnson Controls, Inc.
Notes to Consolidated Financial Statements
|
|
A summary of stock option activity at September 30, 2008, and changes for the fiscal year then
ended, is presented below: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Aggregate |
|
|
|
Weighted |
|
|
Shares |
|
|
Remaining |
|
|
Intrinsic |
|
|
|
Average |
|
|
Subject to |
|
|
Contractual |
|
|
Value |
|
|
|
Option Price |
|
|
Option |
|
|
Life (years) |
|
|
(in millions) |
|
Outstanding, September 30, 2007 |
|
$ |
20.28 |
|
|
|
29,752,698 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
40.20 |
|
|
|
3,501,930 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
16.39 |
|
|
|
(2,206,734 |
) |
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
26.76 |
|
|
|
(454,143 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2008 |
|
$ |
22.74 |
|
|
|
30,593,751 |
|
|
|
6.6 |
|
|
$ |
249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exerciseable, September 30, 2008 |
|
$ |
18.87 |
|
|
|
18,667,755 |
|
|
|
5.7 |
|
|
$ |
197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of options granted during the fiscal years ended
September 30, 2008, 2007 and 2006 was $9.08, $5.59 and $5.12, respectively. |
|
|
|
The total intrinsic value of options exercised during the fiscal years ended September 30, 2008,
2007 and 2006 was approximately $45 million, $125 million and $106 million, respectively. |
|
|
|
In conjunction with the exercise of stock options granted, the Company received cash payments for
the fiscal years ended September 30, 2008, 2007, and 2006 of approximately $34 million, $104
million and $97 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 $19
million, $39 million and $33 million, respectively, for the fiscal years ended September 30, 2008,
2007 and 2006. The Company does not settle equity instruments granted under share-based payment
arrangements for cash. |
|
|
|
At September 30, 2008, the Company had approximately $22 million of total unrecognized
compensation cost related to nonvested share-based compensation arrangements granted under the
Plan. That cost is expected to be recognized over a weighted-average period of 0.8 years. |
|
|
|
Stock Appreciation Rights (SARs) |
|
|
|
The Plan also permits SARs to be separately granted to certain employees. SARs vest under the same
terms and conditions as option awards; however, they are settled in cash for the difference
between the market price on the date of exercise and the exercise price. As a result, SARs are
recorded in the Companys consolidated statements of financial position as a liability until the
date of exercise. |
|
|
|
The fair value of each SAR award is estimated using a similar method described for option awards.
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. |
59
Johnson Controls, Inc.
Notes to Consolidated Financial Statements
|
|
The assumptions used to determine the fair value of the SAR awards at September 30, 2008 were as
follows: |
|
|
|
|
|
Expected life of SAR (years) |
|
|
.1 - 2.8 |
|
Risk-free interest rate |
|
|
0.97% - 2.22 |
% |
Expected volatility of the Companys stock |
|
|
22.00% |
|
Expected dividend yield on the Companys stock |
|
|
1.52% |
|
A summary of SAR activity at September 30, 2008, and changes for the fiscal year then ended, is
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Aggregate |
|
|
|
Weighted |
|
|
Stock |
|
|
Remaining |
|
|
Intrinsic |
|
|
|
Average |
|
|
Appreciation |
|
|
Contractual |
|
|
Value |
|
|
|
SAR Price |
|
|
Rights |
|
|
Life (years) |
|
|
(in millions) |
|
Outstanding, September 30, 2007 |
|
$ |
20.18 |
|
|
|
3,068,757 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
40.21 |
|
|
|
357,618 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
17.82 |
|
|
|
(298,878 |
) |
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
19.31 |
|
|
|
(215,474 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2008 |
|
$ |
22.94 |
|
|
|
2,912,023 |
|
|
|
6.6 |
|
|
$ |
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exerciseable, September 30, 2008 |
|
$ |
18.02 |
|
|
|
1,382,270 |
|
|
|
5.1 |
|
|
$ |
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In conjunction with the exercise of SARs granted, the Company made payments of $5 million and $10
million during the fiscal years ended September 30, 2008 and 2007, 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, 2008, and
changes for the fiscal year then ended, is presented below: |
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Shares |
|
|
|
Average |
|
|
Subject to |
|
|
|
Price |
|
|
Restriction |
|
Nonvested, September 30, 2007 |
|
$ |
23.11 |
|
|
|
1,213,500 |
|
Granted |
|
|
42.07 |
|
|
|
516,000 |
|
Vested |
|
|
22.14 |
|
|
|
(771,000 |
) |
|
|
|
|
|
|
|
|
Nonvested, September 30, 2008 |
|
$ |
34.09 |
|
|
|
958,500 |
|
|
|
|
|
|
|
|
|
|
At September 30, 2008, the Company had approximately $12 million of total unrecognized
compensation cost related to nonvested share-based compensation arrangements granted under the
restricted stock plan. That cost is expected to be recognized over a weighted-average period of
1.2 years. |
|
13. |
|
EARNINGS PER SHARE |
|
|
|
On July 25, 2007, the Companys Board of Directors declared a three-for-one split of the Companys
outstanding common stock payable October 2, 2007 to shareholders of record on September 14, 2007.
All prior year share and per share amounts
disclosed in this document have been restated to reflect the three-for-one stock split. The stock
split resulted in an increase of approximately 396 million in the outstanding shares of common
stock as of the date of the split. In connection with the stock split, the par value of the common
stock was changed from $.04 1/6 per share to $.01 7/18 per share.
|
60
Johnson Controls, Inc.
Notes to Consolidated Financial Statements
|
|
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 fiscal years ended September 30, 2008, 2007 and 2006 (in millions): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Income Available to Common Shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income available to common shareholders |
|
$ |
979 |
|
|
$ |
1,252 |
|
|
$ |
1,028 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares Outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
|
593.1 |
|
|
|
590.6 |
|
|
|
583.5 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
8.3 |
|
|
|
8.6 |
|
|
|
6.4 |
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding |
|
|
601.4 |
|
|
|
599.2 |
|
|
|
589.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antidilutive Securities |
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase common shares |
|
|
1.1 |
|
|
|
0.1 |
|
|
|
0.4 |
|
14. |
|
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. |
61
Johnson Controls, Inc.
Notes to Consolidated Financial Statements
|
|
The Companys pension plan asset allocations by asset category are shown below: |
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
Equity securities: |
|
|
|
|
|
|
|
|
U.S. plans |
|
|
52 |
% |
|
|
63 |
% |
Non-U.S. plans |
|
|
46 |
% |
|
|
52 |
% |
|
|
|
|
|
|
|
|
|
Debt securities: |
|
|
|
|
|
|
|
|
U.S. plans |
|
|
29 |
% |
|
|
30 |
% |
Non-U.S. plans |
|
|
47 |
% |
|
|
41 |
% |
|
|
|
|
|
|
|
|
|
Real estate/other: |
|
|
|
|
|
|
|
|
U.S. plans |
|
|
14 |
% |
|
|
5 |
% |
Non-U.S. plans |
|
|
6 |
% |
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
Cash/liquidity: |
|
|
|
|
|
|
|
|
U.S. plans |
|
|
5 |
% |
|
|
2 |
% |
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 $2,870 million,
$2,562 million and $2,089 million, respectively, as of September 30, 2008 and $1,090 million, $996
million and $562 million, respectively, as of September 30, 2007. |
|
|
|
In fiscal 2008, total employer and employee contributions to the defined
benefit pension plans were $187 million, of which $93 million were voluntary
contributions made by the Company. The Company expects to contribute approximately $135 million in cash to its defined benefit pension
plans in fiscal year 2009. Projected benefit payments from the plans as of September 30, 2008 are
estimated as follows (in millions): |
|
|
|
|
|
2009 |
|
$ |
151 |
|
2010 |
|
|
157 |
|
2011 |
|
|
163 |
|
2012 |
|
|
171 |
|
2013 |
|
|
189 |
|
2014-2018 |
|
|
1,094 |
|
|
|
Savings and Investment Plans |
|
|
|
The Company sponsors various defined contribution savings plans primarily in the U.S. that allow
employees to contribute a portion of their pre-tax and/or after-tax income in accordance with plan
specified guidelines. Under specified conditions, the Company will contribute to certain savings
plans based on the employees eligible pay and/or will match a percentage of the employee
contributions up to certain limits. Matching contributions charged to expense amounted to $39
million, $76 million and $60 million for the fiscal years ended 2008, 2007 and 2006, respectively. |
|
|
|
Postretirement Health and Other Benefits |
|
|
|
The Company provides certain health care and life insurance benefits for eligible retirees and
their dependents primarily in the U.S. Most non-U.S. employees are covered by government sponsored
programs, and the cost to the Company is not significant. The U.S. benefits are paid as incurred.
No change in the Companys practice of funding these benefits on a pay-as-you-go basis is
anticipated. |
|
|
|
Eligibility for coverage is based on meeting certain years of service and retirement age
qualifications. These benefits may be subject to deductibles, co-payment provisions and other
limitations, and the Company has reserved the right to modify these
|
62
Johnson Controls, Inc.
Notes to Consolidated Financial Statements
|
|
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, 2008 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 8.5%
decreasing one half percent each year to an ultimate rate of 5.0% and prescription drug trend rates
of 10.5% decreasing one half percent each year to an ultimate rate of 6.0%. The September 30, 2007
APBO for both pre-65 and post-65 years of age employees was determined using medical care cost
trend rates of 9.0% decreasing one half percent each year to an ultimate rate of 5.0% and
prescription drug trend rates of 11.0% decreasing one half percent each year to an ultimate rate of
6.0%. 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 $10 million at September 30, 2008 and the sum of
the service and interest costs in fiscal year 2008 by $1 million. A one percentage point decrease
in the assumed health care cost trend rate would have decreased the accumulated benefit obligation
by $8 million at September 30, 2008 and the sum of the service and interest costs by $1 million. |
|
|
|
The Company expects to contribute approximately $25 million in cash to its postretirement health
and other benefit plans in fiscal year 2009. Projected benefit payments from the plans as of
September 30, 2008 are estimated as follows (in millions): |
|
|
|
|
|
2009 |
|
$ |
25 |
|
2010 |
|
|
26 |
|
2011 |
|
|
27 |
|
2012 |
|
|
28 |
|
2013 |
|
|
28 |
|
2014-2018 |
|
|
146 |
|
|
|
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 ABO and reconciliations of the changes in the PBO, the changes
in plan assets and the funded status (in millions): |
63
Johnson Controls, Inc.
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension |
|
|
Postretirement |
|
|
|
U.S. Plans |
|
|
Non-U.S. Plans |
|
|
Health and Other |
|
September 30, |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Accumulated Benefit Obligation |
|
$ |
1,905 |
|
|
$ |
1,938 |
|
|
$ |
1,238 |
|
|
$ |
1,336 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Projected Benefit Obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year |
|
|
2,202 |
|
|
|
2,018 |
|
|
|
1,452 |
|
|
|
1,340 |
|
|
|
280 |
|
|
|
327 |
|
Service cost |
|
|
79 |
|
|
|
74 |
|
|
|
39 |
|
|
|
38 |
|
|
|
5 |
|
|
|
6 |
|
Interest cost |
|
|
140 |
|
|
|
129 |
|
|
|
73 |
|
|
|
63 |
|
|
|
17 |
|
|
|
19 |
|
Plan participant contributions |
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
Acquisitions |
|
|
6 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss (gain) |
|
|
(155 |
) |
|
|
64 |
|
|
|
(195 |
) |
|
|
(29 |
) |
|
|
(22 |
) |
|
|
(11 |
) |
Amendments made during the year |
|
|
1 |
|
|
|
(4 |
) |
|
|
19 |
|
|
|
6 |
|
|
|
|
|
|
|
(36 |
) |
Benefits paid |
|
|
(96 |
) |
|
|
(113 |
) |
|
|
(60 |
) |
|
|
(57 |
) |
|
|
(29 |
) |
|
|
(30 |
) |
Estimated subsidy received |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
Special termination benefits |
|
|
|
|
|
|
1 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Curtailment loss (gain) |
|
|
1 |
|
|
|
(1 |
) |
|
|
(2 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
(1 |
) |
Settlement |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Measurement date change |
|
|
|
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
Currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
90 |
|
|
|
(1 |
) |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at end of year |
|
$ |
2,174 |
|
|
$ |
2,202 |
|
|
$ |
1,334 |
|
|
$ |
1,452 |
|
|
$ |
253 |
|
|
$ |
280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year |
|
$ |
2,077 |
|
|
$ |
1,853 |
|
|
$ |
1,065 |
|
|
$ |
914 |
|
|
$ |
|
|
|
$ |
|
|
Actual return on plan assets |
|
|
(294 |
) |
|
|
329 |
|
|
|
(132 |
) |
|
|
55 |
|
|
|
|
|
|
|
|
|
Acquisitions |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer and employee contributions |
|
|
86 |
|
|
|
8 |
|
|
|
101 |
|
|
|
94 |
|
|
|
29 |
|
|
|
30 |
|
Benefits paid |
|
|
(96 |
) |
|
|
(113 |
) |
|
|
(60 |
) |
|
|
(57 |
) |
|
|
(29 |
) |
|
|
(30 |
) |
Settlement payments |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
(14 |
) |
|
|
59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year |
|
$ |
1,772 |
|
|
$ |
2,077 |
|
|
$ |
960 |
|
|
$ |
1,065 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status |
|
$ |
(402 |
) |
|
$ |
(125 |
) |
|
$ |
(374 |
) |
|
$ |
(387 |
) |
|
$ |
(253 |
) |
|
$ |
(280 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the statement of
financial position consist of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid benefit cost |
|
$ |
24 |
|
|
$ |
78 |
|
|
$ |
4 |
|
|
$ |
39 |
|
|
$ |
|
|
|
$ |
|
|
Accrued benefit liability |
|
|
(426 |
) |
|
|
(203 |
) |
|
|
(378 |
) |
|
|
(426 |
) |
|
|
(253 |
) |
|
|
(280 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized |
|
$ |
(402 |
) |
|
$ |
(125 |
) |
|
$ |
(374 |
) |
|
$ |
(387 |
) |
|
$ |
(253 |
) |
|
$ |
(280 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Assumptions (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
7.50 |
% |
|
|
6.50 |
% |
|
|
5.50 |
% |
|
|
4.90 |
% |
|
|
7.50 |
% |
|
|
6.50 |
% |
Rate of compensation increase |
|
|
4.20 |
% |
|
|
4.30 |
% |
|
|
3.00 |
% |
|
|
3.00 |
% |
|
NA |
|
|
NA |
|
|
|
|
(1) |
|
Plan assets and obligations are determined based on a September 30 measurement
date at September 30, 2008 and 2007. |
64
Johnson Controls, Inc.
Notes to Consolidated Financial Statements
|
|
The amounts in accumulated other comprehensive income on the balance sheet, exclusive of tax
impacts, that have not yet been recognized as components of net periodic benefit cost at September
30, 2008 are as follows (in millions): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement |
|
|
|
Pension |
|
|
Health and Other |
|
|
|
Benefits |
|
|
Benefits |
|
Accumulated other comprehensive loss (income) |
|
|
|
|
|
|
|
|
Net transition obligation |
|
$ |
4 |
|
|
$ |
|
|
Net actuarial loss (gain) |
|
|
595 |
|
|
|
(45 |
) |
Net prior service cost (credit) |
|
|
26 |
|
|
|
(28 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
625 |
|
|
$ |
(73 |
) |
|
|
|
|
|
|
|
The incremental effects of adoption of SFAS No. 158 on individual line items in the September 30,
2007 consolidated balance sheet are shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Application |
|
|
|
|
|
After Application |
|
|
of SFAS No. 158 |
|
Adjustments |
|
of SFAS No. 158 |
Other intangible assets, net |
|
$ |
779 |
|
|
$ |
(6 |
) |
|
$ |
773 |
|
Other noncurrent assets |
|
|
1,226 |
|
|
|
100 |
|
|
|
1,326 |
|
Postretirement health and other benefits |
|
|
324 |
|
|
|
(68 |
) |
|
|
256 |
|
Other noncurrent liabilities |
|
|
1,408 |
|
|
|
231 |
|
|
|
1,639 |
|
Accumulated other comprehensive income |
|
|
842 |
|
|
|
(60 |
) |
|
|
782 |
|
Retained earnings |
|
|
6,707 |
|
|
|
(9 |
) |
|
|
6,698 |
|
The amounts in accumulated other comprehensive income expected to be recognized as components of
net periodic benefit cover over the next fiscal year are shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement |
|
|
|
Pension |
|
|
Health and Other |
|
|
|
Benefits |
|
|
Benefits |
|
Amortization of: |
|
|
|
|
|
|
|
|
Net actuarial loss (gain) |
|
$ |
8 |
|
|
$ |
(3 |
) |
Net prior service cost (credit) |
|
|
2 |
|
|
|
(7 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
10 |
|
|
$ |
(10 |
) |
|
|
|
|
|
|
|
65
Johnson Controls, Inc.
Notes to Consolidated Financial Statements
The table that follows contains the components of net periodic benefit cost (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension |
|
|
Postretirement |
|
|
|
U.S. Plans |
|
|
Non-U.S. Plans |
|
|
Health and Other |
|
Year ended September 30 |
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
Components of Net Periodic Benefit Cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
79 |
|
|
$ |
74 |
|
|
$ |
87 |
|
|
$ |
39 |
|
|
$ |
38 |
|
|
$ |
38 |
|
|
$ |
5 |
|
|
$ |
6 |
|
|
$ |
7 |
|
Interest cost |
|
|
140 |
|
|
|
129 |
|
|
|
112 |
|
|
|
73 |
|
|
|
63 |
|
|
|
50 |
|
|
|
17 |
|
|
|
19 |
|
|
|
16 |
|
Expected return on plan assets |
|
|
(166 |
) |
|
|
(151 |
) |
|
|
(144 |
) |
|
|
(67 |
) |
|
|
(55 |
) |
|
|
(41 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of transitional obligation |
|
|
|
|
|
|
(2 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss (gain) |
|
|
6 |
|
|
|
10 |
|
|
|
36 |
|
|
|
6 |
|
|
|
8 |
|
|
|
9 |
|
|
|
(2 |
) |
|
|
|
|
|
|
2 |
|
Amortization of prior service cost (credit) |
|
|
2 |
|
|
|
2 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7 |
) |
|
|
(6 |
) |
|
|
(2 |
) |
Special termination benefits |
|
|
|
|
|
|
1 |
|
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Curtailment loss (gain) |
|
|
4 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
(2 |
) |
Currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
65 |
|
|
$ |
62 |
|
|
$ |
92 |
|
|
$ |
51 |
|
|
$ |
53 |
|
|
$ |
56 |
|
|
$ |
13 |
|
|
$ |
18 |
|
|
$ |
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense Assumptions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
6.50 |
% |
|
|
6.50 |
% |
|
|
5.50 |
% |
|
|
4.90 |
% |
|
|
4.60 |
% |
|
|
4.00 |
% |
|
|
6.50 |
% |
|
|
6.50 |
% |
|
|
5.50 |
% |
Expected return on plan assets |
|
|
8.50 |
% |
|
|
8.25 |
% |
|
|
8.75 |
% |
|
|
6.10 |
% |
|
|
5.60 |
% |
|
|
5.90 |
% |
|
NA |
|
NA |
|
NA |
Rate of compensation increase |
|
|
4.30 |
% |
|
|
3.60 |
% |
|
|
3.80 |
% |
|
|
3.00 |
% |
|
|
3.30 |
% |
|
|
2.75 |
% |
|
NA |
|
NA |
|
NA |
|
|
To better align the Companys resources with its growth strategies while reducing the cost
structure of its global operations, the Company committed to a restructuring plan (2008 Plan) in
the fourth quarter of fiscal 2008 and recorded a $495 million restructuring charge. The
restructuring charge relates to cost reduction initiatives in its automotive experience, building
efficiency and power solutions businesses and includes workforce reductions and plant
consolidations. The Company expects to substantially complete the initiative by early 2010. The
automotive-related restructuring is in response to the fundamentals of the European and North
American automotive markets. The actions target reductions in the Companys cost base by
decreasing excess manufacturing capacity due to lower industry production and the continued
movement of vehicle production to low-cost countries, especially in Europe. The restructuring
actions in building efficiency are primarily in Europe where the Company is centralizing certain
functions and rebalancing its resources to target the geographic markets with the greatest
potential growth. Power solutions actions are focused on optimizing its regional manufacturing
capacity. |
|
|
|
The 2008 Plan included workforce reductions of approximately 9,400 employees (3,700 for automotive
experience North America, 3,400 for automotive experience Europe, 300 for building efficiency
North America, 900 for building efficiency Europe, 600 for building efficiency rest of
world, and 500 for power solutions). 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, 2008,
approximately 750 of the employees have been separated from the company pursuant to the 2008 Plan.
In addition, the 2008 Plan includes 21 plant closures (9 for automotive experience North
America, 9 for automotive experience Europe, 1 for building efficiency North America, and 2
for power solutions). As of September 30, 2008, none of the plants have been closed. The
restructuring charge for the impairment of long-lived assets associated with the plant closures
was determined using fair value based on a discounted cash flow analysis. |
66
Johnson Controls, Inc.
Notes to Consolidated Financial Statements
|
|
The following table summarizes the changes in the Companys 2008 Plan reserve, included within
other current liabilities in the consolidated statements of financial position (in millions): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee |
|
|
|
|
|
|
|
|
|
|
|
|
Severance and |
|
|
|
|
|
|
|
|
|
|
|
|
Termination |
|
|
Fixed Asset |
|
|
|
|
|
|
|
|
|
Benefits |
|
|
Impairment |
|
|
Other |
|
|
Total |
|
Original reserve |
|
$ |
443 |
|
|
$ |
43 |
|
|
$ |
9 |
|
|
$ |
495 |
|
Utilized Cash |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
(8 |
) |
Utilized Noncash |
|
|
|
|
|
|
(43 |
) |
|
|
|
|
|
|
(43 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2008 |
|
$ |
435 |
|
|
$ |
|
|
|
$ |
9 |
|
|
$ |
444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included within the other category are exit costs for terminating supply contracts associated
with changes in the Companys manufacturing footprint and strategies, lease termination costs and
other direct costs. |
|
|
|
In the third quarter of fiscal 2006, the Company committed to a restructuring plan (2006 Plan) to
reduce costs and improve the efficiency of its global operations and recorded a $197 million
restructuring charge in that quarter. During the fourth quarter of fiscal 2006, the Company
increased its 2006 Plan restructuring charge by $8 million for additional employee severance and
termination benefits. This restructuring charge included workforce reductions of approximately
5,000 employees. 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. In addition, the 2006 Plan included 15 plant
closures, of which 14 have been completed as of September 30, 2008. The charge for the impairment
of the long-lived assets associated with the plant closures was determined using fair value based
on a discounted cash flow analysis. As of September 30, 2007, the remaining 2006 Plan reserves
were $45 million. During fiscal 2008, the Company utilized $31 million of the reserve through cash
payments ($26 million for employee severance and termination benefits and $5 million in other
restructuring costs). |
|
|
|
In conjunction with the December 2005 York acquisition, the Company recorded restructuring reserves
of $161 million, including workforce reductions of approximately 3,150 building efficiency
employees, the closure of two manufacturing plants, the merging of other plants and branch offices
with existing Company facilities and contract terminations. These restructuring activities were
recorded as costs of the acquisition and were provided for in accordance with FASB Emerging Issues
Task Force (EITF) Issue No. 95-3, Recognition of Liabilities in Connection with a Purchase
Business Combination. |
|
|
|
As of September 30, 2007, the remaining York restructuring reserves were $56 million. During
fiscal 2008, the Company utilized $25 million of the reserve through cash payments ($11 million
for employee severance and termination benefits and $14 million in other restructuring costs) and
$17 million in noncash adjustments. |
|
|
|
During the second quarter of fiscal 2008, due primarily to a need for increased manufacturing
capacity and changes in the global footprint, the Company reversed its decision to close two plants
originally included in the York restructuring plan. In addition, due to voluntary employee turnover
and the decision not to close the two York manufacturing plants, the number of total workforce
reductions decreased from 3,150 to 2,800. As such, severance costs were lower than the original
liability recognized. In accordance with EITF 95-3, the excess reserves of $21 million were
reversed to goodwill during the second quarter of fiscal 2008. |
|
|
|
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, lead to impairment charges and/or require additional restructuring of its operations. |
67
Johnson Controls, Inc.
Notes to Consolidated Financial Statements
16. |
|
INCOME TAXES |
|
|
|
An analysis of effective income tax rates for continuing operations is shown below: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Federal statutory rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
State income taxes, net of federal benefit |
|
|
2.0 |
|
|
|
0.8 |
|
|
|
2.7 |
|
Foreign income tax expense at different rates and
foreign losses without tax benefits |
|
|
(11.2 |
) |
|
|
(10.7 |
) |
|
|
(22.5 |
) |
U.S. tax on foreign income |
|
|
(1.5 |
) |
|
|
(5.6 |
) |
|
|
(2.6 |
) |
Reserve and valuation allowance adjustments |
|
|
|
|
|
|
(0.9 |
) |
|
|
(8.3 |
) |
Other |
|
|
(0.1 |
) |
|
|
0.1 |
|
|
|
1.2 |
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate |
|
|
24.2 |
% |
|
|
18.7 |
% |
|
|
5.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
The Companys base effective income tax rate for continuing operations for fiscal years 2008,
2007, and 2006 was 21.0%. The rate remained stable and below the U.S. statutory rate due to
continuing global tax planning initiatives and income in certain non-U.S. jurisdictions with a
rate of tax lower than the U.S. statutory tax rate. The Companys effective tax rates were further
adjusted as a result of the following discrete items (in millions): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Federal, state and foreign income tax expense
at base effective income tax rate |
|
$ |
278 |
|
|
$ |
337 |
|
|
$ |
239 |
|
Restructuring charge |
|
|
43 |
|
|
|
|
|
|
|
(19 |
) |
Valuation allowance adjustments |
|
|
|
|
|
|
(7 |
) |
|
|
(163 |
) |
Uncertain tax positions |
|
|
|
|
|
|
(28 |
) |
|
|
(10 |
) |
Change in statutory tax rates |
|
|
|
|
|
|
20 |
|
|
|
|
|
Foreign dividend repatriation |
|
|
|
|
|
|
|
|
|
|
31 |
|
Disposition of a joint venture |
|
|
|
|
|
|
|
|
|
|
(4 |
) |
Change in tax status of foreign subsidiaries |
|
|
|
|
|
|
(22 |
) |
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
$ |
321 |
|
|
$ |
300 |
|
|
$ |
63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring Charge |
|
|
|
In the fourth quarter of fiscal 2008, the Company recorded a $43 million discrete period tax
adjustment related to the fourth quarter 2008 restructuring charge using a blended statutory tax
rate of 12.4%. |
|
|
|
In the third quarter of fiscal 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 |
|
|
|
The Company reviews its deferred tax asset valuation allowances on a quarterly basis, or whenever
events or changes in circumstances indicate that a review is required. In determining the
requirement for a valuation allowance, the historical and projected financial results of the legal
entity or consolidated group recording the net deferred tax asset is considered, along
with any other positive or negative evidence. Since future financial results may differ from
previous estimates, periodic adjustments to the Companys valuation allowances may be necessary. |
|
|
|
In the fourth quarter of fiscal 2007, the tax provision decreased $7 million due to a nonrecurring
tax benefit related to the use of a portion of the Companys capital loss carryforward valuation
allowance. |
68
Johnson Controls, Inc.
Notes to Consolidated Financial Statements
|
|
In the third quarter of fiscal 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 quarter ended June 30, 2006 as a credit to
income tax expense, net of remaining valuation allowances at certain German subsidiaries and tax
reserve requirements. |
|
|
|
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 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 quarter ended March 31, 2006, the Company reversed the valuation allowance of $32 million
attributable to these operating loss and tax credit carryforwards as a credit to income tax
expense. |
|
|
|
Uncertain Tax Positions |
|
|
|
In June 2006, FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109. FIN 48 prescribes a comprehensive model for how a
company should recognize, measure, present, and disclose in its financial statements uncertain tax
positions that a company has taken or expects to take on a tax return. The Company adopted FIN 48
as of October 1, 2007. |
|
|
|
Upon adoption, the Company increased its existing reserves for uncertain tax positions by $93
million. The increase was recorded as a cumulative effect adjustment to shareholders equity of $68
million and an increase to goodwill of $25 million related to business combinations in prior years.
As of the adoption date, the Company had gross tax effected unrecognized tax benefits of $616
million of which $475 million, if recognized, would affect the effective tax rate. Also as of the
adoption date, the Company had accrued interest expense and penalties related to the unrecognized
tax benefits of $75 million (net of tax benefit). The Company recognizes interest and penalties
related to unrecognized tax benefits as a component of income tax expense or goodwill, when
applicable. |
|
|
|
At September 30, 2008, the Company had gross tax effected unrecognized tax benefits of $814 million
of which $674 million, if recognized, would impact the effective tax rate. Total net accrued
interest at September 30, 2008 was approximately $80 million (net of tax benefit). A reconciliation
of the beginning and ending amount of unrecognized tax benefits is as follows: |
|
|
|
|
|
Beginning balance |
|
$ |
616 |
|
Additions for tax positions related to the current year |
|
|
186 |
|
Additions for tax positions of prior years |
|
|
21 |
|
Reductions for tax positions of prior years |
|
|
(9 |
) |
|
|
|
|
Ending balance |
|
$ |
814 |
|
|
|
|
|
|
|
The Company is subject to income taxes in the U.S. and numerous non-U.S. jurisdictions. Judgment is
required in determining its worldwide provision for income taxes and recording the related assets
and liabilities. In the ordinary course of the Companys business, there are many transactions and
calculations where the ultimate tax determination is uncertain. The Company is regularly under
audit by tax authorities including the major jurisdictions noted below: |
69
Johnson Controls, Inc.
Notes to Consolidated Financial Statements
|
|
|
Tax Jurisdiction |
|
Statute of Limitations |
Austria
|
|
5 years |
Belgium
|
|
3 years |
Canada
|
|
5 years |
China
|
|
3 to 5 years |
Czech Republic
|
|
3 years |
France
|
|
3 years |
Germany
|
|
4 to 5 years |
Italy
|
|
4 years |
Japan
|
|
5 to 7 years |
Mexico
|
|
5 years |
Netherlands
|
|
3 to 5 years |
Spain
|
|
4 years |
United Kingdom
|
|
6 years |
United States Federal
|
|
3 years |
United States State
|
|
3 to 5 years |
In the U.S., the Companys tax returns for fiscal 2004 through fiscal 2006 are currently under exam
by the Internal Revenue Service (IRS) and the Companys tax returns for fiscal 1999 through fiscal
2003 are currently under IRS Appeals. Additionally, the Companys tax returns are currently under
exam in the following major foreign jurisdictions:
|
|
|
Tax Jurisdiction |
|
Tax Years Covered |
Austria
|
|
2004-2005 |
Belgium
|
|
2006-2007 |
Canada
|
|
2004-2006 |
France
|
|
2005-2007 |
Germany
|
|
2001-2003 |
Italy
|
|
2004-2005 |
Spain
|
|
2003-2005 |
|
|
In the twelve months ended September 30, 2008, the Company finalized its U.S. federal tax
litigation for fiscal 1997 and fiscal 1998 and, consistent with the established reserves, made a
tax payment of $27 million. It is reasonably possible that certain other U.S. and non-U.S. tax
examinations, appellate proceedings and/or tax litigation will conclude within the next 12 months,
including the resolution of the fiscal 1999 through fiscal 2003 U.S. federal tax years. However,
it is not possible to reasonably estimate the effect this may have upon the unrecognized tax
benefits. There was no other significant change in the total unrecognized tax benefits due to the
settlement of audits, the expiration of the statute of limitations, or from other items arising
during the twelve months ended September 30, 2008. |
|
|
In the second and fourth quarters of fiscal 2007, the Company reduced its income tax liability by
$15 million and $13 million, respectively, due to the favorable resolution of certain tax audits.
In the third quarter of fiscal 2006, the Company recorded a $10 million tax benefit related to a
favorable tax audit resolution in a non-U.S. jurisdiction. |
|
|
Change in Statutory Tax Rates |
|
|
In December 2007, Canada enacted a new tax law which effectively reduced the income tax rates from
35% to 32%. A Business Flat Tax (IETU) was enacted on October 1, 2007, in Mexico that provides
for a tax rate of 16.5% to 17.5% on a modified tax base with a credit for corporate income tax
paid. On December 28, 2007, Italy enacted reductions in regional taxes from 4.25% to 3.9%
effective January 1, 2008. These tax law changes will not have a material impact on the companys
consolidated financial condition, results of operations or cash flows.
|
70
Johnson Controls, Inc.
Notes to Consolidated Financial Statements
|
|
The German Corporate Tax Reform Act was enacted on August 14, 2007, and resulted in a decrease of
the combined Corporate Income Tax and Trade Tax rates. The new rates will apply to the Companys
German entities effective October 1, 2007. The Companys tax provision increased $20 million in the fourth quarter of fiscal 2007 as a
result of this German tax law change. |
|
|
|
In March 2007, the Peoples National Congress in the Peoples Republic of China approved a new tax
reform law to align the tax regime applicable to non-U.S.-owned Chinese enterprises with those
applicable to domestically-owned Chinese enterprises. The new law was effective on January 1,
2008. The tax reform law will not have a material impact on the Companys consolidated financial
condition, results of operations or cash flows. |
|
|
|
On July 19, 2007, the U.K. enacted a new tax law, which reduces the main corporate income tax rate
from 30% to 28%. The reduction goes into effect on April 1, 2008. The U.K. tax rate change will
not have a material impact on the Companys consolidated financial condition, results of
operations or cash flows. |
|
|
|
Foreign Dividend Repatriation |
|
|
|
In October 2004, the U.S. 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 percent dividends received deduction for certain dividends from controlled
non-U.S. operations. The deduction was subject to a number of limitations. During the quarter
ended March 31, 2006, the Company completed its evaluation of its repatriation plans and
approximately $674 million of non-U.S. earnings were designated for repatriation 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 quarter ended March 31, 2006 as $11 million had been previously recorded by York
prior to the acquisition in accordance with Yorks approved repatriation plan. |
|
|
|
Disposition of a Joint Venture |
|
|
|
In the first quarter of fiscal 2006, the tax provision decreased due to a $4 million nonrecurring
tax benefit related to a $9 million gain from the disposition of the Companys interest in a German
joint venture. |
|
|
|
Change in Tax Status of non-U.S. Subsidiary |
|
|
|
For the second quarter of fiscal 2007, the tax provision decreased as a result of a $22 million
tax benefit realized by a change in tax status of an automotive experience subsidiary in the
Netherlands. During the first quarter of fiscal 2006, the tax provision decreased as a result of
an $11 million tax benefit realized by a change in tax status of an automotive experience
subsidiary in Hungary and a building efficiency subsidiary in the Netherlands. |
|
|
|
The change in tax status in each respective period resulted from a voluntary tax election that
produced a deemed liquidation for U.S. federal income tax purposes. The Company received a tax
benefit in the U.S. for the loss from the decrease in value from the original tax basis of these
investments. This election changed the tax status of the respective subsidiaries from controlled
non-U.S. corporations (i.e., taxable entities) to branches (i.e., flow through entities similar to
a partnership) for U.S. federal income tax purposes and is thereby reported as a discrete period
tax benefit in accordance with the provisions of SFAS No. 109. |
|
|
|
Discontinued Operations |
|
|
|
In fiscal 2007, the Company utilized an effective tax rate for discontinued operations of
approximately 38% for Bristol Compressors and 35% for its engine electronic business, which
approximates the local statutory rate adjusted for permanent differences.
|
71
Johnson Controls, Inc.
Notes to Consolidated Financial Statements
|
|
Continuing Operations |
|
|
|
Components of the provision for income taxes on continuing operations were as follows (in
millions): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
136 |
|
|
$ |
95 |
|
|
$ |
259 |
|
State |
|
|
26 |
|
|
|
28 |
|
|
|
67 |
|
Foreign |
|
|
199 |
|
|
|
240 |
|
|
|
141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
361 |
|
|
|
363 |
|
|
|
467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
13 |
|
|
|
(64 |
) |
|
|
(5 |
) |
State |
|
|
9 |
|
|
|
(2 |
) |
|
|
(27 |
) |
Foreign |
|
|
(62 |
) |
|
|
3 |
|
|
|
(372 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(40 |
) |
|
|
(63 |
) |
|
|
(404 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
$ |
321 |
|
|
$ |
300 |
|
|
$ |
63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated domestic income from continuing operations before income taxes and minority interests
for the fiscal years ended September 30, 2008, 2007 and 2006 was $897 million, $883 million and
$754 million, respectively. Consolidated non-U.S. income from continuing operations before income
taxes and minority interests for the fiscal years ended September 30, 2008, 2007 and 2006 was $426
million, $724 million and $384 million, respectively. |
|
|
|
Income taxes paid for the fiscal years ended September 30, 2008, 2007 and 2006 were $317 million,
$306 million, and $156 million, respectively. |
|
|
|
The Company has not provided additional U.S. income taxes on approximately $3.1 billion of
undistributed earnings of consolidated non-U.S. subsidiaries included in stockholders equity.
Such earnings could become taxable upon the sale or liquidation of these non-U.S. subsidiaries or
upon dividend repatriation. The Companys intent is for such earnings to be reinvested by the
subsidiaries or to be repatriated only when it would be tax effective through the utilization of
foreign tax credits. 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, |
|
|
|
2008 |
|
|
2007 |
|
Other current assets |
|
$ |
524 |
|
|
$ |
388 |
|
Other noncurrent assets |
|
|
1,171 |
|
|
|
932 |
|
Other current liabilities |
|
|
(36 |
) |
|
|
(30 |
) |
Other noncurrent liabilities |
|
|
(29 |
) |
|
|
(134 |
) |
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
1,630 |
|
|
$ |
1,156 |
|
|
|
|
|
|
|
|
Temporary differences and carryforwards which gave rise to deferred tax assets and liabilities
included (in millions):
72
Johnson Controls, Inc.
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
Deferred tax assets |
|
|
|
|
|
|
|
|
Accrued expenses and reserves |
|
$ |
778 |
|
|
$ |
727 |
|
Employee and retiree benefits |
|
|
368 |
|
|
|
246 |
|
Net operating loss and other carryforwards |
|
|
1,072 |
|
|
|
898 |
|
Reasearch and development |
|
|
249 |
|
|
|
173 |
|
Other |
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,495 |
|
|
|
2,044 |
|
Valuation allowances |
|
|
(373 |
) |
|
|
(326 |
) |
|
|
|
|
|
|
|
|
|
|
2,122 |
|
|
|
1,718 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities |
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
|
104 |
|
|
|
65 |
|
Joint ventures |
|
|
66 |
|
|
|
35 |
|
Intangible assets |
|
|
168 |
|
|
|
282 |
|
Foreign currency translation adjustments |
|
|
154 |
|
|
|
155 |
|
Other |
|
|
|
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
492 |
|
|
|
562 |
|
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
1,630 |
|
|
$ |
1,156 |
|
|
|
|
|
|
|
|
|
|
At September 30, 2008, the Company had available non-U.S. net operating loss carryforwards of
approximately $2.7 billion, of which $750 million will expire at various dates between 2009 and
2027, 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. |
17. |
|
SEGMENT INFORMATION |
|
|
|
SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, establishes
the standards for reporting information about 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 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 |
|
|
|
Building efficiency designs, produces, markets and installs HVAC and control systems that monitor,
automate and integrate critical building segment equipment and conditions including HVAC,
fire-safety and security in commercial buildings and in various industrial applications. |
|
|
|
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. |
73
Johnson Controls, Inc.
Notes to Consolidated Financial Statements
|
|
|
Global 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 panels and 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 segment income, which represents income from continuing operations
before income taxes and minority interests excluding net financing charges and restructuring
costs. Segment revenues and expenses are allocated to business segments in determining segment
income. Unallocated assets are corporate cash and cash equivalents, investments in partially-owned
affiliates and other non-segment assets. Financial information relating to the Companys
reportable segments is as follows (in millions): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Net Sales |
|
|
|
|
|
|
|
|
|
|
|
|
Building efficiency |
|
|
|
|
|
|
|
|
|
|
|
|
North America systems |
|
$ |
2,282 |
|
|
$ |
2,027 |
|
|
$ |
1,609 |
|
North America service |
|
|
2,409 |
|
|
|
2,273 |
|
|
|
1,943 |
|
North America unitary products |
|
|
810 |
|
|
|
953 |
|
|
|
853 |
|
Global workplace solutions |
|
|
3,197 |
|
|
|
2,677 |
|
|
|
2,046 |
|
Europe |
|
|
2,710 |
|
|
|
2,406 |
|
|
|
1,900 |
|
Rest of world |
|
|
2,713 |
|
|
|
2,401 |
|
|
|
1,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,121 |
|
|
|
12,737 |
|
|
|
10,245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive experience |
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
|
6,723 |
|
|
|
7,276 |
|
|
|
8,041 |
|
Europe |
|
|
9,854 |
|
|
|
8,878 |
|
|
|
8,774 |
|
Asia |
|
|
1,514 |
|
|
|
1,398 |
|
|
|
1,459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,091 |
|
|
|
17,552 |
|
|
|
18,274 |
|
Power solutions |
|
|
5,850 |
|
|
|
4,335 |
|
|
|
3,716 |
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
$ |
38,062 |
|
|
$ |
34,624 |
|
|
$ |
32,235 |
|
|
|
|
|
|
|
|
|
|
|
74
Johnson Controls, Inc.
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Segment Income |
|
|
|
|
|
|
|
|
|
|
|
|
Building efficiency |
|
|
|
|
|
|
|
|
|
|
|
|
North America systems |
|
$ |
256 |
|
|
$ |
216 |
|
|
$ |
131 |
|
North America service (1) |
|
|
224 |
|
|
|
197 |
|
|
|
146 |
|
North America unitary products (2) |
|
|
2 |
|
|
|
65 |
|
|
|
62 |
|
Global workplace solutions (3) |
|
|
59 |
|
|
|
79 |
|
|
|
67 |
|
Europe (4) |
|
|
114 |
|
|
|
77 |
|
|
|
2 |
|
Rest of world (5) |
|
|
302 |
|
|
|
216 |
|
|
|
136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
957 |
|
|
|
850 |
|
|
|
544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive experience |
|
|
|
|
|
|
|
|
|
|
|
|
North America (6) |
|
|
79 |
|
|
|
72 |
|
|
|
188 |
|
Europe (7) |
|
|
464 |
|
|
|
445 |
|
|
|
405 |
|
Asia (8) |
|
|
36 |
|
|
|
2 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
579 |
|
|
|
519 |
|
|
|
605 |
|
|
|
|
|
|
|
|
|
|
|
Power solutions (9) |
|
|
541 |
|
|
|
515 |
|
|
|
459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,077 |
|
|
|
1,884 |
|
|
|
1,608 |
|
|
|
|
|
|
|
|
|
|
|
Net financing charges |
|
|
(258 |
) |
|
|
(277 |
) |
|
|
(273 |
) |
Restructuring costs |
|
|
(495 |
) |
|
|
|
|
|
|
(197 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from
continuing operations before income taxes and minority interests |
|
$ |
1,324 |
|
|
$ |
1,607 |
|
|
$ |
1,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Building efficiency |
|
|
|
|
|
|
|
|
|
|
|
|
North America systems |
|
$ |
1,556 |
|
|
$ |
1,424 |
|
|
$ |
1,550 |
|
North America service |
|
|
1,621 |
|
|
|
1,575 |
|
|
|
1,442 |
|
North America unitary products |
|
|
1,336 |
|
|
|
1,316 |
|
|
|
1,055 |
|
Global workplace solutions |
|
|
797 |
|
|
|
689 |
|
|
|
707 |
|
Europe |
|
|
1,937 |
|
|
|
1,971 |
|
|
|
1,850 |
|
Rest of world |
|
|
2,142 |
|
|
|
1,897 |
|
|
|
1,986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,389 |
|
|
|
8,872 |
|
|
|
8,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive experience |
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
|
3,781 |
|
|
|
3,721 |
|
|
|
3,284 |
|
Europe |
|
|
5,130 |
|
|
|
5,047 |
|
|
|
5,224 |
|
Asia |
|
|
980 |
|
|
|
965 |
|
|
|
851 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,891 |
|
|
|
9,733 |
|
|
|
9,359 |
|
|
|
|
|
|
|
|
|
|
|
Power solutions |
|
|
4,699 |
|
|
|
4,509 |
|
|
|
2,827 |
|
|
|
|
|
|
|
|
|
|
|
Unallocated |
|
|
1,008 |
|
|
|
991 |
|
|
|
1,145 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
24,987 |
|
|
$ |
24,105 |
|
|
$ |
21,921 |
|
|
|
|
|
|
|
|
|
|
|
75
Johnson Controls, Inc.
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Depreciation/Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
Building efficiency |
|
|
|
|
|
|
|
|
|
|
|
|
North America systems |
|
$ |
20 |
|
|
$ |
10 |
|
|
$ |
15 |
|
North America service |
|
|
13 |
|
|
|
15 |
|
|
|
18 |
|
North America unitary products |
|
|
21 |
|
|
|
22 |
|
|
|
20 |
|
Global workplace solutions |
|
|
13 |
|
|
|
10 |
|
|
|
12 |
|
Europe |
|
|
21 |
|
|
|
28 |
|
|
|
24 |
|
Rest of world |
|
|
25 |
|
|
|
17 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113 |
|
|
|
102 |
|
|
|
114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive experience |
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
|
212 |
|
|
|
212 |
|
|
|
201 |
|
Europe |
|
|
258 |
|
|
|
238 |
|
|
|
226 |
|
Asia |
|
|
32 |
|
|
|
29 |
|
|
|
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
502 |
|
|
|
479 |
|
|
|
456 |
|
|
|
|
|
|
|
|
|
|
|
Power solutions |
|
|
168 |
|
|
|
151 |
|
|
|
135 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
783 |
|
|
$ |
732 |
|
|
$ |
705 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Capital Expenditures |
|
|
|
|
|
|
|
|
|
|
|
|
Building efficiency |
|
|
|
|
|
|
|
|
|
|
|
|
North America systems |
|
$ |
74 |
|
|
$ |
43 |
|
|
$ |
6 |
|
North America service |
|
|
11 |
|
|
|
15 |
|
|
|
13 |
|
North America unitary products |
|
|
28 |
|
|
|
10 |
|
|
|
13 |
|
Global workplace solutions |
|
|
11 |
|
|
|
5 |
|
|
|
14 |
|
Europe |
|
|
22 |
|
|
|
52 |
|
|
|
18 |
|
Rest of world |
|
|
47 |
|
|
|
20 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
193 |
|
|
|
145 |
|
|
|
89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive experience |
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
|
143 |
|
|
|
116 |
|
|
|
218 |
|
Europe |
|
|
292 |
|
|
|
217 |
|
|
|
182 |
|
Asia |
|
|
27 |
|
|
|
14 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
462 |
|
|
|
347 |
|
|
|
425 |
|
|
|
|
|
|
|
|
|
|
|
Power solutions |
|
|
152 |
|
|
|
336 |
|
|
|
197 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
807 |
|
|
$ |
828 |
|
|
$ |
711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Building efficiency North America service segment income for the year ended September 30,
2006 excludes $1 million of restructuring costs. |
|
(2) |
|
Building efficiency North America unitary products segment income for the year ended
September 30, 2008 excludes $5 million of restructuring costs. |
|
(3) |
|
Building efficiency Global workplace solutions segment income for the years ended
September 30, 2008 and September 30, 2006 excludes $11 million and $7 million, respectively,
of restructuring costs. |
|
(4) |
|
Building efficiency Europe segment income for the years ended September 30, 2008 and
September 30, 2006 excludes $88 million and $40 million, respectively, of restructuring
costs. |
|
(5) |
|
Building efficiency Rest of world segment income for the years ended September 30, 2008
and September 30, 2006 excludes $5 million and $17 million, respectively, of restructuring
costs. |
76
Johnson Controls, Inc.
Notes to Consolidated Financial Statements
|
|
|
(6) |
|
Automotive experience North America segment income for the years ended September 30, 2008
and September 30, 2006 excludes $102 million and $75 million, respectively, of restructuring
costs. For the years ended September 30, 2008, 2007 and 2006, North
America segment income includes $27 million, $25 million and $41
million, respectively, of equity income. |
|
(7) |
|
Automotive experience Europe segment income for the years ended September 30, 2008 and
September 30, 2006 excludes $208 million and $53 million, respectively, of restructuring
costs. For the years ended September 30, 2008, 2007 and 2006, Europe
segment income includes $9 million, $11 million and $10 million,
respectively, of equity income. |
|
(8) |
|
Automotive experience Asia segment income for the years ended September 30, 2008 and
September 30, 2006 excludes $4 million and $1 million,
respectively, of restructuring costs. For the years ended September
30, 2008, 2007 and 2006, Asia segment income includes $52 million,
$43 million and $40 million, respectively, of equity income. |
|
(9) |
|
Power solutions segment income for the years ended September 30, 2008 and September 30, 2006
excludes $72 million and $3 million, respectively, of
restructuring costs. For the years ended September 30, 2008, 2007 and
2006, power solutions segment income includes $25 million, $3 million
and $15 million, respectively, of equity income. |
|
|
In fiscal 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. |
|
|
The Company has significant sales to the automotive industry. In fiscal year 2006, Ford Motor
Company, General Motors Corporation and the former DaimlerChrysler AG exceeded 10% of consolidated
net sales at 10%, 11%, and 11%, respectively. In fiscal years 2008 and 2007, no customer exceeded
10% of consolidated net sales. |
|
|
Geographic Segments |
|
|
|
Financial information relating to the Companys operations by geographic area is as follows (in
millions): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Net Sales |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
13,372 |
|
|
$ |
13,753 |
|
|
$ |
12,822 |
|
Germany |
|
|
4,009 |
|
|
|
4,335 |
|
|
|
3,390 |
|
Other European countries |
|
|
10,956 |
|
|
|
8,701 |
|
|
|
9,208 |
|
Other foreign |
|
|
9,725 |
|
|
|
7,835 |
|
|
|
6,815 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
38,062 |
|
|
$ |
34,624 |
|
|
$ |
32,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Lived Assets (Year-end) |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
1,675 |
|
|
$ |
1,547 |
|
|
$ |
1,563 |
|
Germany |
|
|
607 |
|
|
|
578 |
|
|
|
448 |
|
Other European countries |
|
|
1,083 |
|
|
|
1,052 |
|
|
|
1,044 |
|
Other foreign |
|
|
1,024 |
|
|
|
1,031 |
|
|
|
913 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,389 |
|
|
$ |
4,208 |
|
|
$ |
3,968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales attributed to geographic locations are based on the location of the assets producing the
sales. Long-lived assets by geographic location consist of net property, plant and equipment. |
18. |
|
COMMITMENTS AND CONTINGENCIES |
|
|
|
As previously reported, following allegations in a U.N. Oil-For-Food Inquiry Report that, prior to
the Companys acquisition of York, York had made improper payments to the Iraqi regime, York and
the Company jointly undertook to investigate the allegations and offered the companies cooperation
to the United States Department of Justice (the DOJ) and the U.S. Securities and Exchange
Commission (SEC). After completing the York acquisition, the Company continued the internal inquiry
and expanded its scope to include other aspects of Yorks Middle East operations, including a
review of Yorks use of agents, consultants and other third parties, Yorks compliance with the
Office of Foreign Assets Control licensing requirements, and Yorks compliance with other
potentially applicable trade laws. The Company also reviewed certain of Yorks sales practices in
other markets. In October 2007, York reached settlements relating to the SEC and DOJ investigations
regarding payments made by York and its subsidiaries in connection with the United Nations
Oil-for-Food Program and other payments unrelated to the Oil-for-Food Program. Specifically, York
entered into an agreement with the SEC under which York consented to the entry of a civil
injunction proscribing future violations of law. York also entered
|
77
Johnson Controls, Inc.
Notes to Consolidated Financial Statements
|
|
into an agreement with the DOJ
under which the DOJ agreed to defer prosecuting York for three criminal charges. The DOJ will not
pursue the charges if York complies with the agreement for its three-year term. The Company has
retained an independent compliance monitor for three years in accordance with the agreements with
both the SEC and DOJ. York paid an aggregate of approximately $22 million to the SEC and the DOJ
pursuant to these settlements, which payments were characterized as disgorgement of profits,
criminal and civil penalties and interest. The Company had adequately reserved for this amount as
part of the York acquisition. The Company is offering continued cooperation to the relevant
authorities in the U.S. Department of Commerce and has been in discussions with that agency to
explore how these matters may be resolved and expects that any additional sanctions will not be
material. The Company is in the process of evaluations and implementing various remedial measures
with respect to York operations. |
|
|
|
The Company accrues for potential environmental losses in a manner consistent with accounting
principles generally accepted in the United States; that is, when it is probable a loss has been
incurred and the amount of the loss is reasonably estimable. Reserves for environmental costs
totaled $44 million and $41 million at September 30, 2008 and 2007, respectively. The Company
reviews the status of its environmental sites on a quarterly basis and adjusts its reserves
accordingly. Such potential liabilities accrued by the Company do not take into consideration
possible recoveries of future insurance proceeds. They do, however, take into account the likely
share other parties will bear at remediation sites. It is difficult to estimate the Companys
ultimate level of liability at many remediation sites due to the large number of other parties that
may be involved, the complexity of determining the relative liability among those parties, the
uncertainty as to the nature and scope of the investigations and remediation to be conducted, the
uncertainty in the application of law and risk
assessment, the various choices and costs associated with diverse technologies that may be used in
corrective actions at the sites, and the often quite lengthy periods over which eventual
remediation may occur. Nevertheless, the Company has no reason to believe at the present time that
any claims, penalties or costs in connection with known environmental matters will have a material
adverse effect on the Companys financial position, results of operations or cash flows. In
addition, the Company has identified asset retirement obligations for environmental matters that
are expected to be addressed at the retirement, disposal, removal or abandonment of existing owned
facilities, primarily in the power solutions business. At September 30, 2008 and 2007, the Company
recorded conditional asset retirement obligations of $75 million and $81 million, respectively. |
|
|
|
The Company is involved in a number of product liability and various other suits incident to the
operation of its businesses. Insurance coverages are maintained and estimated costs are recorded
for claims and suits of this nature. It is managements opinion that none of these will have a
material adverse effect on the Companys financial position, results of operations or cash flows.
Costs related to such matters were not material to the periods presented. |
|
|
|
The Company has entered into supply contracts with certain vendors that include minimum volume
requirements which, if not met, could subject the Company to potential liabilities. At the end of
fiscal 2008, there were no known volume shortfalls for which the Company was contractually
obligated. If terminated, these supply contracts could result in liabilities that, if incurred,
could be material to the Companys consolidated financial condition, results of operations or cash
flows. |
|
|
|
A significant portion of the Companys sales are to customers in the automotive industry. Continued
adverse developments in the North American or European automotive industries could impact the
Companys liquidity position and/or require additional restructuring of the Companys operations or
impairment charges. In addition, a prolonged downturn in the automotive market may also impact
certain vendors financial solvency, including the ability to meet restrictive debt covenants,
resulting in potential liabilities or additional costs to the Company to ensure uninterrupted
supply to its customers. |
78
JOHNSON CONTROLS, INC. AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, |
|
2008 |
|
|
2007 |
|
|
2006 |
|
Accounts Receivable Allowance for Doubtful Accounts |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
75 |
|
|
$ |
80 |
|
|
$ |
47 |
|
Provision charged to costs and expenses |
|
|
52 |
|
|
|
40 |
|
|
|
30 |
|
Reserve adjustments |
|
|
(26 |
) |
|
|
(25 |
) |
|
|
(14 |
) |
Accounts charged off |
|
|
(15 |
) |
|
|
(22 |
) |
|
|
(17 |
) |
Acquisition of businesses |
|
|
|
|
|
|
|
|
|
|
35 |
|
Currency translation |
|
|
1 |
|
|
|
2 |
|
|
|
(1 |
) |
|
|
|
Balance at end of period |
|
$ |
87 |
|
|
$ |
75 |
|
|
$ |
80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Assets Valuation Allowance |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
326 |
|
|
$ |
355 |
|
|
$ |
573 |
|
Allowance established for new operating
and other loss carryforwards |
|
|
110 |
|
|
|
22 |
|
|
|
26 |
|
Acquisition of businesses |
|
|
(6 |
) |
|
|
|
|
|
|
60 |
|
Allowance reversed for loss carryforwards utilized
and other adjustments |
|
|
(57 |
) |
|
|
(51 |
) |
|
|
(304 |
) |
|
|
|
Balance at end of period |
|
$ |
373 |
|
|
$ |
326 |
|
|
$ |
355 |
|
|
|
|
|
|
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
|
|
ITEM 9A CONTROLS AND PROCEDURES |
|
|
Disclosure Controls and Procedures |
|
|
|
The Companys management, with the participation of the Companys Chief Executive Officer and Chief
Financial Officer, have evaluated the effectiveness of the Companys disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) under the Securities Exchange Act of 1934,
as amended (the Exchange Act)) as of the end of the period covered by this report. Based on such
evaluations, the Companys Chief Executive Officer and Chief Financial Officer have concluded that,
as of the end of such period, the Companys disclosure controls and procedures are effective in
recording, processing, summarizing, and reporting, on a timely basis, information required to be
disclosed by the Company in the reports that it files or submits under the Exchange Act, and that
information is accumulated and communicated to the Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely discussions regarding required disclosure. |
|
|
|
Managements Report on Internal Control Over Financial Reporting |
|
|
|
The Companys management is responsible for establishing and maintaining adequate internal control
over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Companys
management, with the participation of the Companys Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Companys internal control over financial reporting
based on the framework in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this evaluation, the companys
management has concluded that, as of September 30, 2008, the Companys internal control over
financial reporting was effective. |
|
|
|
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
|
79
|
|
PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited the
Companys consolidated financial statements and the effectiveness of internal controls over
financial reporting as of September 30, 2008 as stated in their report which is included herein. |
|
|
|
Changes in Internal Control Over Financial Reporting |
|
|
|
There has not been any change in the Companys internal control over financial reporting during
the quarter ended September 30, 2008, that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting. |
|
|
ITEM 9B OTHER INFORMATION |
|
|
The information required by Part III, Items 10, 11, 13 and 14, and certain of the information
required by Item 12, is incorporated herein by reference to the Companys Proxy Statement for its
2009 Annual Meeting of Shareholders (fiscal 2008 Proxy Statement), dated and to be filed with the
SEC on or about December 5, 2008, as follows: |
|
|
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
|
|
Incorporated by reference to the sections entitled Proposal One: Election of Directors, Q: Where
can I find Corporate Governance materials for Johnson Controls?, Director Compensation, Board
Information, Audit Committee Report, and Beneficial Ownership Reporting Compliance Section
16(a), of the fiscal 2008 Proxy Statement. Required information on executive officers of the
Company appears at Part I, Item 4 of this report. |
|
|
ITEM 11 EXECUTIVE COMPENSATION |
|
|
Incorporated by reference to the sections entitled Compensation Committee Report, Executive
Compensation Compensation Discussion and Analysis, Employment Agreements, Board Information,
and Shareholder Information Summary of the fiscal 2008 Proxy Statement. |
80
|
|
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
|
|
Incorporated by reference to sections entitled Johnson Controls Share Ownership and Schedule 13G
Filings of the fiscal 2008 Proxy Statement. |
|
|
|
The following table provides information about the Companys equity compensation plans as of
October 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
|
(b) |
|
|
(c) |
|
|
|
|
|
|
|
|
|
|
|
Number of Securities |
|
|
|
|
|
|
|
|
|
|
|
Remaining Available for |
|
|
|
|
|
|
|
|
|
Future Issuance Under |
|
|
|
Number of Securities to |
|
|
Weighted-Average |
|
|
Equity Compensation |
|
|
|
be Issued upon Exercise |
|
|
Exercise Price of |
|
|
Plans (Excluding |
|
|
|
of Outstanding Options, |
|
|
Outstanding Options, |
|
|
Securities Reflected in |
|
|
|
Warrants and Rights |
|
|
Warrants and Rights |
|
|
Column (a)) |
|
Plan Category |
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans
approved by shareholders |
|
|
35,164,839 |
|
|
$ |
23.55 |
|
|
|
30,891,727 |
|
Equity compensation plans
not approved by shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
35,164,839 |
|
|
$ |
23.55 |
|
|
|
30,891,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) |
|
Includes shares of Common Stock that remain available for grant under Company Plans as
follows: 29,261,244 shares under the 2007 Stock Option Plan, 1,448,000 shares under the 2001
Restricted Stock Plan, as amended, and 182,483 shares under the 2003 Stock Plan for Outside
Directors, as amended and restated. |
|
|
As of October 31, 2008, the Company had issued and outstanding 594,179,011 shares of Common Stock
(including 691,500 shares of unvested restricted stock). |
|
|
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
|
|
Incorporated by reference to sections entitled Board Information Related Person Transactions
and Board Information Board Independence of the fiscal 2008 Proxy Statement. |
|
|
ITEM 14 PRINCIPAL ACCOUNTING FEES AND SERVICES |
|
|
Incorporated by reference to the section entitled Relationship with Independent Auditors of the
fiscal 2008 Proxy Statement. |
81
ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
|
|
|
|
|
|
|
Page in |
|
|
Form 10-K |
(a) The following documents are filed as part of this Form 10-K: |
|
|
|
|
|
|
|
|
|
(1) Financial Statements |
|
|
|
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm |
|
|
41 |
|
|
|
|
|
|
Consolidated Statements of Income for the years ended September 30, 2008, 2007 and 2006 |
|
|
42 |
|
|
|
|
|
|
Consolidated Statements of Financial Position at September 30, 2008 and 2007 |
|
|
43 |
|
|
|
|
|
|
Consolidated Statements of Cash Flows for the years ended September 30, 2008, 2007 and 2006 |
|
|
44 |
|
|
|
|
|
|
Consolidated Statements of Shareholders Equity for the years ended September 30, 2008, 2007 and 2006 |
|
|
45 |
|
|
|
|
|
|
Notes to Consolidated Financial Statements |
|
|
46 |
|
|
|
|
|
|
(2) Financial Statement Schedule |
|
|
|
|
|
|
|
|
|
For the years ended September 30, 2008, 2007 and 2006: |
|
|
|
|
|
|
|
|
|
Schedule II Valuation and Qualifying Accounts |
|
|
79 |
|
|
|
|
|
|
(3) Exhibits |
|
|
|
|
Reference is made to the separate exhibit index contained on pages 84 through 86 filed
herewith.
All other schedules are omitted because they are not applicable, or the required information is
shown in the financial statements or notes thereto. |
|
Financial statements of 50% or less-owned companies have been omitted because the proportionate
share of their profit before income taxes and total assets are less than 20% of the respective
consolidated amounts, and investments in such companies are less than 20% of consolidated total
assets. |
|
Other Matters |
|
For the purposes of complying with the amendments to the rules governing Form S-8 under the
Securities Act of 1933, the undersigned registrant hereby undertakes as follows, which undertaking
shall be incorporated by reference into registrants Registration Statements on Form S-8 Nos.
33-30309, 33-31271, 33-58092, 33-58094, 333-10707, 333-66073, 333-41564, 333-117898 and 333-141578. |
|
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be
permitted to directors, officers and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the SEC
such indemnification is against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue. |
82
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. |
|
|
|
|
|
|
JOHNSON CONTROLS, INC.
|
|
|
By /s/ R. Bruce McDonald
|
|
|
|
|
|
R. Bruce McDonald |
|
|
Executive Vice President and
Chief Financial Officer |
|
|
Date: November 25, 2008
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below as of November 25, 2008, by the following persons on behalf of the registrant and in the
capacities indicated: |
|
|
|
|
|
/s/ Stephen A. Roell
Stephen A. Roell
|
|