10-K 1 jci201410-k.htm 10-K JCI 2014 10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10–K
R
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For The Transition Period From ________ To             
Commission File Number 1-5097
JOHNSON CONTROLS, INC.
(Exact name of registrant as specified in its charter)
Wisconsin
 
39-0380010
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
 
 
5757 North Green Bay Avenue
Milwaukee, Wisconsin
 
53209
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code:
(414) 524-1200
Securities Registered Pursuant to Section 12(b) of the Exchange Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock
 
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  R    No  ¨
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  ¨    No  R
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  R    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  R    No  ¨
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 registrant’s 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.  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
R
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨  
  
Smaller reporting company
 
¨
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  R
As of March 31, 2014, the aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant was approximately $31.5 billion based on the closing sales price as reported on the New York Stock Exchange. As of October 31, 2014, 666,188,889 shares of the registrant’s Common Stock, par value $1.00 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 28, 2015 are incorporated by reference into Part III.



JOHNSON CONTROLS, INC.
Index to Annual Report on Form 10-K
Year Ended September 30, 2014
 
 
Page
 
 
 
 
ITEM 1.
 
 
 
ITEM 1A.
 
 
 
ITEM 1B.
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
 
 
 
 
 
 
 
ITEM 5.
 
 
 
ITEM 6.
 
 
 
ITEM 7.
 
 
 
ITEM 7A.
 
 
 
ITEM 8.
 
 
 
ITEM 9.
 
 
 
ITEM 9A.
 
 
 
ITEM 9B.
 
 
 
 
 
 
ITEM 10.
 
 
 
ITEM 11.
 
 
 
ITEM 12.
 
 
 
ITEM 13.
 
 
 
ITEM 14.
 
 
 
 
 
 
ITEM 15.
 
 
 
 
 
 
 
 



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.

The Company has made statements in this document that are forward-looking and, therefore, are subject to risks and uncertainties. All statements in this document other than statements of historical fact are statements that are, or could be, deemed "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. In this document, statements regarding future financial position, sales, costs, earnings, cash flows, other measures of results of operations, capital expenditures or debt levels and plans, objectives, outlook, targets, guidance or goals are forward-looking statements. Words such as "may," "will," "expect," "intend," "estimate," "anticipate," "believe," "should," "forecast," "project" or "plan" or terms of similar meaning are also generally intended to identify forward-looking statements. Johnson Controls cautions that these statements are subject to numerous important risks, uncertainties, assumptions and other factors, some of which are beyond Johnson Controls' control, that could cause Johnson Controls' actual results to differ materially from those expressed or implied by such forward-looking statements. A detailed discussion of risks is included in the section entitled "Risk Factors" (refer to Part I, Item IA, of this Annual Report on Form 10-K). The forward-looking statements included in this document are only made as of the date of this document, unless otherwise specified, and Johnson Controls assumes no obligation, and disclaims any obligation, to update forward-looking statements to reflect events or circumstances occurring after the date of this document.

PART I

ITEM 1        BUSINESS

General

Johnson Controls is a global diversified technology and industrial leader serving customers in more than 150 countries. The Company creates quality products, services and solutions to optimize energy and operational efficiencies of buildings; lead-acid automotive batteries and advanced batteries for hybrid and electric vehicles; and seating and interior systems for automobiles.

Johnson Controls was originally incorporated in the state of Wisconsin in 1885 as Johnson Electric Service Company to manufacture, install and service automatic temperature regulation systems for buildings. The Company was renamed to Johnson Controls, Inc. in 1974. In 1978, the Company acquired Globe-Union, Inc., a Wisconsin-based manufacturer of automotive batteries for both the replacement and original equipment markets. The Company entered the automotive seating industry in 1985 with the acquisition of Michigan-based Hoover Universal, Inc. In 2005, the Company acquired York International, a global supplier of heating, ventilating, air-conditioning and refrigeration equipment and services. On June 16, 2014, the Company acquired Air Distribution Technologies, Inc. (ADT), one of the largest independent providers of air distribution and ventilation products in North America.

The 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. The Company also provides residential air conditioning and heating systems and industrial refrigeration products.

The Automotive Experience business is one of the world’s largest automotive suppliers, providing innovative seating and interior systems through our design and engineering expertise. The Company’s technologies extend into virtually every area of the interior including seating, door systems, floor consoles, instrument panels and cockpits. Customers include most of the world’s major automakers.

The Power Solutions business is a leading global supplier of lead-acid automotive batteries for virtually every type of passenger car, light truck and utility vehicle. The Company serves both automotive original equipment manufacturers (OEMs) and the general vehicle battery aftermarket. The Company also supplies advanced battery technologies to power certain Start-Stop vehicles, hybrid and electric vehicles.

Financial Information About Business Segments

Accounting Standards Codification (ASC) 280, "Segment Reporting," establishes the standards for reporting information about segments in financial statements. In applying the criteria set forth in ASC 280, the Company has determined that it has seven reportable segments for financial reporting purposes. The Company’s seven reportable segments are presented in the context of its three primary businesses - Building Efficiency, Automotive Experience and Power Solutions.

3



Refer to Note 19, "Segment Information," of the notes to consolidated financial statements for financial information about business segments.

For the purpose of the following discussion of the Company’s businesses, the four Building Efficiency reportable segments and the two 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, products, services and solutions designed to improve the comfort, safety and energy efficiency of non-residential buildings and residential properties with operations in 56 countries. Revenues come from facilities management, technical services, and the replacement and upgrade of HVAC controls and mechanical equipment in the existing buildings market, where the Company’s 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 Company’s extensive global network of sales and service offices. Some building controls, products and mechanical systems are sold to distributors of air-conditioning, refrigeration and commercial heating systems throughout the world. In fiscal 2014, approximately 45% of Building Efficiency’s sales are derived from HVAC products and installed control systems for construction and retrofit markets, including 15% of total sales related to new commercial construction. Approximately 55% of its sales in fiscal 2014 originated from its service offerings. In fiscal 2014, Building Efficiency accounted for 33% of the Company’s consolidated net sales.

The Company’s systems include York® chillers, industrial refrigeration products, air handlers and other HVAC mechanical equipment that provide heating and cooling in non-residential buildings. The Metasys® control system monitors and integrates HVAC equipment with other critical building systems to maximize comfort while reducing energy and operating costs. The Company also produces air conditioning and heating equipment and products, including Titus® and Ruskin® brands, for the residential market. As the largest global supplier of HVAC technical services, Building Efficiency staffs, optimizes and repairs building systems made by the Company and its competitors. The Company offers a wide range of solutions such as performance contracting under which guaranteed energy savings are used by the customer to fund project costs over a number of years. In addition, the Global Workplace Solutions segment provides full-time on-site operations staff and real estate and energy consulting services to help customers, especially multi-national companies, reduce costs and improve the performance of their facility portfolios. The Company’s on-site staff typically performs tasks related to the comfort and reliability of the facility, and manages subcontractors for functions such as food service, cleaning, maintenance and landscaping.

Automotive Experience

Automotive Experience designs and manufactures interior products and systems for passenger cars and light trucks, including vans, pick-up trucks and sport/crossover utility vehicles. The business produces automotive interior systems for OEMs and operates approximately 264 wholly- and majority-owned manufacturing or assembly plants, with operations in 32 countries worldwide. Additionally, the business has partially-owned affiliates in Asia, Europe, North America and South America.

Automotive Experience products and systems include complete seating systems and interior components, including instrument panels, floor consoles, and door systems. In fiscal 2014, Automotive Experience accounted for 51% of the Company’s 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 business’s other automotive interior systems are also supplied on a "just-in-time/in-sequence" basis. Foam, metal and plastic seating components, seat covers, seat mechanisms and other components are shipped to these plants from the business’s production facilities or outside suppliers.


4


Power Solutions

Power Solutions services both automotive OEMs and the battery aftermarket by providing energy storage technology, coupled with systems engineering, marketing and service expertise. The Company is the largest producer of lead-acid automotive batteries in the world, producing and distributing approximately 140 million lead-acid batteries annually in approximately 61 wholly- and majority-owned manufacturing or assembly plants, distribution centers and sales offices in 22 countries worldwide. Investments in new product and process technology have expanded product offerings to absorbent glass mat (AGM) and enhanced flooded battery (EFB) technologies that power Start-Stop vehicles, as well as lithium-ion battery technology for certain hybrid and electric vehicles. The business has also invested to develop sustainable lead and poly recycling operations in the North American and European markets. Approximately 74% of unit sales worldwide in fiscal 2014 were to the automotive replacement market, with the remaining sales to the OEM market.

Power Solutions accounted for 16% of the Company’s fiscal 2014 consolidated net sales. Batteries and key components are manufactured at wholly- and majority-owned plants in North America, South America, Asia and Europe.
 
Competition

Building Efficiency

The Building Efficiency business conducts its operations through thousands of individual contracts that are either negotiated or awarded on a competitive basis. Key factors in the award of contracts include system and service performance, quality, price, design, reputation, technology, application engineering capability and construction or project management expertise. Competitors for HVAC equipment and controls in the residential and non-residential marketplace include many regional, national and international providers; larger competitors include Honeywell International, Inc.; Siemens Building Technologies, an operating group of Siemens AG; Schneider Electric SA; Carrier Corporation, a subsidiary of United Technologies Corporation; Trane Incorporated, a subsidiary of Ingersoll-Rand Company Limited; Daikin Industries, Ltd.; Lennox International, Inc.; GC Midea Holding Co, Ltd. and Gree Electric Appliances, Inc. In addition to HVAC equipment, Building Efficiency competes in a highly fragmented HVAC services market, which is dominated by local providers. The facilities management market, including Global Workplace Solutions, is also fragmented at the local level with many regional companies servicing specific geographies. The largest competition comes from ISS A/S; Sodexo SA and Jones Lang LaSalle, Inc. Sales of services are largely dependent upon numerous individual contracts with commercial businesses worldwide. The loss of any individual contract would not have a material adverse effect on the Company.

Automotive Experience

The Automotive Experience business faces competition from other automotive suppliers and, with respect to certain products, from the automobile OEMs who produce or have the capability to produce certain products the business supplies. The automotive supply industry competes on the basis of technology, quality, reliability of supply and price. Design, engineering and product planning are increasingly important factors. Independent suppliers that represent the principal Automotive Experience competitors include Lear Corporation, Faurecia SA and Magna International Inc.

Power Solutions

Power Solutions is the principal supplier of batteries to many of the largest merchants in the battery aftermarket, including Advance Auto Parts, AutoZone, Robert Bosch GmbH, DAISA S.A., Costco, NAPA, O’Reilly/CSK, Interstate Battery System of America, Sears, Roebuck & Co. and Wal-Mart stores. Automotive batteries are sold throughout the world under private labels and under the Company’s 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, Camel Group Company Limited, East Penn Manufacturing Company and Banner Batteries GB Limited. 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 Company’s backlog relating to the Building Efficiency business is applicable to its sales of systems and services. At September 30, 2014, the backlog was $4.8 billion, the majority of which relates to fiscal 2015. The backlog as of September 30, 2013 was $4.8 billion. The consistency in backlog year over year was primarily due to the increase in the Other segment, offset

5


by a decline in the Asia segment. The backlog does not include amounts associated with contracts in the Global Workplace Solutions business because such contracts are typically multi-year service awards, nor does it include unitary products within the Other segment. The backlog amount outstanding at any given time is not necessarily indicative of the amount of revenue to be earned in the upcoming fiscal year.

Raw Materials

Raw materials used by the businesses in connection with their operations, including lead, steel, tin, aluminum, urethane chemicals, copper, sulfuric acid and polypropylene, were readily available during fiscal 2014, and the Company expects such availability to continue. In fiscal 2015, commodity prices could fluctuate throughout the year and could significantly affect the results of operations.

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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s operations and facilities have been, and in the future may become, the subject of formal or informal enforcement actions or proceedings for noncompliance with environmental laws and worker safety laws or for the remediation of Company-related substances released into the environment. Such matters typically are resolved with regulatory authorities through 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 Company’s potential environmental liabilities.)

Environmental Capital Expenditures

The Company’s ongoing environmental compliance program often results in capital expenditures. Environmental considerations are a part of all significant capital expenditure decisions; however, expenditures in fiscal 2014 related solely to environmental compliance were not material. It is management’s opinion that the amount of any future capital expenditures related solely to environmental compliance will not have a material adverse effect on the Company’s financial results or competitive position in any one year.


6


Employees

As of September 30, 2014, the Company employed approximately 168,000 employees, of whom approximately 106,000 were hourly and 62,000 were salaried.

Seasonal Factors

Certain of Building Efficiency’s sales are seasonal as the demand for residential air conditioning equipment generally increases in the summer months. This seasonality is mitigated by the other products and services provided by the Building Efficiency business that have no material seasonal effect.

Sales of automotive seating and interior systems and of batteries to automobile OEMs for use as original equipment are dependent upon the demand for new automobiles. Management believes that demand for new automobiles generally reflects sensitivity to overall economic conditions with no material seasonal effect.

The automotive replacement battery market is affected by weather patterns because batteries are more likely to fail when extremely low temperatures place substantial additional power requirements upon a vehicle’s 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 19, "Segment Information," of the notes to consolidated financial statements for financial information about geographic areas.

Research and Development Expenditures

Refer to Note 1, "Summary of Significant Accounting Policies," of the notes to consolidated financial statements for research and development expenditures.

Available Information

The Company’s filings with the U.S. Securities and Exchange Commission (SEC), including annual reports on Form 10-K, quarterly reports on Form 10-Q, definitive proxy statements on Schedule 14A, current reports on Form 8-K, and any amendments to those reports filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, are made available free of charge through the Investor Relations section of the Company’s Internet website at http://www.johnsoncontrols.com as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC. Copies of any materials the Company files with the SEC can also be obtained free of charge through the SEC’s website at http://www.sec.gov, at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549, or by calling the SEC’s Office of Investor Education and Advocacy 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 Company’s Internet website or in printed form upon request. The Company is not including the information contained on the Company’s website as a part of, or incorporating it by reference into, this Annual Report on Form 10-K.

ITEM 1A    RISK FACTORS

General Risks

General economic, credit and capital market conditions could adversely affect our financial performance, may affect our ability to grow or sustain our businesses and could negatively affect our ability to access the capital markets.

We compete around the world in various geographic regions and product markets. Global economic conditions affect each of our three primary businesses. As we discuss in greater detail in the specific risk factors for each of our businesses that appear below, any future financial distress in the automotive industry or residential and commercial construction markets could negatively affect our revenues and financial performance in future periods, result in future restructuring charges, and adversely impact our ability to grow or sustain our businesses.

The capital and credit markets provide us with liquidity to operate and grow our businesses beyond the liquidity that operating cash flows provide. A worldwide economic downturn and disruption of the credit markets could reduce our access to capital

7


necessary for our operations and executing our strategic plan. If our access to capital were to become significantly constrained or costs of capital increased significantly due to lowered credit ratings, prevailing industry conditions, the volatility of the capital markets or other factors, then our financial condition, results of operations and cash flows could be adversely affected.

We are subject to risks associated with our non-U.S. operations that could adversely affect our results of operations.

We have significant operations in a number of countries outside the U.S., some of which are located in emerging markets. Long-term economic uncertainty in some of the regions of the world in which we operate, such as Asia, South America, the Middle East, Central Europe and other emerging markets, could result in the disruption of markets and negatively affect cash flows from our operations to cover our capital needs and debt service.

In addition, as a result of our global presence, a significant portion of our revenues and expenses is denominated in currencies other than the U.S. dollar. We are therefore subject to foreign currency risks and foreign exchange exposure. Our primary exposures are to the euro, British pound, Japanese yen, Czech koruna, Mexican peso, Romanian lei, Hungarian forint, Polish zloty, Canadian dollar and Chinese renminbi. While we employ financial instruments to hedge some of our transactional foreign exchange exposure, these activities do not insulate us completely from those exposures. Exchange rates can be volatile and could adversely impact our financial results and comparability of results from period to period.

There are other risks that are inherent in our non-U.S. operations, including the potential for changes in socio-economic conditions, laws and regulations, including import, export, labor and environmental laws, and monetary and fiscal policies; protectionist measures that may prohibit acquisitions or joint ventures, or impact trade volumes; unsettled political conditions; government-imposed plant or other operational shutdowns; backlash from foreign labor organizations related to our restructuring actions; corruption; natural and man-made disasters, hazards and losses; violence, civil and labor unrest, and possible terrorist attacks.

These and other factors may have a material adverse effect on our non-U.S. operations and therefore on our business and results of operations.

We are subject to regulation of our international operations that could adversely affect our business and results of operations.

Due to our global operations, we are subject to many laws governing international relations, including those that prohibit improper payments to government officials and commercial customers, and restrict where we can do 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, U.K. Bribery Act and the U.S. Export Administration Act. Violations of these laws, which are complex, may result in criminal penalties or sanctions that could have a material adverse effect on our business, financial condition and results of operations.

Global climate change could negatively affect our business.

Increased public awareness and concern regarding global climate change may result in more regional and/or federal requirements to reduce or mitigate the effects of greenhouse gas emissions. There continues to be a lack of consistent climate legislation, which creates economic and regulatory uncertainty. Such regulatory uncertainty extends to future incentives for energy efficient buildings and vehicles and costs of compliance, which may impact the demand for our products, obsolescence of our products and our results of operations.

There is a growing consensus that greenhouse gas emissions are linked to global climate changes. Climate changes, such as extreme weather conditions, create financial risk to our business. For example, the demand for our products and services, such as residential air conditioning equipment and automotive replacement batteries, may be affected by unseasonable weather conditions. Climate changes could also disrupt our operations by impacting the availability and cost of materials needed for manufacturing and could increase insurance and other operating costs. These factors may impact our decisions to construct new facilities or maintain existing facilities in areas most prone to physical climate risks. The Company could also face indirect financial risks passed through the supply chain, and process disruptions due to physical climate changes could result in price modifications for our products and the resources needed to produce them.

Regulations related to conflict minerals could adversely impact our business.

The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions to improve transparency and accountability concerning the supply of certain minerals, known as conflict minerals, originating from the Democratic Republic of Congo (DRC) and adjoining countries. As a result, in August 2012, the SEC adopted annual disclosure and reporting requirements for those companies who use conflict minerals in their products. Accordingly, we began our reasonable country of origin inquiries in fiscal

8


2013, with our initial disclosure relating to conflict minerals occurring in May 2014. There are costs associated with complying with these disclosure requirements, including for diligence to determine the sources of conflict minerals used in our products and other potential changes to products, processes or sources of supply as a consequence of such verification activities. Our continued compliance with these disclosure rules could adversely affect the sourcing, supply and pricing of materials used in our products. As there may be only a limited number of suppliers offering "conflict free" conflict minerals, we cannot be sure that we will be able to obtain necessary conflict minerals from such suppliers in sufficient quantities or at competitive prices. Also, we may face reputational challenges if we determine that certain of our products contain minerals not determined to be conflict free or if we are unable to sufficiently verify the origins for all conflict minerals used in our products through the procedures we may implement.

We are subject to requirements relating to environmental regulation and environmental remediation matters, which could adversely affect our business and results of operations.

Because of uncertainties associated with environmental regulation and environmental remediation activities at sites where we may be liable, future expenses that we may incur to remediate identified sites could be considerably higher than the current accrued liability on our consolidated statement of financial position, which could have a material adverse effect on our business and results of operations.

Risks related to our defined benefit retirement plans may adversely impact our results of operations and cash flow.

Significant changes in actual investment return on defined benefit plan assets, discount rates, mortality assumptions and other factors could adversely affect our results of operations and the amounts of contributions we must make to our defined benefit plans in future periods. As we mark-to-market our defined benefit plan assets and liabilities on an annual basis, large non-cash gains or losses could be recorded in the fourth quarter of each fiscal year. Generally accepted accounting principles in the U.S. require that we calculate income or expense for the plans using actuarial valuations. These valuations reflect assumptions about financial markets and interest rates, which may change based on economic conditions. Funding requirements for our defined benefit plans are dependent upon, among other things, interest rates, underlying asset returns and the impact of legislative or regulatory changes related to defined benefit funding obligations. For a discussion regarding the significant assumptions used to determine net periodic benefit cost, refer to "Critical Accounting Estimates and Policies" included in Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations."

We may be unable to realize the expected benefits of our restructuring actions, which could adversely affect our profitability and operations.

In order to align our resources with our growth strategies, operate more efficiently and control costs, we periodically announce restructuring plans, which include workforce reductions, global plant closures and consolidations, asset impairments and other cost reduction initiatives. We may undertake additional restructuring actions and workforce reductions in the future. As these plans and actions are complex, unforeseen factors could result in expected savings and benefits to be delayed or not realized to the full extent planned, and our operations and business may be disrupted.

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 additional changes in our valuation allowances against deferred tax assets and other tax reserves on our statement of financial position, and the future sale of certain businesses could potentially result in the repatriation of accumulated foreign earnings that could materially and adversely affect our results of operations. Additionally, changes in tax laws in the U.S. or in other countries where we have significant operations could materially affect deferred tax assets and liabilities on our consolidated statement of financial position and income tax provision on our consolidated statement of income.

We are also subject to tax audits by governmental authorities in the U.S. and in non-U.S. jurisdictions. Negative unexpected results from one or more such tax audits could adversely affect our results of operations.

Legal proceedings in which we are, or may be, a party may adversely affect us.

We are currently and may in the future become subject to legal proceedings and commercial or contractual disputes. These are typically claims that arise in the normal course of business including, without limitation, commercial or contractual disputes with our suppliers, intellectual property matters, third party liability, including product liability claims and employment claims. There exists the possibility that such claims may have an adverse impact on our results of operations that is greater than we anticipate.


9


An investigation by the European Commission (EC) related to European lead recyclers’ procurement practices is currently underway, with the Company one of several named companies subject to review. The Company cannot predict the ultimate financial impact, as the investigation is at a preliminary stage. We will continue to cooperate with the EC in their investigation and monitor related commercial and financial implications, if any. The Company’s policy is to comply with antitrust and competition laws and, if a violation of any such laws is found, to take appropriate remedial action and to cooperate fully with any related governmental inquiry. Competition and antitrust law investigations may continue for several years and can result in substantial fines depending on the gravity and duration of the violations.

A downgrade in the ratings of our debt could restrict our ability to access the debt capital markets and increase our interest costs.

Changes in the ratings that rating agencies assign to our debt may ultimately impact our access to the debt capital markets and the costs we incur to borrow funds. If ratings for our debt fall below investment grade, our access to the debt capital markets would become restricted. Tightening in the credit markets and the reduced level of liquidity in many financial markets due to turmoil in the financial and banking industries could affect our access to the debt capital markets or the price we pay to issue debt. Historically, we have relied on our ability to issue commercial paper rather than to draw on our credit facility to support our daily operations, which means that a downgrade in our ratings or volatility in the financial markets causing limitations to the debt capital markets could have an adverse effect on our business or our ability to meet our liquidity needs.

Additionally, several of our credit agreements generally include an increase in interest rates if the ratings for our debt are downgraded. Further, an increase in the level of our indebtedness may increase our vulnerability to adverse general economic and industry conditions and may affect our ability to obtain additional financing.

We are subject to potential insolvency or financial distress of third parties.

We are exposed to the risk that third parties to various arrangements who owe us money or goods and services, or who purchase goods and services from us, will not be able to perform their obligations or continue to place orders due to insolvency or financial distress. If third parties fail to perform their obligations under arrangements with us, we may be forced to replace the underlying commitment at current or above market prices or on other terms that are less favorable to us. In such events, we may incur losses, or our results of operations, financial position or liquidity could otherwise be adversely affected.

We may be unable to complete or integrate acquisitions effectively, which may adversely affect our growth, profitability and results of operations.

We expect acquisitions of businesses and assets to play a role in our future growth. We cannot be certain that we will be able to identify attractive acquisition targets, obtain financing for acquisitions on satisfactory terms, successfully acquire identified targets or manage timing of acquisitions with capital obligations across our businesses. Additionally, we may not be successful in integrating acquired businesses into our existing operations and achieving projected synergies. Competition for acquisition opportunities in the various industries in which we operate may rise, thereby increasing our costs of making acquisitions or causing us to refrain from making further acquisitions. We are also subject to applicable antitrust laws and must avoid anticompetitive behavior. These and other acquisition-related factors may negatively and adversely impact our growth, profitability and results of operations.

We are subject to business continuity risks associated with centralization of certain administrative functions.

We have been and are in the process of regionally centralizing certain administrative functions, primarily in North America, Europe and Asia, to improve efficiency and reduce costs. To the extent that these central locations are disrupted or disabled, key business processes, such as invoicing, payments and general management operations, could be interrupted.

A failure of our information technology (IT) infrastructure could adversely impact our business and operations.

We rely upon the capacity, reliability and security of our information technology infrastructure and our ability to expand and continually update this infrastructure in response to the changing needs of our business. For example, we are implementing a global enterprise resource planning system over a period of several years in addition to other IT systems in certain of our businesses. As we implement the new systems, they may not perform as expected. We also face the challenge of supporting our older systems and implementing necessary upgrades. If we experience a problem with the functioning of an important IT system or a security breach of our IT systems, the resulting disruptions could have an adverse effect on our business.

We and certain of our third-party vendors receive and store personal information in connection with our human resources operations and other aspects of our business. Despite our implementation of security measures, our IT systems are vulnerable to damages

10


from computer viruses, natural disasters, unauthorized access, cyber attack and other similar disruptions. Any system failure, accident or security breach could result in disruptions to our operations. A material network breach in the security of our IT systems could include the theft of our intellectual property, trade secrets or customer information. To the extent that any disruptions or security breach results in a loss or damage to our data, or an inappropriate disclosure of confidential or customer information, it could cause significant damage to our reputation, affect our relationships with our customers, lead to claims against the Company and ultimately harm our business. In addition, we may be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future.

Our business success depends on attracting and retaining qualified personnel.

Our ability to sustain and grow our business requires us to hire, retain and develop a highly skilled and diverse management team and workforce. Failure to ensure that we have the leadership capacity with the necessary skill set and experience could impede our ability to deliver our growth objectives and execute our strategic plan. Organizational and reporting changes as a result of our leadership transition and quantity of corporate initiatives could result in increased turnover. Additionally, any unplanned turnover or inability to attract and retain key employees could have a negative effect on our results of operations.

Building Efficiency Risks

Failure to comply with regulations due to our contracts with U.S. government entities could adversely affect our business and results of operations.

Our Building Efficiency business contracts with government entities and is subject to specific rules, regulations and approvals applicable to government contractors. We are subject to routine audits by the Defense Contract Audit Agency to assure our compliance with these requirements. Our failure to comply with these or other laws and regulations could result in contract terminations, suspension or debarment from contracting with the U.S. federal government, civil fines and damages and criminal prosecution. In addition, changes in procurement policies, budget considerations, unexpected U.S. developments, such as terrorist attacks, or similar political developments or events abroad that may change the U.S. federal government’s national security defense posture may affect sales to government entities.

Volatility in commodity prices may adversely affect our results of operations.

Increases in commodity costs negatively impact the profitability of orders in backlog as prices on those orders are fixed; therefore, in the short-term we cannot adjust for changes in commodity prices. If we are not able to recover commodity cost increases through price increases to our customers on new orders, then such increases will have an adverse effect on our results of operations. Additionally, unfavorability in our hedging programs during a period of declining commodity prices could result in lower margins as we reduce prices to match the market on a fixed commodity cost level.

Conditions in the commercial and residential new construction markets may adversely affect our results of operations.

HVAC equipment sales in the commercial and residential new construction markets correlate to the number of new buildings and homes that are built. The strength of the commercial and residential markets depends in part on the availability of commercial and consumer financing for our customers, along with inventory and pricing of existing buildings and homes. If economic and credit market conditions decline, it may result in a decline in the construction of new commercial buildings and residential housing construction market. Such conditions could have an adverse effect on our results of operations and result in potential liabilities or additional costs, including impairment charges.

A variety of other factors could adversely affect the results of operations of our Building Efficiency business.

Any of the following could materially and adversely impact the results of operations of our Building Efficiency business: loss of, changes in, or failure to perform under facility management supply contracts or other guaranteed performance contracts with our major customers; cancellation of, or significant delays in, projects in our backlog; delays or difficulties in new product development; the potential introduction of similar or superior technologies; financial instability or market declines of our major component suppliers; the unavailability of raw materials (primarily steel, copper and electronic components) necessary for production of HVAC equipment; price increases of limited-source components, products and services that we are unable to pass on to the market; unseasonable weather conditions in various parts of the world; changes in energy costs or governmental regulations that would decrease the incentive for customers to update or improve their building control systems; revisions to energy efficiency or refrigerant legislation; a decline in the outsourcing of facility management services; availability of labor to support growth of our service businesses; and natural or man-made disasters or losses that impact our ability to deliver facility management and other products and services to our customers.

11


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 2014, our largest customers globally were automobile manufacturers Ford Motor Company (Ford), Fiat Chrysler Automobiles N.V. (Chrysler), General Motors Corporation (GM), Daimler AG and Volkswagen AG (VW). If automakers experience a decline in the number of new vehicle sales, we may experience reductions in orders from these customers, incur write-offs of accounts receivable, incur impairment charges or require additional restructuring actions beyond our current restructuring plans, particularly if any of the automakers cannot adequately fund their operations or experience financial distress.

Uncertainty related to the economic conditions in Europe may adversely affect our results of operations.

Automakers across Europe are experiencing difficulties from a weakened economy and tightening credit markets. As a result, we have experienced and may continue to experience reductions in orders from these OEM customers. A prolonged downturn in the European automotive industry or a significant change in product mix due to consumer demand could require us to shut down additional plants or result in additional impairment charges, restructuring actions or changes in our valuation allowances against deferred tax assets, which could be material to our consolidated financial statements. Continued uncertainty relating to the economic conditions in Europe may continue to have an adverse impact on our business.

We are subject to pricing pressure from our automotive customers.

We face significant competitive pressures in all of our business segments. Because of their purchasing size, our automotive customers can influence market participants to compete on price terms. If we are not able to offset pricing reductions resulting from these pressures by improved operating efficiencies and reduced expenditures, those pricing reductions may have an adverse impact on our business.

Financial distress of the automotive supply chain could harm our results of operations.

Automotive industry conditions could adversely affect the original equipment supplier base. Lower production levels for key customers, increases in certain raw material, commodity and energy costs and global credit market conditions could result in financial distress among many companies within the automotive supply base. Financial distress within the supplier base may lead to commercial disputes and possible supply chain interruptions, which in turn could disrupt our production. In addition, an adverse industry environment may require us to provide financial support to distressed suppliers or take other measures to ensure uninterrupted production, which could involve additional costs or risks. If any of these risks materialize, we are likely to incur losses, or our results of operations, financial position or liquidity could otherwise be adversely affected.

Change in consumer demand may adversely affect our results of operations.

Increases in energy costs or other factors (e.g., climate change concerns) may shift consumer demand away from motor vehicles that typically have higher interior content that we supply, such as light trucks, cross-over vehicles, minivans and SUVs, to smaller vehicles having less interior content. The loss of business with respect to, or a lack of commercial success of, one or more particular vehicle models for which we are a significant supplier could reduce our sales and harm our profitability, thereby adversely affecting our results of operations.

We may not be able to successfully negotiate pricing terms with our customers in the Automotive Experience business, which may adversely affect our results of operations.

We negotiate sales prices annually with our automotive customers. Cost-cutting initiatives that our customers have adopted generally result in increased downward pressure on pricing. In some cases our customer supply agreements require reductions in component pricing over the period of production. If we are unable to generate sufficient production cost savings in the future to offset price reductions, our results of operations may be adversely affected. In particular, large commercial settlements with our customers may adversely affect our results of operations or cause our financial results to vary on a quarterly basis.

Volatility in commodity prices may adversely affect our results of operations.

Commodity prices can be volatile from year to year. If commodity prices rise, and if we are not able to recover these cost increases from our customers, these increases will have an adverse effect on our results of operations.


12


The cyclicality of original equipment automobile production rates may adversely affect the results of operations in our Automotive Experience business.

The financial performance of our Automotive Experience business is directly related to automotive production by our customers. Automotive production and sales are highly cyclical and depend on general economic conditions and other factors, including consumer spending and preferences. An economic decline that results in a reduction in automotive production by our Automotive Experience customers could have a material adverse impact on our results of operations.

A variety of other factors could adversely affect the results of operations of our Automotive Experience business.

Any of the following could materially and adversely impact the results of operations of our Automotive Experience business: the loss of, or changes in, automobile supply contracts, sourcing strategies or customer claims 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 customer’s 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 and integration; quantity and complexity of new program launches, which are subject to our customers’ timing, performance, design and quality standards; interruption of supply of certain single-source components; the potential introduction of similar or superior technologies; changing nature and prevalence of our joint ventures and relationships with our strategic business partners; global overcapacity and vehicle platform proliferation; and potential complications or the failure to consummate the anticipated joint venture formation for a majority of our Interiors business.

Power Solutions Risks

We face competition and pricing pressure from other companies in the Power Solutions business.

Our Power Solutions business competes with a number of major domestic and international manufacturers and distributors of lead-acid batteries, as well as a large number of smaller, regional competitors. The North American, European and Asian lead-acid battery markets are highly competitive. The manufacturers in these markets compete on price, quality, technical innovation, service and warranty. If we are unable to remain competitive and maintain market share in the regions and markets we serve, our results of operations may be adversely affected.

Volatility in commodity prices may adversely affect our results of operations.

Lead is a major component of our lead-acid batteries, and the price of lead may be highly volatile. We attempt to manage the impact of changing lead prices through the recycling of used batteries returned to us by our aftermarket customers, commercial terms and commodity hedging programs. Our ability to mitigate the impact of lead price changes can be impacted by many factors, including customer negotiations, inventory level fluctuations and sales volume/mix changes, any of which could have an adverse effect on our results of operations.

Additionally, the prices of other commodities, primarily fuel, acid, resin and tin, may be volatile. If other commodity prices rise, and if we are not able to recover these cost increases through price increases to our customers, such increases will have an adverse effect on our results of operations. Moreover, the implementation of any price increases to our customers could negatively impact demand for our products.

Decreased demand from our customers in the automotive industry may adversely affect our results of operations.

Our financial performance in the Power Solutions business depends, in part, on conditions in the automotive industry. Sales to OEMs accounted for approximately 26% of the total sales of the Power Solutions business in fiscal 2014. Declines in the North American, European and Asian automotive production levels could reduce our sales and adversely affect our results of operations. In addition, if any OEMs reach a point where they cannot fund their operations, we may incur write-offs of accounts receivable, incur impairment charges or require additional restructuring actions beyond our current restructuring plans.

A variety of other factors could adversely affect the results of operations of our Power Solutions business.

Any of the following could materially and adversely impact the results of operations of our Power Solutions business: loss of, or changes in, automobile battery supply contracts with our large original equipment and aftermarket customers; the increasing quality and useful life of batteries or use of alternative battery technologies, both of which may adversely impact the lead-acid battery market, including replacement cycle; delays or cancellations of new vehicle programs; market and financial consequences of any recalls that may be required on our products; delays or difficulties in new product development, including lithium-ion technology;

13


impact of potential increases in lithium-ion battery volumes on established lead-acid battery volumes as lithium-ion battery technology grows and costs become more competitive; financial instability or market declines of our customers or suppliers; slower than projected market development in emerging markets; interruption of supply of certain single-source components; changing nature of our joint ventures and relationships with our strategic business partners; unseasonable weather conditions in various parts of the world; increasing global environmental and safety regulations related to the manufacturing and recycling of lead-acid batteries, and transportation of battery materials; our ability to secure sufficient tolling capacity to recycle batteries; price and availability of battery cores used in recycling; and the lack of the development of a market for hybrid and electric vehicles.

ITEM 1B    UNRESOLVED STAFF COMMENTS

The Company has no unresolved written comments regarding its periodic or current reports from the staff of the SEC.


14


ITEM 2        PROPERTIES

At September 30, 2014, the Company conducted its operations in 58 countries throughout the world, with its world headquarters located in Milwaukee, Wisconsin. The Company’s wholly- and majority-owned facilities, which are listed in the table on the following pages by business and location, totaled approximately 96 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.
Building Efficiency
 
 
 
 
 
Alabama
Dothan (3)
 
Minnesota
Fridley (3)
 
Geneva (3)
 
 
Plymouth (1),(4)
 
Huntsville (2)
 
Mississippi
Hattiesburg (1)
Arizona
Tucson (3)
 
 
Olive Branch
California
Mira Loma (2),(3)
 
Missouri
Albany
 
Roseville (1),(4)
 
 
Grandview (4)
 
San Jose (1)
 
 
St. Louis (1),(4)
 
Sanger (1)
 
New Jersey
Hainesport (1),(4)
 
Simi Valley (1),(4)
 
North Carolina
Charlotte (1),(4)
Delaware
Newark (1),(4)
 
 
Sanford
Florida
Largo (1),(3)
 
 
Tarboro
 
Medley (1),(4)
 
Ohio
Cincinnati (3)
 
Tampa (1),(4)
 
 
Clayton
Georgia
Roswell (1),(4)
 
 
Dayton (4)
Idaho
Nampa
 
Oklahoma
Norman (3)
Illinois
Arlington Heights (4)
 
 
Ponca City (1)
 
Carol Stream (1)
 
Oregon
Portland (1),(4)
 
Elmhurst (1),(4)
 
Pennsylvania
Audubon (1),(4)
 
Wheeling (1)
 
 
East Greenville (1),(3)
Indiana
Lebanon
 
 
Waynesboro (3)
 
Rochester (3)
 
 
York (1)
Kansas
Lenexa (1),(4)
 
Texas
Carrollton (1),(3)
 
Parson (3)
 
 
Coppell (1)
 
Wichita (2),(3)
 
 
El Paso (2)
Kentucky
Lexington (1),(3)
 
 
Houston (1),(3)
 
Louisville (2),(3)
 
 
Irving (4)
Maryland
Baltimore (1),(4)
 
 
Plano (1),(4)
 
Capitol Heights (1),(4)
 
 
Richardson (1),(4)
 
Rossville (1)
 
 
San Antonio
 
Sparks (1),(4)
 
Washington
Fife (1),(4)
Massachusetts
Lynnfield (4)
 
Wisconsin
Milwaukee (2),(4)
 
Turner Falls (1)
 
 
Waukesha (1),(4)
Michigan
Grand Rapids (1),(4)
 
 
 
 
Sterling Heights (1),(4)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

15


Building Efficiency (continued)
 
 
 
 
 
Austria
Vienna (4)
 
Italy
Milan (1),(3)
Belgium
Diegem (1),(4)
 
Japan
Tokyo (1),(4)
Brazil
Curitiba (1),(4)
 
Macau
Macau (1),(4)
Canada
Ajax (1),(3)
 
Malaysia
Petaling Jaya (1),(4)
 
Markham (2),(4)
 
Mexico
Apodaca (1),(3)
 
Nobel (1)
 
 
Durango
 
Oakville (1),(4)
 
 
Juarez (2)
 
Prescott (1)
 
 
Mexicali (1)
China
Beijing (1),(4)
 
 
Monterrey (1),(4)
 
Qingyuan (2),(3)
 
 
Ojinga (1)
 
Suzhou (1),(3)
 
 
Reynosa (3)
 
Wuxi (2),(3)
 
 
Santa Catarina (1),(3)
Denmark
Hojbjerg (3)
 
Netherlands
Dordrecht (3)
 
Hornslet (2),(3)
 
 
Gorinchem (1),(3)
 
Viby (3)
 
Poland
Warsaw (1),(3)
France
Carquefou Cedex (2),(3)
 
Russia
Moscow (1),(3)
 
Colombes (1),(3)
 
South Africa
Isando (1),(4)
Germany
Essen (1),(3)
 
Spain
Sabadell (1),(3)
 
Hamburg (1),(3)
 
Thailand
Amper Kabinburi (1),(3)
 
Mannheim (1),(3)
 
Turkey
Manisa (1)
Hong Kong
Hong Kong (1),(4)
 
United Kingdom
Bridgnorth (3)
India
Bangalore (1)
 
 
Whitstable (3)
 
Gurgaon (1)
 
United Arab Emirates
Dubai (1)
 
Mumbai (1),(4)
 
 
 
 
Pune (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

16


Automotive Experience
 
 
 
 
 
Alabama
Bessemer (1)
 
Argentina
Buenos Aires (1)
 
Clanton
 
 
Rosario
 
Eastaboga
 
Australia
Adelaide (1)
 
McCalla (1)
 
Austria
Graz (1)
Georgia
West Point (1)
 
 
Mandling
Illinois
Sycamore
 
Belgium
Assenede (1)
Kentucky
Cadiz
 
Brazil
Pouso Alegre
 
Georgetown (2)
 
 
Quatro Barras (2)
 
Louisville (1)
 
 
Santo Andre (1)
 
Shelbyville (1)
 
 
Sao Bernardo do Campo
 
Winchester (1)
 
 
Sao Jose dos Pinhais (1)
Michigan
Auburn Hills (1)
 
Canada
Milton
 
Battle Creek
 
 
Mississauga (1)
 
Cascade (1)
 
 
Tillsonburg
 
Detroit
 
 
Whitby (2)
 
Highland Park (1)
 
China
Guangzhou (2)
 
Holland (2),(3)
 
 
Shanghai (1),(3)
 
Lansing (2)
 
 
Wuhu (2)
 
Monroe (1)
 
Czech Republic
Bezdecin (1)
 
Plymouth (2),(4)
 
 
Ceska Lipa (4)
 
Romulus (1)
 
 
Mlada Boleslav (1)
 
Taylor (1)
 
 
Roudnice
 
Warren (1)
 
 
Rychnov (1)
 
Zeeland (1)
 
 
Strakonice
Missouri
Eldon (2)
 
 
Straz pod Ralskem
 
Riverside (1)
 
 
Zatec
Ohio
Bryan
 
France
Conflans-sur-Lanterne
 
Greenfield
 
 
Fesches-le-Chatel (1)
 
Northwood
 
 
Laroque D'Olmes
 
Wauseon
 
 
Rosny
Tennessee
Athens
 
 
Strasbourg
 
Lexington (1)
 
 
 
 
Murfreesboro
 
 
 
 
Pulaski (1)
 
 
 
Texas
El Paso (1)
 
 
 
 
San Antonio (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


17


Automotive Experience (continued)
 
 
 
 
 
Germany
Boblingen (1)
 
Mexico
Coahuila (1)
 
Bochum (2)
 
 
El Marquez
 
Bremen (1)
 
 
Juarez
 
Burscheid (2),(4)
 
 
Lerma (1)
 
Dautphe
 
 
Matamaros (1)
 
Espelkamp
 
 
Monclova
 
Grefrath
 
 
Puebla (1)
 
Grobbottwar (1)
 
 
Ramos Arizpe
 
Hilchenbach (1)
 
 
Saltillo (2)
 
Kaiserslauten
 
 
Tlaxcala
 
Luneburg
 
 
Toluca (1)
 
Mannweiler (1)
 
Poland
Bierun
 
Markgroningen (2)
 
 
Siemianowice
 
Neuenburg (1)
 
 
Skarbimierz (1)
 
Neuss (1),(4)
 
 
Swiebodzin
 
Neustadt
 
 
Zory
 
Rastatt (1)
 
Portugal
Palmela
 
Remscheid (1)
 
Romania
Bradu
 
Rockenhausen
 
 
Craiova (1)
 
Saarlouis (1)
 
 
Jimbolia
 
Solingen (3)
 
 
Mioveni (1)
 
Ueberherrn
 
 
Pitesti (1)
 
Waghausel
 
 
Ploesti
 
Wuppertal (1),(3)
 
 
Timisoara (1)
 
Zwickau (1)
 
Russia
St. Petersburg (2)
Hungary
Mezolak
 
 
Togliatti (1)
 
Mor
 
Slovak Republic
Bratislava (1),(4)
India
Dharwad (1)
 
 
Kostany nad Turcom (2)
 
Pune (2),(3)
 
 
Lozorno (1)
Indonesia
Bekasi (1)
 
 
Lucenec
 
Purwakarta (1)
 
 
Trencin (1),(4)
Italy
Grugliasco (1)
 
 
Zilina (2)
 
Melfi
 
South Africa
Chloorkop (1)
 
Ogliastro Cilento
 
 
East London (1)
 
Rocca D'Evandro
 
 
Eastern Cape (1)
Japan
Hamamatsu
 
 
Joannesburg
 
Higashiomi
 
 
Port Elizabeth (1)
 
Yokohama (1),(4)
 
 
Pretoria
 
Yokosuka (2)
 
 
Swartkops (1)
Korea
Ansan (1),(4)
 
 
Uitenhage (1)
 
Asan
 
 
Wynberg (1)
Malaysia
Melaka (1)
 
Spain
Abrera
 
Pekan (1)
 
 
Alagon
 
Selangor Darul Ehsan
 
 
Almussafes (1)
 
 
 
 
Pedrola
 
 
 
 
Redondela (1)
 
 
 
 
Valladolid
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

18


Automotive Experience (continued)
 
 
 
 
 
Sweden
Goteburg (1)
 
 
 
Thailand
Chonburi (1)
 
 
 
 
Rayong
 
 
 
Turkey
Bursa (1)
 
 
 
 
Kocaeli
 
 
 
United Kingdom
Birmingham
 
 
 
 
Burton-Upon-Trent
 
 
 
 
Ellesmere (1)
 
 
 
 
Garston (1)
 
 
 
 
Sunderland
 
 
 
 
Telford (1)
 
 
 
 
Wednesbury
 
 
 

Power Solutions
 
 
 
 
 
Arizona
Yuma (3)
 
Austria
Vienna (1),(3)
Delaware
Middletown (3)
 
Brazil
Sorocaba (3)
Florida
Tampa (3)
 
China
Changxing (3)
Georgia
Columbus (1)
 
 
Chongqing (3)
Illinois
Geneva (3)
 
 
Shanghai (2),(3)
Indiana
Ft. Wayne (3)
 
Colombia
Yumbo (2),(3)
Iowa
Red Oak (3)
 
Czech Republic
Ceska Lipa (2),(3)
Kentucky
Florence (2),(3)
 
France
Rouen
Michigan
Holland (3)
 
 
Sarreguemines (3)
Missouri
St. Joseph (3)
 
Germany
Hannover (3)
North Carolina
Kernersville (3)
 
 
Krautscheid (3)
Ohio
Toledo (3)
 
 
Zwickau (2),(3)
Oregon
Canby (2),(3)
 
Korea
Gumi (2),(3)
South Carolina
Florence (3)
 
Mexico
Celaya
 
Oconee (2),(3)
 
 
Cienega de Flores (1)
Texas
San Antonio (3)
 
 
Escobedo
Wisconsin
Milwaukee (4)
 
 
Flores
 
 
 
 
Garcia
 
 
 
 
San Pedro (1),(4)
 
 
 
 
Tlalnepantla (1),(4)
 
 
 
 
Torreon
 
 
 
Peru
Lima (1),(4)
 
 
 
Spain
Burgos
 
 
 
 
Guadalajara (1)
 
 
 
 
Guadamar del Segura
 
 
 
 
Ibi (3)
 
 
 
Sweden
Hultsfred

Corporate
 
 
 
 
 
Wisconsin
Milwaukee (2),(4)
 
China
Dalian (1),(4)
 
 
 
Mexico
Monterrey (1),(4)
 
 
 
Singapore
Singapore (1),(4)
 
 
 
Slovak Republic
Bratislava (1),(4)




19


(1)Leased facility
(2)Includes both leased and owned facilities
(3)Includes both administrative and manufacturing facilities
(4)Administrative facility only

In addition to the above listing, which identifies large properties (greater than 25,000 square feet), there are approximately 534 Building Efficiency branch offices and other administrative offices located in major cities throughout the world. These offices are primarily leased facilities and vary in size in proportion to the volume of business in the particular locality.

ITEM 3        LEGAL PROCEEDINGS

As noted in Item 1, liabilities potentially arise globally under various environmental laws and worker safety laws for activities that are not in compliance with such laws and for the cleanup of sites where Company-related substances have been released into the environment.

Currently, the Company is responding to allegations that it is responsible for performing environmental remediation, or for the repayment of costs spent by governmental entities or others performing remediation, at approximately 40 sites in the United States. Many of these sites are landfills used by the Company in the past for the disposal of waste materials; others are secondary lead smelters and lead recycling sites where the Company returned lead-containing materials for recycling; a few involve the cleanup of Company manufacturing facilities; and the remaining fall into miscellaneous categories. The Company may face similar claims of liability at additional sites in the future. Where potential liabilities are alleged, the Company pursues a course of action intended to mitigate them.

The Company accrues for potential environmental liabilities in a manner consistent with accounting principles generally accepted in the United States; that is, when it is probable a liability has been incurred and the amount of the liability is reasonably estimable. Reserves for environmental liabilities totaled $24 million and $25 million at September 30, 2014 and 2013, 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 Company’s ultimate level of liability at many remediation sites due to the large number of other parties that may be involved, the complexity of determining the relative liability among those parties, the uncertainty as to the nature and scope of the investigations and remediation to be conducted, the uncertainty in the application of law and risk assessment, the various choices and costs associated with diverse technologies that may be used in corrective actions at the sites, and the often quite lengthy periods over which eventual remediation may occur. Nevertheless, the Company does not currently believe that any claims, penalties or costs in connection with known environmental matters will have a material adverse effect on the Company’s 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, 2014 and 2013, the Company recorded conditional asset retirement obligations of $52 million and $56 million, respectively.

In June 2013, the Company self-reported to the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) alleged Foreign Corrupt Practices Act (FCPA) violations related to its Building Efficiency marine business in China dating back to 2007. These allegations were isolated to the Company’s marine business in China which had annual sales ranging from $20 million to $50 million during this period. The Company, under the oversight of its Audit Committee and Board of Directors, proactively initiated an investigation into this matter with the assistance of external legal counsel and external forensic accountants. In connection with this investigation, the Company has made and continues to evaluate certain enhancements to its FCPA compliance program. The Company continues to fully cooperate with the SEC and the DOJ; however, at this time, the Company is unable to predict the ultimate resolution of this matter with these agencies.

The Company is involved in a number of product liability and various other casualty lawsuits incident to the operation of its businesses. The Company maintains insurance coverages and records estimated costs for claims and suits of this nature. It is management’s opinion that none of these will have a material adverse effect on the Company’s financial position, results of operations or cash flows. Costs related to such matters were not material to the periods presented.

ITEM 4        MINE SAFETY DISCLOSURES

Not applicable.


20


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 19, 2014 is included as an unnumbered Item in Part I of this report in lieu of being included in the Company’s Proxy Statement relating to the Annual Meeting of Shareholders to be held on January 28, 2015.

    Michael K. Bartschat, 52, was elected a Vice President and named Chief Procurement Officer in July 2014. He previously served as Group Vice President and General Manager, Metals and Mechanisms, Automotive Seating from January 2013 to July 2014, as Group Vice President and General Manager, Trim and Fabrics, Automotive Seating from November 2011 to December 2012 and as Group Vice President, Global Purchasing from November 2004 to November 2011. Mr. Bartschat joined the Company in 2004.

Beda Bolzenius, 58, was elected a Vice President in November 2005 and has served as President - Automotive Experience and as Vice Chairman, Asia Pacific since May 2014. He previously served as President, Automotive Seating from October 2012 to May 2014, as President of the Automotive Experience business from November 2006 to October 2012 and as Executive Vice President and General Manager Europe, Africa and South America for Automotive Experience from November 2004 to November 2006. 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 Bosch’s Body Electronics division.

    Brian J. Cadwallader, 55, was elected a Vice President in January 2014 and named General Counsel and Secretary in October 2014. He previously served as Assistant Secretary from January 2014 to September 2014, as Assistant General Counsel from September 2011 to September 2014 and as Group Vice President and General Counsel, Building Efficiency from August 2010 to September 2011. Mr. Cadwallader joined the Company in 2010. Prior to joining the Company, Mr. Cadwallader served as Associate General Counsel, International Business and Shared Services from 2009 to 2010 of International Paper Company, Memphis, Tennessee (a paper and packaging company) and as Associate General Counsel, Shared Services of International Paper Company from 2005 to 2009.

Grady L. Crosby, 48, was elected Vice President, Public Affairs and named Chief Diversity Officer in October 2014. He previously served as Vice President and Global General Counsel, Power Solutions from October 2013 to September 2014, as Vice President and General Counsel, Power Solutions Americas and Global Aftermarket from August 2012 to October 2013 and as Vice President and General Counsel, Power Solutions Americas from August 2011 to August 2012. Prior to joining the Company in August 2011, Mr. Crosby served as Associate General Counsel of Hanesbrands Inc., Winston-Salem, North Carolina (an apparel manufacturer and marketer) from 2005 to 2011.

    Simon Davis, 50, was elected a Vice President and named Assistant Chief Human Resources Officer in May 2014. He previously served as Vice President - Talent Strategy & Organizational Excellence from July 2011 to May 2014 and as Vice President - Human Resources for Power Solutions from January 2007 to July 2011. Mr. Davis has held human resources positions of increasing responsibility since joining the Company in 1997.

     Susan F. Davis, 61, was elected an Executive Vice President in September 2006 and named Chief Human Resources Officer in May 2014. She previously served as Executive Vice President of Human Resources from September 2006 to May 2014, as Vice President of Human Resources from May 1994 to September 2006 and as Vice President of Organizational Development for the Automotive Experience business from August 1993 to April 1994. Ms. Davis joined the Company in 1983. Ms. Davis is a Director of Quanex Building Products Corporation, Houston, Texas (building products manufacturer), where she is the Chairwoman of the Compensation and Management Development Committee and serves on the Nominating and Corporate Governance Committee.

Charles A. Harvey, 62, was elected a Vice President in November 2005. He previously served as Vice President of Diversity and Public Affairs from November 2005 to September 2014 and as Chief Diversity Officer from 2013 to September 2014. Mr. Harvey also served as Vice President of Human Resources for the Automotive Experience business and in other human resources leadership positions. Mr. Harvey joined the Company in 1991.

     William C. Jackson, 54, was elected a Vice President and named President, Building Efficiency in September 2014. He previously served as Executive Vice President, Corporate Development from September 2013 to September 2014, as President, Automotive Electronics & Interiors from March 2012 to July 2014 and as Executive Vice President, Operations and Innovation, from May 2011 to September 2013. Prior to joining Johnson Controls, Mr. Jackson was Vice President and President of Automotive at Sears Holdings Corporation, (an integrated retailer) from 2009 to 2010. Prior to that, he served as Senior Vice

21


President and board member of Booz, Allen & Hamilton and Booz & Company, (a strategy and consulting firm) where he led the firm’s Global Automotive, Transportation and Industrials Practice.

     Brian Kesseler, 48, was elected a Vice President and named President, Power Solutions in January 2013. He previously served as the Chief Operating Officer of the Power Solutions business from May 2012 to January 2013. He served as Vice President and General Manager, Europe Systems & Service, North America Service & Unitary Products Group for the Building Efficiency business from 2009 to April 2012, as Vice President and General Manager, Americas for the Power Solutions business from 2006 to 2009 and as Vice President and General Manager, North America for the Automotive business from 2003 to 2006. Mr. Kesseler joined the Company in 1994.

     R. Bruce McDonald, 54, was elected Vice Chairman in September 2014 and has served as an Executive Vice President since September 2006. He previously served as Chief Financial Officer from May 2005 to September 2014, as Vice President from January 2002 to September 2006, as 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. Mr. McDonald is a Director of Dana Holding Corporation, Maumee, Ohio (global provider of high technology driveline, sealing and thermal-management products), where he serves on the Audit Committee and Compensation Committee.

     Kim Metcalf-Kupres, 53, was elected a Vice President and named Chief Marketing Officer in May 2013. She previously served as Vice President, Strategy, Marketing and Sales in the Power Solutions business from 2007 to May 2013. Ms. Metcalf-Kupres also served as Vice President, Sales and Marketing for Building Efficiency Systems in North America and has held positions of increasing responsibility since joining the Company in 1994.

     Alex A. Molinaroli, 55, was elected Chief Executive Officer and President effective October 2013. He also serves as the Company’s Principal Executive Officer. He was also elected Chairman of the Board of Directors in January 2014 and has served as a Director since October 2013. He previously served as Vice Chairman from January 2013 to October 2013, as a Corporate Vice President from May 2004 to January 2013 and as President of the Company’s Power Solutions business from January 2007 to January 2013. Mr. Molinaroli served as Vice President and General Manager for North America Systems & the Middle East for the Company’s 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.

    Jerome D. Okarma, 62, was elected a Vice President in September 2003. He previously served as Secretary and General Counsel from November 2004 to September 2014, 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.

     Brian J. Stief, 58, was elected an Executive Vice President and Chief Financial Officer in September 2014. He also serves as the Company’s Principal Financial Officer. He previously served as Vice President and Corporate Controller from July 2010 to September 2014. Prior to joining the Company in July 2010, Mr. Stief was a partner with PricewaterhouseCoopers LLP, (an audit and assurance, tax and consulting services provider) which he joined in 1979 and in which he became partner in 1989.

    Suzanne M. Vincent, 44, was elected a Vice President and Corporate Controller in September 2014. She also serves as the Company’s Principal Accounting Officer. She previously served as Vice President, Internal Audit since joining the Company in October 2012. Prior to joining the Company, Ms. Vincent was a partner with KPMG LLP, (an audit and assurance, tax and consulting services provider) which she joined in November 2001 and in which she became an audit partner in October 2008.

     Frank A. Voltolina, 54, was elected a 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., (now known as Meritor, Inc. - an automobile component manufacturer for military suppliers, trucks, and trailers).

There are no family relationships, as defined by the instructions to this item, among the Company’s 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 duly-elected and qualified or until their earlier resignation or removal.

22


PART II

ITEM 5
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The shares of the Company’s common stock are traded on the New York Stock Exchange under the symbol "JCI."
Title of Class
Number of Record Holders
as of September 30, 2014
Common Stock, $1.00 par value
36,687
 
 
Common Stock Price Range
 
Dividends
 
2014
 
2013
 
2014
 
2013
First Quarter
$ 39.42 - 51.90
 
$ 24.75 - 30.74
 
$
0.22

 
$
0.19

Second Quarter
43.85 - 52.50
 
30.30 - 35.17
 
0.22

 
0.19

Third Quarter
43.16 - 50.71
 
31.95 - 38.33
 
0.22

 
0.19

Fourth Quarter
43.74 - 51.60
 
35.43 - 43.49
 
0.22

 
0.19

Year
$ 39.42 - 52.50
 
$ 24.75 - 43.49
 
$
0.88

 
$
0.76


In November 2012, the Company’s Board of Directors authorized a stock repurchase program to acquire up to $500 million of the Company’s outstanding common stock, which supersedes any prior programs. In September 2013, the Company’s Board of Directors authorized up to an additional $500 million in stock repurchases of the Company’s outstanding common stock, and in November 2013, the Company's Board of Directors authorized an additional $3.0 billion under the stock repurchase program, both incremental to prior authorizations. Stock repurchases under the stock repurchase program may be made through open market, privately negotiated, or structured transactions or otherwise at times and in such amounts as Company management deems appropriate. The stock repurchase program does not have an expiration date and may be amended or terminated by the Board of Directors at any time without prior notice. The Company spent approximately $1,249 million on repurchases under the stock repurchase program in fiscal 2014. As of November 19, 2014, the Company has spent approximately $395 million on repurchases under the stock repurchase program in fiscal 2015.

The Company entered into an Equity Swap Agreement, dated March 13, 2009, with Citibank, N.A. (Citibank). The Company selectively uses equity swaps to reduce market risk associated with its stock-based compensation plans, such as its deferred compensation plans. These equity compensation liabilities increase as the Company’s stock price increases and decrease as the Company’s stock price decreases. In contrast, the value of the Equity Swap Agreement moves in the opposite direction of these liabilities, allowing the Company to fix a portion of the liabilities at a stated amount.

In connection with the Equity Swap Agreement, Citibank may purchase unlimited shares of the Company’s stock in the market or in privately negotiated transactions. The Company disclaims that Citibank is an "affiliated purchaser" of the Company as such term is defined in Rule 10b-18(a)(3) under the Securities Exchange Act or that Citibank is purchasing any shares for the Company. The Equity Swap Agreement has no stated expiration date. The net effect of the change in fair value of the Equity Swap Agreement and the change in equity compensation liabilities was not material to the Company’s earnings for the three months ended September 30, 2014.


23



The following table presents information regarding the repurchase of the Company’s common stock by the Company as part of the publicly announced program and purchases of the Company’s common stock by Citibank in connection with the Equity Swap Agreement during the three months ended September 30, 2014.
Period
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of the Publicly Announced Program
 
Approximate Dollar Value of Shares that May Yet be Purchased under the Programs
7/1/14 - 7/31/14
 
 
 
 
 
 
 
Purchases by Company
1,009,379

 
$49.51
 
1,009,379

 
$2,400,629,831
8/1/14 - 8/31/14
 
 
 
 
 
 
 
Purchases by Company

 

 

 
$2,400,629,831
9/1/14 - 9/30/14
 
 
 
 
 
 
 
Purchases by Company

 

 

 
$2,400,629,831
7/1/14 - 7/31/14
 
 
 
 
 
 
 
Purchases by Citibank (1)

 

 

 
NA
8/1/14 - 8/31/14
 
 
 
 
 
 
 
Purchases by Citibank

 

 

 
NA
9/1/14 - 9/30/14
 
 
 
 
 
 
 
Purchases by Citibank

 

 

 
NA

(1)
In July 2014, Citibank reduced its holding of the Company's stock by 250,000 shares in connection with the Equity Swap Agreement.


24


The following information in Item 5 is not deemed to be "soliciting material" or to be "filed" with the SEC or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934 (Exchange Act) or to the liabilities of Section 18 of the Exchange Act, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except to the extent the Company specifically incorporates it by reference into such a filing.

The line graph below compares the cumulative total shareholder return on our Common Stock with the cumulative total return of companies on the Standard & Poor’s (S&P’s) 500 Stock Index and companies in our Diversified Industrials Peer Group.* This graph assumes the investment of $100 on September 30, 2009 and the reinvestment of all dividends since that date.

The Company’s transfer agent’s contact information is as follows:

Wells Fargo Bank, N.A.
Shareowner Services Department
P.O. Box 64874
St. Paul, MN 55164-0874
(877) 602-7397

25


ITEM 6        SELECTED FINANCIAL DATA

The following selected financial data reflects the results of operations, financial position data and common share information for the fiscal years ended September 30, 2010 through September 30, 2014 (dollars in millions, except per share data). Certain amounts have been revised to reflect the retrospective application of the classification of the Automotive Experience Electronics segment as a discontinued operation for all periods presented.

 
Year ended September 30,
 
2014
 
2013
 
2012
 
2011
 
2010
OPERATING RESULTS
 
 
 
 
 
 
 
 
 
Net sales
$
42,828

 
$
41,410

 
$
40,604

 
$
39,543

 
$
33,381

Segment income (1)
2,877

 
2,686

 
2,349

 
2,187

 
1,966

Income from continuing operations attributable to Johnson Controls, Inc. (6)
1,433

 
1,077

 
1,099

 
1,326

 
1,322

Net income attributable to Johnson Controls, Inc.
1,215

 
1,178

 
1,184

 
1,415

 
1,354

Earnings per share from continuing operations (6)
 
 
 
 
 
 
 
 
 
Basic
$
2.15

 
$
1.58

 
$
1.61

 
$
1.96

 
$
1.97

Diluted
2.12

 
1.56

 
1.60

 
1.93

 
1.94

Return on average shareholders’ equity attributable to Johnson Controls, Inc. (2) (6)
12
%
 
9
%
 
10
%
 
12
%
 
14
%
Capital expenditures
$
1,199

 
$
1,377

 
$
1,831

 
$
1,325

 
$
777

Depreciation and amortization
955

 
952

 
824

 
731

 
691

Number of employees
168,000

 
170,000

 
170,000

 
162,000

 
137,000

 
 
 
 
 
 
 
 
 
 
FINANCIAL POSITION
 
 
 
 
 
 
 
 
 
Working capital (3)
$
971

 
$
1,062

 
$
2,370

 
$
1,701

 
$
1,031

Total assets
32,804

 
31,518

 
30,954

 
29,788

 
25,855

Long-term debt
6,357

 
4,560

 
5,321

 
4,533

 
2,652

Total debt
6,680

 
5,498

 
6,068

 
5,146

 
3,389

Shareholders' equity attributable to Johnson Controls, Inc.
11,311

 
12,314

 
11,625

 
11,154

 
10,183

Total debt to capitalization (4)
37
%
 
31
%
 
34
%
 
32
%
 
25
%
Net book value per share (5)
$
17.00

 
$
17.99

 
$
17.04

 
$
16.40

 
$
15.11

 
 
 
 
 
 
 
 
 
 
COMMON SHARE INFORMATION
 
 
 
 
 
 
 
 
 
Dividends per share
$
0.88

 
$
0.76

 
$
0.72

 
$
0.64

 
$
0.52

Market prices
 
 
 
 
 
 
 
 
 
High
$
52.50

 
$
43.49

 
$
35.95

 
$
42.92

 
$
35.77

Low
39.42

 
24.75

 
23.37

 
25.91

 
23.62

Weighted average shares (in millions)
 
 
 
 
 
 
 
 
 
Basic
666.9

 
683.7

 
681.5

 
677.7

 
672.0

Diluted
674.8

 
689.2

 
688.6

 
689.9

 
682.5

Number of shareholders
36,687

 
38,067

 
40,019

 
43,340

 
44,627

 
(1)
Segment income is calculated as income from continuing operations before income taxes and noncontrolling interests excluding net financing charges, significant restructuring and impairment costs, and net mark-to-market adjustments on pension and postretirement plans.

(2)
Return on average shareholders’ equity attributable to Johnson Controls, Inc. (ROE) represents income from continuing operations attributable to Johnson Controls, Inc. divided by average shareholders’ equity attributable to Johnson Controls, Inc.


26


(3)
Working capital is defined as current assets less current liabilities, excluding cash, short-term debt, the current portion of long-term debt, and the current portion of assets and liabilities held for sale.

(4)
Total debt to total capitalization represents total debt divided by the sum of total debt and shareholders’ equity attributable to Johnson Controls, Inc.

(5)
Net book value per share represents shareholders’ equity attributable to Johnson Controls, Inc. divided by the number of common shares outstanding at the end of the period.

(6)
Income from continuing operations attributable to Johnson Controls, Inc. includes $324 million, $957 million and $287 million of significant restructuring and impairment costs in fiscal year 2014, 2013 and 2012, respectively. It also includes $274 million, $(405) million, $445 million, $383 million and $268 million of net mark-to-market charges (gains) on pension and postretirement plans in fiscal year 2014, 2013, 2012, 2011 and 2010, respectively. The preceding amounts are stated on a pre-tax basis.


ITEM 7
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

The Company operates in three primary businesses: Building Efficiency, Automotive Experience and Power Solutions. Building Efficiency provides facility systems, services and workplace solutions including comfort, energy and security management for the residential and non-residential buildings markets. Automotive Experience designs and manufactures interior systems and products for passenger cars and light trucks, including vans, pick-up trucks and sport/crossover utility vehicles. Power Solutions designs and manufactures automotive batteries for the replacement and original equipment markets.

This discussion summarizes the significant factors affecting the consolidated operating results, financial condition and liquidity of the Company for the three-year period ended September 30, 2014. This discussion should be read in conjunction with Item 8, the consolidated financial statements and the notes to consolidated financial statements.

Effective October 1, 2013, the Company reorganized the reportable segments within its Building Efficiency business to align with its new management reporting structure and business activities. Prior to this reorganization, Building Efficiency was comprised of five reportable segments for financial reporting purposes: North America Systems, North America Service, Global Workplace Solutions, Asia and Other. As a result of this change, Building Efficiency is now comprised of four reportable segments for financial reporting purposes, with the only change being the the combination of North America Systems and North America Service into one reportable segment called North America Systems and Service. Historical information has been revised to reflect the new Building Efficiency reportable segment structure.

At March 31, 2014, the Company determined that its Automotive Experience Electronics segment met the criteria to be classified as a discontinued operation, which required retrospective application to financial information for all periods presented. Refer to Note 3, "Discontinued Operations," of the notes to consolidated financial statements for further information regarding the Company's discontinued operations.

Outlook

On October 30, 2014, the Company gave a preliminary outlook of its market and financial expectations for fiscal 2015, saying it believes improving markets, ongoing business portfolio changes and focused capital allocation strategies will enable the Company to pursue growth markets with higher returns in the upcoming year. Additionally, the Company announced that it expects fiscal 2015 first quarter earnings from continuing operations, excluding transaction/integration related costs, to be $0.74-$0.77 per diluted share. The Company will provide further detailed fiscal 2015 guidance at an analyst meeting on December 2, 2014, which will be accessible to the public in a manner that the Company will disclose in advance.



27


FISCAL YEAR 2014 COMPARED TO FISCAL YEAR 2013

Net Sales
 
Year Ended
September 30,
 
 
(in millions)
2014
 
2013
 
Change
Net sales
$
42,828

 
$
41,410

 
3
%

The increase in consolidated net sales was due to higher sales in the Automotive Experience business ($1.5 billion) and Power Solutions business ($244 million), and the favorable impact of foreign currency translation ($60 million), partially offset by lower sales in the Building Efficiency business ($370 million). Excluding the favorable impact of foreign currency translation, consolidated net sales increased 3% as compared to the prior year. The favorable impacts of higher Automotive Experience volumes globally, and higher global battery shipments and improved pricing in the Power Solutions business were partially offset by lower market demand for Building Efficiency in North America, the Middle East, Latin America and Europe. The incremental sales related to business acquisitions were $622 million across all segments. Refer to the segment analysis below within Item 7 for a discussion of net sales by segment.

Cost of Sales / Gross Profit
 
Year Ended
September 30,
 
 
(in millions)
2014
 
2013
 
Change
Cost of sales
$
36,201

 
$
34,945

 
4
%
Gross profit
6,627

 
6,465

 
3
%
% of sales
15.5
%
 
15.6
%
 
 

The increase in cost of sales year over year corresponds to the sales growth noted above, with gross profit percentage decreasing by 10 basis points. Gross profit in the Automotive Experience business was favorably impacted by higher volumes globally, and lower operating and purchasing costs due to improved operational performance, partially offset by net unfavorable pricing and commercial settlements. The Power Solutions business was impacted by favorable pricing and product mix including lead acquisition costs and battery cores, and increased benefits of vertical integration. Gross profit in the Building Efficiency business was unfavorably impacted by lower market demand in North America, the Middle East, Latin America and Europe, and contract related charges in the Middle East, partially offset by strong operating performance in Asia due to cost and pricing initiatives. Foreign currency translation had an unfavorable impact on cost of sales of approximately $62 million. Net mark-to-market adjustments on pension and postretirement plans had a net unfavorable year over year impact on cost of sales of $227 million ($43 million charge in fiscal 2014 compared to a $184 million gain in fiscal 2013) primarily due to a decrease in year over year discount rates. Refer to the segment analysis below within Item 7 for a discussion of segment income by segment.

Selling, General and Administrative Expenses
 
Year Ended
September 30,
 
 
(in millions)
2014
 
2013
 
Change
Selling, general and administrative expenses
$
4,308

 
$
3,780

 
14
%
% of sales
10.1
%
 
9.1
%
 
 

Selling, general and administrative expenses (SG&A) increased by $528 million year over year, and SG&A as a percentage of sales increased 100 basis points. Net mark-to-market adjustments on pension and postretirement plans had a net unfavorable year over year impact on SG&A of $452 million ($231 million charge in fiscal 2014 compared to a $221 million gain in fiscal 2013) primarily due to a decrease in year over year discount rates. Net pension settlement activity had a net unfavorable year over year impact on SG&A of $85 million ($16 million charge in fiscal 2014 compared to a $69 million gain in fiscal 2013) primarily related to lump-sum buyouts of participants in the U.S. pension plan. The Automotive Experience business SG&A increased primarily due to higher employee related expenses, partially offset by lower engineering expenses, prior year distressed supplier costs and the benefits of cost reduction initiatives. The Power Solutions business SG&A increased primarily due to prior year net favorable legal settlements and higher employee related expenses. The Building Efficiency business SG&A decreased primarily due to lower employee related expenses and other cost reduction initiatives, partially offset by a prior year pension curtailment gain resulting

28


from a lost Global Workplace Solutions contract and transaction-related costs. Foreign currency translation had an unfavorable impact on SG&A of $1 million. Refer to the segment analysis below within Item 7 for a discussion of segment income by segment.

Gain (Loss) on Business Divestitures - Net
 
Year Ended
September 30,
 
 
(in millions)
2014
 
2013
 
Change
Gain (loss) on business divestitures - net

$
(111
)
 
$
7

 
*
* Measure not meaningful

Refer to Note 2, "Acquisitions and Divestitures," of the notes to consolidated financial statements for information on the gain (loss) on business divestitures - net.

Restructuring and Impairment Costs
 
Year Ended
September 30,
 
 
(in millions)
2014
 
2013
 
Change
Restructuring and impairment costs
$
324

 
$
957

 
-66
 %

Refer to Note 16, "Significant Restructuring and Impairment Costs," of the notes to consolidated financial statements for information on the restructuring and impairment costs.

Net Financing Charges
 
Year Ended
September 30,
 
 
(in millions)
2014
 
2013
 
Change
Net financing charges
$
244

 
$
247

 
-1
 %

Net financing charges decreased slightly in fiscal 2014 as compared to fiscal 2013 primarily due to lower interest expense as a result of lower interest rates, partially offset by higher average borrowing levels.

Equity Income
 
Year Ended
September 30,
 
 
(in millions)
2014
 
2013
 
Change
Equity income
$
395

 
$
399

 
-1
 %

The decrease in equity income was primarily due to prior year gains on acquisitions of a partially-owned affiliates in the Automotive Experience business ($106 million) and lower current year income at certain Power Solutions and Building Efficiency partially-owned affiliates, partially offset by higher current year income at certain Automotive Experience partially-owned affiliates and gains on acquisitions of partially-owned affiliates in the Power Solutions business ($19 million) and Building Efficiency business ($19 million). Refer to the segment analysis below within Item 7 for a discussion of segment income by segment.

Income Tax Provision
 
Year Ended
September 30,
 
 
(in millions)
2014
 
2013
 
Change
Income tax provision
$
482

 
$
696

 
-31
 %
* Measure not meaningful

The effective rate is below the U.S. statutory rate for fiscal 2014 primarily due to the benefits of continuing global tax planning initiatives and income in certain non-U.S. jurisdictions with a tax rate lower than the U.S. statutory tax rate, partially offset by the

29


tax consequences of business divestitures, significant restructuring and impairment costs, the change in assertion over reinvestment of foreign undistributed earnings related to the Global Workplace Solutions business and valuation allowance adjustments. The effective rate is above the U.S. statutory rate for fiscal 2013 primarily due to the tax consequences of significant restructuring and impairment costs, and valuation allowance and uncertain tax position adjustments, partially offset by favorable tax audit resolutions, the benefits of continuing global tax planning initiatives and income in certain non-U.S. jurisdictions with a tax rate lower than the U.S. statutory tax rate. Refer to Note 18, "Income Taxes," of the notes to consolidated financial statements for further details.

Valuation Allowances

The Company reviews the realizability of 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 Company’s valuation allowances may be necessary.

In the fourth quarter of fiscal 2014, the Company performed an analysis related to the realizability of its worldwide deferred tax assets. As a result, and after considering tax planning initiatives and other positive and negative evidence, the Company determined that it was more likely than not that deferred tax assets within Italy would not be realized. Therefore, the Company recorded $34 million of net valuation allowances as income tax expense in the three month period ended September 30, 2014.

In the first quarter of fiscal 2014, the Company determined that it was more likely than not that the deferred tax asset associated with a capital loss in Mexico would not be utilized. Therefore, the Company recorded a $21 million valuation allowance as income tax expense.

In the fourth quarter of fiscal 2013, the Company determined that it was more likely than not that deferred tax assets within Germany and Poland would not be realized. The Company also determined that it was more likely than not that the deferred tax assets within two French Power Solutions entities would be realized. Therefore, the Company recorded $145 million of net valuation allowances as income tax expense in the three month period ended September 30, 2013.

In the second quarter of fiscal 2013, the Company determined that it was more likely than not that a portion of the deferred tax assets within Brazil and Germany would not be realized. Therefore, the Company recorded $94 million of valuation allowances as income tax expense.

Uncertain Tax Positions

The Company is subject to income taxes in the U.S. and numerous foreign 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 Company’s business, there are many transactions and calculations where the ultimate tax determination is uncertain. The Company is regularly under audit by tax authorities.

In the third quarter of fiscal 2013, tax audit resolutions resulted in a net $79 million benefit to income tax expense.

As a result of foreign law changes during the second quarter of fiscal 2013, the Company increased its total reserve for uncertain tax positions, resulting in income tax expense of $17 million.

The Company’s 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, 2014, 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.

It is reasonably possible that certain tax examinations, appellate proceedings and/or tax litigation will conclude within the next twelve months, the impact of which could be up to a $50 million adjustment to tax expense.




30


Other Tax Matters

During fiscal 2014 and 2013, the Company incurred significant charges for restructuring and impairment costs. Refer to Note 16, "Significant Restructuring and Impairment Costs," of the notes to consolidated financial statements for additional information. A substantial portion of these charges cannot be benefited for tax purposes due to our current tax position in these jurisdictions and the underlying tax basis in the impaired assets, thus causing $75 million and $229 million incremental tax expense in fiscal 2014 and 2013, respectively.

During the fourth quarter of fiscal 2014, the Company recorded a discrete tax benefit of $51 million due to change in entity status.

In the fourth quarter of fiscal 2014, the Company provided income tax expense on the foreign undistributed earnings of the non-U.S. subsidiaries related to the Global Workplace Solutions business, which resulted in $35 million of tax expense.

In the third quarter of fiscal 2014, the Company disposed of its Automotive Experience Interiors headliner and sun visor product lines. Refer to Note 2, "Acquisitions and Divestitures," of the notes to consolidated financial statements for additional information. As a result, the Company recorded a pre-tax loss on divestiture of $95 million and income tax expense of $38 million. The income tax expense is due to the jurisdictional mix of gains and losses on the sale, which resulted in non-benefited losses in certain countries and taxable gains in other countries.

In the third quarter of fiscal 2013, the Company resolved certain Mexican tax issues, which resulted in a $61 million benefit to income tax expense.

Impacts of Tax Legislation and Change in Statutory Tax Rates

The "look-through rule," under subpart F of the U.S. Internal Revenue Code, expired for the Company on September 30, 2014. The "look-through rule" had provided an exception to the U.S. taxation of certain income generated by foreign subsidiaries. It is generally thought that this rule will be extended with the possibility of retroactive application. The "look-through rule" previously expired for the Company on September 30, 2012 but was extended in January 2013 retroactive to the beginning of the Company's 2013 fiscal year.

As a result of changes to Mexican tax law in the first quarter of fiscal 2014, the Company recorded a benefit to income tax expense of $25 million. Tax legislation was also adopted in various other jurisdictions during the fiscal year ended September 30, 2014. These law changes did not have a material impact on the Company's consolidated financial statements.

As a result of foreign law changes during the second quarter of fiscal 2013, the Company increased its total reserve for uncertain tax positions, resulting in income tax expense of $17 million.

Income (Loss) From Discontinued Operations, Net of Tax
 
Year Ended
September 30,
 
 
(in millions)
2014
 
2013
 
Change
Income (loss) from discontinued operations,
    net of tax
$
(218
)
 
$
101

 
*
* Measure not meaningful

The change in income (loss) from discontinued operations, net of tax, was primarily due to a prior year gain, net of tax, of $257 million related to the sale of the Automotive Experience Electronics' HomeLink® product line, a fiscal 2014 discrete non-cash tax charge of $180 million related to the repatriation of foreign cash associated with the divestiture of the Electronics business and $80 million of divestiture related losses recorded in fiscal 2014, partially offset by a fiscal 2013 tax charge of $210 million related to foreign undistributed earnings of the non-U.S. subsidiaries related to the Electronics business.

Refer to Note 3, "Discontinued Operations," of the notes to consolidated financial statements for further information regarding the Company's discontinued operations.


31


Income from Continuing Operations Attributable to Noncontrolling Interests
 
Year Ended
September 30,
 
 
(in millions)
2014
 
2013
 
Change
Income from continuing operations attributable
   to noncontrolling interests
$
120

 
$
114

 
5
%

The increase in income from continuing operations attributable to noncontrolling interests for fiscal 2014 was primarily due to higher income at certain Automotive Experience and Building Efficiency partially-owned affiliates, partially offset by lower income at certain Power Solutions partially-owned affiliates and the effects of an increase in ownership percentage in a Power Solutions partially-owned affiliate.

Net Income Attributable to Johnson Controls, Inc.
 
Year Ended
September 30,
 
 
(in millions)
2014
 
2013
 
Change
Net income attributable to Johnson Controls, Inc.
$
1,215

 
$
1,178

 
3
%

The increase in net income attributable to Johnson Controls, Inc. was primarily due to lower restructuring and impairment costs, a decrease in the income tax provision and higher gross profit, partially offset by higher selling, general and administrative expenses, a loss from discontinued operations, and a loss on business divestitures. Fiscal 2014 diluted earnings per share attributable to Johnson Controls, Inc. was $1.80 compared to $1.71 in fiscal 2013.

Segment Analysis

Management evaluates the performance of its business units based primarily on segment income, which is defined as income from continuing operations before income taxes and noncontrolling interests excluding net financing charges, significant restructuring and impairment costs, and net mark-to-market adjustments on pension and postretirement plans.

Building Efficiency
 
Net Sales
for the Year Ended
September 30,
 
 
 
Segment Income
for the Year Ended
September 30,
 
 
(in millions)
2014
 
2013
 
Change
 
2014
 
2013
 
Change
North America Systems and Service
$
4,336

 
$
4,492

 
-3
 %
 
$
455

 
$
506

 
-10
 %
Global Workplace Solutions
4,079

 
4,265

 
-4
 %
 
95

 
113

 
-16
 %
Asia
2,069

 
2,022

 
2
 %
 
336

 
277

 
21
 %
Other
3,680

 
3,812

 
-3
 %
 
44

 
88

 
-50
 %
 
$
14,164

 
$
14,591

 
-3
 %
 
$
930

 
$
984

 
-5
 %
 
Net Sales:

The decrease in North America Systems and Service was due to lower volumes of equipment, controls systems and energy solutions ($132 million), and the unfavorable impact of foreign currency translation ($24 million).

The decrease in Global Workplace Solutions was due to lost customer accounts and lower project work ($264 million), partially offset by incremental sales from a prior year business acquisition ($66 million) and the favorable impact of foreign currency translation ($12 million).

The increase in Asia was due to higher volumes of equipment and controls systems ($74 million), and higher service volumes ($24 million), partially offset by the unfavorable impact of foreign currency translation ($51 million).

The decrease in Other was due to lower volumes related to a prior period business divestiture ($225 million), and lower volumes in the Middle East ($156 million), Latin America ($58 million) and Europe ($28 million), partially offset by

32


incremental sales related to a business acquisition ($276 million), higher volumes in unitary products ($44 million) and other businesses ($9 million), and the favorable impact of foreign currency translation ($6 million).

Segment Income:

The decrease in North America Systems and Service was due to unfavorable mix and margin rates ($116 million), lower volumes ($26 million), a prior year pension settlement gain ($12 million), net unfavorable current year contract related charges ($9 million), the unfavorable impact of foreign currency translation ($3 million) and a current year pension settlement loss ($3 million), partially offset by lower selling, general and administrative expenses ($118 million).

The decrease in Global Workplace Solutions was due to the indemnification of certain costs associated with a previously divested business ($25 million), a prior year pension curtailment gain resulting from a lost contract net of other contract losses ($24 million), a prior year pension settlement gain ($14 million), lower volumes ($13 million) and a current year pension settlement loss ($4 million), partially offset by lower selling, general and administrative expenses ($46 million), and favorable margin rates ($16 million).

The increase in Asia was due to higher volumes ($29 million), favorable margin rates ($19 million) and a gain on acquisition of partially-owned affiliates ($19 million), partially offset by the unfavorable impact of foreign currency translation ($7 million), and higher selling, general and administrative expenses ($1 million).

The decrease in Other was due to net unfavorable current year contract related charges in the Middle East ($50 million), lower volumes ($40 million), acquisition related costs ($27 million), lower equity income ($12 million) and a prior year pension settlement gain ($2 million), partially offset by lower selling, general and administrative expenses ($27 million), a prior year loss on business divestiture including transaction costs ($22 million), incremental operating income due to a business acquisition ($20 million), favorable margin rates ($8 million), net unfavorable prior year contract related charges ($7 million) and higher operating income related to a prior year business divestiture ($3 million).

Automotive Experience
 
Net Sales
for the Year Ended
September 30,
 
 
 
Segment Income (Loss)
for the Year Ended
September 30,
 
 
(in millions)
2014
 
2013
 
Change
 
2014
 
2013
 
Change
Seating
$
17,531

 
$
16,285

 
8
%
 
$
880

 
$
710

 
24
%
Interiors
4,501

 
4,176

 
8
%
 
6

 
(12
)
 
*

 
$
22,032

 
$
20,461

 
8
%
 
$
886

 
$
698

 
27
%
* Measure not meaningful

Net Sales:

The increase in Seating was due to higher volumes ($1.0 billion), incremental sales related to business acquisitions ($139 million), favorable sales mix ($115 million) and the favorable impact of foreign currency translation ($44 million), partially offset by lower volumes due to a prior year business divestiture ($53 million), and net unfavorable pricing and commercial settlements ($25 million).

The increase in Interiors was due to higher volumes ($346 million), net favorable pricing and commercial settlements ($79 million), and the favorable impact of foreign currency translation ($43 million), partially offset by lower volumes related to business divestitures ($134 million) and unfavorable sales mix ($9 million).

Segment Income:

The increase in Seating was due to higher volumes ($185 million), lower operating costs ($130 million), lower purchasing costs ($88 million), higher equity income ($71 million), prior year distressed supplier costs ($21 million), lower engineering expenses ($20 million), incremental operating income due to business acquisitions ($9 million) and the favorable impact of foreign currency translation ($4 million), partially offset by prior year gains on acquisitions of partially-owned affiliates ($106 million), higher selling, general and administrative expenses ($80 million), net unfavorable pricing and commercial settlements ($58 million), unfavorable mix ($51 million), a prior year gain on business divestiture ($29

33


million), a prior year pension settlement gain ($21 million), lower operating income due to a prior year business divestiture ($9 million) and a current year pension settlement loss ($4 million).

The increase in Interiors was due to higher volumes ($69 million), lower operating costs ($50 million), higher equity income ($19 million) and lower purchasing costs ($6 million), partially offset by a net loss on business divestitures ($86 million), lower operating income due to a business divestiture ($15 million), unfavorable mix ($10 million), net unfavorable pricing and commercial settlements ($8 million), a prior year pension settlement gain ($4 million), higher engineering expenses ($2 million) and a current year pension settlement loss ($1 million).

Power Solutions
 
Year Ended
September 30,
 
 
(in millions)
2014
 
2013
 
Change
Net sales
$
6,632

 
$
6,358

 
4
%
Segment income
1,061

 
1,004

 
6
%

Net sales increased due to incremental sales related to a business acquisition ($141 million), higher sales volumes ($74 million), favorable pricing and product mix ($48 million), and the favorable impact of foreign currency translation ($30 million), partially offset by the impact of lower lead costs on pricing ($19 million).

Segment income increased due to favorable product mix including lead acquisition costs and battery cores ($81 million), lower operating costs ($54 million), higher volumes ($21 million), a gain on acquisition of a partially-owned affiliate ($19 million), incremental operating income related to a business acquisition ($14 million) and the favorable impact of foreign currency translation ($3 million), partially offset by higher selling, general and administrative expenses ($54 million), prior year favorable legal settlements ($20 million), higher transportation costs ($20 million), a prior year change in asset retirement obligations ($17 million), a prior year pension settlement gain ($16 million), a current year pension settlement loss ($4 million) and lower equity income ($4 million).


34


FISCAL YEAR 2013 COMPARED TO FISCAL YEAR 2012

Net Sales
 
Year Ended
September 30,
 
 
(in millions)
2013
 
2012
 
Change
Net sales
$
41,410

 
$
40,604

 
2
%

The increase in consolidated net sales was due to higher sales in the Automotive Experience business ($616 million) and Power Solutions business ($459 million), partially offset by the unfavorable impact of foreign currency translation ($234 million) and lower sales in the Building Efficiency business ($35 million). Excluding the unfavorable impact of foreign currency translation, consolidated net sales increased 3% as compared to fiscal 2012. The favorable impacts of higher Automotive Experience volumes in North America and Europe, higher global battery shipments and improved pricing in the Power Solutions business, and improved market conditions in the North America residential market were partially offset by softness in global building demand. Refer to the segment analysis below within Item 7 for a discussion of net sales by segment.

Cost of Sales / Gross Profit
 
Year Ended
September 30,
 
 
(in millions)
2013
 
2012
 
Change
Cost of sales
$
34,945

 
$
34,767

 
1
%
Gross profit
6,465

 
5,837

 
11
%
% of sales
15.6
%
 
14.4
%
 
 

The increase in total cost of sales year over year corresponds to the sales growth noted above, with gross profit as a percentage of sales increasing by 120 basis points. Gross profit in the Automotive Experience business was favorably impacted by higher volumes and lower purchasing costs, partially offset by higher operating costs, and net unfavorable commercial settlements and pricing. The Power Solutions business experienced favorable pricing and product mix, higher volumes and increased benefits of vertical integration including the incremental contribution of the Company's battery recycling facility. Gross profit in the Building Efficiency business experienced favorable margin rates, and benefited year over year from improved labor utilization and pricing initiatives. Foreign currency translation had a favorable impact on cost of sales of approximately $205 million. Net mark-to-market adjustments on pension and postretirement plans had a net favorable year over year impact on cost of sales of $216 million ($184 million gain in fiscal 2013 compared to a $32 million charge in fiscal 2012) primarily due to an increase in year over year discount rates and favorable asset return experience, partially offset by assumption changes for certain non-U.S. plans. Refer to the segment analysis below within Item 7 for a discussion of segment income by segment.

Selling, General and Administrative Expenses
 
Year Ended
September 30,
 
 
(in millions)
2013
 
2012
 
Change
Selling, general and administrative expenses
$
3,780

 
$
4,311

 
-12
 %
% of sales
9.1
%
 
10.6
%
 
 

Selling, general and administrative expenses (SG&A) decreased by $531 million year over year, and SG&A as a percentage of sales decreased by 150 basis points. The favorable impact of net mark-to-market adjustments on pension and postretirement plans in SG&A increased year over year by $634 million ($221 million gain in fiscal 2013 compared to a $413 million charge in fiscal 2012) primarily due to an increase in year over year discount rates and favorable asset return experience, partially offset by assumption changes for certain non-U.S. plans. In addition, a pension settlement gain recorded in the fourth quarter of fiscal 2013 related to a lump-sum buyout of deferred vested participants in the U.S. pension plan had a favorable impact on SG&A of $69 million. Power Solutions business SG&A decreased primarily due to favorable legal settlements and a fiscal 2012 impairment of an equity investment, partially offset by higher employee related expenses. Automotive Experience business SG&A increased primarily due to higher engineering and employee related expenses. Building Efficiency business SG&A increased primarily due to higher employee related expenses, partially offset by cost reduction programs and a fiscal 2013 pension curtailment gain resulting

35


from a lost Global Workplace Solutions contract. Foreign currency translation had a favorable impact on SG&A of $17 million. Refer to the segment analysis below within Item 7 for a discussion of segment income by segment.

Gain on Business Divestitures - Net
 
Year Ended
September 30,
 
 
(in millions)
2013
 
2012
 
Change
Gain on business divestitures - net
$
7

 
$
40

 
-83
 %
 
Refer to Note 2, "Acquisitions and Divestitures," of the notes to consolidated financial statements for information on the gain on business divestitures - net.

Restructuring and Impairment Costs
 
Year Ended
September 30,
 
 
(in millions)
2013
 
2012
 
Change
Restructuring and impairment costs
$
957

 
$
287

 
*
* Measure not meaningful
 
Refer to Note 16, "Significant Restructuring and Impairment Costs," of the notes to consolidated financial statements for information on the restructuring and impairment costs.

Net Financing Charges
 
Year Ended
September 30,
 
 
(in millions)
2013
 
2012
 
Change
Net financing charges
$
247

 
$
231

 
7
%

The increase in net financing charges was primarily due to higher interest expense as a result of higher debt levels during fiscal 2013 as compared to fiscal 2012.

Equity Income
 
Year Ended
September 30,
 
 
(in millions)
2013
 
2012
 
Change
Equity income
$
399

 
$
338

 
18
%

The increase in equity income was primarily due to gains on acquisitions of partially-owned affiliates in the Automotive Experience business ($106 million), partially offset by a fiscal 2012 redemption of a warrant for an existing partially-owned affiliate in the Power Solutions business ($25 million), a fiscal 2012 equity interest gain in the Automotive Experience business ($15 million) and a fiscal 2012 equity interest gain on acquisition of a partially-owned affiliate in the Power Solutions business ($9 million). Refer to the segment analysis below within Item 7 for a discussion of segment income by segment.

Income Tax Provision
 
Year Ended
September 30,
 
 
(in millions)
2013
 
2012
 
Change
Income tax provision
$
696

 
$
161

 
*
* Measure not meaningful

The effective rate is above the U.S. statutory rate for fiscal 2013 primarily due to significant restructuring and impairment costs and valuation allowance and uncertain tax position adjustments, partially offset by favorable tax audit resolutions, the benefits of

36


continuing global tax planning initiatives and income in certain non-U.S. jurisdictions with a tax rate lower than the U.S. statutory tax rate. The effective rate is below the U.S. statutory rate for fiscal 2012 primarily 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. Refer to Note 18, "Income Taxes," of the notes to consolidated financial statements for further details.

Valuation Allowances

The Company reviews the realizability of 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 Company’s valuation allowances may be necessary.

In the fourth quarter of fiscal 2013, the Company performed an analysis related to the realizability of its worldwide deferred tax assets. As a result, and after considering tax planning initiatives and other positive and negative evidence, the Company determined that it was more likely than not that deferred tax assets within Germany and Poland would not be realized. The Company also determined that it was more likely than not that the deferred tax assets within two French Power Solutions entities would be realized. Therefore, the Company recorded $145 million of net valuation allowances as income tax expense in the three month period ended September 30, 2013.

In the second quarter of fiscal 2013, the Company determined that it was more likely than not that a portion of the deferred tax assets within Brazil and Germany would not be realized. Therefore, the Company recorded $94 million of valuation allowances as income tax expense.

In fiscal 2012, the Company recorded an overall increase to its valuation allowances of $47 million primarily due to a discrete period income tax adjustment in the fourth quarter. In the fourth quarter of fiscal 2012, the Company determined that it was more likely than not that deferred tax assets within Power Solutions in China would not be realized. Therefore, the Company recorded a $35 million valuation allowance as income tax expense in the three month period ended September 30, 2012.

Uncertain Tax Positions

The Company is subject to income taxes in the U.S. and numerous foreign 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 Company’s business, there are many transactions and calculations where the ultimate tax determination is uncertain. The Company is regularly under audit by tax authorities.

In the third quarter of fiscal 2013, tax audit resolutions resulted in a net $79 million benefit to income tax expense.

As a result of foreign law changes during the second quarter of fiscal 2013, the Company increased its total reserve for uncertain tax positions, resulting in income tax expense of $17 million.

As a result of certain events related to prior tax planning initiatives, during the third quarter of fiscal 2012, the Company reduced the reserve for uncertain tax positions by $22 million, including $13 million of interest and penalties, resulting in a benefit to income tax expense.

The Company’s 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, 2013, 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.

Other Tax Matters

During fiscal 2013 and 2012, the Company incurred significant charges for restructuring and impairment costs. Refer to Note 16, "Significant Restructuring and Impairment Costs," of the notes to consolidated financial statements for additional information. A substantial portion of these charges cannot be benefited for tax purposes due to our current tax position in these jurisdictions and

37


the underlying tax basis in the impaired assets, thus causing $229 million and $78 million incremental tax expense in fiscal 2013 and 2012, respectively.

In the third quarter of fiscal 2013, the Company resolved certain Mexican tax issues, which resulted in a $61 million benefit to income tax expense.

Impacts of Tax Legislation and Change in Statutory Tax Rates

As a result of foreign law changes during the second quarter of fiscal 2013, the Company increased its total reserve for uncertain tax positions, resulting in income tax expense of $17 million.

The "look-through rule," under subpart F of the U.S. Internal Revenue Code, expired for the Company on September 30, 2012. The "look-through rule" had provided an exception to the U.S. taxation of certain income generated by foreign subsidiaries. The rule was extended in January 2013 retroactive to the beginning of the Company's 2013 fiscal year.

During the fiscal year ended September 30, 2012, tax legislation was adopted in Japan which reduced its statutory income tax rate by 5%. Also, tax legislation was adopted in various jurisdictions to limit the annual utilization of tax losses that are carried forward. None of these changes had a material impact on the Company’s consolidated financial condition, results of operations or cash flows.

Income From Discontinued Operations, Net of Tax
 
Year Ended
September 30,
 
 
(in millions)
2013
 
2012
 
Change
Income from discontinued operations, net of tax
$
101

 
$
85

 
19
%

The increase in income from discontinued operations, net of tax, was primarily due to a gain, net of tax, of $257 million related to the fiscal 2013 sale of the Automotive Experience Electronics' HomeLink® product line, partially offset by a fiscal 2013 tax charge of $210 million related to foreign undistributed earnings of the non-U.S. subsidiaries primarily related to the Electronics business, and higher selling, general and administrative expenses.

Refer to Note 3, "Discontinued Operations," of the notes to consolidated financial statements for further information regarding the Company's discontinued operations.

Income from Continuing Operations Attributable to Noncontrolling Interests
 
Year Ended
September 30,
 
 
(in millions)
2013
 
2012
 
Change
Income from continuing operations attributable to noncontrolling interests
$
114

 
$
126

 
-10
 %

The decrease in income attributable to noncontrolling interests was primarily due to the effects of an increase in the Company's ownership percentage in an Automotive Experience partially-owned affiliate.

Net Income Attributable to Johnson Controls, Inc.
 
Year Ended
September 30,
 
 
(in millions)
2013
 
2012
 
Change
Net income attributable to Johnson Controls, Inc.
$
1,178

 
$
1,184

 
-1
 %

The decrease in net income attributable to Johnson Controls, Inc. was primarily due to higher restructuring and impairment costs, higher net financing charges, an increase in the income tax provision and the unfavorable impact of foreign currency translation, partially offset by higher gross profit, lower selling, general and administrative expenses, incremental gains on business divestitures

38


net of transaction costs, higher equity income and lower income attributable to noncontrolling interests. Fiscal 2013 diluted earnings per share attributable to Johnson Controls, Inc. was $1.71 compared to $1.72 in fiscal 2012.

Segment Analysis

Management evaluates the performance of its business units based primarily on segment income, which is defined as income from continuing operations before income taxes and noncontrolling interests excluding net financing charges, significant restructuring and impairment costs, and net mark-to-market adjustments on pension and postretirement plans.

Building Efficiency
 
Net Sales
for the Year Ended
September 30,
 
 
 
Segment Income
for the Year Ended
September 30,
 
 
(in millions)
2013
 
2012
 
Change
 
2013
 
2012
 
Change
North America Systems and Service
$
4,492

 
$
4,534

 
-1
 %
 
$
506

 
$
449

 
13
 %
Global Workplace Solutions
4,265

 
4,294

 
-1
 %
 
113

 
51

 
*

Asia
2,022

 
1,987

 
2
 %
 
277

 
266

 
4
 %
Other
3,812

 
3,900

 
-2
 %
 
88

 
140

 
-37
 %
 
$
14,591

 
$
14,715

 
-1
 %
 
$
984

 
$
906

 
9
 %
* Measure not meaningful

Net Sales:

The decrease in North America Systems and Service was due to a reduction in truck-based volumes ($46 million), lower volumes of equipment and controls systems ($25 million), and the unfavorable impact of foreign currency translation ($3 million), partially offset by higher energy solutions volumes ($32 million).

The decrease in Global Workplace Solutions was due to a net decrease in services to new and existing customers ($109 million) and the unfavorable impact of foreign currency translation ($26 million), partially offset by incremental sales from a business acquisition ($106 million).

The increase in Asia was due to higher volumes of equipment and controls ($47 million), and higher service volumes ($30 million), partially offset by the unfavorable impact of foreign currency translation ($42 million).

The decrease in Other was due to fiscal 2012 divestitures ($67 million), lower volumes in the Middle East ($64 million) and Europe ($54 million), and the unfavorable impact of foreign currency translation ($18 million), partially offset by higher volumes in unitary products ($66 million), Latin America ($23 million) and other businesses ($26 million).

Segment Income:

The increase in North America Systems and Service was due to favorable mix and margin rates ($87 million), a pension settlement gain ($12 million) and a fiscal 2012 loss on business divestitures ($3 million), partially offset by higher selling, general and administrative expenses ($24 million), and lower volumes ($21 million).

The increase in Global Workplace Solutions was due to favorable margin rates ($47 million), a pension curtailment gain resulting from a lost contract net of other contract costs ($24 million), a pension settlement gain ($14 million), incremental operating income from a business acquisition ($3 million), higher equity income ($1 million) and the favorable impact of foreign currency translation ($1 million), partially offset by lower volumes ($14 million), and higher selling, general and administrative expenses ($14 million).

The increase in Asia was due to favorable margin rates ($32 million) and higher volumes ($19 million), partially offset by higher selling, general and administrative expenses ($34 million), the unfavorable impact of foreign currency translation ($5 million) and lower equity income ($1 million).

The decrease in Other was due to fiscal 2012 gains on business divestitures net of transaction costs ($43 million), a fiscal 2013 loss on business divestiture including transaction costs ($22 million), higher selling, general and administrative expenses ($21 million), lower operating income due to fiscal 2012 divestitures ($11 million), contract related charges ($7

39


million) and the unfavorable impact of foreign currency translation ($2 million), partially offset by favorable margin rates ($49 million), higher equity income ($3 million) and a pension settlement gain ($2 million).

Automotive Experience
 
Net Sales
for the Year Ended
September 30,
 
 
 
Segment Income (Loss)
for the Year Ended
September 30,
 
 
(in millions)
2013
 
2012
 
Change
 
2013
 
2012
 
Change
Seating
$
16,285

 
$
15,854

 
3
%
 
$
710

 
$
683

 
4
 %
Interiors
4,176

 
4,129

 
1
%
 
(12
)
 
(23
)
 
-48
 %
 
$
20,461

 
$
19,983

 
2
%
 
$
698

 
$
660

 
6
 %

Net Sales:

The increase in Seating was due to higher volumes to the Company's major OEM customers ($407 million), incremental sales due to business acquisitions ($89 million), favorable sales mix ($75 million), and the fiscal 2012 negative impact of the flooding in Thailand and related events ($25 million), partially offset by the unfavorable impact of foreign currency translation ($147 million) and lower volumes due to a business divestiture ($18 million).

The increase in Interiors was due to higher volumes to the Company's major OEM customers ($38 million) and the favorable impact of foreign currency translation ($9 million).

Segment Income:

The increase in Seating was due to gains on acquisitions of partially-owned affiliates ($106 million), higher volumes ($76 million), lower purchasing costs ($54 million), a gain on business divestiture ($29 million), a pension settlement gain ($21 million), the fiscal 2012 negative impact of the flooding in Thailand and related events ($6 million), and incremental operating income due to a business acquisition ($4 million), partially offset by net unfavorable pricing and commercial settlements ($63 million), higher selling, general and administrative expenses ($61 million), unfavorable mix ($42 million), higher operating costs ($29 million), distressed supplier costs ($21 million), higher engineering and launch costs ($17 million), lower equity income including a fiscal 2012 equity interest gain ($14 million), litigation charges ($10 million), the unfavorable impact of foreign currency translation ($7 million) and lower operating income due to a business divestiture ($5 million).

The increase in Interiors was due to net favorable pricing and commercial settlements ($49 million), lower operating costs ($16 million), higher volumes ($7 million), favorable mix ($6 million), a pension settlement gain ($4 million) and the favorable impact of foreign currency translation ($2 million), partially offset by higher engineering and launch costs ($28 million), higher selling, general and administrative expenses ($25 million), higher purchasing costs ($17 million), distressed supplier costs ($2 million) and lower equity income ($1 million).

Power Solutions
 
Year Ended
September 30,
 
 
(in millions)
2013
 
2012
 
Change
Net sales
$
6,358

 
$
5,906

 
8
%
Segment income
1,004

 
783

 
28
%

Net sales increased due to favorable pricing and product mix ($223 million), higher sales volumes ($172 million) and the impact of higher lead costs on pricing ($64 million), partially offset by the unfavorable impact of foreign currency translation ($7 million).

Segment income increased due to favorable product mix including lead acquisition costs and battery cores ($187 million), higher volumes ($29 million), favorable legal settlements ($20 million), a pension settlement gain ($16 million), a fiscal 2012 impairment of an equity investment ($14 million), change in asset retirement obligations ($7 million) and higher equity income ($2 million), partially offset by a fiscal 2012 gain on redemption of a warrant for an existing partially-owned affiliate ($25 million), higher selling, general and administrative expenses ($15 million), a fiscal 2012 gain on

40


acquisition of a partially-owned affiliate ($9 million), higher net operating and transportation costs ($4 million), and the unfavorable impact of foreign currency translation ($1 million).

GOODWILL, LONG-LIVED ASSETS AND OTHER INVESTMENTS

Goodwill at September 30, 2014 was $7.1 billion, $538 million higher than the prior year. The increase was primarily due to the business acquisitions in the Building Efficiency Other and Power Solutions segments, partially offset by the reclassification of goodwill as assets held for sale for the Building Efficiency Global Workplace Solutions segment and impairment in the Building Efficiency Other segment, as discussed below.

Goodwill reflects the cost of an acquisition in excess of the fair values assigned to identifiable net assets acquired. The Company reviews goodwill for impairment during the fourth fiscal quarter or more frequently if events or changes in circumstances indicate the asset might be impaired. The Company performs impairment reviews for its reporting units, which have been determined to be the Company’s reportable segments or one level below the reportable segments in certain instances, using a fair value method based on management’s judgments and assumptions or third party valuations. The fair value of a reporting unit refers to the price that would be received to sell the unit as a whole in an orderly transaction between market participants at the measurement date. In estimating the fair value, the Company uses multiples of earnings based on the average of historical, published multiples of earnings of comparable entities with similar operations and economic characteristics. In certain instances, the Company uses discounted cash flow analyses or estimated sales price to further support the fair value estimates. The inputs utilized in the analyses are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, "Fair Value Measurement." 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.

During fiscal 2014, as a result of recent operating results, restructuring actions and expected future profitability, the Company's forecasted cash flow estimates used in the goodwill assessment were negatively impacted as of September 30, 2014 for the Building Efficiency Other - Latin America reporting unit. As a result, the Company concluded that the carrying value of the Building Efficiency Other - Latin America reporting unit exceeded its fair value as of September 30, 2014. The Company recorded a goodwill impairment charge of $47 million in the fourth quarter of fiscal 2014, which was determined by comparing the carrying value of the reporting unit's goodwill with the implied fair value of goodwill for the reporting unit. The Building Efficiency Other - Latin America reporting unit has no remaining goodwill at September 30, 2014.

The Company's impairment testing in the fourth quarter of fiscal 2014 indicated that the estimated fair value of the Building Efficiency Other - Middle East reporting unit exceeded its corresponding carrying amount including goodwill by approximately 9%. Accordingly, the Company has not recognized any impairment of goodwill associated with this reporting unit, which as of September 30, 2014 had a goodwill balance of $85 million. The Company continuously monitors for events and circumstances that could negatively impact the key assumptions in determining fair value, including long-term revenue growth projections, profitability, discount rates, recent market valuations from transactions by comparable companies, volatility in the Company's market capitalization, and general industry, market and macro-economic conditions. It is possible that future changes in such circumstances, or in the variables associated with the judgments, assumptions and estimates used in assessing the fair value of the reporting unit, would require the Company to record a non-cash impairment charge. Except as described above, no other reporting units were determined to be at risk of failing step one of the goodwill impairment test as the impairment testing performed indicated that the estimated fair value of each reporting unit substantially exceeded its corresponding carrying amount including recorded goodwill at September 30, 2014, 2013 and 2012.

During fiscal 2013, based on a combination of factors, including the recent operating results of the Automotive Experience Interiors business, restrictions on future capital and restructuring funding, and the Company's announced intention to explore strategic options related to this business, the Company's forecasted cash flow estimates used in the goodwill assessment were negatively impacted as of September 30, 2013. As a result, the Company concluded that the carrying value of the Interiors reporting unit exceeded its fair value as of September 30, 2013. The Company recorded a goodwill impairment charge of $430 million in the fourth quarter of fiscal 2013, which was determined by comparing the carrying value of the reporting unit's goodwill with the implied fair value of goodwill for the reporting unit.

The assumptions included in the impairment tests require judgment, and changes to these inputs could impact the results of the calculations. Other than management's internal projections of future cash flows, the primary assumptions used in the impairment tests were the weighted-average cost of capital and long-term growth rates. Although the Company's cash flow forecasts are based on assumptions that are considered reasonable by management and consistent with the plans and estimates management is using to operate the underlying businesses, there are significant judgments in determining the expected future cash flows attributable to a reporting unit. The impairment charges are non-cash expenses recorded within restructuring and impairment costs on the

41


consolidated statements of income and did not adversely affect the Company's debt position, cash flow, liquidity or compliance with financial covenants.

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. While the Company believes the judgments and assumptions used in the impairment tests are reasonable and no impairment existed at September 30, 2014, 2013 and 2012, different assumptions could change the estimated fair values and, therefore, impairment charges could be required, which could be material to the consolidated financial statements.

The Company reviews long-lived assets, including property, plant and equipment and other intangible assets with definite lives, for impairment whenever events or changes in circumstances indicate that the asset’s carrying amount may not be recoverable. The Company conducts its long-lived asset impairment analyses in accordance with ASC 360-10-15, "Impairment or Disposal of Long-Lived Assets." ASC 360-10-15 requires the Company to group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows. If the undiscounted cash flows do not indicate the carrying amount of the asset is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals.

In the third and fourth quarters of fiscal 2014, the Company concluded it had triggering events requiring assessment of impairment for certain of its long-lived assets in conjunction with its restructuring actions announced in fiscal 2014. In addition, in the fourth quarter of fiscal 2014, the Company concluded that it had a triggering event requiring assessment of impairment of long-lived assets held by the Building Efficiency Other - Latin America reporting unit due to the impairment of goodwill in the quarter. As a result, the Company reviewed the long-lived assets for impairment and recorded a $91 million impairment charge within restructuring and impairment costs on the consolidated statement of income, of which $45 million was recorded in the third quarter and $46 million in the fourth quarter of fiscal 2014. Of the total impairment charge, $45 million related to the Automotive Experience Interiors segment, $34 million related to the Building Efficiency Other segment, $7 million related to the Automotive Experience Seating segment and $5 million related to corporate assets. In addition, the Company recorded $43 million of asset and investment impairments within discontinued operations in the third quarter of fiscal 2014 related to the divestiture of the Automotive Experience Electronics business. Refer to Note 3, "Discontinued Operations," and Note 16, "Significant Restructuring and Impairment Costs," of the notes to consolidated financial statements for additional information. The impairment was measured, depending on the asset, either under an income approach utilizing forecasted discounted cash flows or a market approach utilizing an appraisal to determine fair values of the impairment assets. These methods are consistent with the methods the Company employed in prior periods to value other long-lived assets. The inputs utilized in the analyses are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, "Fair Value Measurement."

In the second, third and fourth quarters of fiscal 2013, the Company concluded it had a triggering event requiring assessment of impairment for certain of its long-lived assets in conjunction with its restructuring actions announced in fiscal 2013. In addition, in the fourth quarter of fiscal 2013, the Company concluded that it had a triggering event requiring assessment of impairment for the long-lived assets held by the Automotive Experience Interiors segment due to the impairment of goodwill in the quarter. As a result, the Company reviewed the long-lived assets for impairment and recorded a $156 million impairment charge within restructuring and impairment costs on the consolidated statement of income, of which $13 million was recorded in the second quarter, $36 million in the third quarter and $107 million in the fourth quarter of fiscal 2013. Of the total impairment charge, $57 million related to the Automotive Experience Interiors segment, $40 million related to the Building Efficiency Other segment, $22 million related to the Automotive Experience Seating segment, $18 million related to the Power Solutions segment, $12 million related to corporate assets and $7 million related to various segments within the Building Efficiency business. Refer to Note 16, "Significant Restructuring and Impairment Costs," of the notes to consolidated financial statements for additional information. The impairment was measured, depending on the asset, either under an income approach utilizing forecasted discounted cash flows or a market approach utilizing an appraisal to determine fair values of the impairment assets. These methods are consistent with the methods the Company employed in prior periods to value other long-lived assets. The inputs utilized in the analyses are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, "Fair Value Measurement."

In the third and fourth quarters of fiscal 2012, the Company concluded it had a triggering event requiring assessment of impairment for certain of its long-lived assets in conjunction with its restructuring actions announced in fiscal 2012. In addition, in the fourth quarter of fiscal 2012, the Company concluded it had a triggering event requiring assessment of impairment for certain of its long-lived assets due to volume declines in the European automotive markets. As a result, the Company reviewed the long-lived assets for impairment and recorded a $39 million impairment charge within restructuring and impairment costs on the consolidated statement of income, of which $3 million was recorded in the third quarter and $36 million in the fourth quarter of fiscal 2012. Of the total impairment charge, $14 million related to the Power Solutions segment, $11 million related to the Automotive Experience Interiors segment, $4 million related to the Building Efficiency Other segment and $10 million related to corporate assets. Refer

42


to Note 16, "Significant Restructuring and Impairment Costs," of the notes to consolidated financial statements for additional information. The impairment was measured, depending on the asset, either under an income approach utilizing forecasted discounted cash flows or a market approach utilizing an appraisal to determine fair values of the impairment assets. These methods are consistent with the methods the Company employed in prior periods to value other long-lived assets. The inputs utilized in the analyses are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, "Fair Value Measurement."

In the second quarter of fiscal 2012, the Company recorded an impairment charge related to an investment in marketable common stock due to the investee’s bankruptcy announcement in March 2012. As a result, the Company recorded a $14 million impairment charge within selling, general, and administrative expenses in the Power Solutions segment. The impairment reduced the investment to zero and was measured under a market approach using the publicized share price. The inputs utilized in the analysis are classified as Level 1 inputs within the fair value hierarchy as defined in ASC 820.

Investments in partially-owned affiliates ("affiliates") at September 30, 2014 were $1.0 billion, $6 million lower than the prior year. The decrease was primarily due to acquisitions of the controlling interest in formerly unconsolidated Building Efficiency and Power Solutions affiliates, partially offset by positive earnings at certain Automotive Experience affiliates.

LIQUIDITY AND CAPITAL RESOURCES

Working Capital
 
September 30,
2014
 
September 30,
2013
 
 
(in millions)
 
 
Change
Current assets
$
13,107

 
$
13,698

 
 
Current liabilities
(11,694
)
 
(12,117
)
 
 
 
1,413

 
1,581

 
-11
 %
 
 
 
 
 
 
Less: Cash
409

 
1,055

 
 
Add: Short-term debt
183

 
119

 
 
Add: Current portion of long-term debt
140

 
819

 
 
Less: Assets held for sale
2,157

 
804

 
 
Add: Liabilities held for sale
1,801

 
402

 
 
Working capital
$
971

 
$
1,062

 
-9
 %
 
 
 
 
 
 
Accounts receivable
5,871

 
7,206

 
-19
 %
Inventories
2,477

 
2,325

 
7
 %
Accounts payable
5,270

 
6,318

 
-17
 %

The Company defines working capital as current assets less current liabilities, excluding cash, short-term debt, the current portion of long-term debt, and the current portion of assets and liabilities held for sale. Management believes that this measure of working capital, which excludes financing-related items, provides a more useful measurement of the Company’s operating performance.

Excluding the impact of amounts classified as held for sale, the decrease in working capital at September 30, 2014 as compared to September 30, 2013 was primarily due to higher accounts payable and an increase in other current liabilities
related to accrued income taxes, partially offset by higher inventory levels.

The Company’s days sales in accounts receivable at September 30, 2014 were 54, a slight increase from 51 at September 30, 2013. There has been no significant adverse change in the level of overdue receivables or changes in revenue recognition methods.

The Company’s inventory turns for the year ended September 30, 2014 were lower than the comparable period ended September 30, 2013 primarily due to higher inventory production to meet higher sales levels.

Days in accounts payable at September 30, 2014 were 74, a slight increase from 72 at September 30, 2013.


43


Cash Flows
 
Year Ended September 30,
(in millions)
2014
 
2013
Cash provided by operating activities
$
2,395