10-Q 1 d360042d10q.htm 10-Q 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

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 or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

5757 North Green Bay Avenue

Milwaukee, Wisconsin

  53209
(Address of principal executive offices)   (Zip Code)

(414) 524-1200

(Registrant's telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   þ    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    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  þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Shares Outstanding at June 30, 2012

Common Stock: $0.01 7/18 par value per share

  683,909,056

 

 

 


Table of Contents

JOHNSON CONTROLS, INC.

FORM 10-Q

Report Index

 

      Page  

Part I. Financial Information

  

Item 1. Financial Statements (unaudited)

  

Condensed Consolidated Statements of Financial Position at
June 30, 2012, September 30, 2011 and June 30, 2011

     3   

Consolidated Statements of Income for the
Three and Nine Month Periods Ended June 30, 2012 and 2011

     4   

Consolidated Statements of Cash Flows for the
Three and Nine Month Periods Ended June 30, 2012 and 2011

     5   

Notes to Condensed Consolidated Financial Statements

     6   

Report of Independent Registered Public Accounting Firm

     31   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     32   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     46   

Item 4. Controls and Procedures

     46   

Part II. Other Information

  

Item 1. Legal Proceedings

     47   

Item 1A. Risk Factors

     47   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     47   

Item 6. Exhibits

     48   

Signatures

     49   

 

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PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

Johnson Controls, Inc.

Condensed Consolidated Statements of Financial Position

(in millions; unaudited)

 

     June 30,
2012
     September 30,
2011
     June 30,
2011
 

Assets

        

Cash and cash equivalents

   $ 602      $ 257      $ 335  

Accounts receivable—net

     7,155        7,151        7,094  

Inventories

     2,362        2,316        2,451  

Other current assets

     2,447        2,291        2,678  
  

 

 

    

 

 

    

 

 

 

Current assets

     12,566        12,015        12,558  
  

 

 

    

 

 

    

 

 

 

Property, plant and equipment—net

     6,116        5,616        5,185  

Goodwill

     6,953        7,016        7,093  

Other intangible assets—net

     949        945        822  

Investments in partially-owned affiliates

     1,007        811        952  

Other noncurrent assets

     3,411        3,273        3,259  
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 31,002      $ 29,676      $ 29,869  
  

 

 

    

 

 

    

 

 

 

Liabilities and Equity

        

Short-term debt

   $ 925      $ 596      $ 592  

Current portion of long-term debt

     110        17        65  

Accounts payable

     6,062        6,159        6,104  

Accrued compensation and benefits

     1,000        1,315        1,329  

Other current liabilities

     2,714        2,695        3,064  
  

 

 

    

 

 

    

 

 

 

Current liabilities

     10,811        10,782        11,154  
  

 

 

    

 

 

    

 

 

 

Long-term debt

     5,624        4,533        4,519  

Pension, postretirement health and other benefits

     744        1,102        625  

Other noncurrent liabilities

     1,866        1,819        1,863  
  

 

 

    

 

 

    

 

 

 

Long-term liabilities

     8,234        7,454        7,007  
  

 

 

    

 

 

    

 

 

 

Commitments and contingencies (Note 18)

        

Redeemable noncontrolling interests

     214        260        229  

Shareholders’ equity attributable to Johnson Controls, Inc.

     11,596        11,042        11,361  

Noncontrolling interests

     147        138        118  
  

 

 

    

 

 

    

 

 

 

Total equity

     11,743        11,180        11,479  
  

 

 

    

 

 

    

 

 

 

Total liabilities and equity

   $ 31,002      $ 29,676      $ 29,869  
  

 

 

    

 

 

    

 

 

 

The accompanying notes are an integral part of the financial statements.

 

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Johnson Controls, Inc.

Consolidated Statements of Income

(in millions, except per share data; unaudited)

 

     Three Months Ended
June 30,
    Nine Months Ended
June 30,
 
     2012     2011     2012     2011  

Net sales

        

Products and systems*

   $ 8,464     $ 8,202     $ 25,293     $ 23,904  

Services*

     2,117       2,162       6,270       6,141  
  

 

 

   

 

 

   

 

 

   

 

 

 
     10,581       10,364       31,563       30,045  

Cost of sales

        

Products and systems*

     7,289       6,954       21,753       20,455  

Services*

     1,755       1,860       5,192       5,152  
  

 

 

   

 

 

   

 

 

   

 

 

 
     9,044       8,814       26,945       25,607  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     1,537       1,550       4,618       4,438  

Selling, general and administrative expenses

     (992     (1,094     (3,115     (3,055

Restructuring costs

     (52     —          (52     —     

Net financing charges

     (59     (43     (171     (124

Equity income

     70       56       269       183  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     504       469       1,549       1,442  

Provision for income taxes

     62       89       260       274  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     442       380       1,289       1,168  

Income attributable to noncontrolling interests

     25       23       98       82  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Johnson Controls, Inc.

   $ 417     $ 357     $ 1,191     $ 1,086  
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share

        

Basic

   $ 0.61     $ 0.53     $ 1.75     $ 1.60  

Diluted

   $ 0.61     $ 0.52     $ 1.73     $ 1.58  

 

* Products and systems consist of automotive experience and power solutions products and systems and building efficiency installed systems. Services are building efficiency technical and global workplace solutions.

The accompanying notes are an integral part of the financial statements.

 

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Johnson Controls, Inc.

Consolidated Statements of Cash Flows

(in millions; unaudited)

 

     Three Months Ended
June 30,
    Nine Months Ended
June 30,
 
     2012     2011     2012     2011  

Operating Activities

        

Net income attributable to Johnson Controls, Inc.

   $ 417     $ 357     $ 1,191     $ 1,086  

Income attributable to noncontrolling interests

     25       23       98       82  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     442       380       1,289       1,168  

Adjustments to reconcile net income to cash provided by operating activities:

        

Depreciation

     190       180       561       511  

Amortization of intangibles

     17       13       42       36  

Equity in earnings of partially-owned affiliates, net of dividends received

     (45     (7     (206     (80

Deferred income taxes

     33       (95     59       (95

Impairment charges

     —          —          14       —     

Gain on divestitures - net

     —          —          (35     —     

Fair value adjustment of equity investment

     —          —          (12     —     

Equity-based compensation

     11       13       46       49  

Other

     20       14       61       14  

Changes in assets and liabilities, excluding acquisitions and divestitures:

        

Receivables

     16       99       (55     (416

Inventories

     (61     (133     (130     (432

Other assets

     (48     (59     (243     (196

Restructuring reserves

     39       (14     24       (83

Accounts payable and accrued liabilities

     71       (200     (393     (75

Accrued income taxes

     (66     169       (257     88  
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash provided by operating activities

     619       360       765       489  
  

 

 

   

 

 

   

 

 

   

 

 

 

Investing Activities

        

Capital expenditures

     (447     (365     (1,433     (900

Sale of property, plant and equipment

     6       18       12       36  

Acquisition of businesses, net of cash acquired

     —          (458     (30     (1,087

Business divestitures

     —          —          91       —     

Settlement of cross-currency interest rate swaps

     —          —          (19     —     

Changes in long-term investments

     (6     (78     (104     (128

Warrant redemption

     —          —          25       —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash used by investing activities

     (447     (883     (1,458     (2,079
  

 

 

   

 

 

   

 

 

   

 

 

 

Financing Activities

        

Increase in short-term debt - net

     403       486       305       499  

Increase in long-term debt

     18       94       1,253       1,829  

Repayment of long-term debt

     (14     (5     (30     (764

Stock repurchases

     (9     —          (42     —     

Payment of cash dividends

     (122     (108     (354     (304

Proceeds from the exercise of stock options

     7       10       28       95  

Settlement of interest rate swaps

     —          —          —          24  

Cash paid to acquire noncontrolling interest

     (96     —          (115     —     

Other

     (29     (14     (50     (22
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash provided by financing activities

     158       463       995       1,357  
  

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     32       (6     43       8  
  

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     362       (66     345       (225

Cash and cash equivalents at beginning of period

     240       401       257       560  
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 602     $ 335     $ 602     $ 335  
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of the financial statements.

 

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Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2012

(unaudited)

 

1. Financial Statements

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (which include normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) have been condensed or omitted pursuant to the rules and regulations of the United States Securities and Exchange Commission (SEC). These condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Johnson Controls, Inc. (the “Company”) Annual Report on Form 10-K for the year ended September 30, 2011. The results of operations for the three and nine month periods ended June 30, 2012 are not necessarily indicative of results for the Company's 2012 fiscal year because of seasonal and other factors.

Certain amounts as of June 30, 2011 have been revised to conform to the current year’s presentation. Recoverable customer engineering expenditures are included in the changes in other assets line within the operating activities section of the consolidated statements of cash flows. In prior years, these cash flows were included in the investing activities section. Also, the long-term portion of pension liabilities is now reclassified into the pension, postretirement health and other benefits line within the long-term liabilities section of the condensed consolidated statements of financial position. In prior years, these liabilities were included in the other noncurrent liabilities line.

The consolidated financial statements include the accounts of Johnson Controls, Inc. and its domestic and non-U.S. subsidiaries that are consolidated in conformity with U.S. GAAP. All significant intercompany transactions have been eliminated. Investments in partially-owned affiliates are accounted for by the equity method when the Company’s interest exceeds 20% and the Company does not have a controlling interest.

Under certain criteria as provided for in Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 810, “Consolidation,” the Company may consolidate a partially-owned affiliate. To determine whether to consolidate a partially-owned affiliate, the Company first determines if the entity is a variable interest entity (VIE). An entity is considered to be a VIE if it has one of the following characteristics: 1) the entity is thinly capitalized; 2) residual equity holders do not control the entity; 3) equity holders are shielded from economic losses or do not participate fully in the entity’s residual economics; or 4) the entity was established with non-substantive voting. If the entity meets one of these characteristics, the Company then determines if it is the primary beneficiary of the VIE. The party with the power to direct activities of the VIE that most significantly impact the VIE’s economic performance and the potential to absorb benefits or losses that could be significant to the VIE is considered the primary beneficiary and consolidates the VIE. If the entity is not considered a VIE, then the Company applies the voting interest model to determine whether or not the Company shall consolidate the partially-owned affiliate.

Consolidated VIEs

Based upon the criteria set forth in ASC 810, the Company has determined that it was the primary beneficiary in three VIEs for the reporting period ended June 30, 2012 and two VIEs for the reporting periods ended September 30, 2011 and June 30, 2011, as the Company absorbs significant economics of the entities and has the power to direct the activities that are considered most significant to the entities.

Two of the VIEs manufacture products in North America for the automotive industry. The Company funds the entities’ short term liquidity needs through revolving credit facilities and has the power to direct the activities that are considered most significant to the entities through its key customer supply relationships.

During the three month period ended December 31, 2011, a pre-existing VIE accounted for under the equity method was reorganized into three separate investments as a result of the counterparty exercising its option to put its interest to the Company. The Company acquired additional interests in two of the reorganized group entities. The reorganized group entities are considered to be VIEs as the other owner party has been provided decision making rights but does not have equity at risk. The Company is considered the primary beneficiary of one of the entities due

 

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Table of Contents

Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2012

(unaudited)

 

to the Company’s power pertaining to decisions over significant activities of the entity. As such, the VIE has been consolidated within the Company’s condensed consolidated statements of financial position. The impact of the consolidation of the entity on the Company’s consolidated statements of income for the three and nine month periods ended June 30, 2012 was not material. The VIE is named as a co-obligor under a third party debt agreement of $135 million, maturing in fiscal 2019, in which it could become subject to paying more than its allocated share of the third party debt in the event of bankruptcy of one or more of the other co-obligors. The other co-obligors, all related parties in which the Company is an equity investor, consist of the remaining group entities involved in the reorganization. As part of the overall reorganization transaction, the Company has also provided financial support to the group entities in the form of loans totaling $101 million, which are subordinate to the third party debt agreement. The Company is a significant customer of certain co-obligors, resulting in a remote possibility of loss. Additionally, the Company is subject to a floor guaranty expiring in fiscal 2022; in the event that the other owner party no longer owns any part of the group entities due to sale or transfer, the Company has guaranteed that the proceeds received from the sale or transfer will not be less than $25 million. The Company has partnered with the group entities to design and manufacture battery components for the power solutions business.

The carrying amounts and classification of assets (none of which are restricted) and liabilities included in the Company’s condensed consolidated statements of financial position for the consolidated VIEs are as follows (in millions):

 

     June 30,
2012
     September 30,
2011
     June 30,
2011
 

Current assets

   $ 212      $ 207      $ 179  

Noncurrent assets

     147        55        55  
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 359      $ 262      $ 234  
  

 

 

    

 

 

    

 

 

 

Current liabilities

   $ 162      $ 144      $ 132  

Noncurrent liabilities

     25        —           —     
  

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 187      $ 144      $ 132  
  

 

 

    

 

 

    

 

 

 

Nonconsolidated VIEs

During the three month period ended June 30, 2011, the Company acquired a 40% interest in an equity method investee. The investee produces and sells lead-acid batteries of which the Company will both purchase and supply certain batteries to complement each investment partners’ portfolio. Commencing on the third anniversary of the closing date, the Company has a contractual right to purchase the remaining 60% equity interest in the investee (the “call option”). If the Company does not exercise the call option on or before the fifth anniversary of the closing date, for a period of six months thereafter the Company is subject to a contractual obligation at the counterparty’s option to sell the Company’s equity investment in the investee to the counterparty (the “repurchase option”). The purchase price is fixed under both the call option and the repurchase option. Based upon the criteria set forth in ASC 810, the Company has determined that the investee is a VIE as the equity holders, through their equity investments, may not participate fully in the entity’s residual economics. The Company is not the primary beneficiary as the Company does not have the power to make key operating decisions considered to be most significant to the VIE. Therefore, the investee is accounted for under the equity method of accounting as the Company’s interest exceeds 20% and the Company does not have a controlling interest. The investment balance included within investments in partially-owned affiliates in the condensed consolidated statements of financial position at June 30, 2012, September 30, 2011 and June 30, 2011 was $53 million, $49 million and $48 million, respectively, which represents the Company’s maximum exposure to loss. Current assets and liabilities related to the VIE are immaterial and represent normal course of business trade receivables and payables for all presented periods.

As mentioned previously within the “Consolidated VIEs” section above, during the three month period ended December 31, 2011, a pre-existing VIE was reorganized into three separate investments as a result of the counterparty exercising its option to put its interest to the Company. The reorganized group entities are considered

 

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Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2012

(unaudited)

 

to be VIEs as the other owner party has been provided decision making rights but does not have equity at risk. The Company is not considered to be the primary beneficiary of two of the entities as the Company cannot make key operating decisions considered to be most significant to the VIEs. Therefore, the entities are accounted for under the equity method of accounting as the Company’s interest exceeds 20% and the Company does not have a controlling interest. The Company’s maximum exposure to loss, which included the partially-owned affiliate investment balance and a note receivable, approximated $43 million at September 30, 2011 and June 30, 2011. The Company’s maximum exposure to loss at June 30, 2012 includes the partially-owned affiliate investment balance of $49 million as well as the subordinated loan from the Company, third party debt agreement and floor guaranty mentioned previously within the “Consolidated VIEs” section above. Current liabilities due to the VIEs are not material and represent normal course of business trade payables for all presented periods.

The Company did not have a significant variable interest in any other unconsolidated VIEs for the presented reporting periods.

 

2. New Accounting Standards

In December 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.” ASU No. 2011-11 requires additional quantitative and qualitative disclosures of gross and net information regarding financial instruments and derivative instruments that are offset or eligible for offset in the consolidated statement of financial position. ASU No. 2011-11 will be effective for the Company for the quarter ending December 31, 2013. The adoption of this guidance will have no impact on the Company’s consolidated financial condition and results of operations.

In September 2011, the FASB issued ASU No. 2011-09, “Compensation – Retirement Benefits – Multiemployer Plans (Subtopic 715-80): Disclosures about an Employer’s Participation in a Multiemployer Plan.” ASU No. 2011-09 requires additional quantitative and qualitative disclosures about an employer’s participation in multiemployer pension plans, including disclosure of the name and identifying number of the significant multiemployer plans in which the employer participates, the level of the employer’s participation in the plans, the financial health of the plans and the nature of the employer commitments to the plans. ASU No. 2011-09 will be effective for the Company for the fiscal year ending September 30, 2012. The adoption of this guidance will have no impact on the Company’s consolidated financial condition and results of operations.

In September 2011, the FASB issued ASU No. 2011-08, “Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment.” ASU No. 2011-08 provides companies an option to perform a qualitative assessment to determine whether further goodwill impairment testing is necessary. If, as a result of the qualitative assessment, it is determined that it is more likely than not that a reporting unit’s fair value is less than its carrying amount, the two-step quantitative impairment test is required. Otherwise, no further testing is required. ASU No. 2011-08 will be effective for the Company for goodwill impairment tests performed in the fiscal year ending September 30, 2013, with early adoption permitted. The adoption of this guidance will have no impact on the Company’s consolidated financial condition and results of operations.

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” ASU No. 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of shareholders’ equity. All non-owner changes in shareholders’ equity instead must be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU No. 2011-05 will be effective for the Company for the quarter ending December 31, 2012. The adoption of this guidance will have no impact on the Company’s consolidated financial condition and results of operations.

In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU No. 2011-04 clarifies and changes the application of various fair value measurement principles and disclosure requirements, and was effective for the Company beginning in the second quarter of fiscal 2012 (January 1, 2012). The adoption of this guidance had no impact on the Company’s consolidated financial condition and results of operations. Refer to Note

 

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Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2012

(unaudited)

 

15, “Fair Value Measurements,” of the notes to condensed consolidated financial statements for disclosures surrounding the Company’s fair value measurements.

 

3. Acquisitions and Divestitures

In the first nine months of fiscal 2012, the Company completed three acquisitions for a combined purchase price, net of cash acquired, of $38 million, all of which was paid in the nine months ended June 30, 2012. The acquisitions in the aggregate were not material to the Company’s consolidated financial statements. In connection with the acquisitions, the Company recorded goodwill of $52 million. As a result of two of the acquisitions, each of which increased the Company’s ownership from a noncontrolling to controlling interest, the Company recorded an aggregate non-cash gain of $12 million, of which $9 million was recorded within power solutions equity income and $3 million was recorded in automotive experience Europe equity income, to adjust the Company’s existing equity investments in the partially-owned affiliates to fair value. Also, in the first nine months of fiscal 2012, the Company recorded an increase to goodwill of $6 million related to a purchase price allocation for a fiscal 2011 acquisition. The purchase price allocations may be subsequently adjusted to reflect final valuation studies.

In the second quarter of fiscal 2012, the Company completed two divestitures for a combined sales price of $91 million, all of which was received in the three months ended March 31, 2012. The divestitures in the aggregate were not material to the Company’s consolidated financial statements. In connection with the divestitures, the Company recorded a gain, net of transaction costs, of $35 million and reduced goodwill by $29 million in the building efficiency business.

During the third quarter of fiscal 2011, the Company completed its acquisition of Keiper/Recaro Automotive, a leader in recliner system technology with engineering and manufacturing expertise in metals and mechanisms for automobile seats, based in Kaiserslautern, Germany. The total purchase price, net of cash acquired, was approximately $442 million, of which $450 million was paid during the three months ended June 30, 2011 and $8 million was received in the three months ended December 31, 2011 as a result of a true-up to the purchase price. In connection with the Keiper/Recaro Automotive acquisition, the Company recorded goodwill of $171 million primarily in the automotive experience Europe segment, of which $45 million was recorded in fiscal 2012.

During the second quarter of fiscal 2011, the Company completed its acquisition of the C. Rob. Hammerstein Group (Hammerstein), a leading global supplier of high-quality metal seat structures, components and mechanisms based in Solingen, Germany. The total purchase price, net of cash acquired, was approximately $529 million, all of which was paid during the nine months ended June 30, 2011. In connection with the Hammerstein acquisition, the Company recorded goodwill of $200 million primarily in the automotive experience Europe segment, of which $7 million was recorded in fiscal 2012.

In the first nine months of fiscal 2011, the Company completed three additional acquisitions for a combined purchase price, net of cash acquired, of $80 million, of which $108 million was paid in the nine months ended June 30, 2011 prior to purchase price true-ups from the seller. The acquisitions in the aggregate were not material to the Company’s consolidated financial statements. In connection with the acquisitions, the Company recorded goodwill of $73 million, of which $14 million was recorded in fiscal 2012.

There were no business divestitures for the nine months ended June 30, 2011.

 

4. Percentage-of-Completion Contracts

The building efficiency business records certain long-term contracts under the percentage-of-completion method of accounting. Under this method, sales and gross profit are recognized as work is performed based on the relationship between actual costs incurred and total estimated costs at completion. The Company records costs and earnings in excess of billings on uncompleted contracts within accounts receivable – net and billings in excess of costs and earnings on uncompleted contracts within other current liabilities in the condensed consolidated statements of financial position. Amounts included within accounts receivable – net related to these contracts were $899 million, $773 million and $798 million at June 30, 2012, September 30, 2011 and June 30, 2011, respectively. Amounts

 

9


Table of Contents

Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2012

(unaudited)

 

included within other current liabilities were $740 million, $730 million and $769 million at June 30, 2012, September 30, 2011 and June 30, 2011, respectively.

 

5. Inventories

Inventories consisted of the following (in millions):

 

     June 30,
2012
    September 30,
2011
    June 30,
2011
 

Raw materials and supplies

   $ 1,146     $ 1,136     $ 1,144  

Work-in-process

     454       434       428  

Finished goods

     883       867       1,013  
  

 

 

   

 

 

   

 

 

 

FIFO inventories

     2,483       2,437       2,585  

LIFO reserve

     (121     (121     (134
  

 

 

   

 

 

   

 

 

 

Inventories

   $ 2,362     $ 2,316     $ 2,451  
  

 

 

   

 

 

   

 

 

 

 

10


Table of Contents

Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2012

(unaudited)

 

6. Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill in each of the Company’s reporting segments for the three month period ended September 30, 2011 and the nine month period ended June 30, 2012 were as follows (in millions):

 

     June 30,
2011
     Business
Acquisitions
    Business
Divestitures
     Currency
Translation and
Other
    September 30,
2011
 

Building efficiency

            

North America systems

   $ 519      $ —        $ —         $ —        $ 519  

North America service

     676        33       —           1       710  

Global workplace solutions

     184        —          —           —          184  

Asia

     391        —          —           —          391  

Other

     1,121        —          —           (56     1,065  

Automotive experience

            

North America

     1,382        (2     —           (1     1,379  

Europe

     1,639        (58     —           (78     1,503  

Asia

     243        16       —           2       261  

Power solutions

     938        93       —           (27     1,004  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 7,093      $ 82     $ —         $ (159   $ 7,016  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

     September 30,
2011
     Business
Acquisitions
     Business
Divestitures
    Currency
Translation and
Other
    June 30,
2012
 

Building efficiency

            

North America systems

   $ 519      $ —         $ —        $ 1     $ 520  

North America service

     710        —           (2     —          708  

Global workplace solutions

     184        —           —          —          184  

Asia

     391        —           —          —          391  

Other

     1,065        —           (27     (45     993  

Automotive experience

            

North America

     1,379        12        —          26       1,417  

Europe

     1,503        60        —          (115     1,448  

Asia

     261        7        —          (5     263  

Power solutions

     1,004        45        —          (20     1,029  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 7,016      $ 124      $ (29   $ (158   $ 6,953  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

11


Table of Contents

Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2012

(unaudited)

 

The Company’s other intangible assets, primarily from business acquisitions, were valued based on independent appraisals and consisted of (in millions):

 

     June 30, 2012      September 30, 2011      June 30, 2011  
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net      Gross
Carrying
Amount
     Accumulated
Amortization
    Net      Gross
Carrying
Amount
     Accumulated
Amortization
    Net  

Amortized intangible assets

                       

Patented technology

   $ 185      $ (108   $ 77      $ 298      $ (209   $ 89      $ 287      $ (215   $ 72  

Customer relationships

     510        (108     402        487        (91     396        440        (85     355  

Miscellaneous

     199        (43     156        184        (38     146        113        (35     78  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total amortized intangible assets

     894        (259     635        969        (338     631        840        (335     505  

Unamortized intangible assets

                       

Trademarks

     314        —          314        314        —          314        317        —          317  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total intangible assets

   $ 1,208      $ (259   $ 949      $ 1,283      $ (338   $ 945      $ 1,157      $ (335   $ 822  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Amortization of other intangible assets for the three month periods ended June 30, 2012 and 2011 was $17 million and $13 million, respectively. Amortization of other intangible assets for the nine month periods ended June 30, 2012 and 2011 was $42 million and $36 million, respectively. Excluding the impact of any future acquisitions, the Company anticipates amortization for fiscal 2013, 2014, 2015, 2016 and 2017 will be approximately $59 million, $57 million, $53 million, $48 million and $48 million per year, respectively.

 

7. Product Warranties

The Company offers warranties to its customers depending upon the specific product and terms of the customer purchase agreement. A typical warranty program requires that the Company replace defective products within a specified time period from the date of sale. The Company records an estimate for future warranty-related costs based on actual historical return rates and other known factors. Based on analysis of return rates and other factors, the Company’s warranty provisions are adjusted as necessary. The Company monitors its warranty activity and adjusts its reserve estimates when it is probable that future warranty costs will be different than those estimates.

The Company’s product warranty liability is recorded in the condensed consolidated statements of financial position in other current liabilities if the warranty is less than one year and in other noncurrent liabilities if the warranty extends longer than one year.

The changes in the carrying amount of the Company’s total product warranty liability for the nine months ended June 30, 2012 and 2011 were as follows (in millions):

 

     Nine Months Ended
June 30,
 
     2012     2011  

Balance at beginning of period

   $ 301     $ 337  

Accruals for warranties issued during the period

     166       150  

Accruals from acquisitions and divestitures

     (1     —     

Accruals related to pre-existing warranties (including changes in estimates)

     (21     (32

Settlements made (in cash or in kind) during the period

     (163     (165

Currency translation

     (5     5  
  

 

 

   

 

 

 

Balance at end of period

   $ 277     $ 295  
  

 

 

   

 

 

 

 

12


Table of Contents

Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2012

(unaudited)

 

8. Significant Restructuring Costs

To improve profitability in the Company’s building efficiency and automotive experience businesses and address the softness in certain underlying markets, the Company committed to a restructuring plan in the third quarter of fiscal 2012 and recorded a $52 million restructuring charge, of which $41 million was recorded for the building efficiency business and $11 million was recorded for the automotive experience business.

The following table summarizes the changes in the Company’s restructuring reserve, included within other current liabilities in the condensed consolidated statements of financial position (in millions):

 

     Employee
Severance and
Termination
Benefits
    Other     Total  

Original reserve

   $ 47     $ 5     $ 52  

Utilized—cash

     (4     (2     (6

Utilized—noncash

     —          (3     (3
  

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

   $ 43     $ —        $ 43  
  

 

 

   

 

 

   

 

 

 

 

9. Income Taxes

Effective Tax Rate

In calculating the provision for income taxes, the Company uses an estimate of the annual effective tax rate based upon the facts and circumstances known at each interim period. On a quarterly basis, the actual effective tax rate is adjusted, as appropriate, based upon changed facts and circumstances, if any, as compared to those forecasted at the beginning of the fiscal year and each interim period thereafter. For the three and nine months ended June 30, 2012, the Company decreased its estimated annual effective income tax rate from continuing operations from 19% to 18.2% due to a reduction of income as well as a geographical shift in income. For the three and nine months ended June 30, 2011, the Company’s estimated annual effective income tax rate from continuing operations was 19%.

Valuation Allowance

The Company reviews the realizability of its deferred tax assets on a quarterly basis, or whenever events or changes in circumstances indicate that a review is required. In determining the requirement for a valuation allowance, the historical and projected financial results of the legal entity or consolidated group recording the net deferred tax asset are considered, along with any other positive or negative evidence. Since future financial results may differ from previous estimates, periodic adjustments to the Company's valuation allowances may be necessary.

It is reasonably possible that over the next twelve months, valuation allowances against deferred tax assets in certain jurisdictions may result in a net increase to tax expense of up to $100 million.

Uncertain Tax Positions

At September 30, 2011, the Company had gross tax effected unrecognized tax benefits of $1,357 million of which $1,164 million, if recognized, would impact the effective tax rate. Total net accrued interest at September 30, 2011 was approximately $77 million (net of tax benefit). The net change in interest and penalties during the nine months ended June 30, 2012 was $7 million, and for the same period in fiscal 2011 was $27 million. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense.

 

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Table of Contents

Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2012

(unaudited)

 

As a result of certain recent 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, which impacts the effective tax rate for the quarter.

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, including major jurisdictions noted below:

 

Tax

Jurisdiction

  

Statute of

Limitations

Austria

   5 years

Belgium

   3 years

Brazil

   5 years

Canada

   5 years

China

   3 to 5 years

Czech Republic

   3 years

France

   3 years

Germany

   4 to 5 years

Italy

   4 years

Japan

   5 to 7 years

Mexico

   5 years

Poland

   5 years

Slovakia

   5 years

Spain

   4 years

United Kingdom

   4 years

United States—Federal

   3 years

United States—State

   3 to 5 years

In the U.S., the fiscal years 2007 through 2009 are currently under exam by the Internal Revenue Service (IRS) and 2004 through 2006 are currently under IRS Appeals. Additionally, the Company is currently under exam in the following major foreign jurisdictions:

 

Tax Jurisdiction

  

Tax Years Covered

Austria

   2005—2008

Brazil

   2004—2008

Canada

   2007—2008

Czech Republic

   2007—2009

France

   2002—2010

Germany

   2001—2010

Italy

   2005—2009

Mexico

   2003—2004

Poland

   2008—2009

Slovakia

   2009—2010

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 $100 million adjustment to tax expense.

 

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Table of Contents

Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2012

(unaudited)

 

Impacts of Tax Legislation

During the nine month period ended June 30, 2012, tax legislation was adopted in Japan which reduces its income tax rate by 5%, the effect of which is not material to the Company’s consolidated financial statements. Also, tax legislation was adopted in various jurisdictions to limit the annual utilization of tax losses that are carried forward.

These and other tax law changes adopted in various jurisdictions during the nine months ended June 30, 2012 will not have a material impact on the Company’s consolidated financial statements.

 

10. Retirement Plans

The components of the Company’s net periodic benefit costs associated with its defined benefit pension plans and other postretirement health and other benefits are shown in the tables below in accordance with ASC 715, “Compensation – Retirement Benefits” (in millions):

 

     U.S. Pension Plans  
     Three Months Ended
June 30,
    Nine Months Ended
June 30,
 
     2012     2011     2012     2011  

Service cost

   $ 17     $ 16     $ 51     $ 49  

Interest cost

     37       36       112       108  

Expected return on plan assets

     (56     (53     (168     (157

Amortization of net actuarial loss

     21       14       63       42  

Amortization of prior service cost

     —          1       1       1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 19     $ 14     $ 59     $ 43  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Non-U.S. Pension Plans  
     Three Months Ended
June 30,
    Nine Months Ended
June 30,
 
     2012     2011     2012     2011  

Service cost

   $ 9     $ 9     $ 26     $ 26  

Interest cost

     17       17       53       51  

Expected return on plan assets

     (19     (20     (56     (58

Amortization of net actuarial loss

     5       3       14       9  

Amortization of prior service cost (credit)

     —          —          (1     1  

Curtailment gain

     —          —          —          (19
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 12     $ 9     $ 36     $ 10  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

15


Table of Contents

Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2012

(unaudited)

 

     Postretirement Health and Other Benefits  
     Three Months Ended
June 30,
    Nine Months Ended
June 30,
 
     2012     2011     2012     2011  

Service cost

   $ 2     $ 1     $ 4     $ 3  

Interest cost

     3       3       10       10  

Expected return on plan assets

     (3     —          (9     —     

Amortization of net actuarial loss

     —          1       1       2  

Amortization of prior service credit

     (4     (4     (13     (13
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost (credit)

   $ (2   $ 1     $ (7   $ 2  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

11. Debt and Financing Arrangements

During the quarter ended March 31, 2012, the Company remarketed $46 million aggregate principal amount of 11.5% subordinated notes due in fiscal 2042, on behalf of holders of Corporate Units and holders of separate notes, by issuing $46 million aggregate principal amount of 2.355% senior notes due on March 31, 2017.

During the quarter ended December 31, 2011, the Company issued $400 million aggregate principal amount of 2.6% senior unsecured fixed rate notes due in fiscal 2017, $450 million aggregate principal amount of 3.75% senior unsecured fixed rate notes due in fiscal 2022 and $250 million aggregate principal amount of 5.25% senior unsecured fixed rate notes due in fiscal 2042. Aggregate net proceeds of $1.1 billion from the issuances were used for general corporate purposes, including the retirement of short-term debt and contributions to the Company’s pension and postretirement health plans.

During the quarter ended December 31, 2011, the Company entered into two committed, one-year revolving credit facilities totaling $135 million in aggregate. There have been no draws on either facility during fiscal 2012.

During the quarter ended December 31, 2011, the Company entered into a five-year, 75 million euro, floating rate credit facility scheduled to mature in fiscal 2017. The Company drew on the credit facility during the quarter ended March 31, 2012. Proceeds from the facility were used for general corporate purposes.

During the quarter ended June 30, 2011, a 150 million euro revolving credit facility and a 50 million euro revolving credit facility matured.

During the quarter ended June 30, 2011, a total of 157,820 equity units, which had a purchase contract settlement date of March 31, 2012, were early exercised. As a result, the Company issued 766,673 shares of Johnson Controls, Inc. common stock and approximately $8 million of 11.50% notes due 2042.

During the quarter ended March 31, 2011, the Company replaced its $2.05 billion committed five-year credit facility, scheduled to mature in December 2011, with a $2.5 billion committed four-year credit facility scheduled to mature in February 2015. The facility is used to support the Company’s outstanding commercial paper. There were no draws on the facility in fiscal 2012 or 2011.

During the quarter ended March 31, 2011, the Company issued $350 million aggregate principal amount of floating rate senior unsecured notes due in fiscal 2014, $450 million aggregate principal amount of 1.75% senior unsecured fixed rate notes due in fiscal 2014, $500 million aggregate principal amount of 4.25% senior unsecured fixed rate notes due in fiscal 2021 and $300 million aggregate principal amount of 5.70% senior unsecured fixed rate notes due in fiscal 2041. Aggregate net proceeds of $1.6 billion from the issues were used for general corporate purposes including the retirement of short-term debt.

 

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Table of Contents

Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2012

(unaudited)

 

During the quarter ended March 31, 2011, the Company entered into a six-year, 100 million euro, floating rate loan scheduled to mature in February 2017. Proceeds from the facility were used for general corporate purposes.

During the quarter ended March 31, 2011, the Company retired $654 million in principal amount, plus accrued interest, of its 5.25% fixed rate notes that matured on January 15, 2011. The Company used cash to fund the payment.

During the quarter ended March 31, 2011, the Company retired its $100 million committed revolving facility prior to its scheduled maturity date of December 2011. There were no draws on the facility.

During the quarter ended December 31, 2010, the Company repaid debt of $82 million which was acquired as part of an acquisition in the same quarter. The Company used cash to repay the debt.

 

12. Earnings Per Share

The Company presents both basic and diluted earnings per share (EPS) amounts. Basic EPS is calculated by dividing net income attributable to Johnson Controls, Inc. by the weighted average number of common shares outstanding during the reporting period. Diluted EPS is calculated by dividing net income attributable to Johnson Controls, Inc. by the weighted average number of common shares and common equivalent shares outstanding during the reporting period that are calculated using the treasury stock method for stock options. The treasury stock method assumes that the Company uses the proceeds from the exercise of awards to repurchase common stock at the average market price during the period. The assumed proceeds under the treasury stock method include the purchase price that the grantee will pay in the future, compensation cost for future service that the Company has not yet recognized and any windfall tax benefits that would be credited to capital in excess of par value when the award generates a tax deduction. If there would be a shortfall resulting in a charge to capital in excess of par value, such an amount would be a reduction of the proceeds.

The Company’s outstanding Equity Units due 2042 and 6.5% convertible senior notes due 2012 are reflected in diluted earnings per share using the “if-converted” method. Under this method, if dilutive, the common stock is assumed issued as of the beginning of the reporting period and included in calculating diluted earnings per share. In addition, if dilutive, interest expense, net of tax, related to the outstanding Equity Units and convertible senior notes is added back to the numerator in calculating diluted earnings per share.

 

17


Table of Contents

Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2012

(unaudited)

 

The following table reconciles the numerators and denominators used to calculate basic and diluted earnings per share (in millions):

 

     Three Months Ended
June 30,
     Nine Months Ended
June 30,
 
     2012      2011      2012      2011  

Income Available to Common Shareholders

           

Basic income available to common shareholders

   $ 417      $ 357      $ 1,191      $ 1,086  

Interest expense, net of tax

     —           1        1        2  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted income available to common shareholders

   $ 417      $ 358      $ 1,192      $ 1,088  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted Average Shares Outstanding

           

Basic weighted average shares outstanding

     683.4        678.6        681.1        677.1  

Effect of dilutive securities:

           

Stock options

     5.3        8.7        5.7        8.6  

Equity units

     0.1        3.9        2.5        4.3  

Convertible senior notes

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted weighted average shares outstanding

     688.8        691.2        689.3        690.0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Antidilutive Securities

           

Options to purchase common shares

     1.1        —           1.1        —     

During the three months ended June 30, 2012 and 2011, the Company declared a dividend of $0.18 and $0.16, respectively, per common share. During the nine months ended June 30, 2012 and 2011, the Company declared three quarterly dividends totaling $0.54 and $0.48, respectively, per common share. The Company paid all dividends in the month subsequent to the end of each fiscal quarter.

 

18


Table of Contents

Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2012

(unaudited)

 

13. Equity and Noncontrolling Interests

The following schedules present changes in consolidated equity attributable to Johnson Controls, Inc. and noncontrolling interests (in millions):

 

     Three Months Ended June 30, 2012     Three Months Ended June 30, 2011  
     Equity
Attributable to
Johnson
Controls, Inc.
    Equity
Attributable to
Noncontrolling
Interests
    Total Equity     Equity
Attributable to
Johnson
Controls, Inc.
    Equity
Attributable to
Noncontrolling
Interests
    Total Equity  

Beginning balance, March 31

   $ 11,595     $ 150     $ 11,745     $ 10,976     $ 130     $ 11,106  

Total comprehensive income:

            

Net income

     417       20       437       357       10       367  

Foreign currency translation adjustments

     (347     3       (344     131       (1     130  

Realized and unrealized losses on derivatives

     (1     —          (1     (7     —          (7

Unrealized losses on marketable common stock

     (3     —          (3     —          —          —     

Employee retirement plans

     23       —          23       (6     —          (6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (328     3       (325     118       (1     117  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     89       23       112       475       9       484  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other changes in equity:

            

Cash dividends—common stock

     (123     —          (123     (109     —          (109

Dividends attributable to noncontrolling interests

     —          (26     (26     —          (22     (22

Redemption value adjustment attributable to redeemable noncontrolling interests

     (13     —          (13     (2     —          (2

Repurchases of common stock

     (9     —          (9     —          —          —     

Other, including options exercised

     57       —          57       21       1       22  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance, June 30

   $ 11,596     $ 147     $ 11,743     $ 11,361     $ 118     $ 11,479  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

19


Table of Contents

Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2012

(unaudited)

 

     Nine Months Ended June 30, 2012     Nine Months Ended June 30, 2011  
     Equity
Attributable to
Johnson
Controls, Inc.
    Equity
Attributable to
Noncontrolling
Interests
    Total Equity     Equity
Attributable to
Johnson
Controls, Inc.
    Equity
Attributable to
Noncontrolling
Interests
    Total Equity  

Beginning balance, September 30

   $ 11,042     $ 138     $ 11,180     $ 10,071     $ 106     $ 10,177  

Total comprehensive income:

            

Net income

     1,191       48       1,239       1,086       41       1,127  

Foreign currency translation adjustments

     (400     2       (398     301       —          301  

Realized and unrealized gains (losses) on derivatives

     28       —          28       (5     —          (5

Unrealized gains on marketable common stock

     5       —          5       7       —          7  

Employee retirement plans

     52       —          52       65       —          65  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (315     2       (313     368       —          368  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     876       50       926       1,454       41       1,495  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other changes in equity:

            

Cash dividends - common stock

     (369     —          (369     (326     —          (326

Dividends attributable to noncontrolling interests

     —          (41     (41     —          (30     (30

Redemption value adjustment attributable to redeemable noncontrolling interests

     (12     —          (12     3       —          3  

Repurchases of common stock

     (42     —          (42     —          —          —     

Other, including options exercised

     101       —          101       159       1       160  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance, June 30

   $ 11,596     $ 147     $ 11,743     $ 11,361     $ 118     $ 11,479  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The Company consolidates certain subsidiaries in which the noncontrolling interest party has within their control the right to require the Company to redeem all or a portion of its interest in the subsidiary. The redeemable noncontrolling interests are reported at their estimated redemption value. Any adjustment to the redemption value impacts retained earnings but does not impact net income. Redeemable noncontrolling interests which are redeemable only upon future events, the occurrence of which is not currently probable, are recorded at carrying value.

The following schedules present changes in the redeemable noncontrolling interests (in millions):

 

     Three Months Ended
June 30, 2012
    Three Months Ended
June 30, 2011
 

Beginning balance, March 31

   $ 318     $ 223  

Net income

     5       13  

Foreign currency translation adjustments

     —          (3

Dividends

     (4     (6

Redemption value adjustment

     13       2  

Change in noncontrolling interest share

     (118     —     
  

 

 

   

 

 

 

Ending balance, June 30

   $ 214     $ 229  
  

 

 

   

 

 

 

 

20


Table of Contents

Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2012

(unaudited)

 

     Nine Months Ended
June 30, 2012
    Nine Months Ended
June 30, 2011
 

Beginning balance, September 30

   $ 260     $ 196  

Net income

     50       41  

Foreign currency translation adjustments

     —          1  

Dividends

     (13     (6

Redemption value adjustment

     12       (3

Change in noncontrolling interest share

     (95     —     
  

 

 

   

 

 

 

Ending balance, June 30

   $ 214     $ 229  
  

 

 

   

 

 

 

 

14. Derivative Instruments and Hedging Activities

The Company selectively uses derivative instruments to reduce market risk associated with changes in foreign currency, commodities, stock-based compensation liabilities and interest rates. Under Company policy, the use of derivatives is restricted to those intended for hedging purposes; the use of any derivative instrument for speculative purposes is strictly prohibited. A description of each type of derivative utilized by the Company to manage risk is included in the following paragraphs. In addition, refer to Note 15, “Fair Value Measurements,” of the notes to condensed consolidated financial statements for information related to the fair value measurements and valuation methods utilized by the Company for each derivative type.

The Company has global operations and participates in the foreign exchange markets to minimize its risk of loss from fluctuations in foreign currency exchange rates. The Company primarily uses foreign currency exchange contracts to hedge certain of its foreign exchange rate exposures. The Company hedges 70% to 90% of the nominal amount of each of its known foreign exchange transactional exposures.

The Company has entered into cross-currency interest rate swaps to selectively hedge portions of its net investment in Japan. The currency effects of the cross-currency interest rate swaps are reflected in the accumulated other comprehensive income (AOCI) account within shareholders’ equity attributable to Johnson Controls, Inc. where they offset gains and losses recorded on the Company’s net investment in Japan. At June 30, 2012, September 30, 2011 and June 30, 2011, the Company had three cross currency interest rate swaps outstanding totaling 20 billion yen.

The Company uses commodity contracts in the financial derivatives market in cases where commodity price risk cannot be naturally offset or hedged through supply base fixed price contracts. Commodity risks are systematically managed pursuant to policy guidelines. As cash flow hedges, the effective portion of the hedge gains or losses due to changes in fair value are initially recorded as a component of AOCI and are subsequently reclassified into earnings when the hedged transactions, typically sales or costs related to sales, occur and affect earnings. Any ineffective portion of the hedge is reflected in the consolidated statement of income. The maturities of the commodity contracts coincide with the expected purchase of the commodities. The Company had the following outstanding commodity hedge contracts that hedge forecasted purchases:

 

         

Volume Outstanding as of

Commodity

  

Units

  

June 30, 2012

  

September 30, 2011

  

June 30, 2011

Copper

   Pounds    12,733,000    18,760,000    13,150,000

Lead

   Metric Tons    23,200    25,600    26,517

Aluminum

   Metric Tons    1,071    5,398    1,134

Tin

   Metric Tons    —      260    —  

The Company selectively uses equity swaps to reduce market risk associated with certain of its stock-based compensation plans, such as its deferred compensation plans. These equity compensation liabilities increase as the Company’s stock price increases and decrease as the Company’s stock price decreases. In contrast, the value of the

 

21


Table of Contents

Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2012

(unaudited)

 

swap agreement moves in the opposite direction of these liabilities, allowing the Company to fix a portion of the liabilities at a stated amount. As of June 30, 2012, September 30, 2011 and June 30, 2011, the Company had hedged approximately 4.3 million shares of its common stock.

The Company selectively uses interest rate swaps to reduce market risk associated with changes in interest rates for its fixed-rate notes. As fair value hedges, the interest rate swaps and related debt balances are valued under a market approach using publicized swap curves. Changes in the fair value of the swap and hedged portion of the debt are recorded in the consolidated statements of income. In the second quarter of fiscal 2011, the Company entered into a fixed to floating interest rate swap totaling $100 million to hedge the coupon of its 5.8% bond maturing November 15, 2012, two fixed to floating interest rate swaps totaling $300 million to hedge the coupon of its 4.875% bond maturing September 15, 2013 and five fixed to floating interest rate swaps totaling $450 million to hedge the coupon of its 1.75% bond maturing March 1, 2014. These eight interest rate swaps were outstanding as of June 30, 2012, September 30, 2011 and June 30, 2011.

In September 2005, the Company entered into three forward treasury lock agreements to reduce the market risk associated with changes in interest rates associated with the Company’s anticipated fixed-rate note issuance to finance the acquisition of York International Corp. (cash flow hedge). The three forward treasury lock agreements, which had a combined notional amount of $1.3 billion, fixed a portion of the future interest cost for 5-year, 10-year and 30-year notes. The fair value of each treasury lock agreement, or the difference between the treasury lock reference rate and the fixed rate at time of note issuance, is amortized to interest expense over the life of the respective note issuance. In January 2006, in connection with the Company’s debt refinancing, the three forward treasury lock agreements were terminated.

The following table presents the location and fair values of derivative instruments and hedging activities included in the Company’s condensed consolidated statements of financial position (in millions):

 

     Derivatives and Hedging Activities Designated as
Hedging Instruments under ASC 815
     Derivatives and Hedging Activities Not Designated as
Hedging Instruments under ASC 815
 
     June 30,
2012
     September 30,
2011
     June 30,
2011
     June 30,
2012
     September 30,
2011
     June 30,
2011
 

Other current assets

                 

Foreign currency exchange derivatives

   $ 12      $ 28      $ 8      $ 8      $ 18      $ —     

Commodity derivatives

     1        —           8        —           —           —     

Cross-currency interest rate swaps

     8        —           —           —           —           —     

Other noncurrent assets

                 

Interest rate swaps

     7        15        15        —           —           —     

Equity swap

     —           —           —           118        112        177  

Foreign currency exchange derivatives

     —           11        1        —           16        1  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 28      $ 54      $ 32      $ 126      $ 146      $ 178  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other current liabilities

                 

Foreign currency exchange derivatives

   $ 18      $ 49      $ 7      $ 8      $ 21      $ 1  

Net investment hedges

     —           20        8        —           —           —     

Commodity derivatives

     5        32        1        —           —           —     

Current portion of long-term debt

                 

Fixed rate debt swapped to floating

     100        —           —           —           —           —     

Long-term debt

                 

Fixed rate debt swapped to floating

     757        865        865        —           —           —     

Other noncurrent liabilities

                 

Foreign currency exchange derivatives

     —           19        1        —           11        —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 880      $ 985      $ 882      $ 8      $ 32      $ 1  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

22


Table of Contents

Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2012

(unaudited)

 

The following tables present the location and amount of the effective portion of gains and losses gross of tax on derivative instruments and related hedge items reclassified from AOCI into the Company’s consolidated statements of income for the three and nine months ended June 30, 2012 and 2011 and amounts recorded in AOCI net of tax in the condensed consolidated statements of financial position (in millions):

 

          Amount of Gain (Loss) Reclassified from AOCI into Income  

Derivatives in ASC 815 Cash Flow

Hedging Relationships

  

Location of Gain (Loss)

Reclassified from AOCI into Income

   Three Months Ended June 30,      Nine Months Ended June 30,  
      2012     2011      2012     2011  

Foreign currency exchange derivatives

   Cost of sales    $ (6   $ 2      $ (16   $ 6  

Commodity derivatives

   Cost of sales      (4     7        (20     26  

Forward treasury locks

   Net financing charges      —          —           1       1  
     

 

 

   

 

 

    

 

 

   

 

 

 

Total

      $ (10   $ 9      $ (35   $ 33  
     

 

 

   

 

 

    

 

 

   

 

 

 

 

Derivatives in ASC 815 Cash Flow

Hedging Relationships

   Amount of Gain (Loss) Recognized in AOCI on Derivative  
   June 30, 2012     September 30, 2011     June 30, 2011  

Foreign currency exchange derivatives

   $ (3   $ (16   $ 1  

Commodity derivatives

     (4     (20     5  

Forward treasury locks

     8       9       9  
  

 

 

   

 

 

   

 

 

 

Total

   $ 1     $ (27   $ 15  
  

 

 

   

 

 

   

 

 

 

 

          Amount of Gain (Loss) Recognized in Income on Derivative  

Derivatives in ASC 815 Fair Value

Hedging Relationships

  

Location of Gain (Loss)

Recognized in Income on Derivative

   Three Months Ended June 30,     Nine Months Ended June 30,  
      2012     2011     2012     2011  

Interest rate swap

   Net financing charges    $ (2   $ 12     $ (8   $ 14  

Fixed rate debt swapped to floating

   Net financing charges      3       (11     9       (14
     

 

 

   

 

 

   

 

 

   

 

 

 

Total

      $ 1     $ 1     $ 1     $ —     
     

 

 

   

 

 

   

 

 

   

 

 

 

 

          Amount of Gain (Loss) Recognized in Income on Derivative  

Derivatives Not Designated as

Hedging Instruments under ASC 815

  

Location of Gain (Loss)

Recognized in Income on Derivative

   Three Months Ended June 30,     Nine Months Ended June 30,  
      2012     2011     2012     2011  

Foreign currency exchange derivatives

   Cost of sales    $ (1   $ 8     $ 22     $ 18  

Foreign currency exchange derivatives

   Net financing charges      21       (7     (9     (9

Foreign currency exchange derivatives

   Provision for income taxes      15       —          15       —     

Equity swap

   Selling, general and administrative      (20     —          6       42  
     

 

 

   

 

 

   

 

 

   

 

 

 

Total

      $ 15     $ 1     $ 34     $ 51  
     

 

 

   

 

 

   

 

 

   

 

 

 

The amount of gains (losses) recognized in cumulative translation adjustment (CTA) within AOCI on the effective portion of outstanding net investment hedges was $5 million, ($12) million and ($5) million at June 30, 2012, September 30, 2011 and June 30, 2011, respectively. For the three and nine months ended June 30, 2012 and 2011, no gains or losses were reclassified from CTA into income for the Company’s outstanding net investment hedges, and no gains or losses were recognized in income for the ineffective portion of cash flow hedges.

 

23


Table of Contents

Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2012

(unaudited)

 

15. Fair Value Measurements

ASC 820, “Fair Value Measurements and Disclosures,” defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a three-level fair value hierarchy that prioritizes information used in developing assumptions when pricing an asset or liability as follows:

Level 1: Observable inputs such as quoted prices in active markets;

Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and

Level 3: Unobservable inputs where there is little or no market data, which requires the reporting entity to develop its own assumptions.

ASC 820 requires the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.

Recurring Fair Value Measurements

The following tables present the Company’s fair value hierarchy for those assets and liabilities measured at fair value as of June 30, 2012, September 30, 2011 and June 30, 2011 (in millions):

 

     Fair Value Measurements Using:  
     Total as of
June 30, 2012
     Quoted Prices
in Active
Markets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Other current assets

           

Foreign currency exchange derivatives

   $ 20      $ 20      $ —         $ —     

Commodity derivatives

     1        —           1        —     

Cross-currency interest rate swaps

     8        —           8        —     

Other noncurrent assets

           

Interest rate swaps

     7        —           7        —     

Investments in marketable common stock

     34        34        —           —     

Equity swap

     118        118        —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 188      $ 172      $ 16      $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Other current liabilities

           

Foreign currency exchange derivatives

   $ 26      $ 26      $ —         $ —     

Commodity derivatives

     5        —           5        —     

Current portion of long-term debt

           

Fixed rate debt swapped to floating

     100        —           100        —     

Long-term debt

           

Fixed rate debt swapped to floating

     757        —           757        —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 888      $ 26      $ 862      $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

24


Table of Contents

Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2012

(unaudited)

 

     Fair Value Measurements Using:  
     Total as of
September 30, 2011
     Quoted Prices
in Active
Markets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Other current assets

           

Foreign currency exchange derivatives

   $ 46      $ 46      $ —         $ —     

Other noncurrent assets

           

Interest rate swaps

     15        —           15        —     

Investments in marketable common stock

     34        34        —           —     

Equity swap

     112        112        —           —     

Foreign currency exchange derivatives

     27        27        —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 234      $ 219      $ 15      $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Other current liabilities

           

Foreign currency exchange derivatives

   $ 70      $ 70      $ —         $ —     

Cross-currency interest rate swaps

     20        —           20        —     

Commodity derivatives

     32        —           32        —     

Long-term debt

           

Fixed rate debt swapped to floating

     865        —           865        —     

Other noncurrent liabilities

           

Foreign currency exchange derivatives

     30        30        —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 1,017      $ 100      $ 917      $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

25


Table of Contents

Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2012

(unaudited)

 

     Fair Value Measurements Using:  
     Total as of
June 30, 2011
     Quoted Prices
in Active
Markets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Other current assets

           

Foreign currency exchange derivatives

   $ 8      $ 8      $ —         $ —     

Commodity derivatives

     8        —           8        —     

Other noncurrent assets

           

Interest rate swaps

     15        —           15        —     

Investments in marketable common stock

     38        38        —           —     

Equity swap

     177        177        —           —     

Foreign currency exchange derivatives

     2        2        —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 248      $ 225      $ 23      $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Other current liabilities

           

Foreign currency exchange derivatives

   $ 8      $ 8      $ —         $ —     

Cross-currency interest rate swaps

     8        —           8        —     

Commodity derivatives

     1        —           1        —     

Long-term debt

           

Fixed rate debt swapped to floating

     865        —           865        —     

Other noncurrent liabilities

           

Foreign currency exchange derivatives

     1        1        —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 883      $ 9      $ 874      $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Valuation Methods

Foreign currency exchange derivatives – The Company selectively hedges anticipated transactions that are subject to foreign exchange rate risk primarily using foreign currency exchange hedge contracts. The foreign currency exchange derivatives are valued under a market approach using publicized spot and forward prices. As cash flow hedges under ASC 815, the effective portion of the hedge gains or losses due to changes in fair value are initially recorded as a component of accumulated other comprehensive income and are subsequently reclassified into earnings when the hedged transactions occur and affect earnings. Any ineffective portion of the hedge is reflected in the consolidated statements of income. These contracts were highly effective in hedging the variability in future cash flows attributable to changes in currency exchange rates at June 30, 2012, September 30, 2011 and June 30, 2011. The fair value of foreign currency exchange derivatives that are designated as fair value hedges under ASC 815, as well as those not designated as hedging instruments under ASC 815 are recorded in the consolidated statements of income.

Commodity derivatives – The Company selectively hedges anticipated transactions that are subject to commodity price risk, primarily using commodity hedge contracts, to minimize overall price risk associated with the Company’s purchases of lead, copper, tin and aluminum. The commodity derivatives are valued under a market approach using publicized prices, where available, or dealer quotes. As cash flow hedges, the effective portion of the hedge gains or losses due to changes in fair value are initially recorded as a component of accumulated other comprehensive income and are subsequently reclassified into earnings when the hedged transactions, typically sales or cost related to sales, occur and affect earnings. Any ineffective portion of the hedge is reflected in the consolidated statements of income. These contracts were highly effective in hedging the variability in future cash flows attributable to commodity price changes at June 30, 2012, September 30, 2011 and June 30, 2011.

Interest rate swaps and related debt – The Company selectively uses interest rate swaps to reduce market risk associated with changes in interest rates for its fixed-rate bonds. As fair value hedges, the interest rate swaps and

 

26


Table of Contents

Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2012

(unaudited)

 

related debt balances are valued under a market approach using publicized swap curves. Changes in the fair value of the swap and hedged portion of the debt are recorded in the consolidated statements of income. In the second quarter of fiscal 2011, the Company entered into a fixed to floating interest rate swap totaling $100 million to hedge the coupons of its 5.80% notes maturing November 15, 2012, two fixed to floating interest rate swaps totaling $300 million to hedge the coupon of its 4.875% notes maturing September 15, 2013 and five fixed to floating interest rate swaps totaling $450 million to hedge the coupon of its 1.75% bond maturing March 1, 2014. These eight interest rate swaps were outstanding as of June 30, 2012, September 30, 2011 and June 30, 2011.

Investments in marketable common stock – The Company invests in certain marketable common stock, which is valued under a market approach using publicized share prices. As of June 30, 2012, September 30, 2011 and June 30, 2011, the Company recorded unrealized gains of $11 million, $9 million and $10 million, respectively, in accumulated other comprehensive income. The Company also recorded unrealized losses of $3 million in accumulated other comprehensive income on these investments as of September 30, 2011, and no unrealized losses as of June 30, 2012 and 2011. 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.

Equity swaps – The Company selectively uses equity swaps to reduce market risk associated with certain of its stock-based compensation plans, such as its deferred compensation plans. The equity swaps are valued under a market approach as the fair value of the swaps is equal to the Company’s stock price at the reporting period date. Changes in fair value on the equity swaps are reflected in the consolidated statement of income within selling, general and administrative expenses.

Cross-currency interest rate swaps – The Company selectively uses cross-currency interest rate swaps to hedge the foreign currency rate risk associated with certain of its investments in Japan. The cross-currency interest rate swaps are valued using observable market data. Changes in the market value of the swaps are reflected in the foreign currency translation adjustments component of accumulated other comprehensive income where they offset gains and losses recorded on the Company’s net investment in Japan. At June 30, 2012, September 30, 2011 and June 30, 2011, the Company had three cross currency interest rate swaps outstanding totaling 20 billion yen.

The fair values of cash and cash equivalents, accounts receivable, short-term debt and accounts payable approximate their carrying values. The fair value of long-term debt, which was $6.2 billion, $4.9 billion and $4.9 billion at June 30, 2012, September 30, 2011 and June 30, 2011, respectively, was determined using market quotes classified as Level 1 inputs within the ASC 820 fair value hierarchy.

 

16. Impairment of Long-Lived Assets

The Company reviews long-lived assets 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 group is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals.

In the second quarter of fiscal 2012, the Company recorded an impairment charge related to an equity investment. Refer to Note 15, “Fair Value Measurements,” of the notes to condensed consolidated financial statements for additional information. The Company concluded it did not have any triggering events requiring assessment of impairment of its long-lived assets at June 30, 2012 and 2011.

 

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Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2012

(unaudited)

 

17. Segment Information

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 nine reportable segments for financial reporting purposes. The Company’s nine reportable segments are presented in the context of its three primary businesses – building efficiency, automotive experience and power solutions.

Building Efficiency

Building efficiency designs, produces, markets and installs heating, ventilating and air conditioning (HVAC) and control systems that monitor, automate and integrate critical building segment equipment and conditions including HVAC, fire-safety and security in commercial buildings and in various industrial applications.

 

   

North America systems designs, produces, markets and installs mechanical equipment that provides heating and cooling in North American non-residential buildings and industrial applications as well as control systems that integrate the operation of this equipment with other critical building systems.

 

   

North America service provides technical services including inspection, scheduled maintenance, repair and replacement of mechanical and control systems in North America, as well as the retrofit and service components of performance contracts and other solutions.

 

   

Global workplace solutions provides on-site staff for complete real estate services, facility operation and management to improve the comfort, productivity, energy efficiency and cost effectiveness of building systems around the globe.

 

   

Asia provides HVAC and refrigeration systems and technical services to the Asian marketplace.

 

   

Other provides HVAC and refrigeration systems and technical services to markets in Europe, the Middle East and Latin America. Other also designs and produces heating and air conditioning solutions for residential and light commercial applications and markets products to the replacement and new construction markets.

Automotive Experience

Automotive experience designs and manufactures interior systems and products for passenger cars and light trucks, including vans, pick-up trucks and sport utility/crossover vehicles in North America, Europe and Asia. Automotive experience systems and products include complete seating systems and components; cockpit systems, including instrument panels and clusters, information displays and body controllers; overhead systems, including headliners and electronic convenience features; floor consoles; and door systems.

Power Solutions

Power solutions services both automotive original equipment manufacturers and the battery aftermarket by providing advanced battery technology, coupled with systems engineering, marketing and service expertise.

 

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Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2012

(unaudited)

 

Management evaluates the performance of the segments based primarily on segment income, which represents income from continuing operations before income taxes and noncontrolling interests excluding net financing charges and significant restructuring costs. General Corporate and other overhead expenses are allocated to business segments in determining segment income. Financial information relating to the Company’s reportable segments is as follows (in millions):

 

                                                                           
     Net Sales  
     Three Months Ended
June 30,
    Nine Months Ended
June 30,
 
     2012     2011     2012     2011  

Building efficiency

        

North America systems

   $ 642     $ 633     $ 1,774     $ 1,711  

North America service

     547       601       1,565       1,639  

Global workplace solutions

     1,064       1,046       3,226       3,053  

Asia

     516       498       1,447       1,334  

Other

     1,031       1,115       2,886       3,068  
  

 

 

   

 

 

   

 

 

   

 

 

 
     3,800       3,893       10,898       10,805  
  

 

 

   

 

 

   

 

 

   

 

 

 

Automotive experience

        

North America

     2,320       1,772       6,554       5,517  

Europe

     2,466       2,800       7,791       7,693  

Asia

     679       546       1,977       1,717  
  

 

 

   

 

 

   

 

 

   

 

 

 
     5,465       5,118       16,322       14,927  
  

 

 

   

 

 

   

 

 

   

 

 

 

Power solutions

     1,316       1,353       4,343       4,313  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

   $ 10,581     $ 10,364     $ 31,563     $ 30,045  
  

 

 

   

 

 

   

 

 

   

 

 

 
     Segment Income  
     Three Months Ended
June 30,
    Nine Months Ended
June 30,
 
     2012     2011     2012     2011  

Building efficiency

        

North America systems

   $ 80     $ 66     $ 189     $ 169  

North America service

     52       35       79       69  

Global workplace solutions

     13       7       23       17  

Asia

     78       69       190       178  

Other

     41       30       67       45  
  

 

 

   

 

 

   

 

 

   

 

 

 
     264       207       548       478  
  

 

 

   

 

 

   

 

 

   

 

 

 

Automotive experience

        

North America

     154       67       340       328  

Europe

     (37     24       14       40  

Asia

     85       51       269       162  
  

 

 

   

 

 

   

 

 

   

 

 

 
     202       142       623       530  
  

 

 

   

 

 

   

 

 

   

 

 

 

Power solutions

     149       163       601       558  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total segment income

   $ 615     $ 512     $ 1,772     $ 1,566  
  

 

 

   

 

 

   

 

 

   

 

 

 

Restructuring costs

     (52     —          (52     —     

Net financing charges

     (59     (43     (171     (124
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

   $ 504     $ 469     $ 1,549     $ 1,442  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Johnson Controls, Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2012

(unaudited)

 

18. Commitments and Contingencies

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 $25 million, $30 million and $42 million at June 30, 2012, September 30, 2011 and June 30, 2011, 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 June 30, 2012, September 30, 2011 and June 30, 2011, the Company has recorded conditional asset retirement obligations of $70 million, $91 million and $95 million, respectively.

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 lawsuits 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.

 

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LOGO

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders

of Johnson Controls, Inc.

We have reviewed the accompanying condensed consolidated statements of financial position of Johnson Controls, Inc. and its subsidiaries (the “Company”) as of June 30, 2012 and 2011, and the related consolidated statements of income and the consolidated statements of cash flows for the three-month and nine-month periods ended June 30, 2012 and 2011. These interim financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of financial position as of September 30, 2011, and the related consolidated statements of income, shareholders’ equity, and cash flows for the year then ended (not presented herein), and in our report dated November 22, 2011, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated statement of financial position as of September 30, 2011 is fairly stated in all material respects in relation to the consolidated statement of financial position from which it has been derived.

/s/ PricewaterhouseCoopers LLP

Milwaukee, Wisconsin

August 2, 2012

PricewaterhouseCoopers LLP, 100 East Wisconsin Avenue, Milwaukee, WI 53202

T: (414) 212- 1600, F: (414) 212- 1880, www.pwc.com/us

 

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statements for Forward-Looking Information

Unless otherwise indicated, references to “Johnson Controls,” the “Company,” “we,” “our” and “us” in this Quarterly Report on Form 10-Q refer to Johnson Controls, Inc. and its consolidated subsidiaries.

Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “forecast,” “outlook,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” “guidance” or the negative thereof or variations thereon or similar terminology generally intended to identify forward-looking statements. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section entitled “Risk Factors” of our Annual Report on Form 10-K for the year ended September 30, 2011, as updated in Part II, Item 1A of our Quarterly report on Form 10-Q for the quarter ended December 31, 2011. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

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

Johnson Controls was originally incorporated in the state of Wisconsin in 1885 as Johnson Electric Service Company to manufacture, install and service automatic temperature regulation systems for buildings. The Company was renamed to Johnson Controls, Inc. in 1974. In 1978, we acquired Globe-Union, Inc., a Wisconsin-based manufacturer of automotive batteries for both the replacement and original equipment markets. We entered the automotive seating industry in 1985 with the acquisition of Michigan-based Hoover Universal, Inc. In 2005, we acquired York International Corporation, a global supplier of heating, ventilating, air-conditioning, and refrigeration equipment and services.

Our building efficiency business is a global market leader in designing, producing, marketing and installing integrated heating, ventilating and air conditioning (HVAC) systems, building management systems, controls, security and mechanical equipment. In addition, the building efficiency business provides technical services, energy management consulting and operations of entire real estate portfolios for the non-residential buildings market. We also provide residential air conditioning and heating systems and industrial refrigeration products.

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

Our power solutions business is a leading global supplier of lead-acid automotive batteries for virtually every type of passenger car, light truck and utility vehicle. We serve both automotive original equipment manufacturers (OEMs) and the general vehicle battery aftermarket. We supply batteries to power Start-Stop vehicles, as well as lithium-ion battery technologies to power certain hybrid and electric vehicles.

 

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The following information should be read in conjunction with the September 30, 2011 consolidated financial statements and notes thereto, along with management’s discussion and analysis of financial condition and results of operations included in our 2011 Annual Report on Form 10-K. References in the following discussion and analysis to “Three Months” refer to the three months ended June 30, 2012 compared to the three months ended June 30, 2011, while references to “Year-to-Date” refer to the nine months ended June 30, 2012 compared to the nine months ended June 30, 2011.

Outlook

On July 19, 2012, the Company stated that due to continued softness in its global markets and expectations for a lower euro, it expects fiscal 2012 fourth quarter earnings to increase zero to five percent from the prior year fourth quarter, versus previous expectations for double-digit earnings improvements. This guidance is exclusive of any restructuring costs and the potential pension and postretirement mark-to-market adjustment in the fiscal 2012 fourth quarter as discussed below. The Company disclosed that it expects additional significant restructuring actions in the fiscal 2012 fourth quarter.

In the fourth quarter of fiscal 2012, the Company plans to change its accounting policy for recognizing pension and postretirement expenses. The current accounting treatment smoothes asset returns and amortizes deferred actuarial gains and losses over a number of years. The adoption of the new mark-to-market accounting method would recognize those gains and losses in the fourth quarter of each fiscal year and would require a retrospective revision of prior years financial statements. The Company believes this new policy would provide greater transparency to on-going operational results. The change would have no impact on pension and postretirement funding or benefits paid to participants. The financial implications of this change are currently under review; however, the fiscal 2012 fourth quarter mark-to-market adjustment would likely be material.

Liquidity and Capital Resources

The Company believes its capital resources and liquidity position at June 30, 2012 are adequate to meet projected needs. The Company believes requirements for working capital, capital expenditures, dividends, minimum pension contributions, debt maturities and any potential acquisitions in fiscal 2012 will continue to be funded from operations, supplemented by short- and long-term borrowings, if required. The Company currently manages its short-term debt position in the U.S. and euro commercial paper markets and bank loan markets. The Company continues to adjust its commercial paper maturities and issuance levels given market reactions to industry events and changes in the Company’s credit rating. In the event the Company is unable to issue commercial paper, it would have the ability to draw on its $2.5 billion revolving credit facility, which matures in February 2015. There were no draws on the revolving credit facility as of June 30, 2012. As such, the Company believes it has sufficient financial resources to fund operations and meet its obligations for the foreseeable future.

The Company’s debt financial covenants require a minimum consolidated shareholders’ equity attributable to Johnson Controls, Inc. of at least $3.5 billion at all times and allow a maximum aggregated amount of 10% of consolidated shareholders’ equity attributable to Johnson Controls, Inc. for liens and pledges. For purposes of calculating the Company’s covenants, consolidated shareholders’ equity attributable to Johnson Controls, Inc. is calculated without giving effect to (i) the application of Accounting Standards Codification (ASC) 715-60, “Defined Benefit Plans—Other Postretirement,” or (ii) the cumulative foreign currency translation adjustment. As of June 30, 2012, consolidated shareholders’ equity attributable to Johnson Controls, Inc. as defined per the Company’s debt financial covenants was $11.4 billion and there were no outstanding amounts for liens and pledges. The Company expects to remain in compliance with all covenants and other requirements set forth in its credit agreements and indentures for the foreseeable future. None of the Company’s significant debt agreements limit access to stated borrowing levels or require accelerated repayment in the event of a decrease in the Company’s credit rating.

The key financial assumptions used in calculating the Company’s pension liability are determined annually, or whenever plan assets and liabilities are re-measured as required under accounting principles generally accepted in the U.S., including the expected rate of return on our plan assets. In fiscal 2012, the Company believes the long-term rate of return will approximate 8.50%, 5.25% and 6.30% for U.S. pension, non-U.S. pension, and postretirement health and other benefit plans, respectively. During the first nine months of fiscal 2012, the Company has made approximately $328 million and $60 million in total defined benefit pension and postretirement health contributions,

 

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respectively. In total, the Company expects to contribute approximately $350 million and $60 million in cash to its defined benefit pension and postretirement health plans, respectively, 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 and significant restructuring costs.

Summary

 

     Three Months Ended
June 30,
           Nine Months Ended
June 30,
        
(in millions)    2012      2011      Change     2012      2011      Change  

Net sales

   $ 10,581      $ 10,364        2   $ 31,563      $ 30,045        5

Segment income

     615        512        20     1,772        1,566        13

Three Months:

 

   

The $217 million increase in consolidated net sales was primarily due to higher sales in the automotive experience business ($680 million), power solutions business ($27 million) and building efficiency business ($25 million), partially offset by the unfavorable impact of foreign currency translation ($515 million).

 

   

The $103 million increase in consolidated segment income was primarily due to higher segment income in the automotive experience business ($56 million) and building efficiency business ($56 million), partially offset by lower segment income in the power solutions business ($7 million) and the unfavorable impact of foreign currency translation ($2 million).

Year-to-Date:

 

   

The $1.5 billion increase in consolidated net sales was primarily due to higher sales in the automotive experience business ($1.9 billion), building efficiency business ($240 million) and power solutions business ($139 million), partially offset by the unfavorable impact of foreign currency translation ($731 million).

 

   

The $206 million increase in consolidated segment income was primarily due to higher segment income in the automotive experience business ($91 million), building efficiency business ($66 million) and power solutions business ($55 million), partially offset by the unfavorable impact of foreign currency translation ($6 million).

 

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Building Efficiency—Net Sales

 

     Net Sales
Three Months Ended
June 30,
           Net Sales
Nine Months Ended
June 30,
        
(in millions)    2012      2011      Change     2012      2011      Change  

North America systems

   $ 642      $ 633        1   $ 1,774      $ 1,711        4

North America service

     547        601        -9     1,565        1,639        -5

Global workplace solutions

     1,064        1,046        2     3,226        3,053        6

Asia

     516        498        4     1,447        1,334        8

Other

     1,031        1,115        -8     2,886        3,068        -6
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
   $ 3,800      $ 3,893        -2   $ 10,898      $ 10,805        1
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Three Months:

 

   

The increase in North America systems was primarily due to higher volumes of controls systems in the commercial construction and replacement markets ($11 million), partially offset by the unfavorable impact of foreign currency translation ($2 million).

 

   

The decrease in North America service was primarily due to a reduction in truck-based volumes ($32 million), energy solutions volumes ($30 million) and the unfavorable impact of foreign currency translation ($2 million), partially offset by the incremental sales from a prior year business acquisition ($10 million).

 

   

The increase in global workplace solutions was primarily due to an increase in services to new and existing customers ($69 million), partially offset by the unfavorable impact of foreign currency translation ($51 million).

 

   

The increase in Asia was primarily due to higher service volumes including the prior year negative impact of the Japan earthquake and related events ($30 million), and the favorable impact of foreign currency translation ($2 million), partially offset by lower volumes of equipment ($14 million).

 

   

The decrease in other was primarily due to the unfavorable impact of foreign currency translation ($65 million); lower volumes in Europe ($23 million), Middle East ($20 million) and Latin America ($14 million); and lower volumes due to current year divestitures ($18 million); partially offset by higher volumes in unitary products in North America ($50 million) and higher volumes in other business areas ($6 million).

Year-to-Date:

 

   

The increase in North America systems was primarily due to higher volumes of equipment and controls systems in the commercial construction and replacement markets ($66 million), partially offset by the unfavorable impact of foreign currency translation ($3 million).

 

   

The decrease in North America service was primarily due to a reduction in truck-based volumes ($75 million) and energy solutions volumes ($19 million), and the unfavorable impact of foreign currency translation ($4 million), partially offset by incremental sales from a prior year business acquisition ($24 million).

 

   

The increase in global workplace solutions was primarily due to an increase in services to new and existing customers ($241 million), partially offset by the unfavorable impact of foreign currency translation ($68 million).

 

   

The increase in Asia was primarily due to higher service volumes including the prior year negative impact of the Japan earthquake and related events ($59 million), higher volumes of equipment and controls systems ($27 million), and the favorable impact of foreign currency translation ($27 million).

 

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The decrease in other was primarily due to the unfavorable impact of foreign currency translation ($99 million), lower volumes in Latin America ($84 million) and Europe ($23 million), lower volumes due to current year divestitures ($18 million) and lower volumes of unitary products in North America ($16 million), partially offset by higher volumes in other business areas ($36 million) and the Middle East ($22 million).

Building Efficiency—Segment Income

 

     Segment Income
Three Months Ended
June 30,
           Segment Income
Nine Months Ended
June 30,
        
(in millions)    2012      2011      Change     2012      2011      Change  

North America systems

   $ 80      $ 66        21   $ 189      $ 169        12

North America service

     52        35        49     79        69        14

Global workplace solutions

     13        7        86     23        17        35

Asia

     78        69        13     190        178        7

Other

     41        30        37     67        45        49
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
   $ 264      $ 207        28   $ 548      $ 478        15
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Three Months:

 

   

The increase in North America systems was primarily due to lower selling, general and administrative expenses ($8 million), favorable margin rates ($5 million) and higher volumes ($1 million).

 

   

The increase in North America service was primarily due to lower selling, general and administrative expenses ($19 million) and favorable margin rates ($11 million), partially offset by lower volumes ($13 million).

 

   

The increase in global workplace solutions was primarily due to lower selling, general and administrative expenses ($6 million) and higher volumes ($4 million), partially offset by unfavorable margin rates ($3 million) and the unfavorable impact of foreign currency translation ($1 million).

 

   

The increase in Asia was primarily due to favorable margin rates ($5 million), higher volumes ($3 million) and the favorable impact of foreign currency translation ($1 million).

 

   

The increase in other was primarily due to prior year non-recurring charges related to South America indirect taxes ($29 million), prior year distribution business costs ($11 million), lower selling, general and administrative expenses ($9 million), and the favorable impact of foreign currency translation ($1 million), partially offset by unfavorable margin rates ($18 million), net prior year warranty accrual adjustment due to favorable experience ($17 million) and lower volumes ($4 million).

Year-to-Date:

 

   

The increase in North America systems was primarily due to higher volumes ($16 million) and lower selling, general and administrative expenses ($7 million), partially offset by unfavorable margin rates ($3 million).

 

   

The increase in North America service was primarily due to favorable margin rates ($15 million) and lower selling, general and administrative expenses ($14 million), partially offset by lower volumes ($16 million) and a loss on business divestiture ($3 million).

 

   

The increase in global workplace solutions was primarily due to higher volumes ($13 million) and lower selling, general and administrative expenses ($2 million), partially offset by unfavorable margin rates ($8 million) and the unfavorable impact of foreign currency translation ($1 million).

 

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The increase in Asia was primarily due to higher volumes ($20 million), the favorable impact of foreign currency translation ($5 million) and favorable margin rates ($4 million), partially offset by higher selling, general and administrative expenses ($17 million).

 

   

The increase in other was primarily due to a gain on business divestiture net of transaction costs ($38 million), prior year non-recurring charges related to South America indirect taxes ($29 million), prior year distribution business costs ($11 million), lower selling, general and administrative expenses ($5 million), and higher equity income ($7 million), partially offset by unfavorable margin rates ($34 million), net prior year warranty accrual adjustment due to favorable experience ($17 million) and lower volumes ($17 million).

Automotive Experience—Net Sales

 

     Net Sales
Three Months Ended
June 30,
           Net Sales
Nine Months Ended
June 30,
        
(in millions)    2012      2011      Change     2012      2011      Change  

North America

   $ 2,320      $ 1,772        31   $ 6,554      $ 5,517        19

Europe

     2,466        2,800        -12     7,791        7,693        1

Asia

     679        546        24     1,977        1,717        15
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
   $ 5,465      $ 5,118        7   $ 16,322      $ 14,927        9
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Three Months:

 

   

The increase in North America was primarily due to higher volumes to the Company’s major OEM customers ($281 million), the prior year negative impact of the Japan earthquake and related events ($256 million), and incremental sales due to prior year business acquisitions ($20 million), partially offset by net unfavorable pricing and commercial settlements ($9 million).

 

   

The decrease in Europe was primarily due to the unfavorable impact of foreign currency translation ($326 million), lower volumes despite the prior year negative impact of the Japan earthquake and related events ($109 million), and net unfavorable pricing ($14 million), partially offset by incremental sales due to prior year and current year business acquisitions ($115 million).

 

   

The increase in Asia was primarily due to higher volumes and new customer awards including the prior year negative impact of the Japan earthquake and related events ($139 million), and incremental sales due to prior year business acquisitions ($16 million), partially offset by net unfavorable pricing and commercial items ($15 million), and the unfavorable impact of foreign currency translation ($7 million).

Year-to-Date:

 

   

The increase in North America was primarily due to higher volumes to the Company’s major OEM customers ($704 million), the prior year negative impact of the Japan earthquake and related events ($256 million), and incremental sales due to prior year business acquisitions ($129 million), partially offset by net unfavorable pricing and commercial items ($52 million).

 

   

The increase in Europe was primarily due to incremental sales due to prior year and current year business acquisitions ($581 million), and higher volumes including the prior year negative impact of the Japan earthquake and related events ($61 million), partially offset by the unfavorable impact of foreign currency translation ($496 million), and net unfavorable pricing and commercial settlements ($48 million).

 

   

The increase in Asia was primarily due to higher volumes and new customer awards including the prior year negative impact of the Japan earthquake and related events ($214 million), incremental sales due to prior year business acquisitions ($78 million) and the favorable impact of foreign currency translation ($21 million), partially offset by net unfavorable pricing and commercial items ($28 million), and the negative impact of the flooding in Thailand and related events ($25 million).

 

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Automotive Experience—Segment Income

 

     Segmen Income
Three Months Ended
June 30,
           Segment Income
Nine Months Ended
June 30,
        
(in millions)    2012     2011      Change     2012      2011      Change  

North America

   $ 154     $ 67        *      $ 340      $ 328        4

Europe

     (37     24        *        14        40        -65

Asia

     85       51        67     269        162        66
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
   $ 202     $ 142        42   $ 623      $ 530        18
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

* Measure not meaningful

Three Months:

 

   

The increase in North America was primarily due to higher volumes ($78 million), the prior year negative impact of the earthquake in Japan and related events ($59 million), lower purchasing costs ($13 million), lower engineering expenses ($9 million), higher equity income ($5 million), lower selling, general and administrative expenses ($1 million), and incremental operating income of prior year business acquisitions ($1 million), partially offset by higher operating and metals launch costs ($57 million), and net unfavorable commercial settlements and pricing ($22 million).

 

   

The decrease in Europe was primarily due to higher operating costs ($48 million), lower volumes despite the prior year negative impact of the earthquake in Japan and related events ($27 million), net unfavorable pricing and commercial settlements ($16 million), higher selling, general and administrative expenses ($11 million), and lower equity income ($1 million), partially offset by prior year costs related to business acquisitions ($28 million), lower engineering expenses ($8 million), the favorable impact of foreign currency translation ($4 million) and lower purchasing costs ($2 million).

 

   

The increase in Asia was primarily due to higher volumes including the prior year negative impact of the earthquake in Japan and related events ($44 million), lower purchasing costs ($8 million), incremental operating income of prior year business acquisitions ($4 million), lower selling, general and administrative expenses ($2 million), and higher equity income ($1 million), partially offset by net unfavorable commercial settlements and pricing ($18 million), higher operating costs ($5 million) and higher engineering expenses ($2 million).

Year-to-Date:

 

   

The increase in North America was primarily due to higher volumes ($158 million), the prior year negative impact of the earthquake in Japan and related events ($59 million), lower purchasing costs ($37 million), incremental operating income of prior year acquisitions ($3 million) and higher equity income ($1 million), partially offset by higher operating and metals launch costs ($111 million), net unfavorable commercial settlements and pricing ($71 million), and higher selling, general and administrative expenses ($64 million).

 

   

The decrease in Europe was primarily due to higher operating costs ($80 million), net unfavorable commercial settlements and pricing ($37 million), higher selling, general and administrative expenses ($35 million), lower volumes despite the prior year negative impact of the earthquake in Japan and related events ($27 million), and the unfavorable impact of foreign currency translation ($2 million), partially offset by prior year costs related to business acquisitions ($64 million), incremental operating income of prior year acquisitions ($42 million), lower purchasing costs ($26 million), lower engineering expenses ($21 million) and higher equity income ($2 million).

 

   

The increase in Asia was primarily due to higher volumes including the prior year negative impact of the earthquake in Japan and related events ($80 million), lower purchasing costs ($27 million), higher equity

 

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income including an equity interest gain ($18 million), incremental operating income of prior year acquisitions ($14 million), the favorable impact of foreign currency translation ($4 million), and lower selling, general and administrative expenses ($3 million), partially offset by net unfavorable commercial settlements and pricing ($28 million), the negative impact of the flooding in Thailand and related events ($5 million), higher operating costs ($3 million) and higher engineering expenses ($3 million).

Power Solutions

 

     Three Months Ended
June 30,
           Nine Months Ended
June 30,
        
(in millions)    2012      2011      Change     2012      2011      Change  

Net sales

   $ 1,316      $ 1,353        -3   $ 4,343      $ 4,313        1

Segment income

     149        163        -9     601        558        8

Three Months:

 

   

Net sales decreased primarily due to the unfavorable impact of foreign currency translation ($64 million) and the impact of pass through pricing ($61 million), partially offset by higher volumes including the prior year negative impact of the earthquake in Japan and related events ($53 million), favorable price/product mix ($27 million) and incremental sales due to business acquisitions ($8 million).

 

   

Segment income decreased primarily due to higher costs for battery cores and lead net of favorable pricing and product mix ($28 million), the unfavorable impact of foreign currency translation ($7 million), higher operating and transportation costs ($5 million), and higher selling, general and administrative costs ($3 million), partially offset by an insurance settlement ($12 million), change in asset retirement obligations ($11 million) and higher sales volumes ($6 million).

Year-to-Date:

 

   

Net sales increased primarily due to favorable price/product mix ($122 million), higher volumes including the prior year negative impact of the earthquake in Japan and related events ($69 million), and incremental sales due to business acquisitions ($29 million), partially offset by the unfavorable impact of foreign currency translation ($109 million) and the impact of pass through pricing ($81 million).

 

   

Segment income increased primarily due to favorable pricing and product mix including lead net of higher costs for battery cores ($83 million), a gain on redemption of a warrant for an existing partially-owned affiliate ($25 million), business interruption insurance recovery net of related costs and lost profit on sales due to a continued plant shutdown in Asia ($13 million), an insurance settlement ($12 million), higher sales volumes ($11 million), change in asset retirement obligations ($11 million) and a gain on acquisition of a partially-owned affiliate ($9 million), partially offset by higher operating and transportation costs ($44 million), higher selling, general and administrative expenses ($39 million), an impairment of an equity investment ($14 million), the unfavorable impact of foreign currency translation ($12 million), the unfavorable impact of business acquisitions ($9 million) and lower equity income ($3 million).

Significant Restructuring Costs

To improve profitability in the Company’s building efficiency and automotive experience businesses and address the softness in certain underlying markets, the Company committed to a restructuring plan in the third quarter of fiscal 2012 and recorded a $52 million restructuring charge, of which $41 million was recorded for the building efficiency business and $11 million was recorded for the automotive experience business.

Refer to Note 8, “Significant Restructuring Costs,” of the notes to condensed consolidated financial statements for further disclosure related to the Company’s restructuring plans.

 

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Net Financing Charges

 

     Three Months Ended
June 30,
           Nine Months Ended
June 30,
        
(in millions)    2012      2011      Change     2012      2011      Change  

Net financing charges

   $ 59      $ 43        37   $ 171      $ 124        38

 

   

The increase in net financing charges for the three and nine month periods ended June 30, 2012 was primarily due to higher debt levels in the current periods.

Provision for Income Taxes

 

     Three Months Ended
June 30,
    Nine Months Ended
June 30,
 
(in millions)    2012     2011     2012     2011  

Tax provision

   $ 62     $ 89     $ 260     $ 274  

Effective tax rate

     12.3     19.0     16.8     19.0

Estimated annual base effective tax rate

     18.2     19.0     18.2     19.0

 

   

In calculating the provision for income taxes, the Company uses an estimate of the annual effective tax rate based upon the facts and circumstances known at each interim period. On a quarterly basis, the annual effective tax rate is adjusted, as appropriate, based upon changed facts and circumstances, if any, as compared to those forecasted at the beginning of the fiscal year and each interim period thereafter.

 

   

In the third quarter of fiscal 2012, the Company decreased its estimated annual effective income tax rate from 19% to 18.2% due to a reduction of income as well as a geographical shift in income.

 

   

As a result of certain recent 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, which impacts the effective tax rate for the quarter.

Income Attributable to Noncontrolling Interests

 

     Three Months Ended
June 30,
           Nine Months Ended
June 30,
        
(in millions)    2012      2011      Change     2012      2011      Change  

Income attributable to noncontrolling interests

   $ 25      $ 23        9   $ 98      $ 82        20

 

   

The increase in income attributable to noncontrolling interests for the three month period ended June 30, 2012 was primarily due to higher earnings at certain automotive experience and building efficiency partially-owned affiliates in Asia, partially offset by lower earnings at a power solutions partially-owned affiliate. The increase in income attributable to noncontrolling interests for the nine month period ended June 30, 2012 was primarily due to higher earnings at certain automotive experience partially-owned affiliates in North America, building efficiency partially-owned affiliates in Asia and power solutions partially-owned affiliates.

 

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Net Income Attributable to Johnson Controls, Inc.

 

     Three Months Ended
June 30,
           Nine Months Ended
June 30,
        
(in millions)    2012      2011      Change     2012      2011      Change  

Net income attributable to
Johnson Controls, Inc.

   $ 417      $ 357        17   $ 1,191      $ 1,086        10

 

   

The increase in net income attributable to Johnson Controls, Inc. for the three months ended June 30, 2012 was primarily due to higher segment income in the automotive experience and building efficiency businesses, and a decrease in the provision for income taxes, partially offset by lower segment income in the power solutions business, restructuring costs, higher net financing charges and the unfavorable impact of foreign currency translation.

 

   

The increase in net income attributable to Johnson Controls, Inc. for the nine months ended June 30, 2012 was primarily due to higher segment income in the automotive experience, building efficiency and power solutions businesses, and a decrease in the provision for income taxes, partially offset by restructuring costs, higher net finance charges and income attributable to noncontrolling interests, and the unfavorable impact of foreign currency translation.

Backlog

Building efficiency’s backlog relates to its control systems and service activity. At June 30, 2012, the unearned backlog was $5.3 billion, or a 4% increase compared to June 30, 2011. Excluding the negative impact of foreign currency, the backlog was higher by 7% at June 30, 2012 compared to June 30, 2011. The Asia and North America systems backlog increased compared to prior year levels, while there was a decline in other and North America service backlog.

Financial Condition

Working Capital

 

(in millions)    June 30,
2012
    September 30,
2011
    Change     June 30,
2011
    Change  

Current assets

   $ 12,566     $ 12,015       $ 12,558    

Current liabilities

     (10,811     (10,782       (11,154  
  

 

 

   

 

 

     

 

 

   
     1,755       1,233       42     1,404       25

Less: Cash

     602       257         335    

Add: Short-term debt

     925       596         592    

Add: Current portion of long-term debt

     110       17         65    
  

 

 

   

 

 

     

 

 

   

Working capital

   $ 2,188     $ 1,589       38   $ 1,726       27
  

 

 

   

 

 

     

 

 

   

Accounts receivable

     7,155       7,151       0     7,094       1

Inventories

     2,362       2,316       2     2,451       -4

Accounts payable

     6,062       6,159       -2     6,104       -1

 

   

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

 

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The increase in working capital at June 30, 2012 as compared to September 30, 2011 was primarily due to higher inventory levels to support higher backlog levels and lower accounts payable primarily due to timing of supplier payments. Compared to June 30, 2011, the increase was primarily due to higher accounts receivable from higher sales volumes and lower accounts payable due to timing of supplier payments, partially offset by lower inventory levels based on increased turnover.

 

   

The Company’s days sales in accounts receivable for the three months ended June 30, 2012 were 53, compared to 52 and 55 for the comparable periods ended September 30, 2011 and June 30, 2011, respectively. The increase in accounts receivable compared to June 30, 2011 was primarily due to higher sales volumes in the current quarter compared to the comparable prior quarter. 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 three months ended June 30, 2012 were consistent with the comparable period ended September 30, 2011 and higher than the comparable period ended June 30, 2011 primarily due to increased sales volumes and improvements in inventory management.

 

   

Days in accounts payable at June 30, 2012 were 71 days, consistent with September 30, 2011 and an increase from 69 days at June 30, 2011. This increase was primarily due to the timing of supplier payments.

Cash Flows

 

     Three Months Ended
June 30,
    Nine Months Ended
June 30,
 
(in millions)    2012     2011     2012     2011  

Cash provided by operating activities

   $ 619     $ 360     $ 765     $ 489  

Cash used by investing activities

     (447