10-K 1 d398531d10k.htm 10-K 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10–K

 

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

For the Fiscal Year Ended September 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 of Incorporation)  

(I.R.S. Employer

Identification No.)

5757 North Green Bay Avenue

Milwaukee, Wisconsin

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

Registrant’s telephone number, including area code:

(414) 524-1200

Securities Registered Pursuant to Section 12(b) of the Exchange Act:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Common Stock   New York Stock Exchange
Corporate Units   New York Stock Exchange

Securities Registered Pursuant to Section 12(g) of the Exchange Act: None

 

 

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes  ¨    No  x

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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

 

Large accelerated filer   x    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  x

As of March 31, 2012, the aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant was approximately $22.1 billion based on the closing sales price as reported on the New York Stock Exchange. As of October 31, 2012, 683,797,753 shares of the registrant’s Common Stock, par value $0.01 7/18 per share, were outstanding.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held on January 23, 2013 are incorporated by reference into Part III.

 

 

 


Table of Contents

JOHNSON CONTROLS, INC.

Index to Annual Report on Form 10-K

Year Ended September 30, 2012

 

         Page  
CAUTIONARY STATEMENTS FOR FORWARD-LOOKING INFORMATION      3   
PART I.   
ITEM 1.  

BUSINESS

     3   
ITEM 1A.  

RISK FACTORS

     7   
ITEM 1B.  

UNRESOLVED STAFF COMMENTS

     14   
ITEM 2.  

PROPERTIES

     15   
ITEM 3.  

LEGAL PROCEEDINGS

     18   
ITEM 4.  

MINE SAFETY DISCLOSURES

     19   
 

EXECUTIVE OFFICERS OF THE REGISTRANT

     19   
PART II.   
ITEM 5.  

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

     21   
ITEM 6.  

SELECTED FINANCIAL DATA

     24   
ITEM 7.  

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

     25   
ITEM 7A.  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     50   
ITEM 8.  

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     51   
ITEM 9.  

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     106   
ITEM 9A.  

CONTROLS AND PROCEDURES

     106   
ITEM 9B.  

OTHER INFORMATION

     107   
PART III.   
ITEM 10.  

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

     107   
ITEM 11.  

EXECUTIVE COMPENSATION

     107   
ITEM 12.  

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

     107   
ITEM 13.  

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

     107   
ITEM 14.  

PRINCIPAL ACCOUNTING FEES AND SERVICES

     107   
PART IV.   
ITEM 15.  

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

     108   
 

SIGNATURES

     109   
 

INDEX TO EXHIBITS

     110   


Table of Contents

CAUTIONARY STATEMENTS FOR FORWARD-LOOKING INFORMATION

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

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

PART I

 

  ITEM 1 BUSINESS

General

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

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

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

The Automotive Experience business is one of the world’s largest automotive suppliers, providing innovative interior systems through our design and engineering expertise. The Company’s 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.

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

Financial Information About Business Segments

Accounting Standards Codification (ASC) 280, “Segment Reporting,” establishes the standards for reporting information about segments in financial statements. In applying the criteria set forth in ASC 280, the Company has determined that it has nine reportable segments for financial reporting purposes. The Company’s nine reportable

 

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segments are presented in the context of its three primary businesses - Building Efficiency, Automotive Experience and Power Solutions.

Refer to Note 18, “Segment Information,” of the notes to consolidated financial statements for financial information about business segments.

For the purpose of the following discussion of the Company’s businesses, the five Building Efficiency reportable segments and the three Automotive Experience reportable segments are presented together due to their similar customers and the similar nature of their products, production processes and distribution channels.

Products/Systems and Services

Building Efficiency

Building Efficiency is a global leader in delivering integrated control systems, mechanical equipment, services and solutions designed to improve the comfort, safety and energy efficiency of non-residential buildings and residential properties with operations in 59 countries. Revenues come from facilities management, technical services and the replacement and upgrade of HVAC controls and mechanical equipment in the existing buildings market, where the Company’s large base of current customers leads to repeat business, as well as with installing controls and equipment during the construction of new buildings. Customer relationships often span entire building lifecycles.

Building Efficiency sells its control systems, mechanical equipment and services primarily through the Company’s extensive global network of sales and service offices. Some building controls and mechanical systems are sold to distributors of air-conditioning, refrigeration and commercial heating systems throughout the world. Approximately 43% of Building Efficiency’s sales are derived from HVAC products and installed control systems for construction and retrofit markets, including 13% of total sales related to new commercial construction. Approximately 57% of its sales originate from its service offerings. In fiscal 2012, Building Efficiency accounted for 35% of the Company’s consolidated net sales.

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

Automotive Experience

Automotive Experience designs and manufactures interior products and systems for passenger cars and light trucks, including vans, pick-up trucks and sport/crossover utility vehicles. The business produces automotive interior systems for original equipment manufacturers (OEMs) and operates approximately 240 wholly- and majority-owned manufacturing or assembly plants, with operations in 33 countries worldwide. Additionally, the business has partially-owned affiliates in Asia, Europe, North America and South America.

Automotive Experience products and systems include complete seating systems and components; cockpit systems, including instrument panels and clusters, information displays and body controllers; overhead systems, including headliners and electronic convenience features; floor consoles; and door systems. In fiscal 2012, Automotive Experience accounted for 51% of the Company’s consolidated net sales.

The business operates assembly plants that supply automotive OEMs with complete seats on a “just-in-time/in-sequence” basis. Seats are assembled to specific order and delivered on a predetermined schedule directly to an automotive assembly line. Certain of the business’s other automotive interior systems are also supplied on a “just-in-time/in-sequence” basis. Foam, metal and plastic seating components, seat covers, seat mechanisms and other components are shipped to these plants from the business’s production facilities or outside suppliers.

 

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Power Solutions

Power Solutions services both automotive OEMs and the battery aftermarket by providing energy storage technology, coupled with systems engineering, marketing and service expertise. The Company is the largest producer of lead-acid automotive batteries in the world, producing and distributing approximately 135 million lead-acid batteries annually in approximately 60 wholly- and majority-owned manufacturing or assembly plants and sales offices in 15 countries worldwide. Investments in new product and process technology have expanded product offerings to absorbent glass mat (AGM) technology that powers Start-Stop vehicles, as well as lithium-ion battery technology for certain hybrid and electric vehicles. Approximately 77% of unit sales worldwide in fiscal 2012 were to the automotive replacement market, with the remaining sales to the OEM market.

Power Solutions accounted for 14% of the Company’s fiscal 2012 consolidated net sales. Batteries and key components are manufactured at wholly- and majority-owned plants in North America, South America, Asia and Europe.

Competition

Building Efficiency

The Building Efficiency business conducts certain of its operations through thousands of individual contracts that are either negotiated or awarded on a competitive basis. Key factors in the award of contracts include system and service performance, quality, price, design, reputation, technology, application engineering capability and construction or project management expertise. Competitors for contracts in the residential and non-residential marketplace include many regional, national and international providers; larger competitors include Honeywell International, Inc.; Siemens Building Technologies, an operating group of Siemens AG; Schneider Electric SA; Carrier Corporation, a subsidiary of United Technologies Corporation; Trane Incorporated, a subsidiary of Ingersoll-Rand Company Limited; Daikin Industries, Ltd.; Lennox International, Inc.; Goodman Global, Inc; CBRE, Inc.; and Jones Lang LaSalle, Inc. The services market, including Global Workplace Solutions, is highly fragmented. Sales of services are largely dependent upon numerous individual contracts with commercial businesses worldwide. The loss of any individual contract would not have a material adverse effect on the Company.

Automotive Experience

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

Power Solutions

Power Solutions is the principal supplier of batteries to many of the largest merchants in the battery aftermarket, including Advance Auto Parts, AutoZone, Robert Bosch GmbH, Costco, NAPA, O’Reilly/CSK, Interstate Battery System of America, Pep Boys, Sears, Roebuck & Co. and Wal-Mart stores. Automotive batteries are sold throughout the world under private labels and under the Company’s brand names (Optima®, Varta®, LTH® and Heliar®) to automotive replacement battery retailers and distributors and to automobile manufacturers as original equipment. The Power Solutions business competes with a number of major domestic and international manufacturers and distributors of lead-acid batteries, as well as a large number of smaller, regional competitors. The Power Solutions business primarily competes in the battery market with Exide Technologies, GS Yuasa Corporation, East Penn Manufacturing Company and Fiamm Group. The North American, European and Asian lead-acid battery markets are highly competitive. The manufacturers in these markets compete on price, quality, technical innovation, service and warranty.

Backlog

The Company’s backlog relating to the Building Efficiency business is applicable to its sales of systems and services. At September 30, 2012, the backlog was $5.2 billion, the majority of which relates to fiscal 2013. The backlog as of September 30, 2011 was $5.1 billion. The increase in backlog was primarily due to market share gains and conditions in Asia, partially offset by a decline in the North America Service segment. The backlog does not include amounts associated with contracts in the Global Workplace Solutions business because such contracts are

 

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typically multi-year service awards, nor does it include unitary products within the Other segment. The backlog amount outstanding at any given time is not necessarily indicative of the amount of revenue to be earned in the upcoming fiscal year.

Raw Materials

Raw materials used by the businesses in connection with their operations, including lead, steel, tin, aluminum, urethane chemicals, copper, sulfuric acid and polypropylene, were readily available during the year, and the Company expects such availability to continue. In fiscal 2013, commodity prices could fluctuate throughout the year and could significantly affect the results of operations.

Intellectual Property

Generally, the Company seeks statutory protection for strategic or financially important intellectual property developed in connection with its business. Certain intellectual property, where appropriate, is protected by contracts, licenses, confidentiality or other agreements.

The Company owns numerous U.S. and non-U.S. patents (and their respective counterparts), the more important of which cover those technologies and inventions embodied in current products or which are used in the manufacture of those products. While the Company believes patents are important to its business operations and in the aggregate constitute a valuable asset, no single patent, or group of patents, is critical to the success of the business. The Company, from time to time, grants licenses under its patents and technology and receives licenses under patents and technology of others.

The Company’s trademarks, certain of which are material to its business, are registered or otherwise legally protected in the U.S. and many non-U.S. countries where products and services of the Company are sold. The Company, from time to time, becomes involved in trademark licensing transactions.

Most works of authorship produced for the Company, such as computer programs, catalogs and sales literature, carry appropriate notices indicating the Company’s claim to copyright protection under U.S. law and appropriate international treaties.

Environmental, Health and Safety Matters

Laws addressing the protection of the environment (environmental laws) and workers’ safety and health (worker safety laws) govern the Company’s ongoing global operations. They generally provide for civil and criminal penalties, as well as injunctive and remedial relief, for noncompliance or require remediation of sites where Company-related materials have been released into the environment.

The Company has expended substantial resources globally, both financial and managerial, to comply with environmental laws and worker safety laws and maintains procedures designed to foster and ensure compliance. Certain of the Company’s businesses are, or have been, engaged in the handling or use of substances that may impact workplace health and safety or the environment. The Company is committed to protecting its workers and the environment against the risks associated with these substances.

The Company’s operations and facilities have been, and in the future may become, the subject of formal or informal enforcement actions or proceedings for noncompliance with environmental laws and worker safety laws or for the remediation of Company-related substances released into the environment. Such matters typically are resolved by negotiation with regulatory authorities that result in commitments to compliance, abatement or remediation programs and, in some cases, payment of penalties. Historically, neither such commitments nor such penalties have been material. (See Item 3, “Legal Proceedings,” of this report for a discussion of the Company’s potential environmental liabilities.)

Environmental Capital Expenditures

The Company’s ongoing environmental compliance program often results in capital expenditures. Environmental considerations are a part of all significant capital expenditure decisions; however, expenditures in fiscal 2012 related solely to environmental compliance were not material. It is management’s opinion that the amount of any future capital expenditures related solely to environmental compliance will not have a material adverse effect on the Company’s financial results or competitive position in any one year.

 

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Employees

As of September 30, 2012, the Company employed approximately 170,000 employees, of whom approximately 107,000 were hourly and 63,000 were salaried.

Seasonal Factors

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

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

The automotive replacement battery market is affected by weather patterns because batteries are more likely to fail when extremely low temperatures place substantial additional power requirements upon a vehicle’s electrical system. Also, battery life is shortened by extremely high temperatures, which accelerate corrosion rates. Therefore, either mild winter or moderate summer temperatures may adversely affect automotive replacement battery sales.

Financial Information About Geographic Areas

Refer to Note 18, “Segment Information,” of the notes to consolidated financial statements for financial information about geographic areas.

Research and Development Expenditures

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

Available Information

The Company’s filings with the U.S. Securities and Exchange Commission (SEC), including annual reports on Form 10-K, quarterly reports on Form 10-Q, definitive proxy statements on Schedule 14A, current reports on Form 8-K, and any amendments to those reports filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, are made available free of charge through the Investor Relations section of the Company’s Internet website at http://www.johnsoncontrols.com as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC. Copies of any materials the Company files with the SEC can also be obtained free of charge through the SEC’s website at http://www.sec.gov, at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549, or by calling the SEC’s Office of Investor Education and Advocacy at 1-800-732-0330. The Company also makes available, free of charge, its Ethics Policy, Corporate Governance Guidelines, Board of Directors committee charters and other information related to the Company on the Company’s Internet website or in printed form upon request. The Company is not including the information contained on the Company’s website as a part of, or incorporating it by reference into, this Annual Report on Form 10-K.

 

  ITEM 1A RISK FACTORS

General Risks

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

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

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

 

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our access to capital necessary for our operations and executing our strategic plan. If our access to capital were to become significantly constrained or costs of capital increased significantly due to lowered credit ratings, prevailing industry conditions, the volatility of the capital markets or other factors, then our financial condition, results of operations and cash flows could be adversely affected. The Company’s $2.5 billion four-year revolving credit facility expires in February 2015. The Company plans to renew the facility prior to its expiration.

We are subject to pricing pressure from our automotive customers.

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

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

We have significant operations in a number of countries outside the U.S., some of which are located in emerging markets. Long-term economic uncertainty in some of the regions of the world in which we operate, such as Asia, South America, the Middle East, Central Europe and other emerging markets, could result in the disruption of markets and negatively affect cash flows from our operations to cover our capital needs and debt service. The sovereign debt crisis in countries in which we operate in Europe could negatively impact our access to, and cost of, capital, and therefore could have an adverse effect on our business, results of operations, financial condition and competitive position.

In addition, as a result of our global presence, a significant portion of our revenues and expenses is denominated in currencies other than the U.S. dollar. We are therefore subject to foreign currency risks and foreign exchange exposure. Our primary exposures are to the euro, British pound, Japanese yen, Czech koruna, Mexican peso, Romanian lei, Hungarian forint, Polish zloty, Canadian dollar and Chinese renminbi. While we employ financial instruments to hedge transactional foreign exchange exposure, these activities do not insulate us completely from those exposures. Exchange rates can be volatile and could adversely impact our financial results and comparability of results from period to period. Specifically, there is concern regarding the overall stability of the euro and the future of the euro as a single currency given the diverse economic and political circumstances in individual Eurozone countries. Potential negative developments and market perceptions related to the euro could adversely affect the value of our euro-denominated assets, as well as those of our customers and suppliers.

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

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

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

Due to our global operations, we are subject to many laws governing international relations, including those that prohibit improper payments to government officials and commercial customers, and restrict where we can do business, what information or products we can supply to certain countries and what information we can provide to a non-U.S. government, including but not limited to the Foreign Corrupt Practices Act, U.K. Bribery Act and the U.S. Export Administration Act. Violations of these laws, which are complex, may result in criminal penalties or sanctions that could have a material adverse effect on our business, financial condition and results of operations.

Global climate change could negatively affect our business.

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

 

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

New regulations related to conflict minerals could adversely impact our business.

The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions to improve transparency and accountability concerning the supply of certain minerals, known as conflict minerals, originating from the Democratic Republic of Congo (DRC) and adjoining countries. As a result, in August 2012 the SEC adopted annual disclosure and reporting requirements for those companies who use conflict minerals mined from the DRC and adjoining countries in their products. These new requirements will require due diligence efforts in fiscal 2013, with initial disclosure requirements beginning in May 2014. There will be costs associated with complying with these disclosure requirements, including for diligence to determine the sources of conflict minerals used in our products and other potential changes to products, processes or sources of supply as a consequence of such verification activities. The implementation of these rules could adversely affect the sourcing, supply and pricing of materials used in our products. As there may be only a limited number of suppliers offering “conflict free” conflict minerals, we cannot be sure that we will be able to obtain necessary conflict minerals from such suppliers in sufficient quantities or at competitive prices. Also, we may face reputational challenges if we determine that certain of our products contain minerals not determined to be conflict free or if we are unable to sufficiently verify the origins for all conflict minerals used in our products through the procedures we may implement.

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

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

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

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

Negative or unexpected tax consequences could adversely affect our results of operations.

Adverse changes in the underlying profitability and financial outlook of our operations in several jurisdictions could lead to changes in our valuation allowances against deferred tax assets and other tax reserves on our statement of financial position that could materially and adversely affect our results of operations. Additionally, changes in tax laws in the U.S. or in other countries where we have significant operations could materially affect deferred tax assets and liabilities on our consolidated statement of financial position and tax expense.

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

 

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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

Our business success depends on attracting and retaining qualified personnel.

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

Building Efficiency Risks

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

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

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

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

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

HVAC equipment sales in the residential and commercial new construction markets correlate to the number of new homes and buildings that are built. The strength of the residential and commercial markets depends in part on the availability of consumer and commercial financing for our customers, along with inventory and pricing of existing homes and buildings. If economic and credit market conditions worsen, it may result in a decline in the residential

 

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housing construction market and construction of new commercial buildings. Such conditions could have an adverse effect on our results of operations and result in potential liabilities or additional costs, including impairment charges.

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

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

Automotive Experience Risks

Conditions in the automotive industry may adversely affect our results of operations.

Our financial performance depends, in part, on conditions in the automotive industry. In fiscal 2012, our largest customers globally were automobile manufacturers Ford Motor Company (Ford), Daimler AG and General Motors Corporation (GM). If automakers experience a decline in the number of new vehicle sales, we may experience reductions in orders from these customers, incur write-offs of accounts receivable, incur impairment charges or require additional restructuring actions beyond our current restructuring plans, particularly if any of the automakers cannot adequately fund their operations or experience financial distress.

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

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

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

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

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

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

 

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

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

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

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

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

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

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

Any of the following could materially and adversely impact the results of operations of our Automotive Experience business: the loss of, or changes in, automobile supply contracts or sourcing strategies with our major customers or suppliers; start-up expenses associated with new vehicle programs or delays or cancellations of such programs; underutilization of our manufacturing facilities, which are generally located near, and devoted to, a particular customer’s facility; inability to recover engineering and tooling costs; market and financial consequences of any recalls that may be required on products that we have supplied; delays or difficulties in new product development; quantity and complexity of new program launches, which are subject to our customers’ timing, performance, design and quality standards; interruption of supply of certain single-source components; the potential introduction of similar or superior technologies; changing nature of our joint ventures and relationships with our strategic business partners; and global overcapacity and vehicle platform proliferation.

Power Solutions Risks

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

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

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

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

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

 

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

Our financial performance in the Power Solutions business depends, in part, on conditions in the automotive industry. Sales to OEMs accounted for approximately 23% of the total sales of the Power Solutions business in fiscal 2012. Declines in the North American and European automotive production levels could reduce our sales and adversely affect our results of operations. In addition, if any OEMs reach a point where they cannot fund their operations, we may incur write-offs of accounts receivable, incur impairment charges or require additional restructuring actions beyond our current restructuring plans.

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

Any of the following could materially and adversely impact the results of operations of our Power Solutions business: loss of, or changes in, automobile battery supply contracts with our large original equipment and aftermarket customers; the increasing quality and useful life of batteries or use of alternative battery technologies, both of which may contribute to a growth slowdown in the lead-acid battery market; delays or cancellations of new vehicle programs; market and financial consequences of any recalls that may be required on our products; delays or difficulties in new product development, including lithium-ion technology; impact of potential increases in lithium-ion battery volumes on established lead-acid battery volumes as lithium-ion battery technology grows and costs become more competitive; financial instability or market declines of our customers or suppliers; interruption of supply of certain single-source components; changing nature of our joint ventures and relationships with our strategic business partners; unseasonable weather conditions in various parts of the world; increasing global environmental and safety regulations related to the manufacturing and recycling of lead-acid batteries, and transportation of battery materials; our ability to secure sufficient tolling capacity to recycle batteries; price and availability of battery cores used in recycling; and the lack of the development of a market for hybrid and electric vehicles.

 

  ITEM 1B UNRESOLVED STAFF COMMENTS

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

 

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  ITEM 2 PROPERTIES

At September 30, 2012, the Company conducted its operations in 67 countries throughout the world, with its world headquarters located in Milwaukee, Wisconsin. The Company’s wholly- and majority-owned facilities, which are listed in the table on the following pages by business and location, totaled approximately 88 million square feet of floor space and are owned by the Company except as noted. The facilities primarily consisted of manufacturing, assembly and/or warehouse space. The Company considers its facilities to be suitable and adequate for their current uses. The majority of the facilities are operating at normal levels based on capacity.

 

Building Efficiency

Arizona    Phoenix (1),(4)    Austria    Vienna (4)
California    Fremont (1),(4)    Belgium    Diegem (1),(4)
   Roseville (1),(4)    Brazil    Pinhais (1),(4)
   Simi Valley (1),(4)    Canada    Ajax (1),(3)
   Whittier (4)       Oakville (1),(4)
Delaware    Newark (1),(4)       Victoria (1),(4)
Florida    Largo (1),(3)    China    Beijing (1),(4)
   Medley (1),(4)       Dalian (1),(4)
Georgia    Atlanta (1),(4)       Guangzhou (1),(4)
Illinois    Arlington Heights (4)       Qingyuan (2),(3)
   Elmhurst (1),(4)       Wuxi (2),(3)
   Wheeling (1),(4)    Denmark    Hornslet (2),(4)
Kansas    Lenexa (1),(4)       Viby (2),(3)
   Wichita (2),(3)    France    Carquefou Cedex (3)
Kentucky    Erlanger (1)       Colombes (1),(3)
   Louisville (1),(4)       Nantes (1)
Maryland    Baltimore (1),(4)    Germany    Essen (1),(3)
   Capitol Heights (1),(4)       Flensburg (1)
   Rossville (1)       Hamburg (1),(3)
   Sparks (1),(4)       Kempen (1)
Massachusetts    Lynnfield (4)       Mannheim (1),(3)
Michigan    Sterling Heights (1),(4)    Hong Kong    Hong Kong (1),(3)
Minnesota    Plymouth (1),(4)    India    Chakan (1),(3)
Mississippi    Hattiesburg (1)       Pune (1),(3)
Missouri    Albany    Italy    Milan (1),(3)
   St. Louis (1),(4)    Japan    Tokyo (1),(4)
New Jersey    Hainesport (1),(4)    Mexico    Apodaca (1)
North Carolina    Charlotte (1),(4)       Durango
Oregon    Portland (1),(4)       Juarez (3)
Oklahoma    Norman (3)       Monterrey (1),(3)
Pennsylvania    Audubon (1),(4)       Reynosa (3)
   York (1)    Netherlands    Dordrecht (3)
   Waynesboro (3)       Gorinchem (1),(3)
Texas    Houston (1),(4)    Poland    Warsaw (1),(3)
   Irving (4)    Russia    Moscow (1),(3)
   San Antonio    South Africa    Johannesburg (1),(4)
Washington    Fife (1),(4)    Spain    Sabadell (1),(3)
Wisconsin    Milwaukee (2),(4)    Turkey    Manisa (1)
   Waukesha (1),(4)    United Arab Emirates    Dubai (2),(3)

 

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Automotive Experience

Alabama    Calera (1)    Argentina    Buenos Aires (1)
   Clanton       Cordoba (1)
   Cottondale       Rosario
   Eastaboga    Australia    Adelaide (1)
   McCalla (1)    Austria    Graz (1)
Georgia    LaGrange (1)       Mandling
   West Point (1)    Belgium    Assenede (1)
Illinois    Chicago (1)       Geel (1),(4)
   Sycamore    Brazil    Gravatai
Indiana    Kendallville       Pouso Alegre
Kentucky    Cadiz       Quatro Barras (2)
   Georgetown (2)       San Bernardo do Campo
   Louisville (1)       Santo Andre (1)
   Owensboro (1)       Sao Jose dos Campos
   Shelbyville (1)       Sao Jose dos Pinhais (1)
   Winchester (1)    Bulgaria    Sofia (1),(4)
Louisiana    Shreveport    Canada    Milton
Michigan    Auburn Hills (1)       Mississauga (1)
   Battle Creek       Tillsonburg
   Cascade (1)       Whitby (2)
   Croswell (1)    China    Beijing (3)
   Detroit       Kunshan (1),(3)
   Highland Park (1)       Shanghai (1),(3)
   Holland (2),(3)       Shenyang (1),(3)
   Kentwood (1)    Czech Republic    Benatky (1)
   Lansing (2)       Ceska Lipa (4)
   Monroe (1)       Mlada Boleslav (1)
   Port Huron (1)       Roudnice
   Plymouth (2),(4)       Rychnov (1)
   Romulus (1)       Strakonice
   Taylor (1)       Straz pod Ralskem
   Troy (1)    France    Cergy (1),(4)
   Warren (1)       Conflans-sur-Lanterne
Missouri    Eldon (2)       Creutzwald
   Kansas City (1)       Fesches-le-Chatel (1)
   Riverside (1)       La Ferte Bernard
Ohio    Bryan       Rosny
   Greenfield       Strasbourg
   Northwood      
   Wauseon      
Tennessee    Columbia (1)      
   Franklin      
   Murfreesboro (2)      
   Pulaski (1)      
Texas    El Paso (1)      
   San Antonio (1)      

 

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Automotive Experience (continued)

 

 

Germany    Boblingen (1)    Poland    Bierun
   Bochum (2)       Siemianowice
   Bremen (1)       Skarbimierz (1)
   Burscheid (2),(4)       Swiebodzin
   Dautphe (2)       Zory
   Espelkamp    Portugal    Palmela
   Grefrath    Republic of Slovenia    Novo Mesto (1)
   Hannover (1)       Slovenj Gradec (3)
   Hilchenbach (2)    Romania    Bradu
   Holzgerlingen (1)       Craiova (1)
   Kaiserslautern       Jimbolia (1)
   Karlsruhe (1),(4)       Mioveni (1)
   Luneburg       Pitesti (1)
   Mannweiler (1)       Ploesti
   Markgroningen (1)       Timisoara (1)
   Neustadt    Russia    St. Petersburg (1)
   Rastatt (1)       Togliatti (1)
   Remscheid (1)    Slovak Republic    Bratislava (1),(4)
   Rockenhausen       Kostany nad Turcom (2)
   Saarlouis (1)       Lozorno (1)
   Solingen       Lucenec (2)
   Uberherrn       Namestovo (1)
   Waghausel (3)       Trencin (1)
   Zwickau       Zilina (2)
Italy    Grugliasco (1)    South Africa    Chloorkop (1)
   Melfi       East London (1)
   Ogliastro Cilento       Korsten
   Rocca D’Evandro       Pretoria
Japan    Ayase (1)       Swartkops (1)
   Hamamatsu       Uitenhage (1)
   Higashiomi       Wynberg (1)
   Shibahara (3)    Spain    Abrera
   Yokohama (1),(4)       Alagon
   Yokosuka (2)       Almussafes (2)
Korea    Ansan (1),(4)       Calatorao (1)
   Asan       Pedrola
Macedonia    Skopje       Redondela (1)
Malaysia    Melaka (1)       Valladolid
   Pekan (1)    Sweden    Goteburg (1)
   Perak Darul Redzuan (1)    Thailand    Chonburi (1)
   Selangor Darul Ehsan       Rayong
Mexico    Coahuila (1)    Tunesia    Bi’r al Bay (1)
   Ecapetec Edo (1)    Turkey    Bursa (2)
   Juarez (2)       Kocaeli
   Lerma (1)    United Kingdom    Birmingham
   Matamaros (1)       Burton-Upon-Trent
   Monclova       Ellesmere (1)
   Puebla (2)       Garston (1)
   Ramos Arizpe       Sunderland
   Reynosa (1)       Telford (1)
   Saltillo (2)       Wednesbury
   Tlaxcala      
   Toluca (1)      

 

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Power Solutions

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

 

Corporate

Wisconsin    Milwaukee (4)      

 

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

In addition to the above listing, which identifies large properties (greater than 25,000 square feet), there are approximately 570 Building Efficiency branch offices and other administrative offices located in major cities throughout the world. These offices are primarily leased facilities and vary in size in proportion to the volume of business in the particular locality.

 

  ITEM 3 LEGAL PROCEEDINGS

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

Currently, the Company is responding to allegations that it is responsible for performing environmental remediation, or for the repayment of costs spent by governmental entities or others performing remediation, at approximately 38 sites in the United States. Many of these sites are landfills used by the Company in the past for the disposal of waste materials; others are secondary lead smelters and lead recycling sites where the Company returned lead-containing materials for recycling; a few involve the cleanup of Company manufacturing facilities; and the remaining fall into miscellaneous categories. The Company may face similar claims of liability at additional sites in the future. Where potential liabilities are alleged, the Company pursues a course of action intended to mitigate them.

 

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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 and $30 million at September 30, 2012 and 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 September 30, 2012 and 2011, the Company recorded conditional asset retirement obligations of $76 million and $91 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 will have a material adverse effect on the Company’s financial position, results of operations or cash flows. Costs related to such matters were not material to the periods presented.

 

  ITEM 4 MINE SAFETY DISCLOSURES

Not applicable.

EXECUTIVE OFFICERS OF THE REGISTRANT

Pursuant to General Instruction G(3) of Form 10-K, the following list of executive officers of the Company as of November 14, 2012 is included as an unnumbered Item in Part I of this report in lieu of being included in the Company’s Proxy Statement relating to the Annual Meeting of Shareholders to be held on January 23, 2013.

Beda Bolzenius, 56, was elected a Corporate Vice President in November 2005 and has served as President - Automotive Seating since October 2012. He previously served as President of the Automotive Experience business from November 2005 to October 2012 and as Executive Vice President and General Manager Europe, Africa and South America for Automotive Experience from November 2004 to November 2005. Dr. Bolzenius joined the Company in November 2004 from Robert Bosch GmbH, a global manufacturer of automotive and industrial technology, consumer goods and building technology, where he most recently served as the president of Bosch’s Body Electronics division.

Colin Boyd, 53, was elected Vice President, Information Technology and Chief Information Officer in October 2008. Mr. Boyd previously served as Chief Information Officer and Corporate Vice President of Sony Ericsson from 2002 to 2008.

Susan F. Davis, 59, was elected Executive Vice President of Human Resources in September 2006. She previously served as Vice President of Human Resources from May 1994 to September 2006 and as Vice President of Organizational Development for the Automotive Experience business from August 1993 to April 1994. Ms. Davis joined the Company in 1983.

Charles A. Harvey, 60, was elected Corporate Vice President of Diversity and Public Affairs in November 2005. He previously served as Vice President of Human Resources for the Automotive Experience business and in other human resources leadership positions. Mr. Harvey joined the Company in 1991.

William C. Jackson, 52, was elected Executive Vice President - Operations and Innovation, in July 2011 and has served as President - Automotive Electronics & Interiors since October 2012. Prior to joining Johnson Controls, Mr. Jackson was Vice President and President of Automotive at Sears Holdings Corporation from 2009 to 2010. Prior to that, he served as Senior Vice President and board member of Booz, Allen & Hamilton and

 

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Booz & Company, a strategy and consulting firm, where he led the firm’s Global Automotive, Transportation and Industrials Practice.

R. Bruce McDonald, 52, was elected Executive Vice President in September 2006 and Chief Financial Officer in May 2005. He previously served as Corporate Vice President from January 2002 to September 2006, Assistant Chief Financial Officer from October 2004 to May 2005 and Corporate Controller from November 2001 to October 2004. Mr. McDonald joined the Company in 2001.

Alex A. Molinaroli, 53, was elected a Corporate Vice President in May 2004 and has served as President of the Power Solutions business since January 2007. Previously, Mr. Molinaroli served as Vice President and General Manager for North America Systems & the Middle East for the Building Efficiency business and has held increasing levels of responsibility for controls systems and services sales and operations. Mr. Molinaroli joined the Company in 1983.

C. David Myers, 49, was elected a Corporate Vice President and President of the Building Efficiency business in December 2005, when he joined the Company in connection with the acquisition of York International Corporation (York). At York, Mr. Myers served as Chief Executive Officer from February 2004 to December 2005, President from June 2003 to December 2005, Executive Vice President and Chief Financial Officer from January 2003 to June 2003 and Vice President and Chief Financial Officer from February 2000 to January 2003.

Jerome D. Okarma, 60, was elected Vice President, Secretary and General Counsel in November 2004 and was named a Corporate Vice President in September 2003. He previously served as Assistant Secretary from 1990 to November 2004 and as Deputy General Counsel from June 2000 to November 2004. Mr. Okarma joined the Company in 1989.

Stephen A. Roell, 62, was elected Chief Executive Officer effective in October 2007, Chairman effective in January 2008, and President effective in May 2009. He was first elected to the Board of Directors in October 2004 and served as Executive Vice President from October 2004 through September 2007. Mr. Roell previously served as Chief Financial Officer between 1991 and May 2005, Senior Vice President from September 1998 to October 2004 and Vice President from 1991 to September 1998. Mr. Roell joined the Company in 1982.

Brian J. Stief, 56, was elected Vice President and Corporate Controller in July 2010 and serves as the Company’s Principal Accounting Officer. Prior to joining the Company, Mr. Stief was a partner with PricewaterhouseCoopers LLP, which he joined in 1979 and in which he became partner in 1989. He served several of the firm’s largest clients and also held various office managing partner roles.

Jacqueline F. Strayer, 58, was elected Vice President, Corporate Communication in September 2008. She previously served as Vice President, Corporate Communications, for Arrow Electronics, Inc. from 2004 to 2008. Prior to that, she held communication leadership positions at United Technologies Corporation and GE Capital Corporation.

Frank A. Voltolina, 52, was elected a Corporate Vice President and Corporate Treasurer in July 2003 when he joined the Company. Prior to joining the Company, Mr. Voltolina was Vice President and Treasurer at ArvinMeritor, Inc.

There are no family relationships, as defined by the instructions to this item, among the Company’s executive officers.

All officers are elected for terms that expire on the date of the meeting of the Board of Directors following the Annual Meeting of Shareholders or until their successors are duly-elected and qualified.

 

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PART II

 

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

The shares of the Company’s common stock are traded on the New York Stock Exchange under the symbol “JCI.”

 

Title of Class

   Number of Record Holders

as of September 30, 2012

 

Common Stock, $0.01 7/18 par value

     40,019   

 

     Common Stock Price Range    Dividends  
     2012    2011    2012      2011  

First Quarter

   $24.29 - 33.90    $29.95 - 40.15    $ 0.18      $ 0.16  

Second Quarter

   30.81 - 35.95    36.95 - 42.42      0.18        0.16  

Third Quarter

   26.15 - 33.26    35.37 - 42.53      0.18        0.16  

Fourth Quarter

   23.37 - 29.59    25.91 - 42.92      0.18        0.16  
  

 

  

 

  

 

 

    

 

 

 

Year

   $23.37 - 35.95    $25.91 - 42.92    $ 0.72      $ 0.64  
  

 

  

 

  

 

 

    

 

 

 

In September 2006, the Company’s Board of Directors authorized a stock repurchase program to acquire up to $200 million of the Company’s outstanding common stock. Stock repurchases under this program may be made through open market, privately negotiated transactions or otherwise at times and in such amounts as Company management deems appropriate. The stock repurchase program was substantially completed in the fourth quarter of fiscal 2012.

In November 2012, the Company’s Board of Directors authorized a stock repurchase program to acquire up to $500 million of the Company’s outstanding common stock, which supersedes any prior programs. Stock repurchases under this program may be made through open market, privately negotiated transactions or otherwise at times and in such amounts as Company management deems appropriate. The stock repurchase program does not have an expiration date and may be amended or terminated by the Board of Directors at any time without prior notice.

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

In connection with the Equity Swap Agreement, Citibank may purchase unlimited shares of the Company’s stock in the market or in privately negotiated transactions. The Company disclaims that Citibank is an “affiliated purchaser” of the Company as such term is defined in Rule 10b-18(a)(3) under the Securities Exchange Act or that Citibank is purchasing any shares for the Company. The Equity Swap Agreement has no stated expiration date. The net effect of the change in fair value of the Equity Swap Agreement and the change in equity compensation liabilities was not material to the Company’s earnings for the three months ended September 30, 2012.

 

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The following table presents information regarding the repurchase of the Company’s common stock by the Company as part of the publicly announced program and purchases of the Company’s common stock by Citibank in connection with the Equity Swap Agreement during the three months ended September 30, 2012.

 

Period

   Total
Number of
Shares
Purchased
     Average
Price
Paid per
Share
     Total
Number of
Shares
Purchased as
Part of the
Publicly
Announced
Program
     Approximate
Dollar Value
of Shares that
May Yet be
Purchased
under the
Programs
 

7/1/12 - 7/31/12

           

Purchases by Company (1)

     250,000      $ 24.09        250,000      $ 54,242,754   

8/1/12 - 8/31/12

           

Purchases by Company (1)

     1,656,629      $ 25.86        1,656,629      $ 11,398,755   

9/1/12 - 9/30/12

           

Purchases by Company (1)

     418,686      $ 27.17        418,686      $ 21,366   
  

 

 

    

 

 

    

 

 

    

 

 

 

7/1/12 - 7/31/12

           

Purchases by Citibank

     250,000      $ 24.04        —           NA   

8/1/12 - 8/31/12

           

Purchases by Citibank

     —           —           —           NA   

9/1/12 - 9/30/12

           

Purchases by Citibank

     —           —           —           NA   

 

(1) Repurchases of the Company’s common stock by the Company pursuant to its publicly announced program may be intended to partially offset dilution related to the Company’s stock option and restricted stock equity compensation plans.

 

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

The line graph below compares the cumulative total shareholder return on our Common Stock with the cumulative total return of companies on the Standard & Poor’s (S&P’s) 500 Stock Index and companies in our Diversified Industrials Peer Group.* This graph assumes the investment of $100 on September 30, 2007 and the reinvestment of all dividends since that date.

 

LOGO

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

Wells Fargo Bank, N.A.

Shareowner Services Department

P.O. Box 64874

St. Paul, MN 55164-0874

(877) 602-7397

 

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  ITEM 6 SELECTED FINANCIAL DATA

The following selected financial data reflects the results of operations, financial position data and common share information for the fiscal years ended September 30, 2008 through September 30, 2012 (in millions, except per share data and number of employees and shareholders). Certain amounts have been revised to reflect the retrospective application of the Company’s accounting policy change for recognizing pension and postretirement benefit expense. Refer to Note 1, “Summary of Significant Accounting Policies,” of the notes to consolidated financial statements for further details surrounding this accounting policy change.

 

     Year ended September 30,  
     2012     2011     2010     2009     2008  

OPERATING RESULTS

          

Net sales

   $ 41,955     $ 40,833     $ 34,305     $ 28,497     $ 38,062  

Segment income (1)

     2,567       2,347       1,948       244       2,094  

Net income (loss) attributable to Johnson Controls, Inc. (6)

     1,226       1,415       1,307       (681     801  

Earnings (loss) per share (6)

          

Basic

   $ 1.80     $ 2.09     $ 1.94     $ (1.14   $ 1.35  

Diluted

     1.78       2.06       1.92       (1.14     1.33  

Return on average shareholders’ equity attributable to Johnson Controls, Inc. (2) (6)

     11     13     14     -7     9

Capital expenditures

   $ 1,831     $ 1,325     $ 777     $ 647     $ 807  

Depreciation and amortization

     824       731       691       745       783  

Number of employees

     170,000       162,000       137,000       130,000       140,000  

FINANCIAL POSITION

          

Working capital (3)

   $ 2,300     $ 1,589     $ 919     $ 1,147     $ 1,225  

Total assets

     30,884       29,676       25,743       24,088       24,987  

Long-term debt

     5,321       4,533       2,652       3,168       3,201  

Total debt

     6,068       5,146       3,389       3,966       3,944  

Shareholders’ equity attributable to Johnson Controls, Inc.

     11,555       11,042       10,071       9,100       9,406  

Total debt to total capitalization (4)

     34     32     25     30     30

Net book value per share (5)

   $ 16.94     $ 16.23     $ 14.95     $ 13.56     $ 15.83  

COMMON SHARE INFORMATION

          

Dividends per share

   $ 0.72     $ 0.64     $ 0.52     $ 0.52     $ 0.52  

Market prices

          

High

   $ 35.95     $ 42.92     $ 35.77     $ 30.01     $ 44.46  

Low

     23.37       25.91       23.62       8.35       26.00  

Weighted average shares (in millions)

          

Basic

     681.5       677.7       672.0       595.3       593.1  

Diluted

     688.6       689.9       682.5       595.3       601.4  

Number of shareholders

     40,019       43,340       44,627       46,460       47,543  

 

(1) Segment income is calculated as income from continuing operations before income taxes and noncontrolling interests excluding net financing charges, debt conversion costs, significant restructuring costs and net mark-to-market adjustments on pension and postretirement plans.
(2) Return on average shareholders’ equity attributable to Johnson Controls, Inc. (ROE) represents net income attributable to Johnson Controls, Inc. divided by average shareholders’ equity attributable to Johnson Controls, Inc.

 

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(3) Working capital is defined as current assets less current liabilities, excluding cash, short-term debt and the current portion of long-term debt.
(4) Total debt to total capitalization represents total debt divided by the sum of total debt and shareholders’ equity attributable to Johnson Controls, Inc.
(5) Net book value per share represents shareholders’ equity attributable to Johnson Controls, Inc. divided by the number of common shares outstanding at the end of the period.
(6) Net income attributable to Johnson Controls, Inc. includes $297 million, $230 million and $495 million of significant restructuring costs in fiscal year 2012, 2009 and 2008, respectively. It also includes $447 million, $384 million, $269 million, $532 million and $301 million of net mark-to-market charges on pension and postretirement plans in fiscal year 2012, 2011, 2010, 2009 and 2008, respectively. The preceding amounts are stated on a pre-tax basis.

 

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

General

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

This discussion summarizes the significant factors affecting the consolidated operating results, financial condition and liquidity of the Company for the three-year period ended September 30, 2012. This discussion should be read in conjunction with Item 8, the consolidated financial statements and the notes to consolidated financial statements.

Certain amounts have been revised to reflect the retrospective application of the Company’s accounting policy change for recognizing pension and postretirement benefit expense. Refer to Note 1, “Summary of Significant Accounting Policies,” of the notes to consolidated financial statements for further details surrounding this accounting policy change.

Outlook

On October 30, 2012, the Company gave a preliminary outlook of its market and financial expectations for fiscal 2013, saying it believes softening end markets will limit its ability to grow revenues and earnings in the upcoming year. In addition, the Company anticipates a higher effective tax rate of 20% in fiscal 2013 due to an increased percentage of total earnings in the United States. The Company expects fiscal 2013 first-half earnings to be significantly lower than the same period of fiscal 2012 with higher year over year earnings in the second half of the year. The Company also expects to incur additional restructuring-related costs in the first half of fiscal 2013 (approximately $0.08 - $0.10 impact on earnings per share) and believes the financial benefits of the restructuring announced in the fiscal 2012 fourth quarter will begin to accrue in the second half of fiscal 2013. The Company plans to be diligent in controlling costs, but will remain committed to making investments that support its long-term growth and profitability strategies. The Company expects full year fiscal 2013 earnings to be flat to slightly higher than fiscal 2012.

Effective October 1, 2013, the Company reorganized its Automotive Experience reportable segments to align with its new management reporting structure and business activities. As a result of this change, Automotive Experience will be comprised of three new reportable segments for financial reporting purposes: Seating, Electronics and Interiors. This change will be reflected in the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2012, with comparable periods revised to conform to the new presentation.

 

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FISCAL YEAR 2012 COMPARED TO FISCAL YEAR 2011

Net Sales

 

     Year Ended         
     September 30,         
(in millions)    2012      2011      Change  

Net sales

   $ 41,955      $ 40,833        3

The increase in consolidated net sales was due to higher sales in the Automotive Experience business ($2.0 billion), Power Solutions business ($224 million) and Building Efficiency business ($95 million), partially offset by the unfavorable impact of foreign currency translation ($1.2 billion). Excluding the unfavorable impact of foreign currency translation, consolidated net sales increased 6% as compared to the prior year. The favorable impacts of increased automotive industry production in North America, strong automotive and buildings demand in China, and incremental sales from acquisitions were partially offset by the negative impacts of lower automotive industry production in Europe, weak Building Efficiency markets and mild weather conditions on automotive battery aftermarket demand. Refer to the segment analysis below within Item 7 for a discussion of net sales by segment.

Cost of Sales / Gross Profit

 

     Year Ended        
     September 30,        
(in millions)    2012     2011     Change  

Cost of sales

   $ 35,737     $ 34,775       3

Gross profit

     6,218       6,058       3

% of sales

     14.8     14.8  

The increase in total cost of sales year over year corresponds to the sales growth noted above, with gross profit percentage remaining consistent. Gross profit in the Automotive Experience business was favorably impacted by lower purchasing costs offset by higher operating costs associated with performance at metals facilities and net unfavorable commercial settlements and pricing. The Power Solutions business experienced favorable pricing and product mix offset by higher operating, battery core and transportation costs. Gross profit in the Building Efficiency business benefited year over year from improved labor utilization and pricing initiatives, offset by overall unfavorable gross margin rates. Foreign currency translation had a favorable impact on cost of sales of approximately $1.1 billion. Net mark-to-market adjustments on pension and postretirement plans had a net favorable year over year impact on cost of sales of $87 million ($33 million charge in fiscal 2012 compared to $120 million charge in fiscal 2011) primarily due to assumption changes for certain non-U.S. plans partially offset by a decline in year over year discount rates. Refer to the segment analysis below within Item 7 for a discussion of segment income by segment.

Selling, General and Administrative Expenses

 

     Year Ended        
     September 30,        
(in millions)    2012     2011     Change  

Selling, general and administrative expenses

   $ 4,438     $ 4,393       1

% of sales

     10.6     10.8  

Selling, general and administrative expenses (SG&A) increased slightly year over year, but decreased slightly as a percentage of sales. Automotive Experience business SG&A increased primarily due to the incremental SG&A of acquired businesses, partially offset by non-recurring prior year costs related to business acquisitions. Power Solutions business SG&A increased primarily due to higher employee-related costs and incremental SG&A of acquired businesses. Building Efficiency business SG&A decreased primarily due to cost reduction initiatives, prior year restructuring costs and gains on business divestitures. The unfavorable impact of net mark-to-market

 

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adjustments on pension and postretirement plans in SG&A increased year over year by $150 million ($414 million charge in fiscal 2012 compared to $264 million charge in fiscal 2011) primarily due to a significant decline in year over year discount rates. Foreign currency translation had a favorable impact on SG&A of $101 million. Refer to the segment analysis below within Item 7 for a discussion of segment income by segment.

Significant Restructuring Costs

 

     Year Ended         
     September 30,         
(in millions)    2012      2011      Change  

Restructuring costs

   $ 297      $ —           *   

 

* Measure not meaningful

To better align its resources with its growth strategies and reduce the cost structure of its global operations to address the softness in certain underlying markets, the Company committed to a significant restructuring plan (2012 Plan) in the third and fourth quarters of fiscal 2012 and recorded a $297 million restructuring charge, $52 million in the third quarter and $245 million in the fourth quarter of fiscal 2012. The restructuring charge related to cost reduction initiatives in the Company’s Automotive Experience, Building Efficiency and Power Solutions businesses and included workforce reductions and plant closures. The restructuring actions are expected to be substantially complete by the end of fiscal 2014.

Refer to Note 15, “Significant Restructuring Costs,” of the notes to consolidated financial statements for further disclosure related to the Company’s restructuring plans.

Net Financing Charges

 

     Year Ended         
     September 30,         
(in millions)    2012      2011      Change  

Net financing charges

   $ 233      $ 174        34

The increase in net financing charges was primarily due to higher debt levels in fiscal 2012 as compared to the prior year.

Equity Income

 

     Year Ended         
     September 30,         
(in millions)    2012      2011      Change  

Equity income

   $ 340      $ 298        14

The increase in equity income was primarily due to a gain on redemption of a warrant for an existing partially-owned affiliate and a gain on a current year acquisition of a partially-owned affiliate in the Power Solutions business, partially offset by a gain on a prior year acquisition of a partially-owned affiliate net of acquisition costs and related purchase accounting adjustments and a partially-owned equity affiliate’s restatement of prior period income in the Power Solutions business. The remaining increase in equity income was primarily due to higher earnings at certain Building Efficiency partially-owned affiliates. Refer to the segment analysis below within Item 7 for a discussion of segment income by segment.

 

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Provision for Income Taxes

 

     Year Ended         
     September 30,         
(in millions)    2012      2011      Change  

Provision for income taxes

   $ 237      $ 257        -8

The effective rate is below the U.S. statutory rate primarily due to continuing global tax planning initiatives and income in certain non-U.S. jurisdictions with a rate of tax lower than the U.S. statutory tax rate. Refer to Note 17, “Income Taxes,” of the notes to consolidated financial statements for further details.

Valuation Allowances

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

In fiscal 2012, the Company recorded an overall increase to its valuation allowances of $47 million primarily due to a discrete period income tax adjustment in the fourth quarter. In the fourth quarter of fiscal 2012, the Company performed an analysis related to the realizability of its worldwide deferred tax assets. As a result, and after considering tax planning initiatives and other positive and negative evidence, the Company determined that it was more likely than not that deferred tax assets within Power Solutions in China would not be utilized. Therefore, the Company recorded a $35 million valuation allowance in the three month period ended September 30, 2012.

In fiscal 2011, the Company recorded a decrease to its valuation allowances primarily due to a $30 million discrete period income tax adjustment in the fourth quarter. In the fourth quarter of fiscal 2011, the Company performed an analysis related to the realizability of its worldwide deferred tax assets. As a result, and after considering tax planning initiatives and other positive and negative evidence, the Company determined that it was more likely than not that the deferred tax assets primarily within Denmark, Italy, Automotive Experience in Korea and Automotive Experience in the United Kingdom would be utilized. Therefore, the Company released a net $30 million of valuation allowances in the three month period ended September 30, 2011.

Given the current economic uncertainty, 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 $400 million.

Uncertain Tax Positions

The Company is subject to income taxes in the U.S. and numerous foreign jurisdictions. Judgment is required in determining its worldwide provision for income taxes and recording the related assets and liabilities. In the ordinary course of the Company’s business, there are many transactions and calculations where the ultimate tax determination is uncertain. The Company is regularly under audit by tax authorities.

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.

The Company’s federal income tax returns and certain non-U.S. income tax returns for various fiscal years remain under various stages of audit by the Internal Revenue Service and respective non-U.S. tax authorities. Although the outcome of tax audits is always uncertain, management believes that it has appropriate support for the positions taken on its tax returns and that its annual tax provisions included amounts sufficient to pay assessments, if any, which may be proposed by the taxing authorities. At September 30, 2012, the Company had recorded a liability for its best estimate of the probable loss on certain of its tax positions, the majority of which is included in other noncurrent liabilities in the consolidated statements of financial position. Nonetheless, the amounts ultimately paid,

 

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if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year.

The Company expects 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 $200 million benefit to tax expense.

Impacts of Tax Legislation and Change in Statutory Tax Rates

The look-through rule, under subpart F of the U.S. Internal Revenue Code, expired for the Company on September 30, 2012. The look-through rule had provided an exception to the U.S. taxation of certain income generated by foreign subsidiaries. It is generally thought that this rule will be extended with the possibility of retroactive application.

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

Income Attributable to Noncontrolling Interests

 

     Year Ended         
     September 30,         
(in millions)    2012      2011      Change  

Income attributable to noncontrolling interests

   $ 127      $ 117        9

The increase in income attributable to noncontrolling interests was primarily due to higher earnings at certain Power Solutions and Building Efficiency partially-owned affiliates, partially offset by the effects of an increase in the Company’s ownership percentage in an Automotive Experience partially-owned affiliate.

Net Income Attributable to Johnson Controls, Inc.

 

     Year Ended         
     September 30,         
(in millions)    2012      2011      Change  

Net income attributable to Johnson Controls, Inc.

   $ 1,226      $ 1,415        -13

The decrease in net income attributable to Johnson Controls, Inc. was primarily due to higher selling, general and administrative expenses, restructuring costs, net financing charges and income attributable to noncontrolling interests, and the unfavorable impact of foreign currency translation, partially offset by higher sales and equity income, and a decrease in the provision for income taxes. Fiscal 2012 diluted earnings per share was $1.78 compared to prior year’s diluted earnings per share of $2.06.

Segment Analysis

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

 

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Building Efficiency

 

     Net Sales            Segment Income         
     for the Year Ended            for the Year Ended         
     September 30,            September 30,         
(in millions)    2012      2011      Change     2012      2011      Change  

North America Systems

   $ 2,389      $ 2,343        2   $ 286      $ 247        16

North America Service

     2,145        2,305        -7     164        121        36

Global Workplace Solutions

     4,294        4,153        3     52        22        *   

Asia

     1,987        1,840        8     267        251        6

Other

     3,900        4,252        -8     141        105        34
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
   $ 14,715      $ 14,893        -1   $ 910      $ 746        22
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

* Measure not meaningful

Net Sales:

 

   

The increase in North America Systems was primarily due to higher volumes of equipment and controls systems in the commercial construction and replacement markets ($50 million), partially offset by the unfavorable impact of foreign currency translation ($4 million).

 

   

The decrease in North America Service was primarily due to a reduction in truck-based volumes ($130 million) and energy solutions volumes ($50 million), and the unfavorable impact of foreign currency translation ($4 million), partially offset by the incremental sales from a prior year business acquisition ($24 million).

 

   

The increase in Global Workplace Solutions was primarily due to a net increase in services to new and existing customers ($264 million), partially offset by the unfavorable impact of foreign currency translation ($123 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 ($84 million), higher volumes of equipment and controls systems ($39 million), and the favorable impact of foreign currency translation ($24 million).

 

   

The decrease in Other was primarily due to the unfavorable impact of foreign currency translation ($166 million), lower volumes in Latin America ($93 million), the Middle East ($41 million) and Europe ($32 million), and lower volumes due to current year divestitures ($55 million), partially offset by higher volumes in other business areas ($33 million) and unitary products ($2 million).

Segment Income:

 

   

The increase in North America Systems was primarily due to lower selling, general and administrative expenses ($24 million) and higher volumes ($15 million).

 

   

The increase in North America Service was primarily due to lower selling, general and administrative expenses ($40 million) and favorable margin rates ($38 million), partially offset by lower volumes ($31 million), loss on a business divestiture ($3 million) and lower equity income ($1 million).

 

   

The increase in Global Workplace Solutions was primarily due to higher volumes ($15 million), lower selling, general and administrative expenses ($14 million) and favorable margin rates ($4 million), partially offset by unfavorable impact of foreign currency translation ($3 million).

 

   

The increase in Asia was primarily due to higher volumes ($30 million) and the favorable impact of foreign currency translation ($6 million), partially offset by higher selling, general and administrative expenses ($18 million) and unfavorable margin rates ($2 million).

 

   

The increase in Other was primarily due to gains on business divestitures net of transaction costs ($42 million), prior year restructuring costs ($35 million), prior year non-recurring charges related to South America indirect taxes ($24 million), lower selling, general and administrative expenses ($14 million), prior year business distribution costs ($11 million) and higher equity income ($6 million), partially offset by unfavorable margin rates ($51 million), lower volumes ($20 million), net prior year warranty accrual adjustment due to favorable experience ($14 million), lower income due to current year divestitures ($10 million) and the unfavorable impact of foreign currency translation ($1 million).

 

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Automotive Experience

 

     Net Sales            Segment Income (Loss)         
     for the Year Ended            for the Year Ended         
     September 30,            September 30,         
(in millions)    2012      2011      Change     2012     2011      Change  

North America

   $ 8,721      $ 7,431        17   $ 487     $ 419        16

Europe

     9,973        10,267        -3     (52     116        *   

Asia

     2,640        2,367        12     368       245        50
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 
   $ 21,334      $ 20,065        6   $ 803     $ 780        3
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

* Measure not meaningful

Net Sales:

 

   

The increase in North America was primarily due to higher volumes to major OEM customers ($967 million), the prior year negative impact of the Japan earthquake and related events ($263 million), and incremental sales due to prior year business acquisitions ($129 million), partially offset by net unfavorable pricing and commercial settlements ($69 million).

 

   

The decrease in Europe was primarily due to the unfavorable impact of foreign currency translation ($773 million), net unfavorable pricing and commercial settlements ($84 million), and lower volumes despite the prior year negative impact of the Japan earthquake and related events ($32 million), partially offset by incremental sales due to business acquisitions ($595 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 ($182 million), incremental sales due to prior year acquisitions ($144 million) and the favorable impact of foreign currency translation ($9 million), partially offset by net unfavorable pricing and commercial settlements ($37 million) and the negative impact of the flooding in Thailand and related events ($25 million).

Segment Income:

 

   

The increase in North America was primarily due to higher volumes ($199 million), the prior year negative impact of the earthquake in Japan and related events ($61 million), lower purchasing costs ($49 million), higher equity income ($4 million), lower engineering expenses ($3 million) and incremental operating income of prior year acquisitions ($3 million), partially offset by higher operating costs ($126 million), net unfavorable commercial settlements and pricing ($91 million), and higher selling, general and administrative expenses ($34 million).

 

   

The decrease in Europe was primarily due to higher operating costs ($131 million), net unfavorable commercial settlements and pricing ($88 million), lower volumes despite the prior year negative impact of the earthquake in Japan and related events ($65 million), and higher selling, general and administrative expenses ($40 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 ($23 million) and the favorable impact of foreign currency translation ($1 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 ($64 million), lower purchasing costs ($41 million), lower selling, general and administrative expenses ($28 million), incremental operating income of prior year acquisitions ($19 million), lower operating costs ($14 million) and the favorable impact of foreign currency translation ($2 million), partially offset by net unfavorable commercial settlements and pricing ($34 million), the negative impact of the flooding in Thailand and related events ($5 million), higher engineering expenses ($3 million) and lower equity income ($3 million).

 

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Power Solutions

 

     Year Ended         
     September 30,         
(in millions)    2012      2011      Change  

Net sales

   $ 5,906      $ 5,875        1

Segment income

     854        821        4

 

   

Net sales increased primarily due to favorable pricing and product mix ($156 million), higher volumes including the prior year negative impact of the earthquake in Japan and related events ($144 million), and incremental sales due to business acquisitions ($38 million), partially offset by the unfavorable impact of foreign currency translation ($193 million) and impact of pass through pricing ($114 million).

 

   

Segment income increased primarily due to favorable pricing and product mix including lead net of higher costs for battery cores ($117 million); a gain on redemption of a warrant for an existing partially-owned affiliate ($25 million); higher volumes including the prior year negative impact of the earthquake in Japan and related events ($24 million); change in asset retirement obligations ($14 million); an insurance settlement ($12 million); a gain on a current year acquisition of a partially-owned affiliate ($9 million) and higher equity income ($4 million); partially offset by higher operating and transportation costs ($46 million); higher selling, general and administrative expenses ($43 million); a gain on a prior year acquisition of a partially-owned affiliate net of acquisition costs and related purchase accounting adjustments and a partially-owned affiliate’s restatement of prior period income ($37 million); the unfavorable impact of foreign currency translation ($21 million); an impairment of an equity investment ($14 million) and the unfavorable impact of business acquisitions ($11 million).

FISCAL YEAR 2011 COMPARED TO FISCAL YEAR 2010

Net Sales

 

     Year Ended         
     September 30,         
(in millions)    2011      2010      Change  

Net sales

   $ 40,833      $ 34,305        19

The increase in consolidated net sales was primarily due to higher sales in the Automotive Experience business ($3.1 billion) as a result of increased industry production levels in all segments and incremental sales due to business acquisitions; higher sales in the Building Efficiency business ($1.7 billion) as a result of higher sales in all segments; higher sales in the Power Solutions business ($0.9 billion) reflecting higher sales volumes, the impact of higher lead costs on pricing and sales associated with a prior year business acquisition; and the favorable impact of foreign currency translation ($0.8 billion). Excluding the favorable impact of foreign currency translation, consolidated net sales increased 17% as compared to the prior year. Refer to the segment analysis below within Item 7 for a discussion of net sales by segment.

Cost of Sales / Gross Profit

 

     Year Ended        
     September 30,        
(in millions)    2011     2010     Change  

Cost of sales

   $ 34,775     $ 29,084       20

Gross profit

     6,058       5,221       16

% of sales

     14.8     15.2  

The increase in total cost of sales year over year corresponds to the sales growth noted above, with gross profit percentage decreasing slightly. Gross profit in the Automotive Experience business was unfavorably impacted by the earthquake in Japan and related events, higher operating costs in Europe and unfavorable commercial

 

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settlements and pricing in Europe, partially offset by the income of acquisitions. Gross profit in the Building Efficiency business reflected overall unfavorable gross margin rates partially offset by prior year inventory adjustments. The Power Solutions business experienced favorable pricing and product mix, and income associated with a prior year business acquisition, partially offset by higher operating and transportation costs. Foreign currency translation had an unfavorable impact on cost of sales of approximately $0.7 billion. The unfavorable impact of net mark-to-market adjustments on pension and postretirement plans in cost of sales increased year over year by $52 million ($120 million charge in fiscal 2011 compared to $68 million charge in fiscal 2010) primarily due to a decline in year over year discount rates. Refer to the segment analysis below within Item 7 for a discussion of segment income by segment.

Selling, General and Administrative Expenses

 

     Year Ended        
     September 30,        
(in millions)    2011     2010     Change  

Selling, general and administrative expenses

   $ 4,393     $ 3,796       16

% of sales

     10.8     11.1  

Selling, general and administrative expenses (SG&A) increased year over year, but decreased as a percentage of sales. Automotive Experience business SG&A increased primarily due to costs related to business acquisitions, incremental SG&A of acquired businesses and higher engineering expenses. Building Efficiency business SG&A increased primarily due to higher employee-related costs, restructuring costs and information technology implementation costs. Power Solutions business SG&A increased primarily due to higher employee-related costs and incremental SG&A of acquired businesses. The unfavorable impact of net mark-to-market adjustments on pension and postretirement plans in SG&A increased year over year by $63 million ($264 million charge in fiscal 2011 compared to $201 million charge in fiscal 2010) primarily due to a decline in year over year discount rates. Foreign currency translation had an unfavorable impact on SG&A of $63 million. Refer to the segment analysis below within Item 7 for a discussion of segment income by segment.

Net Financing Charges

 

     Year Ended         
     September 30,         
(in millions)    2011      2010      Change  

Net financing charges

   $ 174      $ 170        2

The increase in net financing charges was primarily due to higher debt levels partially offset by lower interest rates in fiscal 2011.

Equity Income

 

     Year Ended         
     September 30,         
(in millions)    2011      2010      Change  

Equity income

   $ 298      $ 254        17

The increase in equity income was primarily due to a gain on acquisition of partially-owned affiliate net of acquisition costs and purchase accounting adjustments and a partially-owned equity affiliate’s restatement of prior period income in the Power Solutions business, partially offset by a prior year gain on consolidation of a Korean partially-owned affiliate in the Power Solutions business. The remaining increase in equity income was primarily due to higher earnings at certain Automotive Experience and Building Efficiency partially-owned affiliates.

 

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Provision for Income Taxes

 

     Year Ended         
     September 30,         
(in millions)    2011      2010      Change  

Provision for income taxes

   $ 257      $ 127        *   

 

* Measure not meaningful

The effective rate is below the U.S. statutory rate primarily due to continuing global tax planning initiatives and income in certain non-U.S. jurisdictions with a rate of tax lower than the U.S. statutory tax rate. Refer to Note 17, “Income Taxes,” of the notes to consolidated financial statements for further details.

Valuation Allowances

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

In fiscal 2011, the Company recorded a decrease to its valuation allowances primarily due to a $30 million discrete period income tax adjustment in the fourth quarter. In the fourth quarter of fiscal 2011, the Company performed an analysis related to the realizability of its worldwide deferred tax assets. As a result, and after considering tax planning initiatives and other positive and negative evidence, the Company determined that it was more likely than not that the deferred tax assets primarily within Denmark, Italy, Automotive Experience in Korea and Automotive Experience in the United Kingdom would be utilized. Therefore, the Company released a net $30 million of valuation allowances in the three month period ended September 30, 2011.

In fiscal 2010, the Company recorded an overall decrease to its valuation allowances of $87 million primarily due to a $111 million discrete period income tax adjustment. In the fourth quarter of fiscal 2010, the Company performed an analysis related to the realizability of its worldwide deferred tax assets. As a result, and after considering tax planning initiatives and other positive and negative evidence, the Company determined that it was more likely than not that the deferred tax assets primarily within Mexico would be utilized. Therefore, the Company released $39 million of valuation allowances in the three month period ended September 30, 2010. Further, the Company determined that it was more likely than not that the deferred tax assets would not be utilized in selected entities in Europe. Therefore, the Company recorded $14 million of valuation allowances in the three month period ended September 30, 2010. To the extent the Company improves its underlying operating results in these entities, these valuation allowances, or a portion thereof, could be reversed in future periods.

In the third quarter of fiscal 2010, the Company determined that it was more likely than not that a portion of the deferred tax assets within the Slovakia Automotive Experience entity would be utilized. Therefore, the Company released $13 million of valuation allowances in the three month period ended June 30, 2010.

In the first quarter of fiscal 2010, the Company determined that it was more likely than not that a portion of the deferred tax assets within the Brazil Automotive Experience entity would be utilized. Therefore, the Company released $69 million of valuation allowances. This was comprised of a $93 million decrease in income tax expense offset by a $24 million reduction in cumulative translation adjustments.

In the fourth quarter of fiscal 2010, the Company increased the valuation allowances by $20 million, which was substantially offset by a decrease in its reserves for uncertain tax positions in a similar amount. These adjustments were based on a review of tax return filing positions taken in these jurisdictions and the established reserves.

Uncertain Tax Positions

The Company is subject to income taxes in the U.S. and numerous non-U.S. jurisdictions. Judgment is required in determining its worldwide provision for income taxes and recording the related assets and liabilities. In the ordinary course of the 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.

 

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Based on published case law in a non-U.S. jurisdiction and the settlement of a tax audit during the third quarter of fiscal 2010, the Company released net $38 million of reserves for uncertain tax positions, including interest and penalties.

As a result of certain events related to prior year tax planning initiatives during the first quarter of fiscal 2010, the Company increased the reserve for uncertain tax positions by $31 million, including $26 million of interest and penalties.

In the fourth quarter of fiscal 2010, the Company decreased its reserves for uncertain tax positions by $20 million, which was substantially offset by an increase in its valuation allowances in a similar amount. These adjustments were based on a review of tax filing positions taken in jurisdictions with valuation allowances as indicated above.

The Company’s federal income tax returns and certain non-U.S. income tax returns for various fiscal years remain under various stages of audit by the Internal Revenue Service and respective non-U.S. tax authorities. Although the outcome of tax audits is always uncertain, management believes that it has appropriate support for the positions taken on its tax returns and that its annual tax provisions included amounts sufficient to pay assessments, if any, which may be proposed by the taxing authorities. At September 30, 2011, the Company had recorded a liability for its best estimate of the probable loss on certain of its tax positions, the majority of which is included in other noncurrent liabilities in the consolidated statements of financial position. Nonetheless, the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities, may differ materially from the amounts accrued for each year.

Impacts of Tax Legislation and Change in Statutory Tax Rates

During the fiscal year ended September 30, 2011, tax legislation was adopted in various jurisdictions. None of these changes had a material impact on the Company’s consolidated financial condition, results of operations or cash flows.

On March 23, 2010, the U.S. President signed into law comprehensive health care reform legislation under the Patient Protection and Affordable Care Act (HR3590). Included among the major provisions of the law was a change in the tax treatment of a portion of Medicare Part D medical payments. The Company recorded a noncash tax charge of approximately $18 million in the second quarter of fiscal year 2010 to reflect the impact of this change. In the fourth quarter of fiscal 2010, the amount decreased by $2 million resulting in an overall impact of $16 million.

Income Attributable to Noncontrolling Interests

 

     Year Ended         
     September 30,         
(in millions)    2011      2010      Change  

Income attributable to noncontrolling interests

   $ 117      $ 75        56

The increase in income attributable to noncontrolling interests was primarily due to higher earnings at certain Automotive Experience partially-owned affiliates in North America and Asia, and a Power Solutions partially-owned affiliate.

 

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Net Income Attributable to Johnson Controls, Inc.

 

     Year Ended         
     September 30,         
(in millions)    2011      2010      Change  

Net income attributable to Johnson Controls, Inc.

   $ 1,415      $ 1,307        8

The increase in net income attributable to Johnson Controls, Inc. was primarily due to higher sales and equity income, and the favorable impact of foreign currency translation, partially offset by an increase in selling, general and administrative expenses, provision for income taxes and income attributable to noncontrolling interests. Fiscal 2011 diluted earnings per share was $2.06 compared to prior year’s diluted earnings per share of $1.92.

Segment Analysis

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

Building Efficiency

 

     Net Sales            Segment Income         
     for the Year Ended            for the Year Ended         
     September 30,            September 30,         
(in millions)    2011      2010      Change     2011      2010      Change  

North America Systems

   $ 2,343      $ 2,142        9   $ 247      $ 206        20

North America Service

     2,305        2,127        8     121        117        3

Global Workplace Solutions

     4,153        3,288        26     22        40        -45

Asia

     1,840        1,422        29     251        180        39

Other

     4,252        3,823        11     105        136        -23
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
   $ 14,893      $ 12,802        16   $ 746      $ 679        10
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Net Sales:

 

   

The increase in North America Systems was primarily due to higher volumes of equipment and controls systems in the commercial construction and replacement markets ($191 million), and the favorable impact of foreign currency translation ($10 million).

 

   

The increase in North America Service was primarily due to higher volumes, mainly driven by energy solutions and truck-based business ($120 million), incremental sales due to a prior year business acquisition ($46 million) and the favorable impact of foreign currency translation ($12 million).

 

   

The increase in Global Workplace Solutions was primarily due to a net increase in services to new and existing customers ($709 million), and the favorable impact of foreign currency translation ($156 million).

 

   

The increase in Asia was primarily due to higher volumes of equipment and controls systems ($255 million), the favorable impact of foreign currency translation ($98 million), and higher service volumes including the negative impact of the Japan earthquake and related events ($65 million).

 

   

The increase in Other was primarily due to higher volumes in the Middle East ($198 million), Latin America ($107 million) and Europe ($39 million), and the favorable impact of foreign currency translation ($85 million).

Segment Income:

 

   

The increase in North America Systems was primarily due to higher volumes ($38 million), favorable margin rates ($25 million), prior year reserves for existing customers ($13 million) and the favorable

 

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impact of foreign currency translation ($1 million), partially offset by higher selling, general and administrative expenses ($36 million).

 

   

The increase in North America Service was primarily due to prior year inventory adjustments and information technology implementation costs ($55 million), higher volumes ($25 million), lower selling, general and administrative expenses ($2 million) and the favorable impact of foreign currency translation ($1 million), partially offset by unfavorable mix and margin rates ($79 million).

 

   

The decrease in Global Workplace Solutions was primarily due to unfavorable margin rates ($40 million) and higher selling, general and administrative expenses ($32 million), partially offset by higher volumes ($49 million) and the favorable impact of foreign currency translation ($5 million).

 

   

The increase in Asia was primarily due to higher volumes ($82 million) and the favorable impact of foreign currency translation ($15 million), partially offset by higher selling, general and administrative expenses ($26 million).

 

   

The decrease in Other was primarily due to higher selling, general and administrative expenses ($41 million), restructuring costs ($35 million), non-recurring charges related to South America indirect taxes ($24 million), unfavorable margin rates ($15 million) and distribution business costs ($11 million), partially offset by higher volumes ($75 million), higher equity income ($18 million) and the favorable impact of foreign currency translation ($2 million).

Automotive Experience

 

     Net Sales            Segment Income         
     for the Year Ended            for the Year Ended         
     September 30,            September 30,         
(in millions)    2011      2010      Change     2011      2010      Change  

North America

   $ 7,431      $ 6,765        10   $ 419      $ 380        10

Europe

     10,267        8,019        28     116        108        7

Asia

     2,367        1,826        30     245        109        125
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
   $ 20,065      $ 16,610        21   $ 780      $ 597        31
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Net Sales:

 

   

The increase in North America was primarily due to higher volumes to the Company’s major OEM customers ($779 million), incremental sales due to business acquisitions ($129 million) and net favorable commercial settlements and pricing ($21 million), partially offset by the negative impact of the Japan earthquake and related events ($263 million).

 

   

The increase in Europe was primarily due to higher volumes and new customer awards including the negative impact of the Japan earthquake and related events ($1.1 billion), incremental sales due to business acquisitions ($855 million) and the favorable impact of foreign currency translation ($295 million), partially offset by net unfavorable commercial settlements and pricing ($37 million).

 

   

The increase in Asia was primarily due to higher volumes and new customer awards including the negative impact of the Japan earthquake and related events ($455 million), the favorable impact of foreign currency translation ($88 million) and incremental sales due to business acquisitions ($13 million), partially offset by unfavorable commercial settlements and pricing ($15 million).

Segment Income:

 

   

The increase in North America was primarily due to higher volumes ($160 million), higher equity income ($6 million), and net favorable commercial settlements and pricing ($5 million), partially offset by the negative impact of the earthquake in Japan and related events ($61 million), higher selling, general and administrative expenses net of a legal settlement award ($36 million), higher engineering expenses ($27 million) and higher purchasing costs ($8 million).

 

   

The increase in Europe was primarily due to higher volumes including the negative impact of the earthquake in Japan and related events ($95 million), operating income of current year acquisitions ($75 million), lower selling, general and administrative expenses ($16 million) and the favorable impact of

 

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foreign currency translation ($9 million), partially offset by costs related to business acquisitions ($64 million), higher operating costs ($58 million), unfavorable commercial settlements and pricing ($34 million), higher engineering expenses ($22 million) and higher purchasing costs ($9 million).

 

   

The increase in Asia was primarily due to higher volumes including the negative impact of the earthquake in Japan and related events ($84 million), higher equity income mainly in China ($55 million), prior year asset impairment charges in Japan ($22 million), lower purchasing costs ($19 million), lower operating costs ($13 million) and the favorable impact of foreign currency translation ($4 million), partially offset by higher selling, general and administrative expenses ($33 million), unfavorable pricing ($16 million) and higher engineering expenses ($12 million).

Power Solutions

 

     Year Ended         
     September 30,         
(in millions)    2011      2010      Change  

Net sales

   $ 5,875      $ 4,893        20

Segment income

     821        672        22

 

   

Net sales increased primarily due to the impact of higher lead costs on pricing ($287 million), higher sales volumes including the negative impact of the earthquake in Japan and related events ($283 million), sales associated with a prior year business acquisition ($261 million), favorable price/product mix ($81 million) and the favorable impact of foreign currency translation ($70 million).

 

   

Segment income increased primarily due to favorable pricing and product mix net of lead and other commodity costs ($145 million); higher sales volumes ($56 million); a gain on acquisition of a partially-owned affiliate net of acquisition costs and related purchase accounting adjustments and a partially-owned equity affiliate’s restatement of prior period income ($37 million); income associated with a prior year business acquisition ($30 million); and the favorable impact of foreign currency translation ($8 million); partially offset by higher operating and transportation costs ($44 million); higher selling, general and administrative expenses ($38 million); prior year net gain on acquisition of a Korean partially-owned affiliate ($37 million); and lower equity income ($8 million).

GOODWILL, LONG-LIVED ASSETS AND OTHER INVESTMENTS

Goodwill at September 30, 2012 was $7.0 billion, $34 million lower than the prior year. The decrease was primarily due to the impact of foreign currency translation and current year business divestitures, partially offset by business acquisitions.

Goodwill reflects the cost of an acquisition in excess of the fair values assigned to identifiable net assets acquired. The Company reviews goodwill for impairment during the fourth fiscal quarter or more frequently if events or changes in circumstances indicate the asset might be impaired. The Company performs impairment reviews for its reporting units, which have been determined to be the Company’s reportable segments or one level below the reportable segments in certain instances, using a fair-value method based on management’s judgments and assumptions or third party valuations. The fair value of a reporting unit refers to the price that would be received to sell the unit as a whole in an orderly transaction between market participants at the measurement date. In estimating the fair value, the Company uses multiples of earnings based on the average of historical, published multiples of earnings of comparable entities with similar operations and economic characteristics. In certain instances, the Company uses discounted cash flow analyses to further support the fair value estimates. The inputs utilized in the analyses are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, “Fair Value Measurements and Disclosures.” The estimated fair value is then compared with the carrying amount of the reporting unit, including recorded goodwill. The Company is subject to financial statement risk to the extent that the carrying amount exceeds the estimated fair value. The impairment testing performed by the Company in the fourth quarter of fiscal year 2012, 2011 and 2010 indicated that the estimated fair value of each reporting unit substantially exceeded its corresponding carrying amount including recorded goodwill, and as such, no impairment existed at September 30, 2012, 2011 and 2010. No reporting unit was determined to be at risk of failing step one of the goodwill impairment test. While at September 30, 2012 the estimated fair value of each reporting unit substantially exceeded its corresponding carrying amount including recorded goodwill, a prolonged significant decline in the European automotive industry could put the Company at risk of not achieving future growth assumptions and could

 

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result in impairment of goodwill or other long-lived assets, or result in additional restructuring actions, within the Automotive Experience Europe segment, which could be material to the consolidated financial statements.

Indefinite lived other intangible assets are also subject to at least annual impairment testing. Other intangible assets with definite lives continue to be amortized over their estimated useful lives and are subject to impairment testing if events or changes in circumstances indicate that the asset might be impaired. A considerable amount of management judgment and assumptions are required in performing the impairment tests. While the Company believes the judgments and assumptions used in the impairment tests are reasonable and no impairment existed at September 30, 2012, 2011 and 2010, different assumptions could change the estimated fair values and, therefore, impairment charges could be required, which could be material to the consolidated financial statements.

The Company reviews 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. Given the current economic uncertainty, 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 $400 million.

The Company has certain subsidiaries, mainly located in France and Spain, which have generated operating and/or capital losses and, in certain circumstances, have limited loss carryforward periods. In accordance with ASC 740, “Income Taxes,” the Company is required to record a valuation allowance when it is more likely than not the Company will not utilize deductible amounts or net operating losses for each legal entity or consolidated group based on the tax rules in the applicable jurisdiction, evaluating both positive and negative historical evidences as well as expected future events and tax planning strategies.

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the 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 third and fourth quarters of fiscal 2012, the Company concluded it had a triggering event requiring assessment of impairment for certain of its long-lived assets in conjunction with its 2012 restructuring plan. In addition, in the fourth quarter of fiscal 2012, the Company concluded it had a triggering event requiring assessment of impairment for certain of its long-lived assets due to volume declines in the European automotive markets. As a result, the Company reviewed the long-lived assets for impairment and recorded a $39 million impairment charge within restructuring costs on the consolidated statement of income, of which $3 million was recorded in the third quarter and $36 million in the fourth quarter of fiscal 2012. Of the total impairment charge, $14 million related to the Power Solutions segment, $11 million related to the Automotive Experience Europe segment, $4 million related to the Building Efficiency Other segment and $10 million related to corporate assets. Refer to Note 15, “Significant Restructuring Costs,” of the notes to consolidated financial statements for further information regarding the 2012 Plan. The impairment was measured, depending on the asset, either under an income approach utilizing forecasted discounted cash flows or a market approach utilizing an appraisal to determine fair values of the impairment assets. These methods are consistent with the methods the Company employed in prior periods to value other long-lived assets. The inputs utilized in the analyses are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, “Fair Value Measurements and Disclosures.”

In the second quarter of fiscal 2012, the Company recorded an impairment charge related to an equity investment. Refer to Note 10, “Fair Value Measurements,” of the notes to consolidated financial statements for additional information.

At September 30, 2012 and 2011, the Company concluded it did not have any other triggering events requiring assessment of impairment of its long-lived assets.

In the fourth quarter of fiscal 2010, the Company concluded it had a triggering event requiring assessment of impairment of its long-lived assets due to the planned relocation of a plant in Japan in the Automotive Experience Asia segment. As a result, the Company reviewed its long-lived assets for impairment and recorded an $11 million

 

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impairment charge within cost of sales in the fourth quarter of fiscal 2010 related to the Automotive Experience Asia segment. The impairment was measured under a market approach utilizing an appraisal. The inputs utilized in the analysis are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, “Fair Value Measurements and Disclosures.”

In the third quarter of fiscal 2010, the Company concluded it had a triggering event requiring assessment of impairment of its long-lived assets due to the planned relocation of its headquarters building in Japan in the Automotive Experience Asia segment. As a result, the Company reviewed its long-lived assets for impairment and recorded an $11 million impairment charge within selling, general and administrative expenses in the third quarter of fiscal 2010 related to the Automotive Experience Asia segment. The impairment was measured under a market approach utilizing an appraisal. The inputs utilized in the analysis are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, “Fair Value Measurements and Disclosures.”

In the second quarter of fiscal 2010, the Company concluded it had a triggering event requiring assessment of impairment of its long-lived assets due to planned plant closures for the Automotive Experience North America segment. These closures are a result of the Company’s revised restructuring actions to the 2008 restructuring plan. As a result, the Company reviewed its long-lived assets for impairment and recorded a $19 million impairment charge in the second quarter of fiscal 2010 related to the Automotive Experience North America segment. This impairment charge was offset by a decrease in the Company’s restructuring reserve related to the 2008 restructuring plan due to lower employee severance and termination benefit cash payments than previously expected. The impairment was measured under an income approach utilizing forecasted discounted cash flows to determine the fair value of the impaired assets. This method is consistent with the method the Company has employed in prior periods to value other long-lived assets. The inputs utilized in the discounted cash flow analysis are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, “Fair Value Measurements and Disclosures.”

Investments in partially-owned affiliates (“affiliates”) at September 30, 2012 were $948 million, $137 million higher than the prior year. The increase was primarily due to positive earnings by affiliates in all businesses, primarily in the Automotive Experience Asia and Power Solutions segments, and an acquisition of additional interests in a Power Solutions affiliate, partially offset by dividends paid by affiliates and the acquisition of the controlling interest in a formerly unconsolidated Power Solutions affiliate.

LIQUIDITY AND CAPITAL RESOURCES

Working Capital

 

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

Current assets

   $ 12,673     $ 12,015    

Current liabilities

     (10,855     (10,782  
  

 

 

   

 

 

   
     1,818       1,233       47

Less: Cash

     265       257    

Add: Short-term debt

     323       596    

Add: Current portion of long-term debt

     424       17    
  

 

 

   

 

 

   

Working capital

   $ 2,300     $ 1,589       45

Accounts receivable

     7,308       7,151       2

Inventories

     2,227       2,316       -4

Accounts payable

     6,114       6,159       -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.

 

   

The increase in working capital at September 30, 2012 as compared to September 30, 2011 was primarily due to higher accounts receivable from higher sales volumes, lower accounts payable primarily due to timing of supplier payments, lower accrued compensation and benefits primarily due to lower incentive compensation, and higher other current assets, partially offset by lower inventory levels based on increased turnover.

 

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The Company’s days sales in accounts receivable increased to 55 at September 30, 2012 from 52 for the prior year. The increase in accounts receivable compared to September 30, 2011 was primarily due to increased sales in the current year and timing of customer receipts. There has been no significant adverse change in the level of overdue receivables or changes in revenue recognition methods.

 

   

The Company’s inventory turns during fiscal 2012 were higher compared to the prior year primarily due to increased sales volumes and improvements in inventory management.

 

   

Days in accounts payable at September 30, 2012 increased to 72 days from 71 days at September 30, 2011 primarily due to the timing of supplier payments.

Cash Flows

 

     Year Ended September 30,  
(in millions)    2012     2011  

Cash provided by operating activities

   $ 1,559     $ 1,076  

Cash used by investing activities

     (1,792     (2,637

Cash provided by financing activities

     207       1,239  

Capital expenditures

     (1,831     (1,325

 

   

The increase in cash provided by operating activities was primarily due to changes in accounts receivable, inventory and restructuring reserves; partially offset by changes in accounts payable and accrued liabilities, other assets and accrued income taxes; and lower net income.

 

   

The decrease in cash used by investing activities was primarily due to lower cash paid for acquisitions of businesses and cash received for business divestitures, partially offset by higher capital expenditures.

 

   

The decrease in cash provided by financing activities was primarily due to a prior year $1.6 billion bond issuance, and current year cash paid to repurchase stock and acquire noncontrolling interests, partially offset by a current year $1.1 billion bond issuance and lower repayments of debt. Refer to Note 8, “Debt and Financing Arrangements,” of the notes to consolidated financial statements for further discussion on debt issuances and debt levels.

 

   

The increase in capital expenditures in the current year primarily related to capacity increases and vertical integration efforts in the Power Solutions business, program spending for new customer launches in the Automotive Experience business, and increased investments to support customer growth and enhance the Company’s strategic footprint primarily in Southeast Asia.

Capitalization

 

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

Short-term debt

   $ 323     $ 596    

Current portion of long-term debt

     424       17    

Long-term debt

     5,321       4,533    
  

 

 

   

 

 

   

Total debt

   $ 6,068     $ 5,146       18

Shareholders’ equity attributable to Johnson Controls, Inc.

     11,555       11,042       5
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 17,623     $ 16,188       9
  

 

 

   

 

 

   

 

 

 

Total debt as a % of total capitalization

     34     32  
  

 

 

   

 

 

   

 

   

The Company believes the percentage of total debt to total capitalization is useful to understanding the Company’s financial condition as it provides a review of the extent to which the Company relies on external debt financing for its funding and is a measure of risk to its shareholders.

 

   

At September 30, 2012 and 2011, the Company had committed bilateral euro denominated revolving credit facilities totaling 237 million euro and 223 million euro, respectively. Additionally, at September 30, 2012 and 2011, the Company had committed bilateral U.S. dollar denominated revolving credit facilities totaling $185

 

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million and $50 million, respectively. There were no draws on any of the revolving facilities for the respective periods. As of September 30, 2012, facilities for $185 million and 137 million euro are scheduled to expire in fiscal 2013, and a facility for 100 million euro is scheduled to expire in fiscal 2014.

 

   

In November 2010, the Company repaid debt of $82 million which was acquired as part of an acquisition in the first quarter of fiscal 2011. The Company used cash to repay the debt.

 

   

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

 

   

In February 2011, the Company issued $350 million aggregate principal amount of floating rate senior unsecured notes due in fiscal 2014, $450 million aggregate principal amount of 1.75% senior unsecured fixed rate notes due in fiscal 2014, $500 million aggregate principal amount of 4.25% senior unsecured fixed rate notes due in fiscal 2021 and $300 million aggregate principal amount of 5.7% senior unsecured fixed rate notes due in fiscal 2041. Aggregate net proceeds of $1.6 billion from the issues were used for general corporate purposes including the retirement of short-term debt.

 

   

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

 

   

In February 2011, the Company replaced its $2.05 billion committed five-year credit facility, scheduled to mature in December 2011, with a $2.5 billion committed four-year credit facility scheduled to mature in February 2015. The facility is used to support the Company’s outstanding commercial paper. At September 30, 2012, there were no draws on the facility.

 

   

In April 2011, a total of 157,820 equity units, which had a purchase contract settlement date of March 31, 2012, were early exercised. As a result, the Company issued 766,673 shares of Johnson Controls, Inc. common stock and approximately $8 million of 11.5% notes due 2042.

 

   

In November 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 issues were used for general corporate purposes, including the retirement of short-term debt and contributions to the Company’s pension and postretirement plans.

 

   

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

 

   

In March 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.

 

   

The Company also selectively makes use of short-term credit lines. The Company estimates that, as of September 30, 2012, it could borrow up to $1.9 billion at its current debt ratings on committed credit lines.

 

   

The Company believes its capital resources and liquidity position at September 30, 2012 are adequate to meet projected needs. The Company believes requirements for working capital, capital expenditures, dividends, minimum pension contributions, debt maturities, announced acquisitions and any potential acquisitions in fiscal 2013 will continue to be funded from operations, supplemented by short- and long-term borrowings, if required. The Company currently manages its short-term debt position in the U.S. and euro commercial paper markets and bank loan markets. In the event the Company is unable to issue commercial paper, it would have the ability to draw on its $2.5 billion revolving credit facility, which matures in February 2015. There were no draws on the revolving credit facility as of September 30, 2012. As such, the Company believes it has sufficient financial resources to fund operations and meet its obligations for the foreseeable future.

 

   

The Company earns a significant amount of its operating income outside the U.S., which is deemed to be permanently reinvested in foreign jurisdictions. The Company currently does not intend nor foresee a need to repatriate these funds. The Company’s intent is for such earnings to be reinvested by the subsidiaries or to be repatriated only when it would be tax effective through the utilization of foreign tax credits. The Company expects existing domestic cash and liquidity to continue to be sufficient to fund the Company’s domestic operating activities and cash commitments for investing and financing activities for at least the next twelve months and thereafter for the foreseeable future. In addition, the Company expects existing foreign cash, cash equivalents, short-term investments and cash flows from operations to continue to be sufficient to fund the Company’s foreign operating activities and cash commitments for investing activities, such as material capital

 

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expenditures, for at least the next twelve months and thereafter for the foreseeable future. Should the Company require more capital in the U.S. than is generated by operations domestically, the Company could elect to raise capital in the U.S. through debt or equity issuances. This alternative could result in increased interest expense or other dilution of the Company’s earnings. The Company has borrowed funds domestically and continues to have the ability to borrow funds domestically at reasonable interest rates.

 

   

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 ASC 715-60, “Defined Benefit Plans - Other Postretirement,” or (ii) the cumulative foreign currency translation adjustment. As of September 30, 2012, consolidated shareholders’ equity attributable to Johnson Controls, Inc. as defined per the Company’s debt financial covenants was $11.2 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 debt agreements limit access to stated borrowing levels or require accelerated repayment in the event of a decrease in the Company’s credit rating.

A summary of the Company’s significant contractual obligations as of September 30, 2012 is as follows (in millions):

 

                                 2018  
     Total      2013      2014-2015      2016-2017      and Beyond  

Contractual Obligations

              

Long-term debt
(including capital lease obligations)*

   $ 5,745      $ 424      $ 1,072      $ 1,645      $ 2,604  

Interest on long-term debt
(including capital lease obligations)*

     2,566        233        413        305        1,615  

Operating leases

     978        315        402        174        87  

Purchase obligations

     2,175        1,732        396        40        7  

Pension and postretirement contributions

     382        94        47        54        187  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual cash obligations

   $ 11,846      $ 2,798      $ 2,330      $ 2,218      $ 4,500  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* See “Capitalization” for additional information related to the Company’s long-term debt.

CRITICAL ACCOUNTING ESTIMATES AND POLICIES

The Company prepares its consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP). This requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. The following policies are considered by management to be the most critical in understanding the judgments that are involved in the preparation of the Company’s consolidated financial statements and the uncertainties that could impact the Company’s results of operations, financial position and cash flows.

Revenue Recognition

The Company’s Building Efficiency business recognizes revenue from certain long-term contracts over the contractual period under the percentage-of-completion (POC) method of accounting. This method of accounting recognizes sales and gross profit as work is performed based on the relationship between actual costs incurred and total estimated costs at completion. Recognized revenues that will not be billed under the terms of the contract until a later date are recorded in unbilled accounts receivable. Likewise, contracts where billings to date have exceeded recognized revenues are recorded in other current liabilities. Changes to the original estimates may be required during the life of the contract and such estimates are reviewed monthly. Sales and gross profit are adjusted using the cumulative catch-up method for revisions in estimated total contract costs and contract values. Estimated losses are recorded when identified. Claims against customers are recognized as revenue upon settlement. The amount of

 

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accounts receivable due after one year is not significant. The use of the POC method of accounting involves considerable use of estimates in determining revenues, costs and profits and in assigning the amounts to accounting periods. The periodic reviews have not resulted in adjustments that were significant to the Company’s results of operations. The Company continually evaluates all of the assumptions, risks and uncertainties inherent with the application of the POC method of accounting.

The Building Efficiency business enters into extended warranties and long-term service and maintenance agreements with certain customers. For these arrangements, revenue is recognized on a straight-line basis over the respective contract term.

The Company’s Building Efficiency business also sells certain heating, ventilating and air conditioning (HVAC) and refrigeration products and services in bundled arrangements, where multiple products and/or services are involved. In accordance with ASU No. 2009-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements - A Consensus of the FASB Emerging Issues Task Force,” the Company divides bundled arrangements into separate deliverables and revenue is allocated to each deliverable based on the relative selling price method. Significant deliverables within these arrangements include equipment, commissioning, service labor and extended warranties. In order to estimate relative selling price, market data and transfer price studies are utilized. Approximately four to twelve months separate the timing of the first deliverable until the last piece of equipment is delivered, and there may be extended warranty arrangements with duration of one to five years commencing upon the end of the standard warranty period.

In all other cases, the Company recognizes revenue at the time title passes to the customer or as services are performed.

Goodwill and Other Intangible Assets

Goodwill reflects the cost of an acquisition in excess of the fair values assigned to identifiable net assets acquired. The Company reviews goodwill for impairment during the fourth fiscal quarter or more frequently if events or changes in circumstances indicate the asset might be impaired. The Company performs impairment reviews for its reporting units, which have been determined to be the Company’s reportable segments or one level below the reportable segments in certain instances, using a fair-value method based on management’s judgments and assumptions or third party valuations. The fair value of a reporting unit refers to the price that would be received to sell the unit as a whole in an orderly transaction between market participants at the measurement date. In estimating the fair value, the Company uses multiples of earnings based on the average of historical, published multiples of earnings of comparable entities with similar operations and economic characteristics. In certain instances, the Company uses discounted cash flow analyses to further support the fair value estimates. The inputs utilized in the analyses are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, “Fair Value Measurements and Disclosures.” The estimated fair value is then compared with the carrying amount of the reporting unit, including recorded goodwill. The Company is subject to financial statement risk to the extent that the carrying amount exceeds the estimated fair value. The impairment testing performed by the Company in the fourth quarter of fiscal year 2012, 2011 and 2010 indicated that the estimated fair value of each reporting unit substantially exceeded its corresponding carrying amount including recorded goodwill, and as such, no impairment existed at September 30, 2012, 2011 and 2010. No reporting unit was determined to be at risk of failing step one of the goodwill impairment test. While at September 30, 2012 the estimated fair value of each reporting unit substantially exceeded its corresponding carrying amount including recorded goodwill, a prolonged significant decline in the European automotive industry could put the Company at risk of not achieving future growth assumptions and could result in impairment of goodwill or other long-lived assets, or result in additional restructuring actions, within the Automotive Experience Europe segment, which could be material to the consolidated financial statements.

Indefinite lived other intangible assets are also subject to at least annual impairment testing. Other intangible assets with definite lives continue to be amortized over their estimated useful lives and are subject to impairment testing if events or changes in circumstances indicate that the asset might be impaired. A considerable amount of management judgment and assumptions are required in performing the impairment tests. While the Company believes the judgments and assumptions used in the impairment tests are reasonable and no impairment existed at September 30, 2012, 2011 and 2010, different assumptions could change the estimated fair values and, therefore, impairment charges could be required, which could be material to the consolidated financial statements.

 

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Employee Benefit Plans

The Company provides a range of benefits to its employees and retired employees, including pensions and postretirement benefits. Plan assets and obligations are measured annually, or more frequently if there is a remeasurement event, based on the Company’s measurement date utilizing various actuarial assumptions such as discount rates, assumed rates of return, compensation increases, turnover rates and health care cost trend rates as of that date. The Company reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when appropriate.

In the fourth quarter of fiscal 2012, the Company changed its accounting policy for recognizing pension and postretirement benefit expenses. The Company’s historical accounting treatment smoothed asset returns and amortized deferred actuarial gains and losses over future years. By adopting the new mark-to-market accounting method, the Company recognizes these gains and losses in the fourth quarter of each fiscal year or at the date of a remeasurement event. The Company believes this new policy is preferable and provides greater transparency to on-going operational results. The change has no impact on future pension and postretirement funding or benefits paid to participants. These changes have been reported through retrospective application of the new policy to all periods presented.

U.S. GAAP requires that companies recognize in the statement of financial position a liability for defined benefit pension and postretirement plans that are underfunded or unfunded, or an asset for defined benefit pension and postretirement plans that are overfunded. U.S. GAAP also requires that companies measure the benefit obligations and fair value of plan assets that determine a benefit plan’s funded status as of the date of the employer’s fiscal year-end.

The Company considers the expected benefit payments on a plan-by-plan basis when setting assumed discount rates. As a result, the Company uses different discount rates for each plan depending on the plan jurisdiction, the demographics of participants and the expected timing of benefit payments. For the U.S. pension and postretirement plans, the Company uses a discount rate provided by an independent third party calculated based on an appropriate mix of high quality bonds. For the non-U.S. pension and postretirement plans, the Company consistently uses the relevant country specific benchmark indices for determining the various discount rates. The Company’s discount rate on U.S. plans was 4.15% and 5.25% at September 30, 2012 and 2011, respectively. The Company’s weighted average discount rate on non-U.S. plans was 3.40% and 4.00% at September 30, 2012 and 2011, respectively.

In estimating the expected return on plan assets, the Company considers the historical returns on plan assets, adjusted for forward-looking considerations, inflation assumptions and the impact of the active management of the plans’ invested assets. Reflecting the relatively long-term nature of the plans’ obligations, approximately 50% of the plans’ assets are invested in equities, with the remainder primarily invested in fixed income and alternative investments. For the years ending September 30, 2012 and 2011, the Company’s expected long-term return on U.S. pension plan assets used to determine net periodic benefit cost was 8.50%. The actual rate of return on U.S. pension plans was above 8.50% in fiscal 2012 and below 8.50% in fiscal 2011. For the years ending September 30, 2012 and 2011, the Company’s weighted average expected long-term return on non-U.S. pension plan assets was 5.15% and 5.50%, respectively. Plan assets for the Company’s postretirement plans were contributed at the end of fiscal 2011 and were not contemplated in fiscal 2011 net periodic benefit costs. For the year ending September 30, 2012, the Company’s weighted average expected long-term return on postretirement plan assets was 6.30%. The actual rate of return on postretirement plan assets was above 6.30% in fiscal 2012.

Beginning in fiscal 2013, the Company believes the long-term rate of return will approximate 8.00%, 4.55% and 5.80% for U.S. pension, non-U.S. pension and postretirement plans, respectively. Any differences between actual investment results and the expected long-term asset returns will be reflected in net periodic benefit costs in the fourth quarter of each fiscal year. If the Company’s actual returns on plan assets are less than the Company’s expectations, additional contributions may be required.

In fiscal 2012, total employer and employee contributions to the defined benefit pension plans were $364 million, of which $266 million were voluntary contributions made by the Company. The Company expects to contribute approximately $100 million in cash to its defined benefit pension plans in fiscal year 2013. In fiscal 2012, total employer and employee contributions to the postretirement plans were $63 million, of which $60 million were voluntary contributions made by the Company. The Company does not expect to make any significant contributions to its postretirement plans in fiscal year 2013.

 

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Based on information provided by its independent actuaries and other relevant sources, the Company believes that the assumptions used are reasonable; however, changes in these assumptions could impact the Company’s financial position, results of operations or cash flows.

Product Warranties

The Company offers warranties to its customers depending upon the specific product and terms of the customer purchase agreement. A typical warranty program requires that the Company replace defective products within a specified time period from the date of sale. The Company records an estimate of future warranty-related costs based on actual historical return rates and other known factors. Based on analysis of return rates and other factors, the adequacy of the Company’s warranty provisions are adjusted as necessary. At September 30, 2012, the Company had recorded $278 million of warranty reserves. The Company monitors its warranty activity and adjusts its reserve estimates when it is probable that future warranty costs will be different than those estimates.

Income Taxes

The Company accounts for income taxes in accordance with ASC 740, “Income Taxes.” Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and other loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company records a valuation allowance that primarily represents non-U.S. operating and other loss carryforwards for which utilization is uncertain. Management judgment is required in determining the Company’s provision for income taxes, deferred tax assets and liabilities and the valuation allowance recorded against the Company’s net deferred tax assets. In calculating the provision for income taxes on an interim basis, the Company uses an estimate of the annual effective tax rate based upon the facts and circumstances known at each interim period. On a quarterly basis, the actual effective tax rate is adjusted as appropriate based upon the actual results as compared to those forecasted at the beginning of the fiscal year. In determining the need for a valuation allowance, the historical and projected financial results of the legal entity or consolidated group recording the net deferred tax asset are considered, along with any other positive or negative evidence. Since future financial results may differ from previous estimates, periodic adjustments to the Company’s valuation allowance may be necessary. At September 30, 2012, the Company had a valuation allowance of $766 million, of which $619 million relates to net operating loss carryforwards primarily in France and Spain, for which sustainable taxable income has not been demonstrated; and $147 million for other deferred tax assets. Given the current economic uncertainty, 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 $400 million.

The Company is subject to income taxes in the U.S. and numerous non-U.S. jurisdictions. Judgment is required in determining its worldwide provision for income taxes and recording the related assets and liabilities. In the ordinary course of the 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. At September 30, 2012, the Company had unrecognized tax benefits of $1,465 million.

The Company does not provide additional U.S. income taxes on undistributed earnings of non-U.S. consolidated subsidiaries included in shareholders’ equity attributable to Johnson Controls, Inc. Such earnings could become taxable upon the sale or liquidation of these non-U.S. subsidiaries or upon dividend repatriation. The Company’s intent is for such earnings to be reinvested by the subsidiaries or to be repatriated only when it would be tax effective through the utilization of foreign tax credits. Refer to “Capitalization” within the “Liquidity and Capital Resources” section for discussion of domestic and foreign cash projections.

NEW ACCOUNTING PRONOUNCEMENTS

In July 2012, the FASB issued Accounting Standards Update (ASU) No. 2012-02, “Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.” ASU No. 2012-02 provides companies an option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, as a result of the qualitative assessment, it is determined that it is not more likely than not that the indefinite-lived intangible assets is impaired, then the Company is not required to take further action. ASU No. 2012-02 will be effective for the Company for impairment tests of indefinite-lived intangible assets 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.

 

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In December 2011, the FASB issued 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 was effective for the Company for the fiscal year ending September 30, 2012. The adoption of this guidance had no impact on the Company’s consolidated financial condition and results of operations. Refer to Note 14, “Retirement Plans,” of the notes to consolidated financial statements for disclosures surrounding the Company’s participation in multiemployer pension plans.

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

RISK MANAGEMENT

The Company selectively uses derivative instruments to reduce market risk associated with changes in foreign currency, commodities, interest rates and stock-based compensation. All hedging transactions are authorized and executed pursuant to clearly defined policies and procedures, which strictly prohibit the use of financial instruments for speculative purposes. At the inception of the hedge, the Company assesses the effectiveness of the hedge instrument and designates the hedge instrument as either (1) a hedge of a recognized asset or liability or of a recognized firm commitment (a fair value hedge), (2) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to an unrecognized asset or liability (a cash flow hedge) or (3) a hedge of a net investment in a non-U.S. operation (a net investment hedge). The Company performs hedge effectiveness testing on an ongoing basis depending on the type of hedging instrument used. All other derivatives not designated as hedging instruments under ASC 815, “Derivatives and Hedging,” are revalued in the consolidated statements of income.

For all foreign currency derivative instruments designated as cash flow hedges, retrospective effectiveness is tested on a monthly basis using a cumulative dollar offset test. The fair value of the hedged exposures and the fair value of the hedge instruments are revalued and the ratio of the cumulative sum of the periodic changes in the value of the hedge instruments to the cumulative sum of the periodic changes in the value of the hedge is calculated. The hedge

 

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is deemed as highly effective if the ratio is between 80% and 125%. For commodity derivative contracts designated as cash flow hedges, effectiveness is tested using a regression calculation. Ineffectiveness is minimal as the Company aligns most of the critical terms of its derivatives with the supply contracts.

For net investment hedges, the Company assesses its net investment positions in the non-U.S. operations and compares it with the outstanding net investment hedges on a quarterly basis. The hedge is deemed effective if the aggregate outstanding principal of the hedge instruments designated as the net investment hedge in a non-U.S. operation does not exceed the Company’s net investment positions in the respective non-U.S. operation.

The Company selectively uses interest rate swaps to reduce market risk associated with changes in interest rates for its fixed-rate bonds. For the five fixed to floating interest rate swaps totaling $450 million to hedge the coupon of its 1.75% notes maturing March 2014, the Company elected the short cut method as the criteria to apply the short cut method as defined in ASC 815 was met and the critical terms for both the hedge and underlying hedged item are identical at inception of the hedge and the presented reporting periods. In applying the short cut method, the Company is allowed to assume zero ineffectiveness without performing detailed effectiveness assessments and does not record any ineffectiveness related to the hedge relationship. For remaining interest rate swaps, the long-haul method is used. The Company therefore assesses retrospective and prospective effectiveness on a quarterly basis and records any measured ineffectiveness in the consolidated statements of income.

Equity swaps and any other derivative instruments not designated as hedging instruments under ASC 815 require no assessment of effectiveness on a quarterly basis.

A discussion of the Company’s accounting policies for derivative financial instruments is included in Note 1, “Summary of Significant Accounting Policies,” of the notes to consolidated financial statements, and further disclosure relating to derivatives and hedging activities is included in Note 9, “Derivative Instruments and Hedging Activities,” and Note 10, “Fair Value Measurements,” of the notes to consolidated financial statements.

Foreign Exchange

The Company has manufacturing, sales and distribution facilities around the world and thus makes investments and enters into transactions denominated in various foreign currencies. In order to maintain strict control and achieve the benefits of the Company’s global diversification, foreign exchange exposures for each currency are netted internally so that only its net foreign exchange exposures are, as appropriate, hedged with financial instruments.

The Company hedges 70% to 90% of the nominal amount of each of its known foreign exchange transactional exposures. The Company primarily enters into foreign currency exchange contracts to reduce the earnings and cash flow impact of the variation of non-functional currency denominated receivables and payables. Gains and losses resulting from hedging instruments offset the foreign exchange gains or losses on the underlying assets and liabilities being hedged. The maturities of the forward exchange contracts generally coincide with the settlement dates of the related transactions. Realized and unrealized gains and losses on these contracts are recognized in the same period as gains and losses on the hedged items. The Company also selectively hedges anticipated transactions that are subject to foreign exchange exposure, primarily with foreign currency exchange contracts, which are designated as cash flow hedges in accordance with ASC 815. At September 30, 2012 and 2011, the Company estimates that an unfavorable 10% change in the exchange rates would have decreased net unrealized gains by approximately $23 million and $54 million, respectively.

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

Interest Rates

The Company uses interest rate swaps to offset its exposure to interest rate movements. In accordance with ASC 815, these outstanding swaps qualify and are designated as fair value hedges. As of September 30, 2012, the Company had eight interest rate swaps totaling $850 million outstanding. A 10% increase in the average cost of the Company’s variable rate debt would result in an unfavorable change in pre-tax interest expense of approximately $3 million and $5 million at September 30, 2012 and 2011, respectively.

 

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Commodities

The Company uses commodity contracts in the financial derivatives market in cases where commodity price risk cannot be naturally offset or hedged through supply base fixed price contracts. Commodity risks are systematically managed pursuant to policy guidelines. As a cash flow hedge, gains and losses resulting from the hedging instruments offset the gains or losses on purchases of the underlying commodities that will be used in the business. The maturities of the commodity contracts coincide with the expected purchase of the commodities.

ENVIRONMENTAL, HEALTH AND SAFETY AND OTHER MATTERS

The Company’s global operations are governed by environmental laws and worker safety laws. Under various circumstances, these laws impose civil and criminal penalties and fines, as well as injunctive and remedial relief, for noncompliance and require remediation at sites where Company-related substances have been released into the environment.

The Company has expended substantial resources globally, both financial and managerial, to comply with applicable environmental laws and worker safety laws and to protect the environment and workers. The Company believes it is in substantial compliance with such laws and maintains procedures designed to foster and ensure compliance. However, the Company has been, and in the future may become, the subject of formal or informal enforcement actions or proceedings regarding noncompliance with such laws or the remediation of Company-related substances released into the environment. Such matters typically are resolved by negotiation with regulatory authorities resulting in commitments to compliance, abatement or remediation programs and in some cases payment of penalties. Historically, neither such commitments nor penalties imposed on the Company have been material.

Environmental considerations are a part of all significant capital expenditure decisions; however, expenditures in fiscal 2012 related solely to environmental compliance were not material. At September 30, 2012 and 2011, the Company recorded environmental liabilities of $25 million and $30 million, respectively. A charge to income is recorded when it is probable that a liability has been incurred and the amount of the liability is reasonably estimable. The Company’s environmental liabilities do not take into consideration any possible recoveries of future insurance proceeds. Because of the uncertainties associated with environmental remediation activities at sites where the Company may be potentially liable, future expenses to remediate identified sites could be considerably higher than the accrued liability. However, while neither the timing nor the amount of ultimate costs associated with known environmental remediation matters can be determined at this time, the Company does not expect that these matters will have a material adverse effect on its financial position, results of operations or cash flows. In addition, the Company has identified asset retirement obligations for environmental matters that are expected to be addressed at the retirement, disposal, removal or abandonment of existing owned facilities, primarily in the Power Solutions business. At September 30, 2012 and 2011, the Company recorded conditional asset retirement obligations of $76 million and $91 million, respectively.

Additionally, the Company is involved in a number of product liability and various other casualty lawsuits incident to the operation of its businesses. The Company maintains insurance coverages and records estimated costs for claims and suits of this nature. It is management’s opinion that none of these will have a materially adverse effect on the Company’s financial position, results of operations or cash flows (see Note 20, “Commitments and Contingencies,” of the notes to consolidated financial statements). Costs related to such matters were not material to the periods presented.

 

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QUARTERLY FINANCIAL DATA

Previously reported quarterly amounts have been updated to reflect the retrospective application of the Company’s accounting policy change for recognizing pension and postretirement benefit expense. Refer to Note 1, “Summary of Significant Accounting Policies,” of the notes to consolidated financial statements for further details surrounding this accounting policy change.

 

(in millions, except per share data)

(unaudited)

   First
Quarter
     Second
Quarter
     Third
Quarter
     Fourth
Quarter
    Full
Year
 

2012

             

Net sales

   $ 10,417      $ 10,565      $ 10,581      $ 10,392     $ 41,955  

Gross profit

     1,536        1,553        1,541        1,588       6,218  

Net income (loss) attributable to Johnson Controls, Inc. (1)

     424        379        431        (8     1,226  

Earnings (loss) per share (3)

             

Basic

     0.62        0.56        0.63        (0.01     1.80  

Diluted

     0.62        0.55        0.63        (0.01     1.78  

2011

             

Net sales

   $ 9,537      $ 10,144      $ 10,364      $ 10,788     $ 40,833  

Gross profit

     1,416        1,476        1,552        1,614       6,058  

Net income attributable to Johnson Controls, Inc. (2)

     400        414        367        234       1,415  

Earnings per share (3)

             

Basic

     0.59        0.61        0.54        0.34       2.09  

Diluted

     0.58        0.60        0.53        0.34       2.06  

 

(1) The fiscal 2012 first quarter net income includes a $25 million gain on redemption of a warrant for an existing Power Solutions partially-owned affiliate. The fiscal 2012 second quarter net income includes a $35 million gain on business divestitures net of transaction costs in the Building Efficiency business and a $14 million impairment of an equity investment in the Power Solutions segment. The fiscal 2012 third quarter net income includes $52 million of significant restructuring costs. The fiscal 2012 fourth quarter net income includes $447 million of net mark-to-market charges on pension and postretirement plans and $245 million of significant restructuring costs. The preceding amounts are stated on a pre-tax basis.
(2) The fiscal 2011 first quarter net income includes a $27 million net actuarial gain due to a pension plan curtailment. The fiscal 2011 second quarter net income includes a $68 million net actuarial gain due to a pension plan curtailment and $36 million of costs related to business acquisitions recorded in the Automotive Experience Europe segment. The fiscal 2011 third quarter net income includes $28 million of costs related to business acquisitions recorded in the Automotive Experience Europe segment. The fiscal 2011 fourth quarter net income includes $479 million of net mark-to-market charges on pension and postretirement plans; a $37 million gain on acquisition of a Power Solutions partially-owned affiliate net of acquisition costs and related purchase accounting adjustments and a Power Solutions partially-owned affiliate’s restatement of prior period income; and $43 million of restructuring costs recorded in the Building Efficiency and Automotive Experience businesses. The preceding amounts are stated on a pre-tax basis.
(3) Due to the use of the weighted-average shares outstanding for each quarter for computing earnings per share, the sum of the quarterly per share amounts may not equal the per share amount for the year.

 

  ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See “Risk Management” included in Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

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  ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements

 

     Page  

Report of Independent Registered Public Accounting Firm

     52   

Consolidated Statements of Income for the years ended September 30, 2012, 2011 and 2010

     54   

Consolidated Statements of Financial Position as of September 30, 2012 and 2011

     55   

Consolidated Statements of Cash Flows for the years ended September 30, 2012, 2011 and 2010

     56   

Consolidated Statements of Shareholders’ Equity Attributable to Johnson Controls, Inc. for the years ended September 30, 2012, 2011 and 2010

     57   

Notes to Consolidated Financial Statements

     58   

Schedule II - Valuation and Qualifying Accounts

     106   

 

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LOGO

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Johnson Controls, Inc.

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Johnson Controls, Inc. and its subsidiaries at September 30, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2012 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Note 1 to the consolidated financial statements, in 2012 the Company has changed its method of accounting for pension and postretirement benefits. All periods have been retroactively revised for this accounting change.

 

      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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A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

  /s/ PricewaterhouseCoopers LLP
  PricewaterhouseCoopers LLP
  Milwaukee, Wisconsin
  November 19, 2012

 

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Johnson Controls, Inc.

Consolidated Statements of Income

 

     Year ended September 30,  
(in millions, except per share data)    2012     2011     2010  

Net sales

      

Products and systems*

   $ 33,561     $ 32,420     $ 27,204  

Services*

     8,394       8,413       7,101  
  

 

 

   

 

 

   

 

 

 
     41,955       40,833       34,305  

Cost of sales

      

Products and systems*

     28,839       27,675       23,263  

Services*

     6,898       7,100       5,821  
  

 

 

   

 

 

   

 

 

 
     35,737       34,775       29,084  
  

 

 

   

 

 

   

 

 

 

Gross profit

     6,218       6,058       5,221  

Selling, general and administrative expenses

     (4,438     (4,393     (3,796

Restructuring costs

     (297     —          —     

Net financing charges

     (233     (174     (170

Equity income

     340       298       254  
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     1,590       1,789       1,509  

Provision for income taxes

     237       257       127  
  

 

 

   

 

 

   

 

 

 

Net income

     1,353       1,532       1,382  

Income attributable to noncontrolling interests

     127       117       75  
  

 

 

   

 

 

   

 

 

 

Net income attributable to Johnson Controls, Inc.

   $ 1,226     $ 1,415     $ 1,307  
  

 

 

   

 

 

   

 

 

 

Earnings per share

      

Basic

   $ 1.80     $ 2.09     $ 1.94  

Diluted

   $ 1.78     $ 2.06     $ 1.92  

 

* 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 Financial Position

 

     September 30,  
(in millions, except par value and share data)    2012     2011  

Assets

    

Cash and cash equivalents

   $ 265     $ 257  

Accounts receivable, less allowance for doubtful accounts of $78 and $89, respectively

     7,308       7,151  

Inventories

     2,227       2,316  

Other current assets

     2,873       2,291  
  

 

 

   

 

 

 

Current assets

     12,673       12,015  
  

 

 

   

 

 

 

Property, plant and equipment - net

     6,440       5,616  

Goodwill

     6,982       7,016  

Other intangible assets - net

     947       945  

Investments in partially-owned affiliates

     948       811  

Other noncurrent assets

     2,894       3,273  
  

 

 

   

 

 

 

Total assets

   $ 30,884     $ 29,676  
  

 

 

   

 

 

 

Liabilities and Equity

    

Short-term debt

   $ 323     $ 596  

Current portion of long-term debt

     424       17  

Accounts payable

     6,114       6,159  

Accrued compensation and benefits

     1,090       1,315  

Other current liabilities

     2,904       2,695  
  

 

 

   

 

 

 

Current liabilities

     10,855       10,782  
  

 

 

   

 

 

 

Long-term debt

     5,321       4,533  

Pension and postretirement benefits

     1,248       1,102  

Other noncurrent liabilities

     1,504       1,819  
  

 

 

   

 

 

 

Long-term liabilities

     8,073       7,454  
  

 

 

   

 

 

 

Commitments and contingencies (Note 20)

    

Redeemable noncontrolling interests

     253       260  

Common Stock, $.01 7/18 par value shares authorized: 1,800,000,000 shares issued: 2012 - 688,483,873; 2011 - 682,634,236

     10       9  

Capital in excess of par value

     2,725       2,620  

Retained earnings

     8,541       7,838  

Treasury stock, at cost (2012 - 6,176,266; 2011 - 2,470,168 shares)

     (179     (74

Accumulated other comprehensive income

     458       649  
  

 

 

   

 

 

 

Shareholders’ equity attributable to Johnson Controls, Inc.

     11,555       11,042  
  

 

 

   

 

 

 

Noncontrolling interests

     148       138  
  

 

 

   

 

 

 

Total equity

     11,703       11,180  
  

 

 

   

 

 

 

Total liabilities and equity

   $ 30,884     $ 29,676  
  

 

 

   

 

 

 

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

 

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Johnson Controls, Inc.

Consolidated Statements of Cash Flows

 

     Year Ended September 30,  
(in millions)    2012     2011     2010  

Operating Activities

      

Net income attributable to Johnson Controls, Inc.

   $ 1,226     $ 1,415     $ 1,307  

Income attributable to noncontrolling interests

     127       117       75  
  

 

 

   

 

 

   

 

 

 

Net income

     1,353       1,532       1,382  

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

      

Depreciation

     768       678       648  

Amortization of intangibles

     56       53       43  

Pension and postretirement benefit expense

     479       410       378  

Pension and postretirement contributions

     (414     (451     (695

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

     (138     (15     5  

Deferred income taxes

     (206     (257     (155

Impairment charges

     53       —          41  

Gain on divestitures - net

     (40     —          —     

Fair value adjustment of equity investment

     (12     (89     (47

Equity-based compensation

     56       59       49  

Other

     (11     2       13  

Changes in assets and liabilities, excluding acquisitions and divestitures:

      

Receivables

     (114     (721     (608

Inventories

     39       (387     (260

Other assets

     (367     (118     274  

Restructuring reserves

     196       (94     (195

Accounts payable and accrued liabilities

     (64     343       812  

Accrued income taxes

     (75     131       (247
  

 

 

   

 

 

   

 

 

 

Cash provided by operating activities

     1,559       1,076       1,438  
  

 

 

   

 

 

   

 

 

 

Investing Activities

      

Capital expenditures

     (1,831     (1,325     (777

Sale of property, plant and equipment

     58       54       47  

Acquisition of businesses, net of cash acquired

     (30     (1,226     (61

Business divestitures

     105       —          —     

Settlement of cross-currency interest rate swaps

     (19     —          —     

Changes in long-term investments

     (100     (140     (101

Warrant redemption

     25       —          —     
  

 

 

   

 

 

   

 

 

 

Cash used by investing activities

     (1,792     (2,637     (892
  

 

 

   

 

 

   

 

 

 

Financing Activities

      

Increase (decrease) in short-term debt - net

     (302     510       (575

Increase in long-term debt

     1,260       1,852       515  

Repayment of long-term debt

     (36     (787     (526

Stock repurchases

     (102     —          —     

Payment of cash dividends

     (477     (413     (339

Proceeds from the exercise of stock options

     40       105       52  

Settlement of interest rate swaps

     —          24       —     

Cash paid to acquire a noncontrolling interest

     (115     (23     —     

Other

     (61     (29     (22
  

 

 

   

 

 

   

 

 

 

Cash provided (used) by financing activities

     207       1,239       (895
  

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     34       19       148  
  

 

 

   

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     8       (303     (201

Cash and cash equivalents at beginning of period

     257       560       761  
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 265     $ 257     $ 560  
  

 

 

   

 

 

   

 

 

 

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

 

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Johnson Controls, Inc.

Consolidated Statements of Shareholders’ Equity Attributable to Johnson Controls, Inc.

 

(in millions, except per share data)

   Total     Common
Stock
     Capital in
Excess of
Par Value
     Retained
Earnings
    Treasury
Stock,
at Cost
    Accumulated
Other
Comprehensive
Income (Loss)
 

At September 30, 2009 (previously reported)

   $ 9,100     $ 9      $ 2,354      $ 6,615     $ (70   $ 192  

Pension and postretirement policy change (Note 1)

     —          —           —           (691     —          691  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

At September 30, 2009 (revised)

     9,100       9        2,354        5,924       (70     883  

Comprehensive income:

              

Net income attributable to Johnson Controls, Inc.

     1,307       —           —           1,307       —          —     

Foreign currency translation adjustments

     (115     —           —           —          —          (115

Realized and unrealized gains on derivatives

     13       —           —           —          —          13  

Unrealized gains on marketable common stock

     3       —           —           —          —          3  

Employee retirement plans

     14       —           —           —          —          14  
  

 

 

             

Other comprehensive loss

     (85            
  

 

 

             

Comprehensive income

     1,222              

Cash dividends

              

Common ($0.52 per share)

     (350     —           —           (350     —          —     

Redemption value adjustment attributable to redeemable noncontrolling interests

     9       —           —           9       —          —     

Other, including options exercised

     90       —           94        —          (4     —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

At September 30, 2010

     10,071       9        2,448        6,890       (74     798  

Comprehensive income:

              

Net income attributable to Johnson Controls, Inc.

     1,415       —           —           1,415       —          —     

Foreign currency translation adjustments

     (109     —           —           —          —          (109

Realized and unrealized losses on derivatives

     (47     —           —           —          —          (47

Unrealized gains on marketable common stock

     3       —           —           —          —          3  

Employee retirement plans

     4       —           —           —          —          4  
  

 

 

             

Other comprehensive loss

     (149            
  

 

 

             

Comprehensive income

     1,266              

Cash dividends

              

Common ($0.64 per share)

     (435     —           —           (435     —          —     

Redemption value adjustment attributable to redeemable noncontrolling interests

     (32     —           —           (32     —          —     

Other, including options exercised

     172       —           172        —          —          —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

At September 30, 2011

     11,042       9        2,620        7,838       (74     649  

Comprehensive income:

              

Net income attributable to Johnson Controls, Inc.

     1,226       —           —           1,226       —          —     

Foreign currency translation adjustments

     (221     —           —           —          —          (221

Realized and unrealized gains on derivatives

     39       —           —           —          —          39  

Unrealized losses on marketable common stock

     (1     —           —           —          —          (1

Employee retirement plans

     (8     —           —           —          —          (8
  

 

 

             

Other comprehensive loss

     (191            
  

 

 

             

Comprehensive income

     1,035              

Cash dividends

              

Common ($0.72 per share)

     (492     —           —           (492     —          —     

Redemption value adjustment attributable to redeemable noncontrolling interests

     (35     —           —           (35     —          —     

Repurchases of common stock

     (102     —           —           —          (102     —     

Other, including options exercised

     107       1        105        4       (3     —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

At September 30, 2012

   $ 11,555     $ 10      $ 2,725      $ 8,541     $ (179   $ 458  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

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

 

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Johnson Controls, Inc.

Notes to Consolidated Financial Statements

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of Johnson Controls, Inc. and its domestic and non-U.S. subsidiaries that are consolidated in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP). All significant intercompany transactions have been eliminated. Investments in partially-owned affiliates are accounted for by the equity method when the 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 September 30, 2012 and two VIEs for the reporting period ended September 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 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 consolidated statements of financial position. The impact of the consolidation of the entity on the Company’s consolidated statements of income for the year ended September 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.

 

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

 

     September 30,  
     2012      2011  

Current assets

   $ 199      $ 207  

Noncurrent assets

     144        55  
  

 

 

    

 

 

 

Total assets

   $ 343      $ 262  
  

 

 

    

 

 

 

Current liabilities

   $ 172      $ 144  

Noncurrent liabilities

     25        —     
  

 

 

    

 

 

 

Total liabilities

   $ 197      $ 144  
  

 

 

    

 

 

 

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 consolidated statement of financial position at September 30, 2012 and 2011 was $55 million and $49 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 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. The Company’s maximum exposure to loss at September 30, 2012 includes the partially-owned affiliate investment balance of $52 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.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

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Fair Value of Financial Instruments

The fair values of cash and cash equivalents, accounts receivable, short-term debt and accounts payable approximate their carrying values. See Note 9, “Derivative Instruments and Hedging Activities,” and Note 10, “Fair Value Measurements,” of the notes to consolidated financial statements for fair value of financial instruments, including derivative instruments, hedging activities and long-term debt.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

Receivables

Receivables consist of amounts billed and currently due from customers and unbilled costs and accrued profits related to revenues on long-term contracts that have been recognized for accounting purposes but not yet billed to customers. The Company extends credit to customers in the normal course of business and maintains an allowance for doubtful accounts resulting from the inability or unwillingness of customers to make required payments. The allowance for doubtful accounts is based on historical experience, existing economic conditions and any specific customer collection issues the Company has identified.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined using either the last-in, first-out (LIFO) method or the first-in, first-out (FIFO) method. Finished goods and work-in-process inventories include material, labor and manufacturing overhead costs.

Pre-Production Costs Related to Long-Term Supply Arrangements

The Company’s policy for engineering, research and development, and other design and development costs related to products that will be sold under long-term supply arrangements requires such costs to be expensed as incurred or capitalized if reimbursement from the customer is contractually assured. Income related to recovery of these costs is recorded within selling, general and administrative expense in the consolidated statements of income. At September 30, 2012 and 2011, the Company recorded within the consolidated statements of financial position approximately $286 million and $215 million, respectively, of engineering and research and development costs for which customer reimbursement is contractually assured. The reimbursable costs are recorded in other current assets if reimbursement will occur in less than one year and in other noncurrent assets if reimbursement will occur beyond one year.

Costs for molds, dies and other tools used to make products that will be sold under long-term supply arrangements are capitalized within property, plant and equipment if the Company has title to the assets or has the non-cancelable right to use the assets during the term of the supply arrangement. Capitalized items, if specifically designed for a supply arrangement, are amortized over the term of the arrangement; otherwise, amounts are amortized over the estimated useful lives of the assets. The carrying values of assets capitalized in accordance with the foregoing policy are periodically reviewed for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. At September 30, 2012 and 2011, approximately $113 million and $109 million, respectively, of costs for molds, dies and other tools were capitalized within property, plant and equipment which represented assets to which the Company had title. In addition, at September 30, 2012 and 2011, the Company recorded within the consolidated statements of financial position in other current assets approximately $284 million and $254 million, respectively, of costs for molds, dies and other tools for which customer reimbursement is contractually assured.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost. Depreciation is provided over the estimated useful lives of the respective assets using the straight-line method for financial reporting purposes and accelerated methods for income tax purposes. The estimated useful lives range from 3 to 40 years for buildings and improvements and from 3 to 15 years for machinery and equipment.

The Company capitalizes interest on borrowings during the active construction period of major capital projects. Capitalized interest is added to the cost of the underlying assets and is amortized over the useful lives of the assets.

 

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Goodwill and Other Intangible Assets

Goodwill reflects the cost of an acquisition in excess of the fair values assigned to identifiable net assets acquired. The Company reviews goodwill for impairment during the fourth fiscal quarter or more frequently if events or changes in circumstances indicate the asset might be impaired. The Company performs impairment reviews for its reporting units, which have been determined to be the Company’s reportable segments or one level below the reportable segments in certain instances, using a fair-value method based on management’s judgments and assumptions or third party valuations. The fair value of a reporting unit refers to the price that would be received to sell the unit as a whole in an orderly transaction between market participants at the measurement date. In estimating the fair value, the Company uses multiples of earnings based on the average of historical, published multiples of earnings of comparable entities with similar operations and economic characteristics. In certain instances, the Company uses discounted cash flow analyses to further support the fair value estimates. The inputs utilized in the analyses are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, “Fair Value Measurements and Disclosures.” The estimated fair value is then compared with the carrying amount of the reporting unit, including recorded goodwill. The Company is subject to financial statement risk to the extent that the carrying amount exceeds the estimated fair value. The impairment testing performed by the Company in the fourth quarter of fiscal year 2012, 2011 and 2010 indicated that the estimated fair value of each reporting unit substantially exceeded its corresponding carrying amount including recorded goodwill, and as such, no impairment existed at September 30, 2012, 2011 and 2010. No reporting unit was determined to be at risk of failing step one of the goodwill impairment test. While at September 30, 2012 the estimated fair value of each reporting unit substantially exceeded its corresponding carrying amount including recorded goodwill, a prolonged significant decline in the European automotive industry could put the Company at risk of not achieving future growth assumptions and could result in impairment of goodwill or other long-lived assets, or result in additional restructuring actions, within the Automotive Experience Europe segment, which could be material to the consolidated financial statements.

Indefinite lived other intangible assets are also subject to at least annual impairment testing. Other intangible assets with definite lives continue to be amortized over their estimated useful lives and are subject to impairment testing if events or changes in circumstances indicate that the asset might be impaired. A considerable amount of management judgment and assumptions are required in performing the impairment tests. While the Company believes the judgments and assumptions used in the impairment tests are reasonable and no impairment existed at September 30, 2012, 2011 and 2010, different assumptions could change the estimated fair values and, therefore, impairment charges could be required, which could be material to the consolidated financial statements.

Impairment of Long-Lived Assets

The Company reviews long-lived assets, including property, plant and equipment and other intangible assets with definite lives, for impairment whenever events or changes in circumstances indicate that the asset’s carrying amount may not be recoverable. The Company conducts its long-lived asset impairment analyses in accordance with ASC 360-10-15, “Impairment or Disposal of Long-Lived Assets.” ASC 360-10-15 requires the Company to group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows. If the undiscounted cash flows do not indicate the carrying amount of the asset is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals. See Note 16, “Impairment of Long-Lived Assets,” of the notes to consolidated financial statements for disclosure of the impairment analyses performed by the Company during fiscal 2012, 2011 and 2010.

Percentage-of-Completion Contracts

The Building Efficiency business records certain long-term contracts under the percentage-of-completion method of accounting. Under this method, sales and gross profit are recognized as work is performed based on the relationship between actual costs incurred and total estimated costs at completion. The Company records costs and earnings in excess of billings on uncompleted contracts within accounts receivable - net and billings in excess of costs and earnings on uncompleted contracts within other current liabilities in the consolidated statements of financial position. Amounts included within accounts receivable - net related to these contracts were $548 million and $476 million at September 30, 2012 and 2011, respectively. Amounts included within other current liabilities were $365 million and $359 million at September 30, 2012 and 2011, respectively.

 

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Revenue Recognition

The Company’s Building Efficiency business recognizes revenue from certain long-term contracts over the contractual period under the percentage-of-completion (POC) method of accounting. This method of accounting recognizes sales and gross profit as work is performed based on the relationship between actual costs incurred and total estimated costs at completion. Recognized revenues that will not be billed under the terms of the contract until a later date are recorded in unbilled accounts receivable. Likewise, contracts where billings to date have exceeded recognized revenues are recorded in other current liabilities. Changes to the original estimates may be required during the life of the contract and such estimates are reviewed monthly. Sales and gross profit are adjusted using the cumulative catch-up method for revisions in estimated total contract costs and contract values. Estimated losses are recorded when identified. Claims against customers are recognized as revenue upon settlement. The amount of accounts receivable due after one year is not significant. The use of the POC method of accounting involves considerable use of estimates in determining revenues, costs and profits and in assigning the amounts to accounting periods. The periodic reviews have not resulted in adjustments that were significant to the Company’s results of operations. The Company continually evaluates all of the assumptions, risks and uncertainties inherent with the application of the POC method of accounting.

The Building Efficiency business enters into extended warranties and long-term service and maintenance agreements with certain customers. For these arrangements, revenue is recognized on a straight-line basis over the respective contract term.

The Company’s Building Efficiency business also sells certain heating, ventilating and air conditioning (HVAC) and refrigeration products and services in bundled arrangements, where multiple products and/or services are involved. In accordance with ASU No. 2009-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements - A Consensus of the FASB Emerging Issues Task Force,” the Company divides bundled arrangements into separate deliverables and revenue is allocated to each deliverable based on the relative selling price method. Significant deliverables within these arrangements include equipment, commissioning, service labor and extended warranties. In order to estimate relative selling price, market data and transfer price studies are utilized. Approximately four to twelve months separate the timing of the first deliverable until the last piece of equipment is delivered, and there may be extended warranty arrangements with duration of one to five years commencing upon the end of the standard warranty period.

In all other cases, the Company recognizes revenue at the time title passes to the customer or as services are performed.

Research and Development Costs

Expenditures for research activities relating to product development and improvement are charged against income as incurred and included within selling, general and administrative expenses in the consolidated statement of income. Such expenditures for the years ended September 30, 2012, 2011 and 2010 were $1,025 million, $876 million and $723 million, respectively.

A portion of the costs associated with these activities is reimbursed by customers and, for the fiscal years ended September 30, 2012, 2011 and 2010 were $516 million, $366 million and $315 million, respectively.

Earnings Per Share

Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share are computed by dividing net income by diluted weighted average shares outstanding. Diluted weighted average shares include the dilutive effect of common stock equivalents which would arise from the exercise of stock options and any outstanding Equity Units and convertible senior notes as of the beginning of the period, for the years ended September 30, 2012, 2011 and 2010. See Note 12, “Earnings per Share,” of the notes to consolidated financial statements for the calculation of earnings per share.

Foreign Currency Translation

Substantially all of the Company’s international operations use the respective local currency as the functional currency. Assets and liabilities of international entities have been translated at period-end exchange rates, and income and expenses have been translated using average exchange rates for the period. Monetary assets and liabilities denominated in non-functional currencies are adjusted to reflect period-end exchange rates. The aggregate

 

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transaction gains (losses), net of the impact of foreign currency hedges, included in net income for the years ended September 30, 2012, 2011 and 2010 were $12 million, $(22) million and $50 million, respectively.

Derivative Financial Instruments

The Company has written policies and procedures that place all financial instruments under the direction of corporate treasury and restrict all derivative transactions to those intended for hedging purposes. The use of financial instruments for speculative purposes is strictly prohibited. The Company uses financial instruments to manage the market risk from changes in foreign exchange rates, commodity prices, stock-based compensation liabilities and interest rates.

The fair values of all derivatives are recorded in the consolidated statements of financial position. The change in a derivative’s fair value is recorded each period in current earnings or accumulated other comprehensive income, depending on whether the derivative is designated as part of a hedge transaction and if so, the type of hedge transaction. See Note 9, “Derivative Instruments and Hedging Activities,” and Note 10, “Fair Value Measurements,” of the notes to consolidated financial statements for disclosure of the Company’s derivative instruments and hedging activities.

Pension and Postretirement Benefits

In the fourth quarter of fiscal 2012, the Company changed its accounting policy for recognizing pension and postretirement benefit expenses. The Company’s historical accounting treatment smoothed asset returns and amortized deferred actuarial gains and losses over future years. The new mark-to-market approach includes measuring the market related value of plan assets at fair value instead of utilizing a three-year smoothing approach. In addition, the Company has elected to completely eliminate the corridor approach and recognize actuarial gains and losses in the fourth quarter of each fiscal year or at the date of a remeasurement event. The Company believes this new policy is preferable and provides greater transparency to on-going operational results. The change has no impact on future pension and postretirement funding or benefits paid to participants. These changes have been reported through retrospective application of the new policy to all periods presented.

This change resulted in a $14 million increase in net income attributable to Johnson Controls, Inc. ($0.02 per diluted share) in each of the quarters ended December 31, 2011, March 31, 2012 and June 30, 2012.

 

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The impact of all adjustments made to the consolidated financial statements presented is summarized in the following table (in millions, except per share data):

 

     2012  
     Previous Method     As Reported     Effect of Change  

Consolidated Statement of Income

      

Cost of sales

      

Products and systems

   $ 28,796     $ 28,839     $ 43  

Services

     6,922       6,898       (24

Gross profit

     6,237       6,218       (19

Selling, general and administrative expenses

     4,102       4,438       336  

Income before income taxes

     1,945       1,590       (355

Provision for income taxes

     378       237       (141

Net income

     1,567       1,353       (214

Net income attributable to Johnson Controls, Inc.

     1,440       1,226       (214

Earnings per share

      

Basic

     2.11       1.80       (0.31

Diluted

     2.09       1.78       (0.31

Consolidated Statement of Financial Position

      

Retained earnings

   $ 9,839     $ 8,541     $ (1,298

Accumulated other comprehensive income (loss)

     (840     458       1,298  

Consolidated Statement of Cash Flows

      

Cash provided by operating activities

      

Net income attributable to Johnson Controls, Inc.

   $ 1,440     $ 1,226     $ (214

Net income

     1,567       1,353       (214

Pension and postretirement benefit expense (1)

     —          479       479  

Pension and postretirement contributions (2)

     —          (414     (414

Deferred income taxes

     (65     (206     (141

Other

     75       (11     (86

Accounts payable and accrued liabilities

     (440     (64     376  

Consolidated Statement of Shareholders’ Equity Attributable to Johnson Controls, Inc.

      

Retained earnings at September 30, 2011

   $ 8,922     $ 7,838     $ (1,084

Net income attributable to Johnson Controls, Inc.

     1,440       1,226       (214

Retained earnings at September 30, 2012

     9,839       8,541       (1,298

Accumulated other comprehensive income (loss) at September 30, 2011

     (435     649       1,084  

Employee retirement plans

     (222     (8     214  

Accumulated other comprehensive income (loss) at September 30, 2012

     (840     458       1,298  

 

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     2011  
     Previously
Reported
    Revised     Effect of Change  

Consolidated Statement of Income

      

Cost of sales

      

Products and systems

   $ 27,631     $ 27,675     $ 44  

Services

     7,032       7,100       68  

Gross profit

     6,170       6,058       (112

Selling, general and administrative expenses

     4,183       4,393       210  

Income before income taxes

     2,111       1,789       (322

Provision for income taxes

     370       257       (113