10-Q 1 q2fy1710-q.htm 10-Q Document


 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
 
 
Form 10-Q
 
 
 
 
 
  
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
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: 001-13836 
 
 
 
 
 
 
JOHNSON CONTROLS INTERNATIONAL PLC
(Exact name of registrant as specified in its charter) 
 
 
 
 
 
 
Ireland
 
98-0390500
(Jurisdiction of Incorporation)
 
(I.R.S. Employer Identification No.)
 
 
One Albert Quay
Cork, Ireland
(Address of principal executive offices)
353-21-423-5000

(Registrant’s telephone number)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report) 
 
 
 
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
þ
 
 
Accelerated filer
¨

Non-accelerated filer
¨

(Do not check if a smaller
 
Smaller reporting company
¨

 
 
 reporting company)

 
Emerging growth company
¨

 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Ordinary Shares Outstanding at March 31, 2017
Ordinary Shares, $0.01 par value per share
 
938,108,615
 
 
 
 
 

1


JOHNSON CONTROLS INTERNATIONAL PLC
FORM 10-Q
Report Index

  
Page
Part I. Financial Information
 
 
 
Item 1. Financial Statements (unaudited)
 
 
 
Consolidated Statements of Financial Position at March 31, 2017 and September 30, 2016
 
 
Consolidated Statements of Income for the Three and Six Month Periods Ended March 31, 2017 and 2016
 
 
Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Month Periods Ended March 31, 2017 and 2016
 
 
Consolidated Statements of Cash Flows for the Six Month Periods Ended March 31, 2017 and 2016
 
 
Notes to Consolidated Financial Statements
 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
 
Item 4. Controls and Procedures
 
 
Part II. Other Information
 
 
 
Item 1. Legal Proceedings
 
 
Item 1A. Risk Factors
 
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
 
Item 6. Exhibits
 
 
Signatures

2



PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
Johnson Controls International plc
Consolidated Statements of Financial Position
(in millions, except par value; unaudited)
 
 
 
 
 
March 31, 2017
 
September 30, 2016
Assets
 
 
 
 
 
 
 
Cash and cash equivalents
$
412

 
$
579

Accounts receivable - net
6,094

 
6,394

Inventories
3,138

 
2,888

Assets held for sale
2,037

 
5,812

Other current assets
1,548

 
1,436

Current assets
13,229

 
17,109

 
 
 
 
Property, plant and equipment - net
5,601

 
5,632

Goodwill
19,644

 
21,024

Other intangible assets - net
6,687

 
7,540

Investments in partially-owned affiliates
1,099

 
990

Noncurrent assets held for sale

 
7,374

Other noncurrent assets
3,347

 
3,510

Total assets
$
49,607

 
$
63,179

 
 
 
 
Liabilities and Equity
 
 
 
 
 
 
 
Short-term debt
$
1,124

 
$
1,078

Current portion of long-term debt
542

 
628

Accounts payable
3,720

 
4,000

Accrued compensation and benefits
1,082

 
1,333

Liabilities held for sale
237

 
4,276

Other current liabilities
4,037

 
5,016

Current liabilities
10,742

 
16,331

 
 
 
 
Long-term debt
11,810

 
11,053

Pension and postretirement benefits
1,048

 
1,550

Noncurrent liabilities held for sale

 
3,888

Other noncurrent liabilities
5,638

 
5,033

Long-term liabilities
18,496

 
21,524

 
 
 
 
Commitments and contingencies (Note 22)


 


 
 
 
 
Redeemable noncontrolling interests
168

 
234

 
 
 
 
Ordinary shares, $0.01 par value
9

 
9

Ordinary A shares, €1.00 par value

 

Preferred shares, $0.01 par value

 

Ordinary shares held in treasury, at cost
(172
)
 
(20
)
Capital in excess of par value
16,270

 
16,105

Retained earnings
4,268

 
9,177

Accumulated other comprehensive loss
(987
)
 
(1,153
)
Shareholders’ equity attributable to Johnson Controls
19,388

 
24,118

Noncontrolling interests
813

 
972

Total equity
20,201

 
25,090

Total liabilities and equity
$
49,607

 
$
63,179

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

3



Johnson Controls International plc
Consolidated Statements of Income
(in millions, except per share data; unaudited)
 
 
 
 
 
 
 
 
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
2017
 
2016
 
2017
 
2016
Net sales
 
 
 
 
 
 
 
Products and systems*
$
5,448

 
$
3,863

 
$
10,753

 
$
7,683

Services*
1,819

 
870

 
3,600

 
1,746

 
7,267

 
4,733

 
14,353

 
9,429

Cost of sales
 
 
 
 
 
 
 
Products and systems*
3,893

 
2,851

 
7,787

 
5,691

Services*
1,093

 
595

 
2,171

 
1,194

 
4,986

 
3,446

 
9,958

 
6,885

 
 
 
 
 
 
 
 
Gross profit
2,281

 
1,287

 
4,395

 
2,544

 
 
 
 
 
 
 
 
Selling, general and administrative expenses
(1,726
)
 
(899
)
 
(3,296
)
 
(1,746
)
Restructuring and impairment costs
(99
)
 
(60
)
 
(177
)
 
(60
)
Net financing charges
(116
)
 
(71
)
 
(252
)
 
(137
)
Equity income
53

 
40

 
108

 
82

 
 
 
 
 
 
 
 
Income from continuing operations before income taxes
393

 
297

 
778

 
683

 
 
 
 
 
 
 
 
Income tax provision
508

 
41

 
481

 
124

 
 
 
 
 
 
 
 
Income (loss) from continuing operations
(115
)
 
256

 
297

 
559

 
 
 
 
 
 
 
 
Loss from discontinued operations, net of tax (Note 5)

 
(725
)
 
(34
)
 
(538
)
 
 
 
 
 
 
 
 
Net income (loss)
(115
)
 
(469
)
 
263

 
21

 
 
 
 
 
 
 
 
Income from continuing operations attributable to noncontrolling
     interests
33

 
38

 
73

 
61

 
 
 
 
 
 
 
 
Income from discontinued operations attributable to noncontrolling
     interests

 
23

 
9

 
40

 
 
 
 
 
 
 
 
Net income (loss) attributable to Johnson Controls
$
(148
)
 
$
(530
)
 
$
181

 
$
(80
)
 
 
 
 
 
 
 
 
Amounts attributable to Johnson Controls ordinary shareholders:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
(148
)
 
$
218

 
$
224

 
$
498

        Loss from discontinued operations

 
(748
)
 
(43
)
 
(578
)
Net income (loss)
$
(148
)
 
$
(530
)
 
$
181

 
$
(80
)
 
 
 
 
 
 
 
 
Basic earnings (loss) per share attributable to Johnson Controls
 
 
 
 
 
 
 
Continuing operations
$
(0.16
)
 
$
0.34

 
$
0.24

 
$
0.77

Discontinued operations

 
(1.15
)
 
(0.05
)
 
(0.89
)
Net income (loss) **
$
(0.16
)
 
$
(0.82
)
 
$
0.19

 
$
(0.12
)
 
 
 
 
 
 
 
 
Diluted earnings (loss) per share attributable to Johnson Controls
 
 
 
 
 
 
 
Continuing operations
$
(0.16
)
 
$
0.33

 
$
0.24

 
$
0.76

Discontinued operations

 
(1.15
)
 
(0.05
)
 
(0.89
)
Net income (loss) **
$
(0.16
)
 
$
(0.81
)
 
$
0.19

 
$
(0.12
)
*
Products and systems consist of Building Technologies & Solutions and Power Solutions products and systems. Services are Building Technologies & Solutions technical services.
**
Certain items do not sum due to rounding.

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

4



Johnson Controls International plc
Consolidated Statements of Comprehensive Income (Loss)
(in millions; unaudited)
 
 
 
 
 
 
 
 
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Net income (loss)
$
(115
)
 
$
(469
)
 
$
263

 
$
21

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
252

 
203

 
(451
)
 
26

Realized and unrealized gains (losses) on derivatives
(8
)
 
5

 
(4
)
 
2

Realized and unrealized gains on marketable securities
11

 

 
9

 

 
 
 
 
 
 
 
 
Other comprehensive income (loss)
255

 
208

 
(446
)
 
28

 
 
 
 
 
 
 
 
Total comprehensive income (loss)
140

 
(261
)
 
(183
)
 
49

 
 
 
 
 
 
 
 
Comprehensive income attributable to noncontrolling interests
42

 
90

 
51

 
111

 
 
 
 
 
 
 
 
Comprehensive income (loss) attributable to Johnson Controls
$
98

 
$
(351
)
 
$
(234
)
 
$
(62
)

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

5



Johnson Controls International plc
Consolidated Statements of Cash Flows
(in millions; unaudited)
 
Six Months Ended March 31,
 
2017
 
2016
Operating Activities
 
 
 
Net income (loss) attributable to Johnson Controls
$
181

 
$
(80
)
Income from continuing operations attributable to noncontrolling interests
73

 
61

Income from discontinued operations attributable to noncontrolling interests
9

 
40

Net income
263

 
21

Adjustments to reconcile net income to cash provided (used) by operating activities:
 
 
 
Depreciation and amortization
638

 
445

Pension and postretirement benefit income
(202
)
 
(34
)
Pension and postretirement contributions
(258
)
 
(53
)
Equity in earnings of partially-owned affiliates, net of dividends received
(116
)
 
(207
)
Deferred income taxes
1,059

 
331

Non-cash restructuring and impairment charges
39

 
29

Fair value adjustment of equity investment

 
(4
)
Equity-based compensation
81

 
51

Other
1

 
5

Changes in assets and liabilities, excluding acquisitions and divestitures:
 
 
 
Accounts receivable
(21
)
 
75

Inventories
(370
)
 
(168
)
Other assets
(150
)
 
134

Restructuring reserves
47

 
67

Accounts payable and accrued liabilities
(616
)
 
(311
)
Accrued income taxes
(1,931
)
 
240

Cash provided (used) by operating activities
(1,536
)
 
621

 
 
 
 
Investing Activities
 
 
 
Capital expenditures
(634
)
 
(543
)
Sale of property, plant and equipment
18

 
14

Acquisition of businesses, net of cash acquired
(6
)
 
(133
)
Business divestitures
180

 
40

Changes in long-term investments
(30
)
 

Other

 
5

Cash used by investing activities
(472
)
 
(617
)
 
 
 
 
Financing Activities
 
 
 
Increase in short-term debt - net
55

 
1,140

Increase in long-term debt
1,552

 

Repayment of long-term debt
(831
)
 
(814
)
Debt financing costs
(17
)
 

Stock repurchases
(119
)
 

Payment of cash dividends
(235
)
 
(356
)
Proceeds from the exercise of stock options
88

 
20

Dividends paid to noncontrolling interests
(78
)
 
(227
)
Dividend from Adient spin-off
2,050

 

Cash transferred to Adient related to spin-off
(665
)
 

Cash paid related to prior acquisitions
(37
)
 

Other
(2
)
 
3

Cash provided (used) by financing activities
1,761

 
(234
)
Effect of exchange rate changes on cash and cash equivalents
(25
)
 
(9
)
Cash held for sale
105

 
(22
)
Decrease in cash and cash equivalents
(167
)
 
(261
)
Cash and cash equivalents at beginning of period
579

 
553

Cash and cash equivalents at end of period
$
412

 
$
292


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

6


Johnson Controls International plc
Notes to Consolidated Financial Statements
March 31, 2017
(unaudited)



1.
Financial Statements

The consolidated financial statements include the consolidated accounts of Johnson Controls International plc, a corporation organized under the laws of Ireland, and its subsidiaries (Johnson Controls International plc and all its subsidiaries, hereinafter collectively referred to as the "Company" or "Johnson Controls"). In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (which include normal recurring adjustments) necessary to state fairly the financial position, results of operations and cash flows for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) have been omitted pursuant to the rules and regulations of the United States Securities and Exchange Commission (SEC). These consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended September 30, 2016 filed with the SEC on November 23, 2016, portions of which (including Part I, Item 1. Business and Item 3. Legal Proceedings, and the following items from Part II of the Annual Report: Item 6. Selected Financial Data, Item 7. Management’s Discussion and Analysis, and Item 8. Financial Statements and Supplementary Data) were recast in the Company's Current Report on Form 8-K filed with the SEC on February 23, 2017. The results of operations for the three and six month periods ended March 31, 2017 are not necessarily indicative of results for the Company’s 2017 fiscal year because of seasonal and other factors.

Nature of Operations

On September 2, 2016, Johnson Controls, Inc. ("JCI Inc.") and Tyco International plc (“Tyco”) completed their combination pursuant to the Agreement and Plan of Merger (the “Merger Agreement”), dated as of January 24, 2016, as amended by Amendment No. 1, dated as of July 1, 2016, by and among JCI Inc., Tyco and certain other parties named therein, including Jagara Merger Sub LLC, an indirect wholly owned subsidiary of Tyco (“Merger Sub”). Pursuant to the terms of the Merger Agreement, on September 2, 2016, Merger Sub merged with and into JCI Inc., with JCI Inc. being the surviving corporation in the merger and a wholly owned, indirect subsidiary of Tyco (the “Merger”). Following the Merger, Tyco changed its name to “Johnson Controls International plc.” The Merger changed the jurisdiction of organization from the United States to Ireland. The domicile to Ireland became effective on September 2, 2016.

The merger was accounted for as a reverse acquisition using the acquisition method of accounting in accordance with Accounting Standards Codification ("ASC") 805, "Business Combinations." JCI Inc. was the accounting acquirer for financial reporting purposes. Accordingly, the historical consolidated financial statements of JCI Inc. for periods prior to this transaction are considered to be the historic financial statements of the Company. Refer to Note 3, "Merger Transaction," of the notes to consolidated financial statements for further information.

On October 31, 2016, the Company completed the spin-off of its Automotive Experience business by way of the transfer of the Automotive Experience Business from Johnson Controls to Adient plc and the issuance of ordinary shares of Adient directly to holders of Johnson Controls ordinary shares on a pro rata basis. Prior to the open of business on October 31, 2016, each of the Company's shareholders received one ordinary share of Adient plc for every 10 ordinary shares of Johnson Controls held as of the close of business on October 19, 2016, the record date for the distribution. Company shareholders received cash in lieu of fractional shares of Adient, if any. Following the separation and distribution, Adient plc is now an independent public company trading on the New York Stock Exchange (NYSE) under the symbol "ADNT." The Company did not retain any equity interest in Adient plc. Adient’s historical financial results are reflected in the Company’s consolidated financial statements as a discontinued operation. Refer to Note 5, "Discontinued Operations," of the notes to consolidated financial statements for further information.

Principles of Consolidation

The consolidated financial statements include the consolidated accounts of Johnson Controls International plc and its subsidiaries that are consolidated in conformity with U.S. GAAP. All significant intercompany transactions have been eliminated. The results of companies acquired or disposed of during the year are included in the consolidated financial statements from the effective date of acquisition or up to the date of disposal. 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.

7


Johnson Controls International plc
Notes to Consolidated Financial Statements
March 31, 2017
(unaudited)


Under certain criteria as provided for in Financial Accounting Standards Board (FASB) 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 rights. 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 one VIE for the reporting period ended March 31, 2017 and three VIEs for the reporting period ended  September 30, 2016, 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 funded the entities’ short-term liquidity needs through revolving credit facilities and had the power to direct the activities that were considered most significant to the entities through its key customer supply relationships. These VIE's were divested as a result of the Adient spin-off in the first quarter of fiscal 2017.

In fiscal 2012, 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, this VIE has been consolidated within the Company’s consolidated statements of financial position. The impact of consolidation of the entity on the Company’s consolidated statements of income for the three and six month periods ended March 31, 2017 and 2016 was not material. The VIE is named as a co-obligor under a third party debt agreement in the amount of $168 million, maturing in fiscal 2020, under 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 $37 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.


8


Johnson Controls International plc
Notes to Consolidated Financial Statements
March 31, 2017
(unaudited)


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):
 
March 31, 2017
 
September 30, 2016
 
 
 
 
Current assets
$
2

 
$
284

Noncurrent assets
53

 
98

Total assets
$
55

 
$
382

 
 
 
 
Current liabilities
$
3

 
$
230

Noncurrent liabilities
44

 
29

Total liabilities
$
47

 
$
259


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

Nonconsolidated VIEs

As mentioned previously within the "Consolidated VIEs" section above, in fisca1 2012, 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 includes the partially-owned affiliate investment balances of $62 million and $59 million at March 31, 2017 and September 30, 2016 respectively, 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.

Restricted Cash

At March 31, 2017, the Company held restricted cash of approximately $42 million, of which $33 million was recorded within other current assets in the consolidated statements of financial position and $9 million was recorded within other noncurrent assets in the consolidated statements of financial position. These amounts were primarily related to cash restricted for payment of asbestos liabilities. At September 30, 2016, the Company held restricted cash of approximately $88 million, of which $79 million was recorded within other current assets in the consolidated statements of financial position and $9 million was recorded within other noncurrent assets in the consolidated statements of financial position. These amounts were primarily related to cash held in escrow from business divestitures and cash restricted for payment of asbestos liabilities.

Retrospective Changes

Certain amounts as of September 30, 2016 have been revised to conform to the current year’s presentation.

During the first quarter of fiscal 2017, the Company determined that its Automotive Experience business (Adient) met the criteria to be classified as a discontinued operation, which required retrospective application to financial information for all periods presented. Refer to Note 5, "Discontinued Operations," of the notes to consolidated financial statements for further information regarding the Company's discontinued operations.

In the first quarter of fiscal 2017, the Company began evaluating the performance of its business segments primarily on segment earnings before interest, taxes and amortization (EBITA), which represents income from continuing operations before income taxes and noncontrolling interests, excluding general corporate expenses, intangible asset amortization, net financing

9


Johnson Controls International plc
Notes to Consolidated Financial Statements
March 31, 2017
(unaudited)


charges, significant restructuring and impairment costs, and the net mark-to-market adjustments related to pension and postretirement plans. Historical information has been revised to present the comparable periods on a consistent basis.

In April 2015, the FASB issued Accounting Standards Update (ASU) No. 2015-03, "Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs." ASU No. 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability.
During the quarter ended December 31, 2016, the Company adopted ASU No. 2015-03 and applied the change retrospectively to all periods presented. This change did not have an impact to any period presented on the consolidated statements of income. The financial statement impact of this change for the period ending September 30, 2016 was a decrease to noncurrent assets held for sale of $44 million, a decrease to noncurrent liabilities held for sale of $44 million, a decrease to other noncurrent assets of $30 million and a decrease to long-term debt of $30 million.
    
2. 
New Accounting Standards

Recently Adopted Accounting Pronouncements

In October 2016, the FASB issued ASU No. 2016-17, "Consolidations (Topic 810): Interests Held through Related Parties that are under Common Control." The ASU changes how a single decision maker of a VIE that holds indirect interest in the entity through related parties that are under common control determines whether it is the primary beneficiary of the VIE. The new guidance amends ASU 2015-02, "Consolidation (Topic 810): Amendments to the Consolidation Analysis" issued in February 2015. ASU No. 2016-17 was effective for the Company for the quarter ending December 31, 2016. The adoption of this guidance did not have an impact on the Company's consolidated financial statements.

In May 2015, the FASB issued ASU No. 2015-07, "Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)." ASU No. 2015-07 removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. Such investments should be disclosed separate from the fair value hierarchy. ASU No. 2015-07 was effective retrospectively for the Company for the quarter ending December 31, 2016. The adoption of this guidance did not have an impact on the Company's consolidated financial statements, but did impact pension asset disclosures.

In February 2015, the FASB issued ASU No. 2015-02, "Consolidation (Topic 810): Amendments to the Consolidation Analysis." ASU No. 2015-02 amends the analysis performed to determine whether a reporting entity should consolidate certain types of legal entities. ASU No. 2015-02 was effective retrospectively for the Company for the quarter ending December 31, 2016. The adoption of this guidance did not have an impact on the Company's consolidated financial statements.
    
Recently Issued Accounting Pronouncements

In March 2017, the FASB issued ASU No. 2017-07, "Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." The ASU requires the service cost component of net periodic benefit cost to be presented with other compensation costs. The other components of net periodic benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. The ASU also allows only the service cost component of net periodic benefit cost to be eligible for capitalization. The guidance will be effective for the Company for the quarter ending December 31, 2018. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. The guidance will be effective retrospectively except for the capitalization of the service cost component which should be applied prospectively. The adoption of this guidance is not expected to have a significant impact on the Company's consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, "Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment," which eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge (Step 2) from the goodwill impairment test. Instead, an impairment charge will equal the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the amount of goodwill allocated to the reporting unit. The guidance will be effective prospectively for the Company for the quarter ending December 31, 2020, with

10


Johnson Controls International plc
Notes to Consolidated Financial Statements
March 31, 2017
(unaudited)


early adoption permitted after January 1, 2017. The impact of this guidance for the Company will depend on the outcomes of future goodwill impairment tests.

In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)." The ASU requires amounts generally described as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The guidance will be effective for the Company for the quarter ending December 31, 2018, with early adoption permitted. The amendments in this update should be applied retrospectively to all periods presented. The impact of this guidance for the Company will depend on the levels of restricted cash balances in the periods presented.

In October 2016, the FASB issued ASU No. 2016-16, "Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory." The ASU requires the tax effects of all intra-entity sales of assets other than inventory to be recognized in the period in which the transaction occurs. The guidance will be effective for the Company for the quarter ending December 31, 2018, with early adoption permitted but only in the first interim period of a fiscal year. The changes are required to be applied by means of a cumulative-effect adjustment recorded in retained earnings as of the beginning of the fiscal year of adoption. The Company is currently assessing the impact adoption of this guidance will have on its consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments." ASU No. 2016-15 provides clarification guidance on eight specific cash flow presentation issues in order to reduce the diversity in practice. ASU No. 2016-15 will be effective for the Company for the quarter ending December 31, 2018, with early adoption permitted. The guidance should be applied retrospectively to all periods presented, unless deemed impracticable, in which case prospective application is permitted. The Company is currently assessing the impact adoption of this guidance will have on its consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." ASU No. 2016-13 changes the impairment model for financial assets measured at amortized cost, requiring presentation at the net amount expected to be collected. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts. Available-for-sale debt securities with unrealized losses will now be recorded through an allowance for credit losses. ASU No. 2016-13 will be effective for the Company for the quarter ended December 31, 2020, with early adoption permitted for the quarter ended December 31, 2019. The adoption of this guidance is not expected to have a significant impact on the Company's consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting." ASU No. 2016-09 impacts certain aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statements of cash flows. ASU No. 2016-09 will be effective for the Company for the quarter ending December 31, 2017, with early adoption permitted. The Company is currently assessing the impact adoption of this guidance will have on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-07, "Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting." ASU No. 2016-07 eliminates the requirement for an investment that qualifies for the use of the equity method of accounting as a result of an increase in the level of ownership or degree of influence to adjust the investment, results of operations and retained earnings retrospectively. ASU No. 2016-07 will be effective prospectively for the Company for increases in the level of ownership interest or degree of influence that result in the adoption of the equity method that occur during or after the quarter ending December 31, 2017, with early adoption permitted. The impact of this guidance for the Company is dependent on any future increases in the level of ownership interest or degree of influence that result in the adoption of the equity method.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)." ASU No. 2016-02 requires recognition of operating leases as lease assets and liabilities on the balance sheet, and disclosure of key information about leasing arrangements. ASU No. 2016-02 will be effective retrospectively for the Company for the quarter ending December 31, 2019, with early adoption permitted. The Company is currently assessing the impact adoption of this guidance will have on its

11


Johnson Controls International plc
Notes to Consolidated Financial Statements
March 31, 2017
(unaudited)


consolidated financial statements. The Company has started the assessment process by evaluating the population of leases under the revised definition of what qualifies as a leased asset. The Company is the lessee under various agreements for facilities and equipment that are currently accounted for as operating leases. The new guidance will require the Company to record operating leases on the balance sheet with a right-of-use asset and corresponding liability for future payment obligations. The Company expects the new guidance will have a material impact on its consolidated statements of financial position for the addition of right-of-use assets and lease liabilities, but the Company does not expect it to have a material impact on its consolidated statements of income.
In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." ASU No. 2016-01 amends certain aspects of recognition, measurement, presentation and disclosure of financial instruments, including marketable securities. ASU No. 2016-01 will be effective for the Company for the quarter ending December 31, 2018, and early adoption is not permitted, with certain exceptions. The changes are required to be applied by means of a cumulative-effect adjustment on the balance sheet as of the beginning of the fiscal year of adoption. The impact of this guidance for the Company will depend on the magnitude of the unrealized gains and losses on the Company's marketable securities investments.

In July 2015, the FASB issued ASU No. 2015-11, "Simplifying the Measurement of Inventory." ASU No. 2015-11 requires inventory that is recorded using the first-in, first-out method to be measured at the lower of cost or net realizable value. ASU No. 2015-11 will be effective prospectively for the Company for the quarter ending December 31, 2017, with early adoption permitted. The adoption of this guidance is not expected to have a significant impact on the Company's consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." ASU No. 2014-09 clarifies the principles for recognizing revenue when an entity either enters into a contract with customers to transfer goods or services or enters into a contract for the transfer of non-financial assets. The original standard was effective retrospectively for the Company for the quarter ending December 31, 2017; however in August 2015, the FASB issued ASU No. 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," which defers the effective date of ASU No. 2014-09 by one-year for all entities. The new standard will become effective retrospectively for the Company for the quarter ending December 31, 2018, with early adoption permitted, but not before the original effective date. Additionally, in March 2016, the FASB issued ASU No. 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)," in April 2016, the FASB issued ASU No. 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing," and in May 2016, the FASB issued ASU No. 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients," and in December 2016, the FASB issued ASU No. 2016-20, "Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers," all of which provide additional clarification on certain topics addressed in ASU No. 2014-09. ASU No. 2016-08, ASU No. 2016-10, ASU No. 2016-12 and ASU No. 2016-20 follow the same implementation guidelines as ASU No. 2014-09 and ASU No. 2015-14. The Company has elected to adopt the new revenue guidance as of October 1, 2018.  In preparation for adoption of the new guidance, the Company has reviewed representative samples of contracts and other forms of agreements with customers globally and is in the process of evaluating the impact of the new revenue standard. Based on its procedures to date, the Company cannot quantify the potential impact the new revenue standard will have to its consolidated financial statements. The Company will decide which retrospective application to apply once its revenue standard assessment is finalized.

3.
Merger Transaction

As discussed in Note 1, "Financial Statements," of the notes to consolidated financial statements, JCI Inc. and Tyco completed the Merger on September 2, 2016. The Merger was accounted for as a reverse acquisition using the acquisition method of accounting in accordance with ASC 805, "Business Combinations." Based on the structure of the Merger and other activities contemplated by the Merger Agreement, relative outstanding share ownership, the composition of the Company's board of directors and the designation of certain senior management positions of the Company, JCI Inc. was the accounting acquirer for financial reporting purposes.

Immediately prior to the Merger and in connection therewith, Tyco shareholders received 0.955 ordinary shares of Tyco (which shares are now referred to as shares of the Company, or “Company ordinary shares”) for each Tyco ordinary share they held by virtue of a 0.955-for-one share consolidation. In the Merger, each outstanding share of common stock, par value $1.00 per

12


Johnson Controls International plc
Notes to Consolidated Financial Statements
March 31, 2017
(unaudited)


share, of JCI Inc. (“JCI Inc. common stock”) (other than shares held by JCI Inc., Tyco and certain of their subsidiaries) was converted into the right to receive either the cash consideration or the share consideration (each as described below), at the election of the holder, subject to proration procedures described in the Merger Agreement and applicable withholding taxes.  The election to receive the cash consideration was undersubscribed. As a result, holders of shares of JCI Inc. common stock that elected to receive the share consideration and holders of shares of JCI Inc. common stock that made no election (or failed to properly make an election) became entitled to receive, for each such share of JCI Inc. common stock, $5.7293 in cash, without interest, and 0.8357 Company ordinary shares, subject to applicable withholding taxes.  Holders of shares of JCI Inc. common stock that elected to receive the cash consideration became entitled to receive, for each such share of JCI Inc. common stock, $34.88 in cash, without interest, subject to applicable withholding taxes.  In the merger, JCI Inc. shareholders received, in the aggregate, approximately $3.864 billion in cash. Immediately after the closing of, and giving effect to, the Merger, former JCI Inc. shareholders owned approximately 56% of the issued and outstanding Company ordinary shares and former Tyco stockholders owned approximately 44% of the issued and outstanding Company ordinary shares.

Tyco is a leading global provider of security products and services, fire detection and suppression products and services, and life safety products. The acquisition of Tyco brings together best-in-class product, technology and service capabilities across controls, fire, security, heating, ventilating and air conditioning (HVAC), power solutions and energy storage, to serve various end-markets including large institutions, commercial buildings, retail, industrial, small business and residential.  The combination of the Tyco and JCI Inc. buildings platforms is expected to create immediate opportunities for near-term growth through cross-selling, complementary branch and channel networks, and expanded global reach for established businesses. The new Company is also expected to benefit by combining innovation capabilities and pipelines involving new products, advanced solutions for smart buildings and cities, value-added services driven by advanced data and analytics and connectivity between buildings and energy storage through infrastructure integration.

Fair Value of Consideration Transferred

The total fair value of consideration transferred was approximately $19.7 billion. Total consideration is comprised of the equity value of the Tyco shares that were outstanding as of September 2, 2016 and the portion of Tyco's share awards and share options earned as of September 2, 2016 ($224 million). Share awards and share options not earned ($101 million) as of September 2, 2016 will be expensed over the remaining future vesting period.

The following table summarizes the total fair value of consideration transferred:
(in millions, except for share consolidation ratio and share data)
 
 
 
 
 
Number of Tyco shares outstanding at September 2, 2016
 
427,181,743

Tyco share consolidation ratio
 
0.955

Tyco ordinary shares outstanding following the share consolidation
     and immediately prior to the merger
 
407,958,565

JCI Inc. converted share price (1)
 
$
47.67

Fair value of equity portion of the merger consideration
 
$
19,447

Fair value of Tyco equity awards
 
224

   Total fair value of consideration transferred
 
$
19,671


(1)
Amount equals JCI Inc. closing share price and market capitalization at September 2, 2016 ($45.45 and $29,012 million, respectively) adjusted for the Tyco $3,864 million cash contribution used to purchase 110.8 million shares of JCI Inc. common stock for $34.88 per share.

Fair Value of Assets Acquired and Liabilities Assumed

The Company accounted for the merger with Tyco as a business combination using the acquisition method of accounting. The assets acquired and liabilities assumed were recorded at their respective fair values as of the acquisition date.


13


Johnson Controls International plc
Notes to Consolidated Financial Statements
March 31, 2017
(unaudited)


As the Company finalizes the fair value of assets acquired and liabilities assumed, additional purchase price adjustments may be recorded during the measurement period in fiscal 2017. Fair value estimates are based on a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions. The judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact the Company's results of operations. The finalization of the purchase accounting assessment may result in a change in the valuation of assets acquired and liabilities assumed and may have a material impact on the Company's results of operations and financial position.

The preliminary fair values of the assets acquired and liabilities assumed are as follows (in millions):
Cash and cash equivalents
 
$
489

Accounts receivable
 
2,097

Inventories
 
823

Other current assets
 
610

Property, plant, and equipment - net
 
1,219

Goodwill
 
16,412

Intangible assets - net
 
6,213

Other noncurrent assets
 
536

   Total assets acquired
 
$
28,399

 
 
 
Short-term debt
 
$
462

Accounts payable
 
724

Accrued compensation and benefits
 
312

Other current liabilities
 
1,418

Long-term debt
 
6,416

Long-term deferred tax liabilities
 
1,173

Long-term pension and postretirement benefits
 
774

Other noncurrent liabilities
 
1,279

   Total liabilities acquired
 
$
12,558

Noncontrolling interests
 
34

Net assets acquired
 
$
15,807

Cash consideration paid to JCI Inc. shareholders
 
3,864

   Total fair value of consideration transferred
 
$
19,671


In connection with the merger, the Company recorded goodwill of $16.4 billion, which is attributable primarily to expected synergies, expanded market opportunities, and other benefits that the Company believes will result from combining its operations with the operations of Tyco. The goodwill created in the merger is not deductible for tax purposes and is subject to potential significant changes as the purchase price allocation is completed. Goodwill has preliminarily been allocated to the Tyco segment based on how the business was reviewed by the Company's Chief Operating Decision Maker as shown in Note 8, "Goodwill and Other Intangible Assets." In connection with the Tyco Merger, the Company recorded additional goodwill of $49 million in the first six months of fiscal 2017 related to purchase price allocations.


14


Johnson Controls International plc
Notes to Consolidated Financial Statements
March 31, 2017
(unaudited)


The preliminary purchase price allocation to identifiable intangible assets acquired are as follows:
 
 
Preliminary Fair Value (in millions)
 
Weighted Average Life (in years)
Customer relationships
 
$
2,280

 
11
Completed technology
 
1,530

 
10
Other definite-lived intangibles
 
233

 
8
Indefinite-lived trademarks
 
2,020

 
 
Other indefinite-lived intangibles
 
90

 
 
In-process research and development
 
60

 
 
Total identifiable intangible assets
 
$
6,213

 
 


4.
Acquisitions and Divestitures

In the first six months of fiscal 2017, the Company completed three acquisitions for a combined purchase price, net of cash acquired, of $9 million$6 million of which was paid in the six months ended March 31, 2017. The acquisitions in the aggregate were not material to the Company’s consolidated financial statements. In connection with the acquisitions, the Company recorded goodwill of $2 million.

In the second quarter of fiscal 2017, the Company announced it signed a definitive agreement to sell its Scott Safety business to 3M Company for approximately $2.0 billion. Net cash proceeds from the transaction are expected to approximate $1.8 to $1.9 billion. Scott Safety is a leader in the design, manufacture and sale of high performance respiratory protection, gas and flame detection, thermal imaging and other critical products for fire services, law enforcement, industrial, oil and gas, chemical, armed forces, and homeland defense end markets. The transaction is expected to close in the second half of calendar 2017, subject to customary closing conditions including required regulatory approval. The Scott Safety business is included in the Tyco segment and is reported within assets and liabilities held for sale in the consolidated statements of financial position as of March 31, 2017. Refer to Note 5, "Discontinued Operations," of the notes to consolidated financial statements for further disclosure related to the Company's net assets held for sale.

In the second quarter of fiscal 2017, the Company completed the sale of its ADT security business in South Africa within the Tyco segment. The selling price, net of cash divested, was $129 million, all of which was received in the six months ended March 31, 2017. In connection with the sale, the Company reduced goodwill in assets held for sale by $92 million. The divestiture was not material to the Company's consolidated financial statements.

In the first six months of fiscal 2017, the Company completed one additional divestiture for a sales price of $4 million, all of which was received in the six months ended March 31, 2017. The divestiture decreased the Company's ownership from a controlling to noncontrolling interest, and as a result, the Company deconsolidated cash of $5 million.The divestiture was not material to the Company's consolidated financial statements.

In the first six months of fiscal 2017, the Company received $52 million in net cash proceeds related to prior year business divestitures.

In the first quarter of fiscal 2016, the Company formed a joint venture with Hitachi to expand its Building Efficiency product offerings. The Company acquired a 60% ownership interest in the new entity for approximately $170 million ($600 million purchase price less cash acquired of $430 million), $133 million of which was paid in the six months ended March 31, 2016 and $37 million was paid in the six months ended March 31, 2017. In connection with the acquisition, the Company recorded goodwill of $253 million related to purchase price allocations.

In the first six months of fiscal 2016, the Company completed one additional acquisition for a purchase price, net of cash acquired, of $3 million, none of which was paid as of March 31, 2016. The acquisition was not material to the Company's consolidated financial statements. In connection with the acquisition, the Company recorded goodwill of $4 million. The acquisition increased the Company's ownership from a noncontrolling to controlling interest. As a result, the Company recorded

15


Johnson Controls International plc
Notes to Consolidated Financial Statements
March 31, 2017
(unaudited)


a non-cash gain of $4 million in equity income for the Building Efficiency Rest of World segment to adjust the Company's existing equity investment in the partially-owned affiliate to fair value.

5.
Discontinued Operations

As discussed in Note 1, "Financial Statements," of the notes to consolidated financial statements, on October 31, 2016, the Company completed the spin-off of its Automotive Experience business by way of the transfer of the Automotive Experience Business from Johnson Controls to Adient plc. The Company did not retain any equity interest in Adient plc. During the first quarter of fiscal 2017, the Company determined that Adient met the criteria to be classified as a discontinued operation and, as a result, Adient’s historical financial results are reflected in the Company’s consolidated financial statements as a discontinued operation, and assets and liabilities were retrospectively reclassified as assets and liabilities held for sale. The Company did not allocate any general corporate overhead to discontinued operations.

The following table summarizes the results of Adient, reclassified as discontinued operations for the six month period ended March 31, 2017, and the three and six month periods ended March 31, 2016 (in millions). As the Adient spin-off occurred on October 31, 2016, there is only one month of Adient results included in the six month period ended March 31, 2017.
 
Three Months Ended March 31,
 
Six Months Ended
March 31,
 
2016
 
2017
 
2016
 
 
 
 
 
 
Net sales
$
4,298

 
$
1,434

 
$
8,531

 
 
 
 
 
 
Income from discontinued operations before income taxes
102

 
1

 
335

Provision for income taxes on discontinued operations
827

 
35

 
873

Income from discontinued operations attributable to noncontrolling
     interests, net of tax
23

 
9

 
40

Loss from discontinued operations
$
(748
)
 
$
(43
)
 
$
(578
)

For the six months ended March 31, 2017, the income from discontinued operations before income taxes included separation costs of $79 million. For the three and six months ended March 31, 2016, the income from discontinued operations before income taxes included separation costs of $90 million and $160 million, respectively.

For the six months ended March 31, 2017, the effective tax rate was more than the U.S. federal statutory rate of 35% primarily due to the tax impacts of separation costs and Adient spin-off related tax expense, partially offset by non-U.S. tax rate differentials. For the three and six months ended March 31, 2016, the effective tax rate was more than the U.S. federal statutory rate of 35% primarily due to $780 million of income tax expense recorded on foreign undistributed earnings of certain non-U.S. subsidiaries, the jurisdictional mix of restructuring and impairment costs, and the tax impacts of separation costs, partially offset by non-U.S. tax rate differentials.


16


Johnson Controls International plc
Notes to Consolidated Financial Statements
March 31, 2017
(unaudited)


Assets and Liabilities Held for Sale

The following table summarizes the carrying value of Adient, reclassified as assets and liabilities held for sale at September 30, 2016 (in millions):
 
 
September 30, 2016
 
 
 
Cash
 
$
105

Cash in escrow related to Adient debt
 
2,034

Accounts receivable - net
 
2,071

Inventories
 
672

Other current assets
 
756

   Assets held for sale
 
$
5,638

 
 
 
Property, plant and equipment - net
 
$
2,240

Goodwill
 
2,385

Other intangible assets - net
 
113

Investments in partially-owned affiliates
 
1,745

Other noncurrent assets
 
891

   Noncurrent assets held for sale
 
$
7,374

 
 
 
Short-term debt
 
$
41

Current portion of long-term debt
 
38

Accounts payable
 
2,764

Accrued compensation and benefits
 
430

Other current liabilities
 
975

   Liabilities held for sale
 
$
4,248

 
 
 
Long-term debt
 
$
3,441

Pension and postretirement benefits
 
188

Other noncurrent liabilities
 
259

   Noncurrent liabilities held for sale
 
$
3,888


The following table summarizes depreciation and amortization, capital expenditures, and significant operating and investing noncash items related to Adient for the six month period ended March 31, 2017, and the three and six month periods ended March 31, 2016 (in millions):
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
2016
 
2017
 
2016
 
 
 
 
 
 
Depreciation and amortization
$
85

 
$
29

 
$
171

Equity in earnings of partially-owned affiliates
(77
)
 
(31
)
 
(171
)
Deferred income taxes
769

 
562

 
765

Non-cash restructuring and impairment charges
14

 

 
14

Equity-based compensation
4

 
1

 
7

Accrued income taxes

 
(808
)
 

Capital expenditures
(75
)
 
(91
)
 
(175
)


17


Johnson Controls International plc
Notes to Consolidated Financial Statements
March 31, 2017
(unaudited)


During the second quarter of fiscal 2017, the Company completed the divestiture of its ADT security business in South Africa within the Tyco segment. The assets and liabilities of this business were presented as held for sale in the consolidated statements of financial position as of September 30, 2016. The business did not meet the criteria to be classified as a discontinued operation.

During the second quarter of fiscal 2017, the Company signed a definitive agreement to sell its Scott Safety business of the Tyco segment to 3M Company. The transaction is expected to close in the second half of calendar 2017, subject to customary closing conditions including required regulatory approval. The assets and liabilities of this business were presented as held for sale in the consolidated statements of financial position as of March 31, 2017. The business did not meet the criteria to be classified as a discontinued operation as the divestiture of the Scott Safety business will not have a major effect on the Company’s operations and financial results.

The following table summarizes the carrying value of the Tyco segment assets and liabilities held for sale at March 31, 2017 and September 30, 2016 (in millions):
 
March 31, 2017
 
September 30, 2016
 
 
 
 
Accounts receivable - net
$
93

 
$
9

Inventories
66

 
7

Other current assets
10

 
3

Property, plant and equipment - net
74

 
15

Goodwill
1,261

 
89

Other intangible assets - net
533

 
30

Other noncurrent assets

 
4

Assets held for sale
$
2,037

 
$
157

 
 
 
 
Accounts payable
$
33

 
$
9

Accrued compensation and benefits
9

 

Other current liabilities
22

 
19

Other noncurrent liabilities
173

 

Liabilities held for sale
$
237

 
$
28


At September 30, 2016, $17 million of certain Corporate assets were classified as held for sale. The assets were sold during the second quarter of fiscal 2017.

6.
Percentage-of-Completion Contracts

The Building Technologies & Solutions 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 primarily within accounts receivable - net and billings in excess of costs and earnings on uncompleted contracts primarily within other current liabilities in the consolidated statements of financial position. Costs and earnings in excess of billings related to these contracts were $863 million and $841 million at March 31, 2017 and September 30, 2016, respectively. Billings in excess of costs and earnings related to these contracts were $472 million and $431 million at March 31, 2017 and September 30, 2016, respectively.


18


Johnson Controls International plc
Notes to Consolidated Financial Statements
March 31, 2017
(unaudited)


7.
Inventories

Inventories consisted of the following (in millions):
 
March 31, 2017
 
September 30, 2016
 
 
 
 
Raw materials and supplies
$
877

 
$
852

Work-in-process
509

 
503

Finished goods
1,752

 
1,533

Inventories
$
3,138

 
$
2,888


8.
Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill in each of the Company’s reportable segments for the six month period ended March 31, 2017 were as follows (in millions):
 
 
 
Business Acquisitions
 
Business Divestitures
 
Currency Translation and Other
 
 
 
September 30,
 
 
 
 
March 31,
 
2016
 
 
 
 
2017
 
 
 
 
 
 
 
 
 
 
Building Technologies & Solutions
 
 
 
 
 
 
 
 
 
  Building Efficiency
 
 
 
 
 
 
 
 
 
     Systems and Service North America
$
975

 
$

 
$

 
$

 
$
975

     Products North America
1,697

 
1

 

 
(2
)
 
1,696

     Asia
657

 

 

 
(23
)
 
634

     Rest of World
301

 
1

 

 
(9
)
 
293

  Tyco
16,308

 
49

 
(1,261
)
 
(124
)
 
14,972

Power Solutions
1,086

 

 

 
(12
)
 
1,074

Total
$
21,024

 
$
51

 
$
(1,261
)
 
$
(170
)
 
$
19,644


At September 30, 2016, accumulated goodwill impairment charges included $47 million related to the Building Efficiency Rest of World - Latin America reporting unit. The six months ended March 31, 2017 Tyco business divestiture amount includes $1,261 million of goodwill transferred to assets held for sale on the consolidated statement of financial position. Refer to Note 5, "Discontinued Operations," of the notes to consolidated financial statements for further information regarding the Company's assets and liabilities held for sale.

The Company’s other intangible assets, primarily from business acquisitions valued based on independent appraisals, consisted of (in millions):
 
March 31, 2017
 
September 30, 2016
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Amortized intangible assets
 
 
 
 
 
 
 
 
 
 
 
Technology
$
1,170

 
$
(94
)
 
$
1,076

 
$
1,528

 
$
(24
)
 
$
1,504

Customer relationships
3,097

 
(339
)
 
2,758

 
3,168

 
(226
)
 
2,942

Miscellaneous
544

 
(228
)
 
316

 
519

 
(130
)
 
389

Total amortized intangible assets
4,811

 
(661
)
 
4,150

 
5,215

 
(380
)
 
4,835

Unamortized intangible assets
 
 
 
 
 
 
 
 
 
 
 
Trademarks/trade names
2,410

 

 
2,410

 
2,555

 

 
2,555

Miscellaneous
127

 

 
127

 
150

 

 
150

Total intangible assets
$
7,348

 
$
(661
)
 
$
6,687


$
7,920


$
(380
)

$
7,540


19


Johnson Controls International plc
Notes to Consolidated Financial Statements
March 31, 2017
(unaudited)


Amortization of other intangible assets included within continuing operations for the three month periods ended March 31, 2017 and 2016 was $126 million and $20 million, respectively. Amortization of other intangible assets included within continuing operations for the six month periods ended March 31, 2017 and 2016 was $275 million and $40 million, respectively. Excluding the impact of any future acquisitions, the Company anticipates amortization for fiscal 2018, 2019, 2020, 2021 and 2022 will be approximately $389 million, $376 million, $365 million, $359 million and $351 million per year, respectively.

9.
Significant Restructuring and Impairment Costs

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 commits to restructuring plans as necessary.

In fiscal 2017, the Company committed to a significant restructuring plan (2017 Plan) and recorded $177 million of restructuring and impairment costs in the consolidated statements of income, of which $78 million was recorded in the first quarter and $99 million was recorded in the second quarter of fiscal 2017. This is the total amount incurred to date for this restructuring plan. The restructuring actions related to cost reduction initiatives in the Company’s Building Technologies & Solutions business and at Corporate. The costs consist primarily of workforce reductions, plant closures and asset impairments. Of the restructuring and impairment costs recorded, $67 million related to Corporate, $49 million related to the Tyco segment, $27 million related to the Building Efficiency Products North America segment, $16 million related to the Building Efficiency Rest of World segment, $9 million related to the Building Efficiency Asia segment and $9 million related to the Building Efficiency Systems and Service North America segment. The restructuring actions are expected to be substantially complete in fiscal 2018.

The following table summarizes the changes in the Company’s 2017 Plan reserve, included within other current liabilities in the consolidated statements of financial position (in millions):
 
Employee Severance and Termination Benefits
 
Long-Lived Asset Impairments
 
Other
 
Total
 
 
 
 
 
 
 
 
Original reserve
$
62

 
$
15

 
$
1

 
$
78

Utilized—noncash

 
(15
)
 
(1
)
 
(16
)
Balance at December 31, 2016
$
62


$


$


$
62

Additional restructuring costs
67

 
23

 
9

 
99

Utilized—cash
(13
)
 

 

 
(13
)
Utilized—noncash

 
(23
)
 

 
(23
)
Balance at March 31, 2017
$
116


$


$
9


$
125


In fiscal 2016, the Company committed to a significant restructuring plan (2016 Plan) and recorded $288 million of restructuring and impairment costs in the consolidated statements of income. This is the total amount incurred to date and the total amount expected to be incurred for this restructuring plan. The restructuring actions related to cost reduction initiatives in the Company’s Building Technologies & Solutions and Power Solutions businesses and at Corporate. The costs consist primarily of workforce reductions, plant closures, asset impairments and change-in-control payments. Of the restructuring and impairment costs recorded, $161 million related to Corporate, $66 million related to the Power Solutions segment, $26 million related to the Building Efficiency Asia segment, $16 million related to the Building Efficiency Rest of World segment, $9 million related to the Building Efficiency Products North America segment, $8 million related to the Tyco segment, and $2 million related to the Building Efficiency Systems and Service North America segment. The restructuring actions are expected to be substantially complete in fiscal 2018. Included in the 2016 Plan is $74 million of committed restructuring actions taken by Tyco for liabilities assumed as part of the Tyco acquisition.

Additionally, the Company recorded $332 million of restructuring and impairment costs within discontinued operations related to Adient in fiscal 2016.

20


Johnson Controls International plc
Notes to Consolidated Financial Statements
March 31, 2017
(unaudited)


The following table summarizes the changes in the Company’s 2016 Plan reserve, included within other current liabilities and Adient liabilities held for sale in the consolidated statements of financial position (in millions):

Employee Severance and Termination Benefits
 
Long-Lived Asset Impairments
 
Other
 
Currency
Translation
 
Total
 
 
 
 
 
 
 
 
 
 
Original reserve
$
368

 
$
190

 
$
62

 
$

 
$
620

Acquired Tyco restructuring
     reserves
78

 

 

 

 
78

Utilized—cash
(32
)
 

 

 

 
(32
)
Utilized—noncash

 
(190
)
 
(32
)
 
1

 
(221
)
Balance at September 30, 2016
$
414

 
$

 
$
30

 
$
1

 
$
445

Adient spin-off impact
(194
)
 

 
(22
)
 

 
(216
)
Utilized—cash
(49
)
 

 
(2
)
 

 
(51
)
Utilized—noncash

 

 

 
(3
)
 
(3
)
Transfer to liabilities held for sale
(3
)
 

 

 

 
(3
)
Adjustment to acquired Tyco
     restructuring reserves
(4
)
 

 

 

 
(4
)
Balance at March 31, 2017
$
164

 
$

 
$
6

 
$
(2
)
 
$
168


The Company's fiscal 2017 and 2016 restructuring plans included workforce reductions of approximately 4,500 employees (3,900 for the Building Technologies & Solutions business and 600 for Corporate). Restructuring charges associated with employee severance and termination benefits are paid over the severance period granted to each employee or on a lump sum basis in accordance with individual severance agreements. As of March 31, 2017, approximately 900 of the employees have been separated from the Company pursuant to the restructuring plans. In addition, the restructuring plans included twelve plant closures in the Building Technologies & Solutions business. As of March 31, 2017, four of the twelve plants have been closed.

Company management closely monitors its overall cost structure and continually analyzes each of its businesses for opportunities to consolidate current operations, improve operating efficiencies and locate facilities in close proximity to customers. This ongoing analysis includes a review of its manufacturing, engineering and purchasing operations, as well as the overall global footprint for all its businesses.

10.
Income Taxes

In calculating the provision for income taxes, the Company uses an estimate of the annual effective tax rate based upon the facts and circumstances known at each interim period. On a quarterly basis, the actual effective tax rate is adjusted, as appropriate, based upon changed facts and circumstances, if any, as compared to those forecasted at the beginning of the fiscal year and each interim period thereafter. The U.S. federal statutory tax rate is being used as a comparison since the Company was a U.S. domiciled company for 11 months of 2016 and due to the Company's current legal entity structure. For the three months ended March 31, 2017, the Company's effective tax rate for continuing operations was 129%. The effective tax rate was higher than the U.S. federal statutory rate of 35% primarily due to the establishment of a deferred tax liability on the outside basis difference of the Company's investment in certain subsidiaries related to the pending divestiture of the Scott Safety business, the jurisdictional mix of significant restructuring and impairment costs, and Tyco Merger transaction and integration costs, partially offset by the benefits of continuing global tax planning initiatives and non-U.S. tax rate differentials.
For the six months ended March 31, 2017, the Company's effective tax rate for continuing operations was 62%. The effective tax rate was higher than the U.S. federal statutory rate of 35% primarily due to the establishment of a deferred tax liability on the outside basis difference of the Company's investment in certain subsidiaries related to the pending divestiture of the Scott Safety business, the jurisdictional mix of significant restructuring and impairment costs, and Tyco Merger transaction /integration costs and purchase accounting impacts, partially offset by the benefits of continuing global tax planning initiatives, non-U.S. tax rate differentials and a tax benefit due to changes in entity tax status. For the three and six months ended March 31,

21


Johnson Controls International plc
Notes to Consolidated Financial Statements
March 31, 2017
(unaudited)


2016, the Company's effective tax rate for continuing operations was 14% and 18%, respectively. The effective rate was lower than the U.S. federal statutory rate of 35% primarily due to the benefits of continuing global tax planning initiatives and non-U.S. tax rate differentials, partially offset by the jurisdictional mix of significant restructuring and impairment costs, as well as the tax impact of transaction and separation costs.

Valuation Allowance

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

Uncertain Tax Positions

At September 30, 2016, exclusive of items included in noncurrent liabilities held for sale, the Company had gross tax effected unrecognized tax benefits of $1,706 million, of which $1,604 million, if recognized, would impact the effective tax rate. Total net accrued interest at September 30, 2016 was approximately $55 million (net of tax benefit). The interest and penalties accrued during the six months ended March 31, 2017 and 2016 was not material. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense.

In the U.S., fiscal years 2010 through 2014 are currently under exam by the Internal Revenue Service ("IRS"). Additionally, the Company is currently under exam in the following major non-U.S. jurisdictions:
Tax Jurisdiction
 
Tax Years Covered
 
 
 
Belgium
 
2012 - 2013
Brazil
 
2011 - 2012
Canada
 
2012 - 2014
France
 
2010 - 2015
Germany
 
2007 - 2015
Spain
 
2010 - 2014
United Kingdom
 
2011 - 2014

It is reasonably possible that certain tax examinations and/or tax litigation will conclude within the next twelve months, which could be up to a $150 million impact to tax expense.

Impacts of Tax Legislation

On October 13, 2016, the U.S. Treasury and the IRS released final and temporary Section 385 regulations. These regulations address whether certain instruments between related parties are treated as debt or equity. The Company does not expect that the regulations will have a material impact on its consolidated financial statements.

During the six months ended March 31, 2017 and 2016, other tax legislation was adopted in various jurisdictions. These law changes did not have a material impact on the Company's consolidated financial statements.

Other Tax Matters

In the second quarter of fiscal 2017, the Company recorded a discrete non-cash tax charge of $457 million related to establishment of a deferred tax liability on the outside basis difference of the Company's investment in certain subsidiaries of the Scott Safety business. This business is now reported as net assets held for sale given the announced sale to 3M Company in calendar 2017. Refer to Note 4, "Acquisitions and Divestitures" and Note 5, "Discontinued Operations," of the notes to consolidated financial statements for additional information.

22


Johnson Controls International plc
Notes to Consolidated Financial Statements
March 31, 2017
(unaudited)


In the second quarter of fiscal 2017, the Company recorded $138 million of transaction and integration costs which generated a $31 million tax benefit.

In the second quarter of fiscal 2017, the Company recorded $99 million of significant restructuring and impairment costs. Refer to Note 9, "Significant Restructuring and Impairment Costs," of the notes to consolidated financial statements for additional information. The restructuring costs generated a $20 million tax benefit, which was impacted by the Company’s current tax position in these jurisdictions.

In the first quarter of fiscal 2017, the Company recorded a discrete tax benefit of $101 million due to changes in entity tax status.

In the first quarter of fiscal 2017, the Company recorded $130 million of transaction and integration costs which generated an $11 million tax benefit.

In the first quarter of fiscal 2017, the Company recorded $78 million of significant restructuring and impairment costs. Refer to Note 9, "Significant Restructuring and Impairment Costs," of the notes to consolidated financial statements for additional information. The restructuring costs generated a $14 million tax benefit, which was impacted by the Company’s current tax position in these jurisdictions.

In the second quarter of fiscal 2016, the Company recorded $60 million of significant restructuring and impairment costs. Refer to Note 9, "Significant Restructuring and Impairment Costs," of the notes to consolidated financial statements for additional information. The restructuring costs generated a $12 million tax benefit, which was impacted by the geographic mix, the Company’s current tax position in these jurisdictions and the underlying tax basis in the impaired assets.

11.
Pension and Postretirement Plans

The components of the Company’s net periodic benefit costs from continuing operations associated with its defined benefit pension and postretirement plans are shown in the tables below in accordance with ASC 715, "Compensation – Retirement Benefits" (in millions):
 
U.S. Pension Plans
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Service cost
$
4

 
$
4

 
$
9

 
$
8

Interest cost
29

 
25

 
57

 
50

Expected return on plan assets
(58
)
 
(46
)
 
(117
)
 
(92
)
Net actuarial gain
(18
)
 

 
(135
)
 

Settlement gain
(1
)
 

 
(9
)
 

Net periodic benefit credit
$
(44
)
 
$
(17
)
 
$
(195
)
 
$
(34
)

 
Non-U.S. Pension Plans
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Service cost
$
8

 
$
2

 
$
16

 
$
5

Interest cost
11

 
6

 
23

 
12

Expected return on plan assets
(22
)
 
(7
)
 
(45
)
 
(15
)
Net periodic benefit cost (credit)
$
(3
)
 
$
1

 
$
(6
)
 
$
2


23


Johnson Controls International plc
Notes to Consolidated Financial Statements
March 31, 2017
(unaudited)



 
Postretirement Benefits
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Service cost
$

 
$

 
$
1

 
$

Interest cost
2

 
2

 
3

 
3

Expected return on plan assets
(2
)
 
(2
)
 
(5
)
 
(4
)
Amortization of prior service credit

 
(1
)
 

 
(1
)
Net periodic benefit credit
$

 
$
(1
)
 
$
(1
)
 
$
(2
)

During the three and six months ended March 31, 2017, the amount of lump sum payouts triggered a remeasurement event for certain U.S. pension plans resulting in the recognition of net actuarial gains of $18 million and $135 million, respectively.

12.
Debt and Financing Arrangements

Debt exchange

In connection with the Tyco Merger, on December 28, 2016, the Company completed its offers to exchange all validly tendered and accepted notes of certain series (the "existing notes") issued by JCI Inc. or Tyco International Finance S.A. ("TIFSA"), as applicable, each of which is a wholly owned subsidiary of the Company, for new notes (the New Notes) to be issued by the Company, and the related solicitation of consents to amend the indentures governing the existing notes (the offers to exchange and the related consent solicitation together the "exchange offers"). Pursuant to the exchange offers, the Company exchanged approximately $5.6 billion of $6.0 billion in aggregate principal amount of dollar denominated notes and approximately 423 million euro of 500 million euro in aggregate principal amount of euro denominated notes. All validly tendered and accepted existing notes have been canceled. Immediately following such cancellation, $380.9 million aggregate principal amount of existing notes (not including the TIFSA Euro Notes) remained outstanding across seventeen series of dollar-denominated existing notes and 77.4 million euro aggregate principal amount of TIFSA Euro Notes remained outstanding across one series. In connection with the settlement of the exchange offers, the New Notes were registered under the Securities Act of 1933 and their terms are described in the Company’s Prospectus dated December 19, 2016, as filed with the SEC under Rule 424(b)(3) of the Act on that date. The issuance of the New Notes occurred on December 28, 2016. The New Notes are unsecured and unsubordinated obligations of the Company and will rank equally with all other unsecured and unsubordinated indebtedness of the Company issued from time to time.

Other financing arrangements

In March 2017, the Company issued one billion euro in principal amount of 1.0% senior unsecured fixed rate notes due in fiscal 2023. Proceeds from the issuance were used to repay existing debt and for other general corporate purposes.

In March 2017, the Company entered into a 364-day $150 million committed revolving credit facility scheduled to expire in March 2018. As of March 31, 2017, there were no draws on the facility.

In March 2017, the Company retired $46 million in principal amount, plus accrued interest, of its 2.355% fixed rate notes that matured in March 2017.

In March and February 2017, the Company repurchased, at a discount, 15 million euro of its TIFSA 1.375% fixed rate notes, plus accrued interest, scheduled to mature in February 2025.

In February 2017, the Company issued $500 million aggregate principal amount of 4.5% senior unsecured fixed rate notes due in fiscal 2047. Proceeds from the issuance were used to repay outstanding commercial paper borrowings and for other general corporate purposes.

24


Johnson Controls International plc
Notes to Consolidated Financial Statements
March 31, 2017
(unaudited)


In February 2017, the Company entered into a 364-day $150 million committed revolving credit facility scheduled to expire in February 2018. As of March 31, 2017, there were no draws on the facility.

In January 2017, the Company entered into a 364-day $250 million committed revolving credit facility scheduled to expire in January 2018. As of March 31, 2017, there were no draws on the facility outstanding.
    
In December 2016, the Company retired $400 million in principal amount, plus accrued interest, of its 2.6% fixed rate notes that matured in December 2016.

In December 2016, the Company entered into a 364-day 100 million euro floating rate term loan scheduled to mature in December 2017. Proceeds from the term loan were used for general corporate purposes. Principal and accrued interest were fully repaid in March 2017.

In December 2016, a $100 million committed revolving credit facility expired. There were no draws on the facility.

In November 2016, the Company fully repaid its 37 billion yen syndicated floating rate term loan, plus accrued interest, scheduled to mature in June 2020.

In November 2016, a $35 million committed revolving credit facility expired. There were no draws on the facility.

In October 2016, the Company repaid two ten-month floating rate term loans totaling $325 million, plus accrued interest, scheduled to mature in October 2016.

In October 2016, the Company repaid a nine-month $100 million floating rate term loan, plus accrued interest, scheduled to mature in November 2016.

In October 2016, the Company repaid a nine-month 100 million euro floating rate term loan, plus accrued interest, scheduled to mature in October 2016.

Net Financing Charges

The Company's net financing charges line item in the consolidated statements of income for the three and six month periods ended March 31, 2017 and 2016 contained the following components (in millions):
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Interest expense, net of capitalized interest costs
$
118

 
$
65

 
$
228

 
$
137

Banking fees and bond cost amortization
11

 
5

 
41

 
12

Interest income
(5
)
 
(2
)
 
(12
)
 
(4
)
Net foreign exchange results for financing activities
(8
)
 
3

 
(5
)
 
(8
)
Net financing charges
$
116

 
$
71

 
$
252

 
$
137


Net financing charges for the six month period ended March 31, 2017 included $17 million of transaction costs related primarily to the debt exchange offers.


25


Johnson Controls International plc
Notes to Consolidated Financial Statements
March 31, 2017
(unaudited)


13.
Stock-Based Compensation

References to the Company's stock throughout Note 13 refer to stock of JCI Inc. prior to the Tyco merger date of September 2, 2016 (the "Merger Date") and to ordinary shares of the Company subsequent to the Merger Date.

During September 2016, the Board of Directors of the Company approved amendments to the Johnson Controls International plc 2012 Share and Incentive Plan (the "Plan"). The types of awards authorized by the Plan comprise of stock options, stock appreciation rights, performance shares, performance units and other stock-based compensation awards. The Compensation Committee of the Company's Board of Directors determines the types of awards to be granted to individual participants and the terms and conditions of the awards. Awards are typically granted annually in the Company’s fiscal first quarter. A summary of the stock-based awards granted during the six month periods ended March 31, 2017 and 2016 is presented below:
 
Six Months Ended March 31,
 
2017
 
2016
 
Number Granted
 
Weighted Average Grant Date Fair Value
 
Number Granted
 
Weighted Average Grant Date Fair Value
 
 
 
 
 
 
 
 
Stock options
2,830,826

 
$
7.81

 
961,705

 
$
13.14

Stock appreciation rights
15,693

 
8.28

 
54,749

 
13.15

Restricted stock
1,582,962

 
41.74

 
2,290,575

 
43.68

Performance shares
846,725

 
48.40

 

 


Stock Options

Stock options are granted with an exercise price equal to the market price of the Company’s stock at the date of grant. Stock option awards typically vest between two and three years after the grant date and expire ten years from the grant date.

The fair value of each option is estimated on the date of grant using a Black-Scholes option valuation model that uses the assumptions noted in the following table. The expected life of options represents the period of time that options granted are expected to be outstanding, assessed separately for executives and non-executives. The risk-free interest rate for periods during the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. For fiscal 2017, expected volatility is based on historical volatility of certain peer companies over the most recent period corresponding to the expected life as of the grant date. For fiscal 2016, expected volatility is based on the historical volatility of the Company's stock and other factors. The expected dividend yield is based on the expected annual dividend as a percentage of the market value of the Company’s ordinary shares as of the grant date. The Company uses historical data to estimate option exercises and employee terminations within the valuation model.

 
Six Months Ended
March 31,
 
2017
 
2016
Expected life of option (years)
4.75 & 6.5
 
6.4
Risk-free interest rate
1.23% - 1.48%
 
1.64%
Expected volatility of the Company’s stock
24.60%
 
36.00%
Expected dividend yield on the Company’s stock
2.21%
 
2.11%


26


Johnson Controls International plc
Notes to Consolidated Financial Statements
March 31, 2017
(unaudited)


Stock Appreciation Rights (SARs)

SARs vest under the same terms and conditions as stock option awards; however, they are settled in cash for the difference between the market price on the date of exercise and the exercise price. As a result, SARs are recorded in the Company’s consolidated statements of financial position as a liability until the date of exercise. The fair value of each SAR award is estimated using a similar method described for stock options. The fair value of each SAR award is recalculated at the end of each reporting period and the liability and expense are adjusted based on the new fair value.

Restricted (Nonvested) Stock

The Plan provides for the award of restricted stock or restricted stock units to certain employees. These awards are typically share settled unless the employee is a non-U.S. employee or elects to defer settlement until retirement at which point the award would be settled in cash. Restricted awards typically vest after three years from the grant date. The Plan allows for different vesting terms on specific grants with approval by the Board of Directors. The value of restricted awards is based on the closing market value of the Company’s ordinary shares on the date of grant.

Performance Share Awards

The Plan permits the grant of performance-based share unit ("PSU") awards. The PSUs are generally contingent on the achievement of pre-determined performance goals over a three-year performance period as well as on the award holder's continuous employment until the vesting date. The PSUs are also indexed to the achievement of specified levels of total shareholder return versus a peer group over the performance period. Each PSU that is earned will be settled with shares of the Company's ordinary shares following the completion of the performance period, unless the award holder elected to defer a portion or all of the award until retirement which would then be settled in cash.

The fair value of each PSU is estimated on the date of grant using a Monte Carlo simulation that uses the assumptions noted in the following table. The risk-free interest rate for periods during the contractual life of the PSU is based on the U.S. Treasury yield curve in effect at the time of grant. Expected volatility is based on historical volatility of certain peer companies over the most recent three-year period as of the grant date.

 
Six Months Ended
March 31, 2017
Risk-free interest rate
1.40%
Expected volatility of the Company’s stock
21.00%

Spin-off Modification

In connection with the Adient spin-off, pursuant to the Employee Matters Agreement between the Company and Adient, outstanding stock options and SARs held on October 31, 2016 (the “Spin Date”) by employees remaining with the Company were converted into options and SARs of the Company using a 1.085317-for-one share ratio, which is based on the pre-spin and post-spin closing prices of the Company’s ordinary shares. The exercise prices for options and SARs were converted using the inverse ratio in a manner designed to preserve the intrinsic value of such awards. In addition, pursuant to the Employee Matters Agreement, nonvested restricted stock held on the Spin Date by employees remaining with the Company were converted into nonvested restricted stock of the Company using the 1.085317-for-one share ratio in a manner designed to preserve the intrinsic value of such awards. There were no performance share awards outstanding as of the Spin Date. Employees remaining with the Company did not receive stock-based compensation awards of Adient as a result of the spin-off. Except for the conversion of awards and related exercise prices discussed herein, the material terms of the awards remained unchanged. No incremental fair value resulted from the conversion of the awards; therefore, no additional compensation expense was recorded related to the award modification.    

Also in connection with the spin-off transaction, pursuant to the Employee Matters Agreement, employees of Adient were entitled to receive stock-based compensation awards of the Company and Adient in replacement of previously outstanding awards of the Company granted prior to the Spin Date. These awards include stock options, SARs and nonvested restricted

27


Johnson Controls International plc
Notes to Consolidated Financial Statements
March 31, 2017
(unaudited)


stock. Upon the Spin Date, the existing awards held by Adient employees were converted into new awards of the Company and Adient on a pro rata basis and further adjusted based on a formula designed to preserve the intrinsic value of such awards. Additional compensation expense, if any, resulting from the modification of awards held by Adient employees is to be recorded by Adient.

14.
Earnings Per Share

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

The following table reconciles the numerators and denominators used to calculate basic and diluted earnings per share (in millions):
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
2017
 
2016
 
2017
 
2016
Income (loss) Available to Ordinary
     Shareholders
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
(148
)
 
$
218

 
$
224

 
$
498

Loss from discontinued operations

 
(748
)
 
(43
)
 
(578
)
Basic and diluted income (loss) available to
     shareholders
$
(148
)
 
$
(530
)
 
$
181

 
$
(80
)
 
 
 
 
 
 
 
 
Weighted Average Shares Outstanding
 
 
 
 
 
 
 
Basic weighted average shares outstanding
939.2

 
648.2

 
938.2

 
648.0

Effect of dilutive securities:
 
 
 
 
 
 
 
Stock options, unvested restricted stock and
     unvested performance share awards

 
3.9

 
9.8

 
4.5

Diluted weighted average shares outstanding
939.2

 
652.1

 
948.0

 
652.5

 
 
 
 
 
 
 
 
Antidilutive Securities
 
 
 
 
 
 
 
Options to purchase shares

 
0.4

 
0.1

 
0.3


For the three months ended March 31, 2017, the total number of potential dilutive shares due to stock options, unvested restricted stock and unvested performance share awards was 9.4 million. However, these items were not included in the computation of diluted loss per share for the three months ended March 31, 2017 since to do so would decrease the loss per share.

During the three months ended March 31, 2017 and 2016, the Company declared a dividend of $0.25 and $0.29, respectively, per share. During the six months ended March 31, 2017 and 2016, the Company declared dividends totaling $0.50 and $0.58, respectively, per share. The Company paid all dividends in the month subsequent to the end of each fiscal quarter.


28


Johnson Controls International plc
Notes to Consolidated Financial Statements
March 31, 2017
(unaudited)


15.
Equity and Noncontrolling Interests

Other comprehensive income includes activity relating to discontinued operations. The following schedules present changes in consolidated equity attributable to Johnson Controls and noncontrolling interests (in millions, net of tax):
 
Three Months Ended March 31, 2017
 
Three Months Ended March 31, 2016
 
Equity
Attributable to
Johnson Controls International plc
 
Equity
Attributable to
Noncontrolling
Interests
 
Total
Equity
 
Equity
Attributable to
Johnson Controls International plc
 
Equity
Attributable to
Noncontrolling
Interests
 
Total
Equity
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance, December 31
$
19,577

 
$
819

 
$
20,396

 
$
10,506

 
$
931

 
$
11,437

Total comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
(148
)
 
25

 
(123
)
 
(530
)
 
50

 
(480
)
Foreign currency translation adjustments
241

 
10

 
251

 
175

 
18

 
193

Realized and unrealized gains (losses) on derivatives
(6
)
 
(2
)
 
(8
)
 
4

 
1

 
5

Realized and unrealized gains on marketable securities
11

 

 
11

 

 

 

    Other comprehensive income
246

 
8

 
254

 
179

 
19

 
198

Comprehensive income (loss)
98

 
33

 
131

 
(351
)
 
69

 
(282
)
 
 
 
 
 
 
 
 
 
 
 
 
Other changes in equity:
 
 
 
 
 
 
 
 
 
 
 
Cash dividends—ordinary shares
(235
)
 

 
(235
)
 
(189
)
 

 
(189
)
Dividends attributable to noncontrolling interests

 
(47
)
 
(47
)
 

 
(29
)
 
(29
)
Repurchases of ordinary shares
(119
)
 

 
(119
)
 

 

 

Change in noncontrolling interest share

 
8

 
8

 

 
(73
)
 
(73
)
Spin-off of Adient
(18
)