Quarterly Report — Form 10-Q — Sect. 13 / 15(d) – SEA’34 Filing Table of Contents
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(Parenthetical)
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38: R26 Guarantees HTML 52K
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42: R30 Financial Statements (Tables) HTML 50K
43: R31 Merger Transaction (Tables) HTML 78K
44: R32 Discontinued Operations (Tables) HTML 74K
45: R33 Discontinued Operations Tyco segments asset and HTML 54K
liabilities held for sale (Tables)
46: R34 Discontinued Operations Adient assets and HTML 56K
liabilities held for sale (Tables)
47: R35 Discontinued Operations Adient discontinued HTML 51K
operations noncash items (Tables)
48: R36 Inventories (Tables) HTML 42K
49: R37 Goodwill and Other Intangible Assets (Tables) HTML 111K
50: R38 Significant Restructuring Costs Changes in HTML 60K
Restructuring Reserve - 2017 Restructuring Plan
(Tables)
51: R39 Significant Restructuring Costs Changes in HTML 78K
Restructuring Reserve - 2016 Restructuring Plan
(Tables)
52: R40 Income Taxes (Tables) HTML 40K
53: R41 Pension and Postretirement Plans (Tables) HTML 96K
54: R42 Debt and Financing Arrangements (Tables) HTML 53K
55: R43 Stock-Based Compensation (Tables) HTML 57K
56: R44 Earnings Per Share (Tables) HTML 67K
57: R45 Equity and Noncontrolling Interests (Tables) HTML 270K
58: R46 Derivative Instruments and Hedging Activities HTML 200K
(Tables)
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60: R48 Segment Information (Tables) HTML 116K
61: R49 Guarantees (Tables) HTML 46K
62: R50 Tifsa (Tables) HTML 770K
63: R51 Related Party Transactions (Tables) HTML 39K
64: R52 Financial Statements - Carrying Amounts and HTML 52K
Classification of Assets and Liabilities for
Consolidated VIEs (Detail)
65: R53 Financial Statements - Additional Information HTML 83K
(Detail)
66: R54 Merger Transaction (Details) HTML 49K
67: R55 Merger Transaction Merger Transaction (Details) HTML 138K
68: R56 Acquisitions and Divestitures - Additional HTML 95K
Information (Detail)
69: R57 Discontinued Operations Discontinued Operations - HTML 45K
Additional Information (Details)
70: R58 Discontinued Operations Discontinued Operations by HTML 63K
Disposal Group - Adient (Details)
71: R59 Discontinued Operations Discontinued Operations - HTML 83K
Assets and Liabilities Held for Sale, Specific
Transactions (Details)
72: R60 Discontinued Operations Discontinued Operations - HTML 104K
Assets and Liabilities Held for Sale, Adient
spin-off (Details)
73: R61 Discontinued Operations Discontinued Operations - HTML 55K
Non cash impact, Adient spin-off (Details)
74: R62 Percentage-of-Completion Contracts (Detail) HTML 38K
75: R63 Inventories - Schedule of Inventories (Detail) HTML 41K
76: R64 Goodwill and Other Intangible Assets - Changes in HTML 62K
Carrying Amount of Goodwill (Details)
77: R65 Goodwill and Other Intangible Assets - Goodwill HTML 34K
Additional Information (Details)
78: R66 Goodwill and Other Intangible Assets - Other HTML 60K
Intangible Assets (Details)
79: R67 Goodwill and Other Intangible Assets - Other HTML 47K
Intangible Assets Additional Information (Details)
80: R68 Significant Restructuring Costs Change in HTML 87K
Restructuring Reserve - 2017 Restructuring Plan
(Details)
81: R69 Significant Restructuring Costs Change in HTML 123K
Restructuring Reserve - 2016 Restructuring Plan
(Details)
82: R70 Significant Restructuring Costs - Additional HTML 48K
Information (Detail)
83: R71 Income Taxes - Tax Jurisdictions and Years HTML 61K
Currently under Audit Exam (Details)
84: R72 Income Taxes - Additional Information (Detail) HTML 67K
85: R73 Pension and Postretirement Plans - Components of HTML 61K
Net Periodic Benefit Cost (Detail)
86: R74 Debt and Financing Arrangements - Additional HTML 116K
Information (Detail)
87: R75 Debt and Financing Arrangements - Components of HTML 43K
Net Financing Charges (Details)
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89: R77 Earnings Per Share - Earnings Per Share (Detail) HTML 61K
90: R78 Earnings Per Share - Additional Information HTML 35K
(Detail)
91: R79 Equity and Noncontrolling Interests - Equity HTML 145K
Attributable to Johnson Controls and
Noncontrolling Interests (Details)
92: R80 Equity and Noncontrolling Interests Equity and HTML 44K
Noncontrolling Interests - Additional Information
(Details)
93: R81 Equity and Noncontrolling Interests - Changes in HTML 52K
Redeemable Noncontrolling Interests (Details)
94: R82 Equity and Noncontrolling Interests - Accumulated HTML 123K
Other Comprehensive Income (Details)
95: R83 Derivative Instruments and Hedging Activities - HTML 132K
Location and Fair Values of Derivative Instruments
and Hedging Activities (Detail)
96: R84 Derivative Instruments and Hedging Activities HTML 56K
Derivative Instruments and Hedging Activities -
Offsetting Assets and Liabilities (Details)
97: R85 Derivative Instruments and Hedging Activities - HTML 83K
Location and Amount of Gains and Losses on
Derivative Instruments and Related Hedge Items
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98: R86 Derivative Instruments and Hedging Activities HTML 47K
Derivative Instruments and Hedging Activities -
Fixed Rate Bonds (Details)
99: R87 Derivative Instruments and Hedging Activities - HTML 78K
Additional Information (Detail)
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Measured at Fair Value (Detail)
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(Detail)
102: R90 Impairment of Long-Lived Assets (Details) HTML 56K
103: R91 Segment Information - Additional Information HTML 34K
(Detail)
104: R92 Segment Information - Financial Information HTML 76K
Related to Company's Reportable Segments (Detail)
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106: R94 Product Warranties - Changes in Carrying Amount of HTML 50K
Product Warranty liability (Detail)
107: R95 TIFSA Condensed Income Statement (Details) HTML 134K
108: R96 TIFSA Condensed Statement of Comprehensive Income HTML 92K
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(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.
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)
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.
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.
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):
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
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
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
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
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)
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.
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.
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
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.
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.
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):
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):
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.
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.
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):
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):
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):
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.
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):
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,
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.
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):
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.
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):
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.
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:
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.
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.
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
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):
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.
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):
Realized
and unrealized gains (losses) on derivatives
(6
)
2
(4
)
3
1
4
Realized
and unrealized gains on marketable securities
9
—
9
—
—
—
Other
comprehensive income (loss)
(415
)
(23
)
(438
)
18
10
28
Comprehensive
income (loss)
(234
)
38
(196
)
(62
)
80
18
Other
changes in equity:
Cash dividends—ordinary shares
(471
)
—
(471
)
(377
)
—
(377
)
Dividends
attributable to noncontrolling interests
—
(47
)
(47
)
—
(36
)
(36
)
Repurchases
of ordinary shares
(119
)
—
(119
)
—
—
—
Change
in noncontrolling interest share
—
(12
)
(12
)
—
691
691
Spin-off
of Adient
(4,038
)
(138
)
(4,176
)
—
—
—
Other,
including options exercised
132
—
132
47
—
47
Ending
balance, March 31
$
19,388
$
813
$
20,201
$
9,984
$
898
$
10,882
As
previously disclosed, on October 31, 2016, the Company completed the Adient spin-off. As a result of the spin-off, the Company divested net assets of $4,038 million.
As previously disclosed, on October 1, 2015, the Company formed a joint venture with Hitachi. In connection with the acquisition, the Company recorded equity attributable to noncontrolling interests of $679 million.
Following the Tyco Merger, the Company adopted, subject to the ongoing existence of sufficient distributable reserves, the existing Tyco International plc $1 billion share repurchase program in September 2016. The share repurchase program does not have an expiration date and may be amended or terminated by the Board of Directors at any time without prior notice. For the three and six month periods ended March 31, 2017, the Company repurchased approximately $119 million of its ordinary shares.
In
April 2017, the Company announced its intention to utilize up to $750 million of the $1 billion authorization during fiscal 2017. Shares may be repurchased from time to time in open market purchases at prevailing market prices, in negotiated transactions off the market, or pursuant to a trading plan in accordance with applicable regulations.
The Company consolidates certain subsidiaries in which the noncontrolling interest party has within its control the right to require the
Company to redeem all or a portion of its interest in the subsidiary. The redeemable noncontrolling interests are reported at their estimated redemption value. Any adjustment to the redemption value impacts retained earnings but does not impact net income. Redeemable noncontrolling interests which are redeemable only upon future events, the occurrence of which is not currently probable, are recorded at carrying value.
Aggregate adjustment for the period (net of tax effect of $5 and $1)
(418
)
15
Adient
spin-off impact (net of tax effect of $0)
563
—
Balance at end of period
(1,007
)
(1,032
)
Realized
and unrealized gains (losses) on derivatives
Balance at beginning of period
4
(7
)
Current period changes in fair value (net of tax effect of $4 and $(1))
7
(6
)
Reclassification
to income (net of tax effect of $(7) and $4) *
(13
)
9
Adient spin-off impact (net of tax effect of $6 and $0)
16
—
Balance at end of period
14
(4
)
Realized
and unrealized gains (losses) on marketable securities
Balance at beginning of period
(1
)
—
Current period changes in fair value (net of tax effect of $0)
9
—
Balance
at end of period
8
—
Pension and postretirement plans
Balance
at beginning of period
(4
)
(3
)
Reclassification to income (net of tax effect of $0) **
—
(1
)
Adient spin-off impact (net of tax effect of $0)
2
—
Other
changes (net of tax effect of $0)
—
1
Balance at end of period
(2
)
(3
)
Accumulated
other comprehensive loss, end of period
$
(987
)
$
(1,039
)
* Refer to Note 16, "Derivative Instruments and Hedging Activities," of the notes to consolidated financial statements for disclosure of the line items on the consolidated statements of income affected by reclassifications from AOCI into income related to derivatives.
** Refer
to Note 11, "Pension and Postretirement Plans," of the notes to consolidated financial statements for disclosure of the components of the Company's net periodic benefit costs associated with its defined benefit pension and postretirement plans. For the three and six months ended March 31, 2016, the amounts reclassified from AOCI into income for pension and postretirement plans were primarily recorded in selling, general and administrative expenses on the consolidated statements of income.
16.
Derivative
Instruments and Hedging Activities
The Company selectively uses derivative instruments to reduce market risk associated with changes in foreign currency, commodities, stock-based compensation liabilities and interest rates. Under Company policy, the use of derivatives is restricted to those intended for hedging purposes; the use of any derivative instrument for speculative purposes is strictly prohibited. A description of each type of derivative utilized by the Company to manage risk is included in the following paragraphs. In addition, refer to Note 17, "Fair Value Measurements," of the notes to consolidated financial statements for information related to the fair value measurements
and valuation methods utilized by the Company for each derivative type.
The
Company has global operations and participates in the foreign exchange markets to minimize its risk of loss from fluctuations in foreign currency exchange rates. The Company selectively hedges anticipated transactions that are subject to foreign exchange rate risk primarily using foreign currency exchange hedge contracts. The Company hedges 70% to 90% of the nominal amount of each of its known foreign exchange transactional exposures. As cash flow hedges under ASC 815, "Derivatives and Hedging," the effective portion of the hedge gains or losses due to changes in fair value are initially recorded as a component
of AOCI and are subsequently reclassified into earnings when the hedged transactions occur and affect earnings. Any ineffective portion of the hedge is reflected in the consolidated statements of income. These contracts were highly effective in hedging the variability in future cash flows attributable to changes in currency exchange rates during the three and six months ended March 31, 2017 and 2016.
The Company selectively hedges anticipated transactions that are subject to commodity price risk, primarily using commodity
hedge contracts, to minimize overall price risk associated with the Company’s purchases of lead, copper, tin and aluminum in cases where commodity price risk cannot be naturally offset or hedged through supply base fixed price contracts. Commodity risks are systematically managed pursuant to policy guidelines. As cash flow hedges, the effective portion of the hedge gains or losses due to changes in fair value are initially recorded as a component of AOCI and are subsequently reclassified into earnings when the hedged transactions, typically sales, occur and affect earnings. Any ineffective portion of the hedge is reflected in the consolidated statements of income. The maturities of the commodity hedge contracts
coincide with the expected purchase of the commodities. These contracts were highly effective in hedging the variability in future cash flows attributable to changes in commodity prices during the three and six months ended March 31, 2017 and 2016.
The Company had the following outstanding contracts to hedge forecasted commodity purchases:
In September 2005, the Company entered into three forward treasury lock agreements to reduce the market risk associated with changes in interest rates associated with the Company’s anticipated fixed-rate note issuance to finance the
acquisition of York International (cash flow hedge). The three forward treasury lock agreements, which had a combined notional amount of $1.3 billion, fixed a portion of the future interest cost for 5-year, 10-year and 30-year notes. The fair value of each treasury lock agreement, or the difference between the treasury lock reference rate and the fixed rate at time of note issuance, is amortized to interest expense over the life of the respective note issuance. In January 2006, in connection with the Company’s debt refinancing, the three forward treasury lock agreements were terminated.
Fair Value Hedges
The
Company selectively uses interest rate swaps to reduce market risk associated with changes in interest rates for its fixed-rate bonds. As fair value hedges, the interest rate swaps and related debt balances are valued under a market approach using publicized swap curves. Changes in the fair value of the swap and hedged portion of the debt are recorded in the consolidated statements of income. In the third quarter of fiscal 2014, the Company entered into four fixed to floating interest rate swaps totaling $400 million to hedge the coupon of its 2.6% notes that matured in December 2016, three fixed to floating interest rate swaps totaling $300 million to hedge
the coupon of its 1.4% notes maturing November 2017 and one fixed to floating interest rate swap totaling $150 million to hedge the coupon of its 7.125% notes maturing July 2017. In December 2016, the four remaining outstanding interest rate swaps were terminated. The Company had no interest rate swaps outstanding at March 31, 2017. There were eight interest rate swaps outstanding as of September 30, 2016.
The Company enters into foreign currency denominated debt obligations to selectively hedge portions of its net investment in non-U.S. subsidiaries. The currency effects of the debt obligations are reflected in the AOCI account within shareholders’ equity attributable to Johnson Controls ordinary
shareholders where they offset gains and losses recorded on the Company’s net investments globally. At March 31, 2017, the Company had one billion euro and 485 million euro bonds designated as net investment hedges in the Company's net investment in Europe. At September 30, 2016, the Company had 37 billion yen
of foreign denominated debt designated as net investment hedge in the Company's net investment in Japan and one billion euro and 500 million euro bonds designated as net investment hedges in the Company's net investment in Europe.
Derivatives Not Designated as Hedging Instruments
The Company selectively uses equity swaps to reduce market risk associated with certain of its stock-based compensation plans, such as its deferred compensation plans.
These equity compensation liabilities increase as the Company’s stock price increases and decrease as the Company’s stock price decreases. In contrast, the value of the swap agreement moves in the opposite direction of these liabilities, allowing the Company to fix a portion of the liabilities at a stated amount. As of March 31, 2017 and September 30, 2016, the Company had no equity swaps outstanding.
The Company also holds certain foreign currency forward contracts which do not qualify for hedge accounting treatment. The change in fair value of foreign currency exchange derivatives not designated as hedging instruments under ASC 815 are recorded in the consolidated statements of income.
The following table presents the location and fair values of derivative instruments and hedging activities included in the Company’s consolidated statements of financial position (in millions):
The use of derivative financial instruments exposes the Company to counterparty credit risk. The Company has established policies and procedures to limit the potential for counterparty credit risk, including establishing limits for credit exposure and continually assessing the creditworthiness of
counterparties. As a matter of practice, the Company deals with major banks worldwide having strong investment grade long-term credit ratings. To further reduce the risk of loss, the Company generally enters into International Swaps and Derivatives Association (ISDA) master netting agreements with substantially all of its counterparties. The Company's derivative contracts do not contain any credit risk related contingent features and do not require collateral or other security to be furnished by the Company or the counterparties. The
Company's exposure to credit risk associated with its derivative instruments is measured on an individual counterparty basis, as well as by groups of counterparties that share similar attributes. The Company does not anticipate any non-performance by any of its counterparties, and the concentration of risk with financial institutions does not present significant credit risk to the Company.
The Company enters into ISDA master netting agreements with counterparties that permit the net settlement of amounts owed under the derivative contracts.
The master netting agreements generally provide for net settlement of all outstanding contracts with a counterparty in the case of an event of default or a termination event. The Company has not elected to offset the fair value positions of the derivative contracts recorded in the consolidated statements of financial position. Collateral is generally not required of the Company or the counterparties under the master netting agreements. As of March 31, 2017, and September 30,
2016, no cash collateral was received or pledged under the master netting agreements.
The gross and net amounts of derivative assets and liabilities were as follows (in millions):
Derivatives
Impact on the Statements of Income and Statements of Comprehensive Income
The following table presents the effective portion of pre-tax gains (losses) recorded in other comprehensive income (loss) related to cash flow hedges for the three and six months ended March 31, 2017 and 2016 (in millions):
Derivatives
in ASC 815 Cash Flow Hedging Relationships
The
following tables present the location and amount of the effective portion of pre-tax gains (losses) on cash flow hedges reclassified from AOCI into the Company’s consolidated statements of income for the three and six months ended March 31, 2017 and 2016 (in millions):
The following table presents the location and amount of pre-tax gains (losses) on fair value hedges recognized in the Company’s consolidated statements of income for the three and six months ended March 31, 2017 and 2016 (in millions):
The
following table presents the location and amount of pre-tax gains (losses) on derivatives not designated as hedging instruments recognized in the Company’s consolidated statements of income for the three and six months ended March 31, 2017 and 2016 (in millions):
Amount of Gain (Loss) Recognized
in Income on Derivative
Derivatives Not Designated as Hedging Instruments under ASC 815
The
effective portion of pre-tax gains (losses) recorded in foreign currency translation adjustment ("CTA") within other comprehensive income (loss) related to net investment hedges were $(19) million and $1 million for the for the three months ended March 31, 2017 and 2016, respectively. The effective portion of pre-tax gains (losses) recorded in CTA within other comprehensive income (loss) related to net investment hedges were $28 million and $16 million for the for the six months ended March 31, 2017
and 2016, respectively. For the three and six months ended March 31, 2017 and 2016, no gains or losses were reclassified from CTA into income for the Company’s outstanding net investment hedges, and no gains or losses were recognized in income for the ineffective portion of cash flow hedges.
17.
Fair
Value Measurements
ASC 820, "Fair Value Measurement," defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a three-level fair value hierarchy that prioritizes information used in developing assumptions when pricing an asset or liability as follows:
Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
Level
3: Unobservable inputs where there is little or no market data, which requires the reporting entity to develop its own assumptions.
ASC 820 requires the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.
The following tables present the Company’s fair value hierarchy for those assets and liabilities measured at fair value as of March 31, 2017 and September 30, 2016 (in millions):
1
Classified as restricted investments for payment of asbestos liabilities. See Note 22, "Commitments and Contingencies," of the notes to consolidated financial statements for further details.
Valuation Methods
Foreign currency exchange derivatives: The foreign currency exchange derivatives are valued under a market approach using publicized spot and forward prices.
Commodity derivatives: The commodity derivatives are valued under a market approach using publicized prices, where available, or dealer quotes.
Interest
rate swaps and related debt: The interest rate swaps and related debt balances are valued under a market approach using publicized swap curves.
Deferred
compensation plan assets: Assets held in the deferred compensation plans will be used to pay benefits under certain of the Company's non-qualified deferred compensation plans. The investments primarily consist of mutual funds which are publicly traded on stock exchanges and are valued using a market approach based on the quoted market prices.
Investments in marketable common stock and exchange traded funds: Investments in marketable common stock and exchange traded funds are valued using a market approach based on the quoted market prices, where available, or broker/dealer quotes of identical or comparable instruments. There was an unrealized gain recorded on these investments of $8 million as of March 31,
2017 within AOCI in the consolidated statements of financial position. There was an unrealized loss recorded on these investments of $1 million as of September 30, 2016 within AOCI in the consolidated statements of financial position.
Foreign currency denominated debt: The Company has entered into a foreign currency denominated debt obligation to selectively hedge portions of its net investment in non-U.S. subsidiaries. The currency effect of the debt obligation are reflected in the AOCI account within shareholders’
equity attributable to Johnson Controls ordinary shareholders where they offset gains and losses recorded on the Company’s net investments globally. The foreign denominated debt obligation is remeasured to current exchange rates under a market approach using publicized spot prices. At March 31, 2017, the Company had one billion euro and 485 million euro bonds designated as net investment hedges in the Company's net investment in Europe. At September 30, 2016,
the Company had 37 billion yen of foreign denominated debt designated as net investment hedge in the Company's net investment in Japan and one billion euro and 500 million euro bonds designated as net investment hedges in the Company's net investment in Europe.
The fair values of cash and cash equivalents, accounts receivable, short-term debt and accounts payable approximate their carrying values. The fair value of long-term debt was $12.6 billion
and $15.7 billion at March 31, 2017 and September 30, 2016, respectively. The fair value of public debt was $8.5 billion and $9.7 billion, at March 31, 2017 and September 30, 2016, respectively, which was determined primarily using market quotes classified as Level 1 inputs within the ASC 820 fair value hierarchy. The fair value of other long-term debt was $4.1 billion and $6.0 billion
at March 31, 2017 and September 30, 2016, respectively, which was determined based on quoted market prices for similar instruments classified as Level 2 inputs within the ASC 820 fair value hierarchy.
18.
Impairment of Long-Lived Assets
The Company reviews long-lived
assets for impairment whenever events or changes in circumstances indicate that the asset’s carrying amount may not be recoverable. The Company conducts its long-lived asset impairment analyses in accordance with ASC 360-10-15, "Impairment or Disposal of Long-Lived Assets." ASC 360-10-15 requires the Company to group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows. If the undiscounted cash flows do not indicate the carrying amount of the asset group is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flow
analysis or appraisals.
In the first and second quarters of fiscal 2017, the Company concluded it had triggering events requiring assessment of impairment for certain of its long-lived assets in conjunction with its restructuring actions announced in fiscal 2017. As a result, the Company reviewed the long-lived assets for impairment and recorded $38 million of asset impairment charges within restructuring and impairment costs on the consolidated statements of income, of which $15 million was recorded in the first quarter and $23 million was recorded
in the second quarter. Of the total impairment charges, $20 million related to the Building Efficiency Products North America segment, $17 million related to Corporate assets and $1 million related to the Tyco segment. Refer to Note 9, "Significant Restructuring and Impairment Costs," of the notes to consolidated financial statements for additional information. The impairments were measured, depending on the asset, under either an income approach utilizing forecasted discounted cash flows or a market approach utilizing an appraisal to determine fair values of the impaired assets. These methods are consistent with the methods the Company employed in prior periods to value other long-lived assets. The inputs utilized in the analyses are classified
as Level 3 inputs within the fair value hierarchy as defined in ASC 820, "Fair Value Measurement."
In the second quarter of fiscal 2016, the Company concluded it had a triggering event requiring assessment of impairment for certain of its long-lived assets in conjunction with its restructuring actions announced in fiscal 2016. As a result, the Company reviewed the long-lived assets for impairment and recorded $15 million of asset impairment charge within restructuring and
impairment costs on the consolidated statements of income. Of the total impairment charge, $8 million related to the Building Efficiency Products North America segment, $4 million related to the Building Efficiency Asia segment and $3 million related to the Building Efficiency Rest of World segment. In addition, the Company recorded $14 million
of asset impairments within discontinued operations related to Adient in the second quarter of fiscal 2016. Refer to Note 9, "Significant Restructuring and Impairment Costs," of the notes to consolidated financial statements for additional information. The impairments were measured, depending on the asset, under either an income approach utilizing forecasted discounted cash flows or a market approach utilizing an appraisal to determine fair values of the impaired assets. These methods are consistent with the methods the Company employed in prior periods to value other long-lived assets. The inputs utilized in the analyses are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, "Fair Value Measurement."
At March 31,
2017 and 2016, the Company concluded it did not have any other triggering events requiring assessment of impairment of its long-lived assets.
19.
Segment Information
During the first quarter of fiscal 2017, the Company determined that the Automotive Experience business 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 EBITA, which represents income from continuing operations before income taxes and noncontrolling interests, excluding general corporate expenses, intangible asset amortization, net financing 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.
ASC 280, "Segment Reporting," establishes the standards for reporting information about segments in financial statements. In applying the criteria set forth in ASC 280, the Company has determined that it has six reportable segments for financial reporting purposes. The Company’s six reportable segments are presented in the context of its two primary businesses – Building Technologies & Solutions and Power Solutions.
Building
Technologies & Solutions
Building Efficiency
Building Efficiency designs, produces, markets and installs HVAC and control systems that monitor, automate and integrate critical building segment equipment and conditions including HVAC, fire-safety and security in commercial buildings and in various industrial applications.
•
Systems and Service North America provides products and services to non-residential building and industrial applications in the North American marketplace. The products and services include HVAC and controls
systems, energy efficiency solutions and technical services, including inspection, scheduled maintenance, and repair and replacement of mechanical and control systems.
•
Products North America designs and produces heating and air conditioning solutions for residential and light commercial applications, and also markets products and refrigeration systems to the replacement and new construction markets in the North American marketplace. Products North America also includes HVAC products installed for Navy and Marine customers globally.
•
Asia
provides HVAC, controls and refrigeration systems and technical services to the Asian marketplace. Asia also includes the Johnson Controls-Hitachi Air Conditioning joint venture, which was formed October 1, 2015.
•
Rest of World provides HVAC, controls and refrigeration systems and technical services to markets in Europe, the Middle East and Latin America.
Tyco designs, sells, installs, services and monitors integrated electronic security systems and integrated fire detection and suppression systems for commercial, industrial, retail, small business, institutional and governmental customers. The Tyco business also designs, manufactures and sells fire protection, security and life safety products, including intrusion security, anti-theft devices, breathing apparatus and access control and video management systems, for commercial, industrial, retail, residential, small business, institutional and governmental customers
worldwide.
Power Solutions
Power Solutions services both automotive original equipment manufacturers and the battery aftermarket by providing advanced battery technology, coupled with systems engineering, marketing and service expertise.
Financial information relating to the Company’s reportable segments is as follows (in millions):
Certain
of the Company's subsidiaries at the business segment level have guaranteed the performance of third-parties and provided financial guarantees for uncompleted work and financial commitments. The terms of these guarantees vary with end dates ranging from the current fiscal year through the completion of such transactions and would typically be triggered in the event of nonperformance. Performance under the guarantees, if required, would not have a material effect on the Company's financial position, results of operations or cash flows.
The Company
offers warranties to its customers depending upon the specific product and terms of the customer purchase agreement. A typical warranty program requires that the Company replace defective products within a specified time period from the date of sale. The Company records an estimate for future warranty-related costs based on actual historical return rates and other known factors. Based on analysis of return rates and other factors, the Company’s warranty provisions are adjusted as necessary. The Company monitors its warranty activity and adjusts its reserve estimates when it is probable that future warranty costs will be different than
those estimates.
The Company’s product warranty liability for continuing operations is recorded in the consolidated statements of financial position in other current liabilities if the warranty is less than one year and in other noncurrent liabilities if the warranty extends longer than one year.
The changes in the carrying amount of the Company’s total product warranty liability for continuing operations, including extended warranties for which deferred revenue is recorded, for the six months ended March 31, 2017 and 2016 were as follows (in millions):
Settlements
made (in cash or in kind) during the period
(146
)
(150
)
Currency translation
(2
)
—
Balance at end of period
$
371
$
334
(1)
The six months ended March 31, 2017 includes $11 million of product warranties transferred to liabilities 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 disposal groups classified as held for sale.
As a result of the Tyco Merger in the fourth quarter of fiscal 2016, the Company recorded, as part of the acquired liabilities of Tyco, $290 million of post sale contingent
tax indemnification liabilities within other noncurrent liabilities in the consolidated statements of financial position. The liabilities are recorded at fair value and relate to certain tax related matters borne by the buyer of previously divested subsidiaries of Tyco which Tyco has indemnified certain parties and the amounts are probable of being paid. Of the $290 million recorded as of September 30, 2016 and March 31, 2017, $255 million is related to prior divested businesses and the remainder relates to Tyco’s tax sharing agreements from its 2007 and 2012 spin-off transactions. These are certain guarantees or indemnifications extended among
Tyco, Medtronic, TE Connectivity, ADT and Pentair in accordance with the terms of the 2007 and 2012 separation and tax sharing agreements. In addition, the Company has recorded $11 million of tax indemnification liabilities as of March 31, 2017 related to other divestitures.
21.
Tyco International Finance S.A.
TIFSA, a 100% owned subsidiary of the
Company, has public debt securities outstanding which, as of September 30, 2016, were fully and unconditionally guaranteed by Johnson Controls and by Tyco Fire & Security Finance S.C.A. ("TIFSCA"), a wholly owned subsidiary of the Company and parent company TIFSA. During the first quarter of fiscal 2017, the guarantees were removed in connection with the previously disclosed debt exchange. The following tables present condensed consolidating financial information for Johnson Controls, TIFSCA, TIFSA and all other subsidiaries. Condensed financial information for the Company, TIFSCA and TIFSA on a stand-alone basis is presented using the equity method
of accounting for subsidiaries.
The TIFSA public debt securities were assumed as part of the Tyco acquisition. Therefore, no consolidating financial information for the period ended March 31, 2016 is presented related to the guarantee of the TIFSA public debt securities. Additional information regarding TIFSA and TIFSCA for the period ended March 25, 2016 can be found in Tyco's Quarterly report on Form 10-Q filed with the SEC on April 29, 2016.
The Company accrues for potential environmental liabilities when it is probable
a liability has been incurred and the amount of the liability is reasonably estimable. As of March 31, 2017, reserves for environmental liabilities totaled $46 million, of which $9 million was recorded within other current liabilities and $37 million was recorded within other noncurrent liabilities in the consolidated statements of financial position. Reserves for environmental liabilities for continuing operations totaled $51 million at September 30, 2016. Such potential liabilities accrued by the Company do not
take into consideration possible recoveries of future insurance proceeds. They do, however, take into account the likely share other parties will bear at remediation sites. It is difficult to estimate the Company’s ultimate level of liability at many remediation sites due to the large number of other parties that may be involved, the complexity of determining the relative liability among those parties, the uncertainty as to the nature and scope of the investigations and remediation to be conducted, the uncertainty in the application of law and risk assessment, the various choices and costs associated with diverse technologies that may be used in corrective actions at the sites, and the often quite lengthy periods over which eventual remediation may occur. Nevertheless, the Company does not currently
believe that any claims, penalties or costs in connection with known environmental matters will have a material adverse effect on the Company’s financial position, results of operations or cash flows. In addition, the Company has identified asset retirement obligations for environmental matters that are expected to be addressed at the retirement, disposal, removal or abandonment of existing owned facilities. At March 31, 2017 and September 30, 2016, the Company recorded conditional asset retirement obligations of $72
million and $74 million, respectively.
Asbestos Matters
The Company and certain of its subsidiaries, along with numerous other third parties, are named as defendants in personal injury lawsuits based on alleged exposure to asbestos containing materials. These cases have typically involved product liability claims based primarily on allegations of manufacture, sale or distribution of industrial products that either contained asbestos or were used with asbestos containing components.
As
of March 31, 2017, the Company's estimated asbestos related net liability recorded on a discounted basis within the Company's consolidated statements of financial position is $152 million. The net liability within the consolidated statements of financial position is comprised of a liability for pending and future claims and related defense costs of $540 million, of which $35 million is recorded in other current liabilities and $505 million is recorded in other noncurrent liabilities. The
Company also maintains separate cash, investments and receivables related to insurance recoveries within the consolidated statements of financial position of $388 million, of which $57 million is recorded in other current assets, and $331 million is recorded in other noncurrent assets. Assets include $33 million of cash and $258 million of investments, which have all been designated as restricted. In connection with the recognition of liabilities for asbestos-related matters, the Company records asbestos-related insurance recoveries that are probable; the amount of such recoveries recorded at March 31,
2017 is $97 million. As of September 30, 2016, the Company's estimated asbestos related net liability recorded on a discounted basis within the Company's consolidated statements of financial position is $148 million. The net liability within the consolidated statements of financial position is comprised of a liability for pending and future claims and related defense costs of $548 million, of which $35 million is recorded in other current liabilities and $513 million is
recorded in other noncurrent liabilities. The Company also maintains separate cash, investments and receivables related to insurance recoveries within the consolidated statements of financial position of $400 million, of which $41 million is recorded in other current assets, and $359 million is recorded in other noncurrent assets. Assets include $16 million of cash and $264 million of investments, which have all been designated as restricted. In connection with the recognition of liabilities for asbestos-related matters, the Company records asbestos-related insurance recoveries
that are probable; the amount of such recoveries recorded at September 30, 2016 is $120 million. The Company believes that the asbestos related liabilities and insurance related receivables recorded as of March 31, 2017 and September 30, 2016 are appropriate.
The Company's estimate of the liability and corresponding insurance recovery for pending and future claims and defense costs
is based on the Company's historical claim experience, and estimates of the number and resolution cost of potential future claims that may be filed and is discounted to present value from 2069 (which is the Company's reasonable best estimate of the actuarially determined time period through which asbestos-related claims will be filed against Company affiliates). Asbestos related defense costs are included in the asbestos liability. The Company's legal strategy for resolving claims also impacts
these estimates. The Company considers various trends and developments in evaluating the period of time (the look-back period) over which historical claim and settlement experience is used to estimate and value claims reasonably projected to be made through 2069. Annually, the Company assesses the sufficiency of its estimated liability for pending and future claims and defense costs by evaluating actual experience regarding claims filed,
settled and dismissed, and amounts paid in settlements. In addition to claims and settlement experience, the Company considers additional quantitative and qualitative factors such as changes in legislation, the legal environment, and the Company's defense strategy. The Company also evaluates the recoverability of its insurance receivable on an annual basis. The Company evaluates all of these factors and determines whether a change in the estimate of its liability for pending and future claims and defense costs or insurance receivable is warranted.
The
amounts recorded by the Company for asbestos-related liabilities and insurance-related assets are based on the Company's strategies for resolving its asbestos claims, currently available information, and a number of estimates and assumptions. Key variables and assumptions include the number and type of new claims that are filed each year, the average cost of resolution of claims, the identity of defendants, the resolution of coverage issues with insurance carriers, amount of insurance, and the solvency risk with respect to the Company's insurance carriers. Many of these factors are closely linked, such that a change in one variable or assumption will impact one or more of the others, and no single variable or assumption
predominately influences the determination of the Company's asbestos-related liabilities and insurance-related assets. Furthermore, predictions with respect to these variables are subject to greater uncertainty in the later portion of the projection period. Other factors that may affect the Company's liability and cash payments for asbestos-related matters include uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case, reforms of state or federal tort legislation and the applicability of insurance policies among subsidiaries. As a result, actual liabilities or insurance recoveries could be significantly higher or lower than those recorded if assumptions used in
the Company's calculations vary significantly from actual results.
Insurable Liabilities
The Company records liabilities for its workers' compensation, product, general, property and auto liabilities. The determination of these liabilities and related expenses is dependent on claims experience. For most of these liabilities, claims incurred but not yet reported are estimated by utilizing actuarial valuations based upon historical claims experience. At March 31, 2017 and September 30,
2016, the insurable liabilities for continuing operations totaled $468 million and $422 million, respectively, of which $86 million and $60 million was recorded within other current liabilities, $32 million and $28 million was recorded within accrued compensation and benefits, and $350 million and $334 million was recorded within other noncurrent liabilities in the consolidated statements of financial position, respectively. The Company records receivables from third party insurers when recovery
has been determined to be probable. The amount of such receivables recorded at March 31, 2017 was $48 million, of which $30 million was recorded within other current assets and $18 million was recorded within other noncurrent assets. Insurance receivables recorded at September 30, 2016 were $21 million, primarily recorded within other noncurrent assets. The Company maintains captive insurance companies to manage certain of its insurable liabilities.
The
Company is involved in various lawsuits, claims and proceedings incident to the operation of its businesses, including those pertaining to product liability, environmental, safety and health, intellectual property, employment, commercial and contractual matters, and various other casualty matters. Although the outcome of litigation cannot be predicted with certainty and some lawsuits, claims or proceedings may be disposed of unfavorably to us, it is management’s opinion that none of these will have a material adverse effect on the Company’s financial position, results of operations or cash flows. Costs related to such matters were not material to the periods presented.
23.
Related
Party Transactions
In the ordinary course of business, the Company enters into transactions with related parties, such as equity affiliates. Such transactions consist of facility management services, the sale or purchase of goods and other arrangements.
The net sales to and purchases from related parties for continuing operations included in the consolidated statements of income were $229 million and $52 million, respectively, for the three months ended March 31, 2017; and $236
million and $45 million, respectively, for the three months ended March 31, 2016. The net sales to and purchases from related parties for continuing
operations included in the consolidated statements of income were
$454 million and $101 million, respectively, for the six months ended March 31, 2017; and $470 million and $83 million, respectively, for the six months ended March 31, 2016.
The following table sets forth the amount of accounts receivable due from and payable to related parties for continuing operations in the consolidated statements of financial position (in millions):
The Company has also provided financial support to certain of its VIE's; see Note 1, "Financial Statements," of the notes to consolidated financial statements for additional information.
54
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statements for Forward-Looking Information
Unless otherwise indicated, references to "Johnson Controls," the "Company,""we,""our" and "us" in this Quarterly Report on Form 10-Q refer to Johnson Controls International plc and its consolidated subsidiaries.
The Company has made statements in this document that are forward-looking
and therefore are subject to risks and uncertainties. All statements in this document other than statements of historical fact are, or could be, "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. In this document, statements regarding Johnson Controls' future financial position, sales, costs, earnings, cash flows, other measures of results of operations, synergies and integration opportunities, capital expenditures and debt levels are forward-looking statements. Words such as "may,""will,""expect,""intend,""estimate,""anticipate,""believe,""should,""forecast,""project" or "plan" and terms of similar meaning are also generally intended to identify forward-looking statements. However, the absence of these words does not mean that a statement is not forward-looking. Johnson Controls
cautions that these statements are subject to numerous important risks, uncertainties, assumptions and other factors, some of which are beyond Johnson Controls’ control, that could cause Johnson Controls’ actual results to differ materially from those expressed or implied by such forward-looking statements, including, among others, risks related to: any delay or inability of Johnson Controls to realize the expected benefits and synergies of recent portfolio transactions such as the merger with Tyco International plc ("Tyco") and the spin-off of Adient, changes in tax laws, regulations, rates, policies or interpretations, the loss of key senior management, the tax treatment of recent portfolio transactions, significant transaction costs and/or unknown liabilities associated with such transactions, the outcome of actual or potential litigation relating to such transactions, the risk that disruptions from recent transactions will harm Johnson Controls’ business, the strength
of the U.S. or other economies, automotive vehicle production levels, mix and schedules, energy and commodity prices, the availability of raw materials and component products, currency exchange rates, and cancellation of or changes to commercial arrangements. A detailed discussion of risks related to Johnson Controls' business is included in Item 1A of Part I of the Company's most recent Annual Report on Form 10-K for the year ended September 30, 2016 filed with the United States Securities and Exchange Commission (SEC) on November 23, 2016 and available at www.sec.gov and www.johnsoncontrols.com under the "Investors"
tab. Shareholders, potential investors and others should consider these factors in evaluating the forward-looking statements and should not place undue reliance on such statements. The forward-looking statements included in this document are only made as of the date of this document, unless otherwise specified, and, except as required by law, Johnson Controls assumes no obligation, and disclaims any obligation, to update such statements to reflect events or circumstances occurring after the date of this document.
Overview
Johnson Controls International plc, headquartered in Cork, Ireland, is a global diversified technology and multi industrial leader serving a wide range of customers in more than 150 countries. The
Company creates intelligent buildings, efficient energy solutions, integrated infrastructure and next generation transportation systems that work seamlessly together to deliver on the promise of smart cities and communities. The Company is committed to helping our customers win and creating greater value for all of its stakeholders through strategic focus on our buildings and energy growth platforms.
Johnson Controls was originally incorporated in the state of Wisconsin in 1885 as Johnson Electric Service Company to manufacture, install and service automatic temperature regulation systems for buildings. The Company was renamed to Johnson Controls, Inc. in 1974. In 1978, the
Company acquired Globe-Union, Inc., a Wisconsin-based manufacturer of automotive batteries for both the replacement and original equipment markets. The Company entered the automotive seating industry in 1985 with the acquisition of Michigan-based Hoover Universal, Inc. In 2005, the Company acquired York International, a global supplier of heating, ventilating, air-conditioning and refrigeration equipment and services. In 2014, the Company acquired Air Distribution Technologies, Inc. (ADTi), one of the largest independent providers of air distribution and ventilation products in North America. On October 1, 2015, the
Company formed a joint venture with Hitachi to expand its Building Technologies & Solutions product offerings.
In the fourth quarter of fiscal 2016, Johnson Controls, Inc. ("JCI Inc.") and Tyco completed their combination, with JCI Inc. merging with a wholly owned, indirect subsidiary of Tyco (the "Merger"). Following the Merger, Tyco changed its name to “Johnson Controls International plc” and JCI Inc. is a wholly-owned subsidiary of Johnson Controls International plc. 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
55
the historic financial statements of the Company. Refer to Note 3, "Merger Transaction," of the notes to consolidated financial statements for additional information.
The acquisition of Tyco brings together best-in-class product, technology and service capabilities across controls, fire, security, 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 Johnson Controls 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.
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 ("Adient") 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 at December 31, 2016.
The Building Efficiency business is a global market leader in designing, producing, marketing and installing integrated heating, ventilating and air conditioning (HVAC) systems, building management systems, controls, security and mechanical equipment. In addition, the Buildings business provides technical services and energy management consulting. The Company also provides residential air conditioning and heating systems and industrial refrigeration products.
The Tyco business is a global market leader in providing security products and services, fire detection
and suppression products and services, and life and safety products. Tyco designs, sells, installs, services and monitors electronic security systems and fire detection and suppression systems. In addition, Tyco manufactures and sells fire protection, security and life safety products, including intrusion security, anti-theft devices, breathing apparatus and access control and video management systems. The products and services are for commercial, industrial, retail, residential, small business, institutional and governmental customers worldwide.
The Power Solutions business is a leading global supplier of lead-acid automotive batteries for virtually every type of passenger car, light truck and utility vehicle. The Company serves both automotive original equipment manufacturers (OEMs) and the
general vehicle battery aftermarket. The Company also supplies advanced battery technologies to power start-stop, hybrid and electric vehicles.
The following information should be read in conjunction with the September 30, 2016 consolidated financial statements and notes thereto, along with management’s discussion and analysis of financial condition and results of operations included in our 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. References in the following discussion and analysis to "Three Months"(or similar language) refer to the three months ended March 31, 2017 compared to the three months ended March 31, 2016, while references to "Year-to-Date" refer to the six months ended March 31,
2017 compared to the six months ended March 31, 2016.
56
Liquidity and Capital Resources
The Company believes its capital resources and liquidity position at March 31, 2017 are adequate to meet projected needs. The
Company believes requirements for working capital, capital expenditures, dividends, stock repurchases, minimum pension contributions, debt maturities and any potential acquisitions in fiscal 2017 will continue be funded from operations, supplemented by short- and long-term borrowings, if required. The Company currently manages its short-term debt position in the U.S. and euro commercial paper markets and bank loan markets. In the event the Company and its wholly-owned indirect subsidiary, Tyco International Holding S.à.r.l ("TSarl"), are unable to issue commercial paper, they would have the ability to draw on their $2.0 billion and $1.0 billion revolving credit facilities, respectively. Both facilities mature in August 2020. There were no draws
on the revolving credit facilities as of March 31, 2017. As such, the Company believes it has sufficient financial resources to fund operations and meet its obligations for the foreseeable future.
The Company’s debt financial covenant in its revolving credit facility require a minimum consolidated shareholders’ equity attributable to Johnson Controls of at least $3.5 billion at all times. The revolving credit facility also limits the amount of debt secured by liens that may be incurred to a maximum aggregated amount of 10% of consolidated shareholders’ equity attributable to Johnson Controls for liens and pledges.
For purposes of calculating these covenants, consolidated shareholders’ equity attributable to Johnson Controls is calculated without giving effect to (i) the application of Accounting Standards Codification (ASC) 715-60, "Defined Benefit Plans - Other Postretirement," or (ii) the cumulative foreign currency translation adjustment. TSarl's, revolving credit facility contains customary terms and conditions, and a financial covenant that limits the ratio of TSarl's debt to earnings before interest, taxes, depreciation, and amortization as adjusted for certain items set forth in the agreement to 3.5x. The TSarl's revolving credit facility also limits its ability to incur subsidiary debt or grant liens on its and its subsidiaries' property. As of March 31, 2017, the
Company and TSarl were in compliance with all covenants and other requirements set forth in their credit agreements and the indentures, governing their notes, and expect to remain in compliance for the foreseeable future. None of the Company’s or TSarl's debt agreements limit access to stated borrowing levels or require accelerated repayment in the event of a decrease in the respective borrower's credit rating.
The key financial assumptions used in calculating the Company’s pension liability are determined annually, or whenever plan assets and liabilities are re-measured as required under accounting
principles generally accepted in the U.S., including the expected rate of return on its plan assets. In fiscal 2017, the Company believes the long-term rate of return will approximate 7.50%, 3.40% and 5.60% for U.S. pension, non-U.S. pension and postretirement plans, respectively. During the first six months of fiscal 2017, the Company made approximately $258 million in total pension and postretirement contributions. In total, the Company expects to contribute approximately $326 million in cash to its defined benefit pension plans in fiscal 2017. The
Company expects to contribute $4 million in cash to its postretirement plans in fiscal 2017.
To better align its resources with its growth strategies and reduce the cost structure of its global operations to address the softness in certain underlying markets, the Company committed to a significant restructuring plan in fiscal 2017 and recorded $177 million of restructuring and impairment costs in the consolidated statements of income. The restructuring action 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. The
Company currently estimates that upon completion of the restructuring action, the fiscal 2017 restructuring plan will reduce annual operating costs from continuing operations by approximately $185 million, which is primarily the result of lower cost of sales and selling, general and administrative expenses due to reduced employee-related costs, depreciation and amortization expense. The Company expects the annual benefit of these actions will be substantially realized in fiscal 2018. For fiscal 2017, the savings from continuing operations, net of execution costs, are expected to be approximately 60% of the expected annual operating cost reduction. The restructuring action is expected to be substantially complete in fiscal 2018. The restructuring plan reserve balance of $125 million at March 31,
2017 is expected to be paid in cash.
To better align its resources with its growth strategies and reduce the cost structure of its global operations to address the softness in certain underlying markets, the Company committed to a significant restructuring plan in fiscal 2016 and recorded $288 million of restructuring and impairment costs in the consolidated statements of income within continuing operations. The restructuring action 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. The Company currently estimates that upon completion of the restructuring action, the fiscal 2016 restructuring plan will reduce annual operating costs from continuing operations by approximately $135 million, which is primarily the result of lower cost of sales and selling, general and administrative expenses due to reduced employee-related costs, depreciation and amortization expense. The Company expects the annual benefit of these actions will be substantially realized by the end of fiscal 2018. For fiscal 2017, the savings from continuing operations, net of execution costs, are expected to be approximately 35% of
57
the
expected annual operating cost reduction. The restructuring action is expected to be substantially complete in fiscal 2018. The restructuring plan reserve balance of $168 million at March 31, 2017 is expected to be paid in cash.
Net Sales
Three
Months Ended
March 31,
Six Months Ended March 31,
(in millions)
2017
2016
Change
2017
2016
Change
Net
sales
$
7,267
$
4,733
54
%
$
14,353
$
9,429
52
%
The
increase in consolidated net sales for the three months ended March 31, 2017 was due to higher sales in the Building Technologies & Solutions business ($2,411 million) and the Power Solutions business ($117 million), and the favorable impact of foreign currency translation ($6 million). Incremental sales resulted from the Tyco Merger, the impact of higher lead costs on pricing in the Power Solutions business and higher volumes across all Building Efficiency segments. Excluding the favorable impacts of the Tyco Merger and foreign currency translation, consolidated net sales increased 4% as compared to the prior year. Refer to the "Segment Analysis" below within Item 2 for a discussion of net sales by segment.
The increase in consolidated net sales for the six months ended
March 31, 2017 was due to higher sales in the Building Technologies & Solutions business ($4,620 million) and the Power Solutions business ($288 million), and the favorable impact of foreign currency translation ($16 million). Incremental sales resulted from the Tyco Merger, the impact of higher lead costs on pricing and higher global shipments in the Power Solutions business, and higher volumes in the Building Efficiency Products North America and Asia segments. Excluding the favorable impacts of the Tyco Merger and foreign currency translation, consolidated net sales increased 3% as compared to the prior year. Refer to the "Segment Analysis" below within Item 2 for a discussion of net sales by segment.
Cost
of Sales / Gross Profit
Three Months Ended
March 31,
Six Months Ended March 31,
(in millions)
2017
2016
Change
2017
2016
Change
Cost
of sales
$
4,986
$
3,446
45
%
$
9,958
$
6,885
45
%
Gross
profit
2,281
1,287
77
%
4,395
2,544
73
%
%
of sales
31.4
%
27.2
%
30.6
%
27.0
%
Cost
of sales for the three month period ended March 31, 2017 increased as compared to the three month period ended March 31, 2016, and gross profit as a percentage of sales increased by 420 basis points. Gross profit in the Building Technologies & Solutions business increased due to the incremental gross profit related to the Tyco Merger and higher volumes across all Building Efficiency segments, partially offset by higher operating costs in the Building Efficiency Asia and Systems and Service North America segments as a result of product and channel investments as well as mix. Gross profit in the Power Solutions business was impacted by favorable pricing and product mix net of lead cost increases, partially offset by higher operating costs. Net mark-to-market adjustments on pension
plans had a favorable impact on cost of sales of $5 million primarily due to favorable investment returns versus expectations. Foreign currency translation had a unfavorable impact on cost of sales of approximately $3 million. Refer to the "Segment Analysis" below within Item 2 for a discussion of segment earnings before interest, taxes and amortization (EBITA) by segment.
Cost of sales for the six month period ended March 31, 2017 increased as compared to the six month period ended March 31, 2016, and gross profit as a percentage of sales increased by 360 basis points. Gross profit in the Building Technologies & Solutions business increased due to the incremental gross profit
related to the Tyco Merger and lower operating costs in the Building Efficiency Products North America segment, partially offset by higher operating costs in the Building Efficiency Systems and Service North America and Asia segments. Gross profit in the Power Solutions business was impacted by favorable pricing and product mix net of lead cost increases, and higher volumes, partially offset by higher operating costs. Net mark-to-market adjustments on pension plans had a favorable impact on cost of sales of $15 million primarily due to an increase in discount rates. Foreign currency translation had a unfavorable impact on cost of sales of approximately $15 million. Refer to the "Segment Analysis" below within Item 2 for a discussion of segment EBITA by segment.
58
Selling,
General and Administrative Expenses
Three Months Ended
March 31,
Six Months Ended March 31,
(in millions)
2017
2016
Change
2017
2016
Change
Selling,
general and administrative
expenses
$
1,726
$
899
92
%
$
3,296
$
1,746
89
%
%
of sales
23.8
%
19.0
%
23.0
%
18.5
%
Selling,
general and administrative expenses (SG&A) for the three month period ended March 31, 2017 increased 92% as compared to the three month period ended March 31, 2016. The increase in SG&A was primarily due to incremental SG&A related to the Tyco Merger, partially offset by productivity savings and costs synergies as well as net mark-to-market adjustments on pension plans. The net mark-to-market adjustments had a favorable impact on SG&A of $13 million primarily due to favorable investment returns versus expectations. Foreign currency translation had an unfavorable impact on SG&A of $3 million. Refer to the "Segment Analysis" below within Item 2 for a discussion of segment EBITA by segment.
SG&A
for the six month period ended March 31, 2017 increased 89% as compared to the six month period ended March 31, 2016. The increase in SG&A was primarily due to incremental SG&A related to the Tyco Merger, partially offset by productivity savings and costs synergies as well as net mark-to-market adjustments on pension plans. The net mark-to-market adjustments had a favorable impact on SG&A of $120 million primarily due to an increase in discount rates. Foreign currency translation had an unfavorable impact on SG&A of $7 million. Refer to the "Segment Analysis" below within Item 2 for a discussion of segment EBITA by segment.
Restructuring
and Impairment Costs
Three Months Ended
March 31,
Six Months Ended March 31,
(in millions)
2017
2016
Change
2017
2016
Change
Restructuring
and impairment costs
$
99
$
60
65
%
$
177
$
60
*
*
Measure not meaningful
Refer to Note 9, "Significant Restructuring and Impairment Costs," of the notes to consolidated financial statements for further disclosure related to the Company's restructuring plans.
Net Financing Charges
Three
Months Ended
March 31,
Six Months Ended March 31,
(in millions)
2017
2016
Change
2017
2016
Change
Net
financing charges
$
116
$
71
63
%
$
252
$
137
84
%
Net
financing charges were higher for the three month period ended March 31, 2017 primarily due to higher interest rates and higher average borrowing levels as a result of the debt assumed with the Tyco Merger. Net financing charges were higher for the six month period ended March 31, 2017 primarily due to higher interest rates, higher average borrowing levels as a result of the debt assumed with the Tyco Merger and debt exchange offer fees.
59
Equity
Income
Three Months Ended
March 31,
Six Months Ended March 31,
(in millions)
2017
2016
Change
2017
2016
Change
Equity
income
$
53
$
40
33
%
$
108
$
82
32
%
The
increase in equity income for the three and six months ended March 31, 2017 was primarily due to higher income at certain partially-owned affiliates of the Power Solutions business and the Johnson Controls - Hitachi (JCH) joint venture in the Building Technologies & Solutions business. Refer to the "Segment Analysis" below within Item 2 for a discussion of segment EBITA by segment.
Income Tax Provision
Three
Months Ended
March 31,
Six Months Ended March 31,
(in millions)
2017
2016
Change
2017
2016
Change
Income
tax provision
$
508
$
41
*
$
481
$
124
*
Effective
tax rate
129
%
14
%
62
%
18
%
*
Measure not meaningful
In calculating the provision for income taxes, the Company uses an estimate of the annual effective tax rate based upon the facts and circumstances known at each interim period. On a quarterly basis, the annual effective tax rate is adjusted, as appropriate, based upon changed facts and circumstances, if any, as compared to those forecasted at the beginning of the fiscal year and each interim period thereafter.
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, 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. The effective tax rate for the six months ended March 31, 2017, increased as compared to the six months ended March 31, 2016, primarily due to the discrete tax items described below, partially offset by tax planning initiatives.
The global tax planning initiatives related primarily to foreign tax credit planning, global financing structures and alignment of our global business functions in a tax efficient manner.
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.
In the second quarter of fiscal 2017, the Company recorded $138 million of transaction and integration costs which generated a $31 million tax benefit.
60
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.
Loss From Discontinued Operations, Net of Tax
Three
Months Ended
March 31,
Six Months Ended March 31,
(in millions)
2017
2016
Change
2017
2016
Change
Loss
from discontinued operations, net of tax
$
—
$
(725
)
*
$
(34
)
$
(538
)
*
*
Measure not meaningful
Refer to Note 5, "Discontinued Operations," of the notes to consolidated financial statements for further information regarding the Company's discontinued operations.
Income Attributable to Noncontrolling Interests
Three
Months Ended
March 31,
Six Months Ended March 31,
(in millions)
2017
2016
Change
2017
2016
Change
Income
from continuing operations attributable to noncontrolling interests
$
33
$
38
-13
%
$
73
$
61
20
%
Income
from discontinued operations attributable to noncontrolling interests
—
23
*
9
40
-78
%
*
Measure not meaningful
The decrease in income from continuing operations attributable to noncontrolling interests for the three months ended March 31, 2017, was primarily due to the mix of earnings and underlying tax rates related to the JCH joint venture in the Building Technologies & Solutions business. The increase in income from continuing operations attributable to noncontrolling interests for the six months ended March 31, 2017, was primarily due to higher net income related to the JCH joint venture in the Building Technologies & Solutions business.
Refer to Note 5, "Discontinued
Operations," of the notes to consolidated financial statements for further information regarding the Company's discontinued operations.
61
Net Income (Loss) Attributable to Johnson Controls
Three
Months Ended
March 31,
Six Months Ended March 31,
(in millions)
2017
2016
Change
2017
2016
Change
Net
income (loss) attributable to
Johnson Controls
$
(148
)
$
(530
)
*
$
181
$
(80
)
*
*
Measure not meaningful
The increase in net income attributable to Johnson Controls for the three and six months ended March 31, 2017 was primarily due to incremental operating income as a result of the Tyco Merger and a prior year loss from discontinued operations, partially offset by an increase in the income tax provision and higher net financing charges. Diluted earnings (loss) per share attributable to Johnson Controls for the three months ended March 31, 2017 was $(0.16) compared to $(0.81) for the three months ended March 31, 2016. Diluted earnings (loss) per share attributable to Johnson
Controls for the six months ended March 31, 2017 was $0.19 compared to $(0.12) for the six months ended March 31, 2016.
Comprehensive Income (Loss) Attributable to Johnson Controls
Three
Months Ended
March 31,
Six Months Ended March 31,
(in millions)
2017
2016
Change
2017
2016
Change
Comprehensive
income (loss)
attributable to Johnson Controls
$
98
$
(351
)
*
$
(234
)
$
(62
)
*
*
Measure not meaningful
The increase in comprehensive income attributable to Johnson Controls for the three months ended March 31, 2017 was primarily due to lower net loss attributable to Johnson Controls ($382 million) and an increase in other comprehensive income attributable to Johnson Controls ($67 million) resulting primarily from favorable foreign currency translation adjustments. These year-over-year favorable foreign currency translation adjustments were primarily driven by the strengthening of the Brazilian real, euro and Japanese yen currencies against the U.S. dollar.
The decrease in comprehensive income attributable to Johnson Controls for the six months ended March 31,
2017 was primarily due to an increase in other comprehensive loss attributable to Johnson Controls ($433 million) resulting primarily from unfavorable foreign currency translation adjustments, partially offset by higher net income attributable to Johnson Controls ($261 million). These year-over-year unfavorable foreign currency translation adjustments were primarily driven by the weakening of the British pound, euro and Japanese yen currencies against the U.S. dollar.
Segment Analysis
Management evaluates the performance of its business units based primarily on segment EBITA, which is defined as income from continuing operations before income
taxes and noncontrolling interests, excluding general corporate expenses, intangible asset amortization, net financing charges, significant restructuring and impairment costs, and the net mark-to-market adjustments related to pension and postretirement plans.
62
Building Technologies & Solutions - Net Sales
Three
Months Ended
March 31,
Six Months Ended March 31,
(in millions)
2017
2016
Change
2017
2016
Change
Building
Efficiency
Systems and Service North America
$
1,047
$
1,034
1
%
$
1,975
$
2,018
-2
%
Products
North America
585
546
7
%
1,128
1,103
2
%
Asia
1,173
1,162
1
%
2,215
2,154
3
%
Rest
of World
424
408
4
%
822
831
-1
%
3,229
3,150
3
%
6,140
6,106
1
%
Tyco
2,342
—
*
4,617
—
*
$
5,571
$
3,150
77
%
$
10,757
$
6,106
76
%
*
Measure not meaningful
Three Months:
•
The increase in Systems and Service North America was due to higher volumes of controls systems and service ($24 million), and the favorable impact of foreign currency translation ($3 million), partially offset by a prior year business divestiture ($14 million). The increase in volumes was primarily attributable to market share changes.
•
The
increase in Products North America was due to higher volumes ($42 million), partially offset by a prior year business divestiture ($2 million) and the unfavorable impact of foreign currency translation ($1 million). The increase in volumes was primarily attributable to market share changes and new product offerings.
•
The increase in Asia was due to the favorable impact of foreign currency translation ($12 million) and higher service volumes ($10 million), partially offset by lower volumes related to a business deconsolidation ($11 million). The increase in volumes was primarily due to favorable local market conditions.
•
The
increase in Rest of World was due to higher volumes in Europe ($23 million), the Middle East ($3 million) and Latin America ($3 million), partially offset by a prior year business divestiture ($9 million) and the unfavorable impact of foreign currency translation ($4 million). The increase in volumes was primarily due to favorable local market conditions.
•
The increase in Tyco was due to incremental sales related to the Tyco Merger ($2,342 million).
Year-to-Date:
•
The
decrease in Systems and Service North America was due to a prior year business divestiture ($28 million), and lower volumes of controls systems and service ($18 million), partially offset by the favorable impact of foreign currency translation ($3 million). The decrease in volumes was primarily attributable to lower performance contracting activity.
•
The increase in Products North America was due to higher volumes ($32 million), partially offset by a prior year business divestiture ($5 million) and the unfavorable impact of foreign currency translation ($2 million). The increase in volumes was primarily attributable to market share changes and new product offerings.
•
The
increase in Asia was due to the favorable impact of foreign currency translation ($41 million), higher service volumes ($21 million), and higher volumes of equipment and control systems ($17 million), partially offset by lower volumes related to a business deconsolidation ($18 million). The increase in volumes was primarily due to favorable local market conditions.
•
The decrease in Rest of World was due to lower volumes in the Middle East ($17 million), a prior year business divestiture ($16 million) and the unfavorable impact of foreign currency translation ($11 million), partially offset by higher volumes in Europe ($25 million) and Latin America ($10 million).
•
The
increase in Tyco was due to incremental sales related to the Tyco Merger ($4,617 million).
63
Building Technologies & Solutions - Segment EBITA
Three
Months Ended
March 31,
Six Months Ended March 31,
(in millions)
2017
2016
Change
2017
2016
Change
Building
Efficiency
Systems and Service North America
$
90
$
101
-11
%
$
165
$
200
-18
%
Products
North America
57
47
21
%
94
80
18
%
Asia
118
118
0
%
237
188
26
%
Rest
of World
9
10
-10
%
(1
)
7
*
274
276
-1
%
495
475
4
%
Tyco
379
—
*
593
—
*
$
653
$
276
*
$
1,088
$
475
*
*
Measure not meaningful
Three Months:
•
The decrease in Systems and Service North America was due to higher operating costs as a result of mix and channel investments ($19 million), current year transaction costs ($1 million) and a prior year business divestiture ($1 million), partially offset by higher volumes ($6 million), and lower selling, general and administrative expenses ($4 million).
•
The
increase in Products North America was due to higher volumes ($11 million), lower operating costs ($6 million), and favorable pricing and mix ($3 million), partially offset by higher selling, general and administrative expenses ($4 million), current year integration costs ($3 million), current year transaction costs ($2 million) and the unfavorable impact of foreign currency translation ($1 million).
•
Asia was level with the prior year due to lower selling, general and administrative expenses as a result of productivity savings ($19 million), prior year integration costs ($5 million), higher volumes ($2 million), the favorable impact of foreign currency translation ($2 million), higher equity
income ($1 million) and prior year transaction costs ($1 million), offset by higher operating costs due to mix and product investments ($30 million).
•
The decrease in Rest of World was due to a prior year gain on acquisition of a partially-owned affiliate ($4 million), higher operating costs ($2 million), lower equity income ($2 million), a prior year business divestiture ($1 million) and the unfavorable impact of foreign currency translation ($1 million), partially offset by higher volumes ($7 million), and lower selling, general and administrative expenses ($2 million).
•
The
increase in Tyco was due to incremental operating income related to the Tyco Merger ($348 million) and the impact of nonrecurring purchasing accounting adjustments ($51 million), partially offset by current year integration costs ($14 million) and current year transaction costs ($6 million).
Year-to-Date:
•
The decrease in Systems and Service North America was due to higher operating costs as a result of mix and channel investments ($29 million), lower volumes ($6 million), current year integration costs ($3 million), current year transaction costs ($3 million) and a prior year business divestiture ($2 million),
partially offset by lower selling, general and administrative expenses ($8 million).
•
The increase in Products North America was due to lower operating costs as a result of cost reduction initiatives ($15 million), higher volumes ($7 million), and favorable pricing and mix ($2 million), partially offset by current year integration costs ($4 million), current year transaction costs ($3 million), the unfavorable impact of foreign currency translation ($2 million) and lower equity income ($1 million).
•
The
increase in Asia was due to lower selling, general and administrative expenses as a result of productivity savings ($26 million), higher equity income ($14 million), prior year transaction costs ($10 million), higher volumes ($9 million) and prior year integration costs ($8 million), partially offset by higher operating costs due to mix and product investments ($18 million).
64
•
The decrease in Rest of World was due to lower equity income ($8 million), a prior year gain on acquisition of a partially-owned affiliate ($4 million),
higher operating costs ($3 million), the unfavorable impact of foreign currency translation ($2 million), a prior year business divestiture ($1 million) and current year integration costs ($1 million), partially offset by lower selling, general and administrative expenses ($9 million), and higher volumes ($2 million).
•
The increase in Tyco was due to incremental operating income related to the Tyco Merger ($697 million), partially offset by the impact of nonrecurring purchasing accounting adjustments ($61 million), current year integration costs ($23 million) and current year transaction costs ($20 million).
Power
Solutions
Three Months Ended
March 31,
Six Months Ended March 31,
(in millions)
2017
2016
Change
2017
2016
Change
Net
sales
$
1,696
$
1,583
7
%
$
3,596
$
3,323
8
%
Segment
EBITA
303
282
7
%
692
642
8
%
Three
Months:
•
Net sales increased due to the impact of higher lead costs on pricing ($127 million), and favorable pricing and product mix ($30 million), partially offset by lower volumes ($40 million) and the unfavorable impact of foreign currency translation ($4 million). The decrease in volumes was driven by changes in customer demand patterns in North America and China, partially offset by an increase in start-stop battery volumes. Additionally, higher start-stop volumes contributed to favorable product mix.
•
Segment
EBITA increased due to favorable pricing and product mix net of lead cost increases ($19 million), higher equity income ($14 million), and lower selling, general and administrative expenses as a result of productivity savings ($10 million), partially offset by lower volumes ($12 million) and higher operating costs ($10 million).
Year-to-Date:
•
Net sales increased due to the impact of higher lead costs on pricing ($174 million), favorable pricing and product mix ($58 million), and higher volumes ($56 million), partially offset by the unfavorable impact of foreign currency translation ($15 million). The
increase in volumes was driven by start-stop battery volumes and growth in China. Additionally, higher start-stop volumes contributed to favorable product mix.
•
Segment EBITA increased due to favorable pricing and product mix net of lead cost increases ($40 million), higher equity income ($18 million), higher volumes ($15 million), and lower selling, general and administrative expenses as a result of productivity savings ($9 million), partially offset by higher operating costs primarily driven by efforts to satisfy growing customer demand ($29 million), the unfavorable impact of foreign currency translation ($2 million) and transaction costs ($1 million).
Backlog
The
Company's backlog relating to the Building Technologies & Solutions business is applicable to its sales of systems and services. At March 31, 2017, the backlog was $8.3 billion and reflects harmonization of the Company's method for determining backlog subsequent to the Tyco Merger. The backlog amount outstanding at any given time is not necessarily indicative of the amount of revenue to be earned during the fiscal year.
65
Financial Condition
Working
Capital
March 31,
September 30,
(in millions)
2017
2016
Change
Current
assets
$
13,229
$
17,109
Current liabilities
(10,742
)
(16,331
)
2,487
778
*
Less:
Cash
(412
)
(579
)
Add: Short-term debt
1,124
1,078
Add:
Current portion of long-term debt
542
628
Less: Assets held for sale
(2,037
)
(5,812
)
Add:
Liabilities held for sale
237
4,276
Working capital (as defined)
$
1,941
$
369
*
Accounts
receivable - net
$
6,094
$
6,394
-5
%
Inventories
3,138
2,888
9
%
Accounts
payable
3,720
4,000
-7
%
*
Measure not meaningful
•
The Company defines working capital as current assets less current liabilities, excluding cash, short-term debt, the current portion of long-term debt, and the current portion of assets and liabilities held for sale. Management
believes that this measure of working capital, which excludes financing-related items, provides a more useful measurement of the Company’s underlying operating performance.
•
Excluding the impact of amounts classified as held for sale, the increase in working capital at March 31, 2017 as compared to September 30, 2016 was primarily due to income tax payments related to the Adient spin-off, a decrease in accounts payable due
to timing of supplier payments and an increase in inventory due to changes in production levels.
•
The Company’s days sales in accounts receivable at March 31, 2017 were 65 days, higher than 61 days at September 30, 2016. There have been no significant adverse changes in the level of overdue receivables or changes in revenue recognition methods.
•
The
Company’s inventory turns for the three months ended March 31, 2017 were lower than the comparable period ended September 30, 2016, primarily due to changes in inventory production levels.
The
increase in cash used by operating activities for the six months ended March 31, 2017 was primarily due to higher income tax payments primarily due to the Adient spin-off ($1.2 billion in the first quarter of fiscal 2017), and unfavorable changes in accounts payable and accrued liabilities, other assets and inventories.
•
The decrease in cash used by investing activities for the six months ended March 31, 2017 was primarily due to cash received from a business divestiture in the current year and cash paid
for the JCH joint venture in the prior year, partially offset by an increase in capital expenditures.
•
The increase in cash provided by financing activities for the six months ended March 31, 2017 was primarily due to the dividend from the Adient spin-off and an increase in long-term debt, partially offset by a decrease in short-term debt and cash transferred to Adient related to the spin-off.
•
The
increase in capital expenditures for the six months ended March 31, 2017 primarily relates to Tyco capital investments in the current year and higher capital investments in the Building Efficiency business.
Deferred Taxes
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.
The Company has certain subsidiaries, mainly located in Australia, Belgium, Brazil, China, France, Spain, Switzerland, Luxembourg and the United Kingdom, which have generated net operating loss carryforwards and, in certain circumstances, have limited loss carryforward periods. In accordance with ASC 740, "Income Taxes,"the
Company is required to record a valuation allowance when it is more likely than not the Company will not utilize deductible amounts or net operating losses for each legal entity or consolidated group based on the tax rules in the applicable jurisdiction, evaluating both positive and negative historical evidences as well as expected future events and tax planning strategies.
Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the asset’s carrying amount may not be recoverable.
The Company conducts its long-lived asset impairment analyses in accordance with ASC 360-10-15, "Impairment or Disposal of Long-Lived Assets." ASC 360-10-15 requires the Company to group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows. If the undiscounted cash flows do not indicate the carrying amount of the asset group is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals.
In
the first and second quarters of fiscal 2017, the Company concluded it had triggering events requiring assessment of impairment for certain of its long-lived assets in conjunction with its restructuring actions announced in fiscal 2017. As a result, the Company reviewed the long-lived assets for impairment and recorded $38 million of asset impairment charges within restructuring and impairment costs on the consolidated statements of income, of which $15 million was recorded in the first quarter and $23 million was recorded in the second quarter. Of the total impairment charges, $20 million related to the Building Efficiency Products North
67
America
segment, $17 million related to Corporate assets and $1 million related to the Tyco segment. Refer to Note 9, "Significant Restructuring and Impairment Costs," of the notes to consolidated financial statements for additional information. The impairments were measured, depending on the asset, under either an income approach utilizing forecasted discounted cash flows or a market approach utilizing an appraisal to determine fair values of the impaired assets. These methods are consistent with the methods the Company employed in prior periods to value other long-lived assets. The inputs utilized in the analyses are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, "Fair Value Measurement."
In the second quarter of fiscal 2016, the
Company concluded it had a triggering event requiring assessment of impairment for certain of its long-lived assets in conjunction with its restructuring actions announced in fiscal 2016. As a result, the Company reviewed the long-lived assets for impairment and recorded $15 million of asset impairment charge within restructuring and impairment costs on the consolidated statements of income. Of the total impairment charge, $8 million related to the Building Efficiency Products North America segment, $4 million related to the Building Efficiency Asia segment and $3 million related to the Building Efficiency Rest of World segment. In addition, the Company recorded $14 million of asset impairments within discontinued operations related to Adient in the second quarter of fiscal 2016. Refer to Note 9,
"Significant Restructuring and Impairment Costs," of the notes to consolidated financial statements for additional information. The impairments were measured, depending on the asset, under either an income approach utilizing forecasted discounted cash flows or a market approach utilizing an appraisal to determine fair values of the impaired assets. These methods are consistent with the methods the Company employed in prior periods to value other long-lived assets. The inputs utilized in the analyses are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, "Fair Value Measurement."
At March 31, 2017 and 2016,
the Company concluded it did not have any other triggering events requiring assessment of impairment of its long-lived assets
Capitalization
March 31,
September
30,
(in millions)
2017
2016
Change
Short-term
debt
$
1,124
$
1,078
Current portion of long-term debt
542
628
Long-term
debt
11,810
11,053
Total debt
13,476
12,759
6
%
Shareholders’
equity attributable to Johnson Controls
ordinary shareholders
19,388
24,118
-20
%
Total
capitalization
$
32,864
$
36,877
-11
%
Total
debt as a % of total capitalization
41
%
35
%
•
The Company believes the percentage of total debt to total capitalization
is useful to understanding the Company’s financial condition as it provides a review of the extent to which the Company relies on external debt financing for its funding and is a measure of risk to its shareholders.
•
Shareholders' equity attributable to Johnson Controls ordinary shareholders decreased as a result of the Adient spin-off in October 2016. Refer to Note 5, "Discontinued Operations," of the notes to consolidated financial statements for further information.
•
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
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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.
•
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 2017 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.
•
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.
•
The Company
also selectively makes use of short-term credit lines other than its revolving credit facilities at the Company and TSarl. The Company estimates that, as of March 31, 2017, it could borrow up to $1.4 billion based on average borrowing levels during the quarter on committed credit lines.
•
The Company believes its capital resources and liquidity position
at March 31, 2017 are adequate to meet projected needs. The Company believes requirements for working capital, capital expenditures, dividends, stock repurchases, minimum pension
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contributions, debt maturities and any potential acquisitions in the remainder of fiscal 2017 will continue to be funded from operations, supplemented by short- and long-term borrowings, if required. The Company currently manages its short-term debt position in the U.S. and euro commercial paper markets
and bank loan markets. In the event the Company and TSarl are unable to issue commercial paper, they would have the ability to draw on their $2.0 billion and $1.0 billion revolving credit facilities, respectively. Both facilities mature in August 2020. There were no draws on the revolving credit facility as of March 31, 2017 and September 30, 2016. As such, the Company believes it has sufficient financial resources to fund operations and meet its obligations for the foreseeable future.
•
The
Company earns a significant amount of its operating income outside of the parent company. Outside basis differences in these subsidiaries are deemed to be permanently reinvested. However, in fiscal 2017, the Company provided income tax expense related to a change in the Company’s assertion over the outside basis difference of the Scott Safety business as a result of the pending divestiture. The Company currently does not intend nor foresee a need to repatriate undistributed earnings included in the outside basis differences other than in tax efficient manners. However, in fiscal 2016, the
Company did provide income tax expense related to a change in the Company's assertion over a portion of the permanently reinvested earnings as a result of the planned spin-off of the Automotive Experience business. Except as noted, the Company’s intent is to reduce basis differences only when it would be tax efficient. The Company expects existing U.S. cash and liquidity to continue to be sufficient to fund the Company’s U.S. operating activities and cash commitments for investing and financing activities for at least the next twelve months and thereafter for the foreseeable future. In addition, the
Company expects existing non-U.S. cash, cash equivalents, short-term investments and cash flows from operations to continue to be sufficient to fund the Company’s non-U.S. operating activities and cash commitments for investing activities, such as material capital expenditures, for at least the next twelve months and thereafter for the foreseeable future. Should the Company require more capital in the U.S. than is generated by operations in the U.S., the Company could elect to raise capital in the U.S. through debt or equity issuances. In addition, should the Company require more capital at the Luxembourg and Ireland holding and
financing entities, other than amounts that can be provided in tax efficient methods, the Company could also elect to raise capital through debt or equity issuances. This alternative could result in increased interest expense or other dilution of the Company’s earnings.
•
The Company’s debt financial covenant in its revolving credit facility require a minimum consolidated shareholders’ equity attributable to Johnson Controls of at least $3.5 billion
at all times. The revolving credit facility also limits the amount of debt secured by liens that may be incurred to a maximum aggregated amount of 10% of consolidated shareholders’ equity attributable to Johnson Controls for liens and pledges. For purposes of calculating these covenants, consolidated shareholders’ equity attributable to Johnson Controls is calculated without giving effect to (i) the application of Accounting Standards Codification (ASC) 715-60, "Defined Benefit Plans - Other Postretirement," or (ii) the cumulative foreign currency translation adjustment. TSarl's, revolving credit facility contains customary terms and conditions, and a financial covenant that limits the ratio of TSarl's debt to earnings before interest, taxes, depreciation, and amortization as adjusted for certain items set forth in the agreement to 3.5x. The TSarl's revolving credit facility also limits its ability to incur subsidiary debt or grant liens on its and its subsidiaries'
property. As of March 31, 2017, the Company and TSarl were in compliance with all covenants and other requirements set forth in their credit agreements and the indentures, governing their notes, and expect to remain in compliance for the foreseeable future. None of the Company’s or TSarl's debt agreements limit access to stated borrowing levels or require accelerated repayment in the event of a decrease in the respective borrower's credit rating.
New Accounting Standards
Recently
Adopted Accounting Pronouncements
In October 2016, the FASB issued Accounting Standards Update (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.
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In April 2015, the FASB issued 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. ASU No. 2015-03 was effective retrospectively for the Company for the quarter ending December 31, 2016. The adoption of this guidance did not have a significant
impact on the Company's consolidated financial statements.
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 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
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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 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
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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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As
of March 31, 2017, the Company had not experienced any adverse changes in market risk exposures that materially affected the quantitative and qualitative disclosures presented in the Company's Annual Report on Form 10-K for the year ended September 30, 2016.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under
the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act). Based upon their evaluation of these disclosure controls and procedures, the principal executive officer and principal financial officer concluded that the disclosure controls and procedures were effective as of March 31, 2017 to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the SEC’s rules and forms, and
to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding disclosure.
Changes in Internal Control Over Financial Reporting
There have been no significant changes in the Company’s internal control over financial reporting during the three months ended March 31,
2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Environmental Matters
As noted in Item 1 to the Company’s Annual Report
on Form 10-K for the year ended September 30, 2016, liabilities potentially arise globally under various environmental laws and worker safety laws for activities that are not in compliance with such laws and for the cleanup of sites where Company-related substances have been released into the environment.
Currently, the Company is responding to allegations that it is responsible for performing environmental remediation, or for the repayment of costs spent by governmental entities or others performing remediation, at approximately 45 sites in the United States. Many of these sites are landfills used by the Company in
the past for the disposal of waste materials; others are secondary lead smelters and lead recycling sites where the Company returned lead-containing materials for recycling; a few involve the cleanup of Company manufacturing facilities; and the remaining fall into miscellaneous categories. The Company may face similar claims of liability at additional sites in the future. Where potential liabilities are alleged, the Company pursues a course of action intended to mitigate them.
The Company accrues for potential environmental liabilities when it
is probable a liability has been incurred and the amount of the liability is reasonably estimable. As of March 31, 2017, reserves for environmental liabilities totaled $46 million, of which $9 million was recorded within other current liabilities and $37 million was recorded within other noncurrent liabilities in the consolidated statements of financial position. Such potential liabilities accrued by the Company do not take into consideration possible recoveries of future insurance proceeds. They do, however, take into account the likely share other parties will bear at remediation sites. It is difficult to estimate the
Company’s ultimate level of liability at many remediation sites due to the large number of other parties that may be involved, the complexity of determining the relative liability among those parties, the uncertainty as to the nature and scope of the investigations and remediation to be conducted, the uncertainty in the application of law and risk
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assessment, the various choices and costs associated with diverse technologies that may be used in corrective actions at the sites, and the often quite lengthy periods over which eventual remediation may occur. Nevertheless, the Company does not currently believe that any claims, penalties or costs in connection with known
environmental matters will have a material adverse effect on the Company’s financial position, results of operations or cash flows. In addition, the Company has identified asset retirement obligations for environmental matters that are expected to be addressed at the retirement, disposal, removal or abandonment of existing owned facilities. At March 31, 2017, the Company recorded conditional asset retirement obligations of $72 million.
Asbestos Matters
The
Company and certain of its subsidiaries, along with numerous other third parties, are named as defendants in personal injury lawsuits based on alleged exposure to asbestos containing materials. These cases have typically involved product liability claims based primarily on allegations of manufacture, sale or distribution of industrial products that either contained asbestos or were used with asbestos containing components.
As of March 31, 2017, the Company's estimated asbestos related net liability recorded on a discounted basis within the
Company's consolidated statements of financial position is $152 million. The net liability within the consolidated statements of financial position is comprised of a liability for pending and future claims and related defense costs of $540 million, of which $35 million is recorded in other current liabilities and $505 million is recorded in other noncurrent liabilities. The Company also maintains separate cash, investments and receivables related to insurance recoveries within the consolidated statements of financial position of $388 million, of which $57 million is recorded in other current assets, and $331
million is recorded in other noncurrent assets. Assets include $33 million of cash and $258 million of investments, which have all been designated as restricted. In connection with the recognition of liabilities for asbestos-related matters, the Company records asbestos-related insurance recoveries that are probable; the amount of such recoveries recorded at March 31, 2017 is $97 million. The Company believes that the asbestos related liabilities and insurance related receivables recorded as of March 31,
2017 are appropriate.
The Company's estimate of the liability and corresponding insurance recovery for pending and future claims and defense costs is based on the Company's historical claim experience, and estimates of the number and resolution cost of potential future claims that may be filed and is discounted to present value from 2069 (which is the Company's reasonable best estimate of the actuarially determined time period through which asbestos-related claims will be filed against Company affiliates). Asbestos related defense costs are included in the asbestos liability. The
Company's legal strategy for resolving claims also impacts these estimates. The Company considers various trends and developments in evaluating the period of time (the look-back period) over which historical claim and settlement experience is used to estimate and value claims reasonably projected to be made through 2069. Annually, the Company assesses the sufficiency of its estimated liability for pending and future claims and defense costs by evaluating actual experience regarding claims filed, settled and dismissed, and amounts paid in settlements. In addition to claims and settlement experience, the Company considers additional quantitative and qualitative factors such as changes in legislation, the legal environment,
and the Company's defense strategy. The Company also evaluates the recoverability of its insurance receivable on an annual basis. The Company evaluates all of these factors and determines whether a change in the estimate of its liability for pending and future claims and defense costs or insurance receivable is warranted.
The amounts recorded by the Company for asbestos-related liabilities and insurance-related assets are based on the Company's strategies for
resolving its asbestos claims, currently available information, and a number of estimates and assumptions. Key variables and assumptions include the number and type of new claims that are filed each year, the average cost of resolution of claims, the identity of defendants, the resolution of coverage issues with insurance carriers, amount of insurance, and the solvency risk with respect to the Company's insurance carriers. Many of these factors are closely linked, such that a change in one variable or assumption will impact one or more of the others, and no single variable or assumption predominately influences the determination of the Company's asbestos-related liabilities and insurance-related assets. Furthermore, predictions with respect to these variables are subject to greater uncertainty in the
later portion of the projection period. Other factors that may affect the Company's liability and cash payments for asbestos-related matters include uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case, reforms of state or federal tort legislation and the applicability of insurance policies among subsidiaries. As a result, actual liabilities or insurance recoveries could be significantly higher or lower than those recorded if assumptions used in the Company's calculations vary significantly from actual results.
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Insurable
Liabilities
The Company records liabilities for its workers' compensation, product, general, property and auto liabilities. The determination of these liabilities and related expenses is dependent on claims experience. For most of these liabilities, claims incurred but not yet reported are estimated by utilizing actuarial valuations based upon historical claims experience. At March 31, 2017, the insurable liabilities for continuing operations totaled $468 million, of which $86 million was recorded within other current liabilities, $32 million was recorded within
accrued compensation and benefits, and $350 million and was recorded within other noncurrent liabilities in the consolidated statements of financial position, respectively. The Company records receivables from third party insurers when recovery has been determined to be probable. The amount of such receivables recorded at March 31, 2017 was $48 million, of which $30 million was recorded within other current assets and $18 million was recorded within other noncurrent assets. The Company maintains captive insurance companies to manage certain of its insurable liabilities.
Other Matters
On
May 20, 2016, a putative class action lawsuit, Laufer v. Johnson Controls, Inc., et al., Docket No. 2016CV003859, was filed in the Circuit Court of Wisconsin, Milwaukee County, naming Johnson Controls, Inc., the individual members of its board of directors, the Company and the Company's merger subsidiary as defendants. The complaint alleged that Johnson Controls Inc.'s directors breached their fiduciary duties in connection with the merger between Johnson Controls Inc. and the Company's merger subsidiary by, among other things, failing to take steps to maximize shareholder value, seeking to benefit themselves improperly and failing to disclose material information in
the joint proxy statement/prospectus relating to the merger. The complaint further alleged that the Company aided and abetted Johnson Controls Inc.'s directors in the breach of their fiduciary duties. The complaint sought, among other things, to enjoin the merger. On August 8, 2016, the plaintiffs agreed to settle the action and release all claims that were or could have been brought by plaintiffs or any member of the putative class of Johnson Controls Inc.'s shareholders. The settlement is conditioned upon, among other things, the execution of an appropriate stipulation of settlement. On November 10, 2016, the parties filed a joint status report notifying the court they had reached such agreement. On November 22, 2016, the court ordered
that a proposed stipulation of settlement be filed by March 15, 2017 and scheduled a status hearing for April 20, 2017. On March 10, 2017, the parties filed a joint letter requesting that the filing and hearing be adjourned and that the parties be allowed an additional 90 days to update the court in light of the Gumm v. Molinaroli action proceeding in federal court, discussed below. There can be no assurance that the parties will ultimately enter into a stipulation of settlement or that the court will approve the settlement. In either event, or certain other circumstances, the settlement could be terminated.
On August 16, 2016, a putative class action lawsuit, Gumm v. Molinaroli,
et al., Case No. 16-cv-1093, was filed in the United States District Court for the Eastern District of Wisconsin, naming Johnson Controls, Inc., the individual members of its board of directors at the time of the merger with the Company’s merger subsidiary and certain of its officers, the Company and the Company’s merger subsidiary as defendants. The complaint asserted various causes of action under the federal securities laws, state law and the Taxpayer Bill of Rights, including that the individual defendants allegedly breached their fiduciary duties and unjustly enriched themselves by structuring the merger among the Company, Tyco
and the merger subsidiary in a manner that would result in a United States federal income tax realization event for the putative class of certain Johnson Controls, Inc. shareholders and allegedly result in certain benefits to the defendants, as well as related claims regarding alleged misstatements in the proxy statement/prospectus distributed to the Johnson Controls, Inc. shareholders, conversion and breach of contract. The complaint also asserted that Johnson Controls, Inc., the Company and the Company’s merger subsidiary aided and abetted the individual defendants in their breach of fiduciary duties and unjust enrichment. The complaint seeks, among other things, disgorgement of profits and damages. On September
30, 2016, approximately one month after the closing of the merger, plaintiffs filed a preliminary injunction motion seeking, among other items, to compel Johnson Controls, Inc. to make certain intercompany payments that plaintiffs contend will impact the United States federal income tax consequences of the merger to the putative class of certain Johnson Controls, Inc. shareholders and to enjoin Johnson Controls, Inc. from reporting to the Internal Revenue Service the capital gains taxes payable by this putative class as a result of the closing of the merger. The court held a hearing on the preliminary injunction motion on January 4, 2017, and on January 25, 2017, the judge denied the plaintiffs' motion. Plaintiffs filed an amended complaint on February 15, 2017, and the
Company filed a motion to dismiss on April 3, 2017. Although the Company believes it has substantial defenses to plaintiffs’ claims, it is not able to predict the outcome of this action.
The Company is involved in various lawsuits, claims and proceedings incident to the operation of its businesses, including those pertaining to product liability, environmental, safety and health, intellectual property, employment, commercial and contractual matters, and various other casualty matters. Although the outcome of litigation cannot be predicted with certainty and some lawsuits, claims or proceedings may be disposed of unfavorably to us, it is management’s opinion
that none of these will have a material adverse effect on the Company’s financial position, results of operations or cash flows. Costs related to such matters were not material to the periods presented.
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ITEM 1A. RISK FACTORS
There have been no material changes to the disclosure regarding risk factors presented in Item 1A to the Company’s Annual Report on Form 10-K for the year ended September 30,
2016.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Following the Tyco Merger, the Company adopted, subject to the ongoing existence of sufficient distributable reserves, the existing Tyco International plc $1 billion share repurchase program in September 2016. The share repurchase program does not have an expiration date and may be amended or terminated by the Board of Directors at any time without prior notice.
In April 2017, the
Company announced its intention to utilize up to $750 million of the $1 billion authorization during fiscal 2017. Shares may be repurchased from time to time in open market purchases at prevailing market prices, in negotiated transactions off the market, or pursuant to a trading plan in accordance with applicable regulations.
From time to time, the Company uses equity swaps to reduce market risk associated with its stock-based compensation plans, such as its deferred compensation plans. These equity compensation liabilities increase as the Company’s stock price increases and decrease as the Company’s stock price decreases.
In contrast, the value of equity swaps move in the opposite direction of these liabilities, allowing the Company to fix a portion of the liabilities at a stated amount.
In connection with equity swap agreements, the counterparty may purchase unlimited shares of the Company’s stock in the market or in privately negotiated transactions. Under these arrangements, the Company disclaims that the counterparty in the agreement is an "affiliated purchaser" of the Company as such term is defined in Rule 10b-18(a)(3) under the Securities Exchange
Act or that the counterparty is purchasing any shares for the Company. The Company had no outstanding equity swaps as of and during the three months ended March 31, 2017.
The following table presents information regarding the repurchase of the Company’s ordinary shares by the Company as part of the publicly announced program. There were no purchases of the Company’s
ordinary shares by counterparties under equity swap agreements during the three months ended March 31, 2017.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Third Supplemental Indenture,
dated March 15, 2017, among Johnson Controls International plc, U.S. Bank National Association, as trustee and Elavon Financial Services DAC, UK Branch, as paying agent (incorporated by reference to Exhibit 4.2 to the registrant’s Current Report on Form 8-K filed on March 15, 2017).
10.1
Form of terms and conditions for Restricted Stock Unit Awards for Directors under the 2012 Stock and Incentive Plan (filed herewith) *
10.2
Johnson
Controls International plc 2012 Share and Incentive Plan, amended and restated as of March 8, 2017 (filed herewith) *
31.1
Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification
of Periodic Financial Report by the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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The following materials from Johnson Controls International plc's Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Position, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statements of Cash Flows, and (v) Notes to Consolidated Financial Statements.