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JCI > SEC Filings for JCI > Form 10-K on 19-Nov-2012All Recent SEC Filings

Show all filings for JOHNSON CONTROLS INC

Form 10-K for JOHNSON CONTROLS INC


19-Nov-2012

Annual Report


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

General

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

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

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

Outlook

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

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


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FISCAL YEAR 2012 COMPARED TO FISCAL YEAR 2011

Net Sales

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

Net sales $ 41,955 $ 40,833 3 %

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

Cost of Sales / Gross Profit



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

                   Cost of sales   $ 35,737      $ 34,775            3 %
                   Gross profit       6,218         6,058            3 %
                   % of sales          14.8 %        14.8 %

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

Selling, General and Administrative Expenses



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

    Selling, general and administrative expenses   $ 4,438      $ 4,393            1 %
    % of sales                                        10.6 %       10.8 %

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


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

Significant Restructuring Costs

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

Restructuring costs $ 297 $ - *

* Measure not meaningful

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

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

Net Financing Charges

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

Net financing charges $ 233 $ 174 34 %

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

Equity Income

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

Equity income $ 340 $ 298 14 %

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


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Provision for Income Taxes

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

Provision for income taxes $ 237 $ 257 -8 %

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

Valuation Allowances

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

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

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

Given the current economic uncertainty, it is reasonably possible that over the next twelve months, valuation allowances against deferred tax assets in certain jurisdictions may result in a net increase to tax expense of up to $400 million.

Uncertain Tax Positions

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

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

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


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

The Company expects that certain tax examinations, appellate proceedings and/or tax litigation will conclude within the next twelve months, the impact of which could be up to a $200 million benefit to tax expense.

Impacts of Tax Legislation and Change in Statutory Tax Rates

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

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

Income Attributable to Noncontrolling Interests

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

Income attributable to noncontrolling interests $ 127 $ 117 9 %

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

Net Income Attributable to Johnson Controls, Inc.

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

Net income attributable to Johnson Controls, Inc. $ 1,226 $ 1,415 -13 %

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

Segment Analysis

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


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Building Efficiency



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

North America Systems                    $    2,389     $  2,343           2 %    $       286       $ 247          16 %
North America Service                         2,145        2,305          -7 %            164         121          36 %
Global Workplace Solutions                    4,294        4,153           3 %             52          22           *
Asia                                          1,987        1,840           8 %            267         251           6 %
Other                                         3,900        4,252          -8 %            141         105          34 %

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

* Measure not meaningful

Net Sales:

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

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

The increase in Global Workplace Solutions was primarily due to a net increase in services to new and existing customers ($264 million), partially offset by the unfavorable impact of foreign currency translation ($123 million).

The increase in Asia was primarily due to higher service volumes including the prior year negative impact of the Japan earthquake and related events ($84 million), higher volumes of equipment and controls systems ($39 million), and the favorable impact of foreign currency translation ($24 million).

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

Segment Income:

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

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

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

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

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


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Automotive Experience



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

  North America   $    8,721     $  7,431          17 %    $     487         $     419          16 %
  Europe               9,973       10,267          -3 %          (52 )             116           *
  Asia                 2,640        2,367          12 %          368               245          50 %

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

* Measure not meaningful

Net Sales:

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

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

The increase in Asia was primarily due to higher volumes and new customer awards including the prior year negative impact of the Japan earthquake and related events ($182 million), incremental sales due to prior year acquisitions ($144 million) and the favorable impact of foreign currency translation ($9 million), partially offset by net unfavorable pricing and commercial settlements ($37 million) and the negative impact of the flooding in Thailand and related events ($25 million).

Segment Income:

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

The decrease in Europe was primarily due to higher operating costs ($131 million), net unfavorable commercial settlements and pricing ($88 million), lower volumes despite the prior year negative impact of the earthquake in Japan and related events ($65 million), and higher selling, general and administrative expenses ($40 million), partially offset by prior year costs related to business acquisitions ($64 million), incremental operating income of prior year acquisitions ($42 million), lower purchasing costs ($26 million), lower engineering expenses ($23 million) and the favorable impact of foreign currency translation ($1 million).

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


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Power Solutions



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

                    Net sales        $ 5,906     $ 5,875           1 %
                    Segment income       854         821           4 %

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

Segment income increased primarily due to favorable pricing and product mix including lead net of higher costs for battery cores ($117 million); a gain on redemption of a warrant for an existing partially-owned affiliate ($25 million); higher volumes including the prior year negative impact of the earthquake in Japan and related events ($24 million); change in asset retirement obligations ($14 million); an insurance settlement ($12 million); a gain on a current year acquisition of a partially-owned . . .

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