Notes to Consolidated Financial Statements
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
On September 2, 2016, Johnson Controls, Inc. (the "Company") 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 the Company, 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 the Company, with the Company 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 ("JCI plc").
Principles of Consolidation
The consolidated financial statements include the accounts of Johnson Controls, Inc. and its domestic and non-U.S. subsidiaries that are consolidated in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP). All significant intercompany transactions have been eliminated. 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) Accounting Standards Codification (ASC) 810, "Consolidation," the Company may consolidate a partially-owned affiliate. To determine whether to consolidate a partially-owned affiliate, the Company first determines if the entity is a variable interest entity (VIE). An entity is considered to be a VIE if it has one of the following characteristics: 1) the entity is thinly capitalized; 2) residual equity holders do not control the entity; 3) equity holders are shielded from economic losses or do not participate fully in the entity’s residual economics; or 4) the entity was established with non-substantive voting. If the entity meets one of these characteristics, the Company then determines if it is the primary beneficiary of the VIE. The party with the power to direct activities of the VIE that most significantly impact the VIE’s economic performance and the potential to absorb benefits or losses that could be significant to the VIE is considered the primary beneficiary and consolidates the VIE. If the entity is not considered a VIE, then the Company applies the voting interest model to determine whether or not the Company shall consolidate the partially-owned affiliate.
Consolidated VIEs
Based upon the criteria set forth in ASC 810, the Company has determined that it was the primary beneficiary in
three
VIEs for the reporting periods ended
September 30, 2016
and
2015
, as the Company absorbs significant economics of the entities and has the power to direct the activities that are considered most significant to the entities.
Two
of the VIEs manufacture products in North America for the automotive industry. The Company funds the entities’ short-term liquidity needs through revolving credit facilities and has the power to direct the activities that are considered most significant to the entities through its key customer supply relationships.
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 years ended
September 30, 2016
,
2015
and
2014
was not material. The VIE is named as a co-obligor under a third party debt agreement of
$170 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
$25 million
. The Company has partnered with the group entities to design and manufacture battery components for the Power Solutions business.
The carrying amounts and classification of assets (none of which are restricted) and liabilities included in the Company’s consolidated statements of financial position for the consolidated VIEs are as follows (in millions):
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September 30,
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2016
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2015
|
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Current assets
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$
|
284
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$
|
281
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Noncurrent assets
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98
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128
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Total assets
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$
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382
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$
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409
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Current liabilities
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$
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230
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$
|
232
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Noncurrent liabilities
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29
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|
34
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Total liabilities
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$
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259
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$
|
266
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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 fiscal 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 balance of
$59 million
and
$62 million
at
September 30, 2016
and
2015
, 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 nonconsolidated VIEs for the presented reporting periods.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The fair values of cash and cash equivalents, accounts receivable, short-term debt and accounts payable approximate their carrying values. See Note 10, "Derivative Instruments and Hedging Activities," and Note 11, "Fair Value Measurements," of the notes to consolidated financial statements for fair value of financial instruments, including derivative instruments, hedging activities and long-term debt.
Assets and Liabilities Held for Sale
The Company classifies assets and liabilities (disposal groups) to be sold as held for sale in the period in which all of the following criteria are met: management, having the authority to approve the action, commits to a plan to sell the disposal group; the disposal group is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such disposal groups; an active program to locate a buyer and other actions required to complete the plan to sell the disposal group have been initiated; the sale of the disposal group is probable, and transfer of the disposal group is expected to qualify for recognition as a completed sale within one year, except if events or circumstances beyond the Company's control extend the period of time required to sell the disposal group beyond one year; the disposal group is being actively marketed for sale at a price that is reasonable
in relation to its current fair value; and actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
The Company initially measures a disposal group that is classified as held for sale at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met. Conversely, gains are not recognized on the sale of a disposal group until the date of sale. The Company assesses the fair value of a disposal group less any costs to sell each reporting period it remains classified as held for sale and reports any subsequent changes as an adjustment to the carrying value of the disposal group, as long as the new carrying value does not exceed the carrying value of the disposal group at the time it was initially classified as held for sale.
Upon determining that a disposal group meets the criteria to be classified as held for sale, the Company reports the assets and liabilities of the disposal group, if material, in the line items assets held for sale and liabilities held for sale in the consolidated statements of financial position. Refer to Note 3, "Discontinued Operations," of the notes to consolidated financial statements for further information.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months
or less when purchased to be cash equivalents.
Cash in Escrow Related to Adient Debt
At September 30, 2016, the Company held restricted cash of
$2,034 million
. These amounts are restricted proceeds deposited into escrow from the issuance of
$2,000 million
aggregate principal of unsecured, unsubordinated notes that Adient Global Holdings Ltd. ("AGH"), a wholly owned subsidiary of the Company, and are expected to be released upon the completion of the Adient spin-off. At September 30, 2015, there was
no
cash in escrow for this purpose.
Approximately
$1,500 million
of the proceeds will be distributed to
the Company in connection with the spin-off and approximately
$500 million
of the proceeds will be used for Adient's general corporate purposes.
Restricted Cash
At September 30, 2016, the Company held restricted cash of approximately
$62 million
, which was recorded within other current assets in the consolidated statements of financial position. These amounts were primarily related to cash held in escrow from business divestitures. At September 30, 2015, the Company did not hold a material amount of restricted cash.
Receivables
Receivables consist of amounts billed and currently due from customers and unbilled costs and accrued profits related to revenues on long-term contracts that have been recognized for accounting purposes but not yet billed to customers. The Company extends credit to customers in the normal course of business and maintains an allowance for doubtful accounts resulting from the inability or unwillingness of customers to make required payments. The allowance for doubtful accounts is based on historical experience, existing economic conditions and any specific customer collection issues the Company has identified. The Company enters into supply chain financing programs to sell certain accounts receivable without recourse to third-party financial institutions. Sales of accounts receivable are reflected as a reduction of accounts receivable on the consolidated balance sheets and the proceeds are included in cash flows from operating activities in the consolidated statements of cash flows.
Inventories
Inventories are stated at the lower of cost or market using the first-in, first-out (FIFO) method. Finished goods and work-in-process inventories include material, labor and manufacturing overhead costs.
Pre-Production Costs Related to Long-Term Supply Arrangements
The Company’s policy for engineering, research and development, and other design and development costs related to products that will be sold under long-term supply arrangements requires such costs to be expensed as incurred or capitalized if reimbursement from the customer is contractually assured. Income related to recovery of these costs is recorded within selling, general and administrative expense in the consolidated statements of income. At
September 30, 2016
and
2015
, the Company recorded within the consolidated statements of financial position approximately
$316 million
and
$299 million
, respectively, of engineering and research and development costs for which customer reimbursement is contractually assured. The reimbursable costs are recorded
in other current assets if reimbursement will occur in less than
one year
and in other noncurrent assets if reimbursement will occur beyond
one year
.
Costs for molds, dies and other tools used to make products that will be sold under long-term supply arrangements are capitalized within property, plant and equipment if the Company has title to the assets or has the non-cancelable right to use the assets during the term of the supply arrangement. Capitalized items, if specifically designed for a supply arrangement, are amortized over the term of the arrangement; otherwise, amounts are amortized over the estimated useful lives of the assets. The carrying values of assets capitalized in accordance with the foregoing policy are periodically reviewed for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. At
September 30, 2016
and
2015
, approximately
$62 million
and
$60 million
, respectively, of costs for molds, dies and other tools were capitalized within property, plant and equipment which represented assets to which the Company had title. In addition, at
September 30, 2016
and
2015
, the Company recorded within the consolidated statements of financial position in other current assets approximately
$203 million
and
$149 million
, respectively, of costs for molds, dies and other tools for which customer reimbursement is contractually assured.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is provided over the estimated useful lives of the respective assets using the straight-line method for financial reporting purposes and accelerated methods for income tax purposes. The estimated useful lives range from
3
to
40
years for buildings and improvements and from
3
to
15
years for machinery and equipment.
The Company capitalizes interest on borrowings during the active construction period of major capital projects. Capitalized interest is added to the cost of the underlying assets and is amortized over the useful lives of the assets.
Goodwill and Indefinite-Lived Intangible Assets
Goodwill reflects the cost of an acquisition in excess of the fair values assigned to identifiable net assets acquired. The Company reviews goodwill for impairment during the fourth fiscal quarter or more frequently if events or changes in circumstances indicate the asset might be impaired. The Company performs impairment reviews for its reporting units, which have been determined to be the Company’s reportable segments or one level below the reportable segments in certain instances, using a fair value method based on management’s judgments and assumptions or third party valuations. The fair value of a reporting unit refers to the price that would be received to sell the unit as a whole in an orderly transaction between market participants at the measurement date. In estimating the fair value, the Company uses multiples of earnings based on the average of historical, published multiples of earnings of comparable entities with similar operations and economic characteristics. In certain instances, the Company uses discounted cash flow analyses or estimated sales price to further support the fair value estimates. The inputs utilized in the analyses are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, "Fair Value Measurement." The estimated fair value is then compared with the carrying amount of the reporting unit, including recorded goodwill. The Company is subject to financial statement risk to the extent that the carrying amount exceeds the estimated fair value.
Refer to Note 6, "Goodwill and Other Intangible Assets," of the notes to consolidated financial statements for information regarding the goodwill impairment testing performed in the fourth quarters of fiscal years
2016
,
2015
and
2014
.
Indefinite-lived intangible assets are also subject to at least annual impairment testing. Indefinite-lived intangible assets consist of trademarks and tradenames and are tested for impairment using a relief-from-royalty method. A considerable amount of management judgment and assumptions are required in performing the impairment tests.
Impairment of Long-Lived Assets
The Company reviews long-lived assets, including property, plant and equipment and other intangible assets with definite lives, for impairment whenever events or changes in circumstances indicate that the asset’s carrying amount may not be recoverable. The Company conducts its long-lived asset impairment analyses in accordance with ASC 360-10-15, "Impairment or Disposal of Long-Lived Assets." ASC 360-10-15 requires the Company to group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows. If the undiscounted cash flows do not indicate the carrying amount of the asset is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals.
Refer to Note 16, "Impairment of Long-Lived Assets," of the notes to consolidated financial statements for information regarding the impairment testing performed in fiscal years
2016
,
2015
and
2014
.
Percentage-of-Completion Contracts
The Building Efficiency business records certain long-term contracts under the percentage-of-completion (POC) 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 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
$396 million
and
$453 million
at
September 30, 2016
and
2015
, respectively. Billings in excess of costs and earnings related to these contracts were
$304 million
and
$340 million
at
September 30, 2016
and
2015
, respectively.
Revenue Recognition
The Building Efficiency business recognizes revenue from certain long-term contracts over the contractual period under the POC method of accounting. This method of accounting recognizes sales and gross profit as work is performed based on the relationship between actual costs incurred and total estimated costs at completion. Recognized revenues that will not be billed under the terms of the contract until a later date are recorded primarily in accounts receivable. Likewise, contracts where billings to date have exceeded recognized revenues are recorded primarily in other current liabilities. Changes to the original estimates may be required during the life of the contract and such estimates are reviewed monthly. Sales and gross profit are adjusted using the cumulative catch-up method for revisions in estimated total contract costs and contract values. Estimated losses are recorded when identified. Claims against customers are recognized as revenue upon settlement. The amount of accounts receivable due after one year is not significant. The use of the POC method of accounting involves considerable use of estimates in determining revenues, costs and profits and in assigning the amounts to accounting periods. The periodic reviews have not resulted in adjustments that were significant to the Company’s results of operations. The Company continually evaluates all of the assumptions, risks and uncertainties inherent with the application of the POC method of accounting.
The Building Efficiency business enters into extended warranties and long-term service and maintenance agreements with certain customers. For these arrangements, revenue is recognized on a straight-line basis over the respective contract term.
The Building Efficiency business also sells certain heating, ventilating and air conditioning (HVAC) and refrigeration products and services in bundled arrangements, where multiple products and/or services are involved. In accordance with ASU No. 2009-13, "Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements - A Consensus of the FASB Emerging Issues Task Force," the Company divides bundled arrangements into separate deliverables and revenue is allocated to each deliverable based on the relative selling price method. Significant deliverables within these arrangements include equipment, commissioning, service labor and extended warranties. In order to estimate relative selling price, market data and transfer price studies are utilized.
Approximately four to twelve months
separate the timing of the first deliverable until the last piece of equipment is delivered, and there may be extended warranty arrangements with duration of
one
to
five
years commencing upon the end of the standard warranty period.
In all other cases, the Company recognizes revenue at the time title passes to the customer or as services are performed.
Research and Development Costs
Expenditures for research activities relating to product development and improvement are charged against income as incurred and included within selling, general and administrative expenses in the consolidated statements of income. Such expenditures for the years ended
September 30, 2016
,
2015
and
2014
were
$598 million
,
$733 million
and
$792 million
, respectively. A portion of the costs associated with these activities is reimbursed by customers and, for the fiscal years ended
September 30, 2016
,
2015
and
2014
were
$308 million
,
$364 million
and
$352 million
, respectively.
Foreign Currency Translation
Substantially all of the Company’s international operations use the respective local currency as the functional currency. Assets and liabilities of international entities have been translated at period-end exchange rates, and income and expenses have been translated using average exchange rates for the period. Monetary assets and liabilities denominated in non-functional currencies are adjusted to reflect period-end exchange rates. The aggregate transaction losses, net of the impact of foreign currency hedges, included in net income for the years ended
September 30, 2016
,
2015
and
2014
were
$88 million
,
$119 million
and
$8 million
, respectively.
Derivative Financial Instruments
The Company has written policies and procedures that place all financial instruments under the direction of Corporate treasury and restrict all derivative transactions to those intended for hedging purposes. The use of financial instruments for speculative purposes is strictly prohibited. The Company selectively uses financial instruments to manage the market risk from changes in foreign exchange rates, commodity prices, stock based compensation liabilities and interest rates.
The fair values of all derivatives are recorded in the consolidated statements of financial position. The change in a derivative’s fair value is recorded each period in current earnings or accumulated other comprehensive income (AOCI), depending on whether the derivative is designated as part of a hedge transaction and if so, the type of hedge transaction. See Note 10, "Derivative Instruments and Hedging Activities," and Note 11, "Fair Value Measurements," of the notes to consolidated financial statements for disclosure of the Company’s derivative instruments and hedging activities.
Pension and Postretirement Benefits
The Company utilizes a mark-to-market approach for recognizing pension and postretirement benefit expenses, including measuring the market related value of plan assets at fair value and recognizing actuarial gains and losses in the fourth quarter of each fiscal year or at the date of a remeasurement event. Refer to Note 14, "Retirement Plans," of the notes to consolidated financial statements for disclosure of the Company's pension and postretirement benefit plans.
Loss Contingencies
Accruals are recorded for various contingencies including legal proceedings, environmental matters, self-insurance and other claims that arise in the normal course of business. The accruals are based on judgment, the probability of losses and, where applicable, the consideration of opinions of internal and/or external legal counsel and actuarially determined estimates. Additionally, the Company records receivables from third party insurers when recovery has been determined to be probable.
The Company is subject to laws and regulations relating to protecting the environment. The Company provides for expenses associated with environmental remediation obligations when such amounts are probable and can be reasonably estimated. Refer to Note 20, "Commitments and Contingencies," of the notes to consolidated financial statements.
The Company records liabilities for its workers' compensation, product, general 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. The Company records receivables from third party insurers when recovery has been determined to be probable.
Asbestos-Related Contingencies
The Company and certain of its subsidiaries along with numerous other companies are named as defendants in personal injury lawsuits based on alleged exposure to asbestos-containing materials. The Company's estimate of the liability 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 2049 (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 2049. 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 evaluates all of these factors and determines whether a change in the estimate of its liability for pending and future claims and defense costs is warranted.
Refer to Note 20, "Commitments and Contingencies," of the notes to consolidated financial statements for a discussion on management's judgments applied in the recognition and measurement of asbestos-related liabilities.
Income Taxes
Deferred tax liabilities and assets are recognized for the expected future tax consequences of events that have been reflected in the consolidated financial statements. Deferred tax liabilities and assets are determined based on the differences between the book and tax bases of particular assets and liabilities and operating loss carryforwards, using tax rates in effect for the years in which the differences are expected to reverse. A valuation allowance is provided to offset deferred tax assets if, based upon the available evidence, including consideration of tax planning strategies, it is more-likely-than-not that some or all of the deferred tax assets will not be realized. Refer to Note 17, "Income Taxes," of the notes to consolidated financial statements.
Retrospective Changes
In the fourth quarter of fiscal 2016, the Company changed its accounting policy for accruing for defense costs for asbestos related claims on a discounted basis. The Company’s historical accounting treatment for asbestos claim defense costs was to accrue as incurred. The new policy is to record an accrual for all future asbestos related defense costs which are determined to be probable and estimable of being incurred. The Company believes this new policy is preferable as it better reflects the economics of settlement of the Company's asbestos claims, improves comparability among the Company’s peer group and provides greater transparency to on-going operating results. These changes have been reported through retrospective application of the new policy to all periods presented. These changes did not have an impact to any period presented on the consolidated statements of income.The financial statement impact of this change for all periods presented was an increase to other noncurrent liabilities of
$68 million
, an increase to other noncurrent assets of
$27 million
and a decrease to retained earnings of
$41 million
.
In September 2016, in conjunction with the Tyco Merger, the par value of the Company’s common stock was changed from
$1.00
per share to
$0.01
per share. This change resulted in a decrease to common stock and corresponding increase in capital in excess of par value in the consolidated statements of financial position and is reported through retrospective application of the new par value for all periods presented.
New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In November 2015, the FASB issued ASU No. 2015-17, "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes." ASU No. 2015-17 requires that deferred tax liabilities and assets be classified as noncurrent in the consolidated statements of financial position. During the quarter ended December 31, 2015, the Company early adopted ASU No. 2015-17 and applied the change retrospectively to all periods presented.
Historical information was already revised throughout these financial statements to reflect the adoption of ASU No. 2015-17 within the Company's recasted consolidated financial statements and notes to consolidated financial statement for the year ended September 30, 2015 in the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on March 3, 2016.
In April 2014, the FASB issued ASU No. 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity." ASU No. 2014-08 limits discontinued operations reporting to situations where the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results, and requires expanded disclosures for discontinued operations. ASU No. 2014-08 was effective for the Company for the quarter ended December 31, 2015. The adoption of this guidance did not have any impact on the Company's consolidated financial statements as there were no dispositions or disposals during the quarter ended December 31, 2015.
Recently Issued 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. The guidance should be applied coincidentally with the adoption of ASU 2015-02, which is effective for the Company for the quarter ending December 31, 2016. The adoption of this guidance is not expected to have a significant impact on the Company's consolidated financial statements.
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 deem 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.
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. 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 Company is currently assessing the impact adoption of this guidance will have on its consolidated financial statements.
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 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 will be effective retrospectively for the Company for the quarter ending December 31, 2016, with early adoption permitted. The adoption of this guidance is not expected to have an impact on the Company's consolidated financial statements but will impact pension asset disclosures.
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 will be effective retrospectively for the Company for the quarter ending December 31, 2016, 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 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. The ASU No. 2015-02 was amended by ASU No. 2016-17, "Consolidations (Topic 810): Interests Held through Related Parties that are under Common Control," issued in October 2016. ASU No. 2015-02 will be effective retrospectively for the Company for the quarter ending December 31, 2016, 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," all of which provide additional clarification on certain topics addressed in ASU No. 2014-09. ASU No. 2016-08, ASU No. 2016-10 and ASU No. 2016-12 follow the same implementation guidelines as ASU No. 2014-09 and ASU No. 2015-14. The Company is currently assessing the impact adoption of this guidance will have on its consolidated financial statements.
2.
ACQUISITIONS AND DIVESTITURES
Fiscal Year 2016
On October 1, 2015, the Company formed a joint venture with Hitachi to expand its Building Efficiency product offerings. The Company acquired a
60
percent ownership interest in the new entity for approximately
$133 million
(
$563 million
purchase price less cash acquired of
$430 million
). The purchase price, net of cash acquired, was paid as of September 30, 2016. In connection with the acquisition, the Company recorded goodwill of
$253 million
related to purchase price allocations.
In the second quarter of fiscal 2016, the Company completed
one
acquisition for a purchase price, net of cash acquired, of
$3 million
, none of which was paid as of September 30, 2016. The acquisition was not material to the Company's consolidated financial statements. In connection with the acquisition, the Company recorded goodwill of
$5 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.
In the fourth quarter of fiscal 2016, the Company completed
two
divestitures for a combined sales price of
$39 million
, exclusive of net cash divested of
$13 million
. None of the sales proceeds were received as of September 30, 2016. The divestitures were not material to the Company's consolidated financial statements. In connection with the divestitures, the Company recorded a gain of
$12 million
within selling, general and administrative expenses on the consolidated statements of income and reduced goodwill by
$13 million
and
$3 million
in the Building Efficiency Rest of World segment and Building Efficiency Products North America segment, respectively.
In the third quarter of fiscal 2016, the Company completed a divestiture for a sales price of
$16 million
, all of which was received as of September 30, 2016. The divestiture was not material to the Company's consolidated financial statements. In connection with the divestiture, the Company recorded a gain of
$14 million
within selling, general and administrative expenses on the consolidated statements of income and reduced goodwill by
$3 million
in the Building Efficiency Systems and Service North America segment.
During fiscal 2016, the Company received
$29 million
in net cash proceeds related to prior year business divestitures.
Fiscal Year 2015
During fiscal 2015, the Company completed
three
acquisitions for a combined purchase price, net of cash acquired, of
$47 million
,
$18 million
of which was paid as of September 30, 2015. 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
$9 million
.
In the fourth quarter of fiscal 2015, the Company completed the sale of its GWS business to CBRE Group, Inc. The selling price, net of cash divested, was
$1.4 billion
, all of which was received as of September 30, 2015. In connection with the sale, the Company recorded a
$940 million
gain,
$643 million
net of tax, within income (loss) from discontinued operations, net of tax, on the consolidated statements of income and reduced goodwill in assets held for sale by
$220 million
. At March 31, 2015, the Company determined that the GWS segment met the criteria to be classified as a discontinued operation. Refer to Note 3, "Discontinued Operations," of the notes to consolidated financial statements for further disclosure related to the Company's discontinued operations.
In the fourth quarter of fiscal 2015, the Company completed its global automotive interiors joint venture with Yanfeng Automotive Trim Systems. In connection with the divestiture of the Interiors business, the Company recorded a
$145 million
gain,
$38 million
net of tax. The pre-tax gain is recorded within selling, general and administrative expenses on the consolidated statements of income and reduced goodwill in assets held for sale by
$21 million
.
Also during fiscal 2015, the Company completed
four
additional divestitures for a combined sales price of
$119 million
,
$86 million
of which was received as of September 30, 2015. The divestitures were not material to the Company's consolidated financial statements. In connection with the divestitures, the Company recorded a gain of
$38 million
within selling, general and administrative expenses on the consolidated statements of income and reduced goodwill by
$14 million
in the Building Efficiency Products North America segment, recorded a gain of
$10 million
within selling, general and administrative expenses on the consolidated statements of income and reduced goodwill by
$4 million
in the Automotive Experience Seating segment and recorded a gain of
$7 million
within selling, general and administrative expenses on the consolidated statements of income and reduced goodwill by
$2 million
in the Building Efficiency Systems and Service North America segment.
In the first nine months of fiscal 2015, the Company adjusted the purchase price allocation of the fiscal 2014 acquisition of Air Distribution Technologies Inc. (ADTi). The adjustment was made as a result of a true-up to the purchase price in the amount of
$4 million
, all of which was paid as of September 30, 2015. Also, in connection with this acquisition, the Company recorded additional goodwill of
$34 million
in fiscal 2015 related to the final purchase price allocations.
In the second quarter of fiscal 2015, the Company completed the sale of its interests in
two
GWS joint ventures to Brookfield Asset Management, Inc. The selling price, net of cash divested, was
$141 million
, all of which was received as of September 30, 2015. In connection with the sale, the Company recorded a
$200 million
gain,
$127 million
net of tax, within income (loss) from discontinued operations, net of tax, on the consolidated statements of income and reduced goodwill in assets held for sale by
$20 million
.
Fiscal Year 2014
In the third quarter of fiscal 2014, the Company completed its purchase of ADTi for approximately
$1.6 billion
, net of cash acquired, all of which was paid as of June 30, 2014. ADTi is one of the largest independent providers of air distribution and ventilation products in North America. In the third quarter of fiscal 2014, the Company completed a public offering of
$1.7 billion
aggregate principal amount of fixed rate senior notes to finance the purchase of ADTi. In fiscal 2014, the Company recorded goodwill of
$837 million
in the Building Efficiency Products North America segment as a result of the ADTi acquisition. The Company also recorded approximately
$477 million
of intangible assets that are subject to amortization, of which approximately
$475 million
was assigned to customer relationships with useful lives between
18
and
20
years. In addition, the Company recorded approximately
$230 million
of trade names that are not subject to amortization.
Also during fiscal 2014, the Company completed
four
additional acquisitions for a combined purchase price, net of cash acquired, of
$144 million
, all of which was paid as of September 30, 2014. 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
$140 million
.
Three
of the acquisitions increased the Company's ownership from a noncontrolling to controlling interest. As a result, the Company recorded a combined non-cash gain of
$38 million
in equity income to adjust the Company's existing equity investments in the partially-owned affiliates to fair value. The
$38 million
gain includes
$19 million
for the Power Solutions business and
$19 million
for the Building Efficiency Asia business.
In the third quarter of fiscal 2014, the Company completed the divestiture of the Automotive Experience Interiors headliner and sun visor product lines. As part of this divestiture, the Company made a cash payment of
$54 million
to the buyer to fund future operational improvement initiatives. The Company recorded a pre-tax loss on divestiture, including transaction costs, of
$95 million
within selling, general and administrative expenses on the consolidated statements of income. The tax impact of the divestiture was income tax expense of
$38 million
due to the jurisdictional mix of gains and losses on the sale, which resulted in non-benefited losses in certain countries and taxable gains in other countries. There was
no
change in goodwill as a result of this transaction.
In the third quarter of fiscal 2014, the Company recorded a
$25 million
charge within income (loss) from discontinued operations, net of tax, on the consolidated statements of income related to the indemnification of certain costs associated with a divested GWS business in 2004.
In the second quarter of fiscal 2014, the Company announced that it had reached an agreement to sell the remainder of its Automotive Experience Electronics business to Visteon Corporation, subject to regulatory and other approvals. The sale closed on July 1, 2014. The cash proceeds from the sale were
$266 million
, all of which was received as of September 30, 2014. At March 31, 2014, the Company determined that the Automotive Experience Electronics segment met the criteria to be classified as a discontinued operation. Refer to Note 3, "Discontinued Operations," of the notes to consolidated financial statements for further disclosure related to the Company's discontinued operations.
In the first quarter of fiscal 2014, the Company completed
one
additional divestiture for a sales price of
$13 million
, all of which was received as of September 30, 2014. The divestiture was not material to the Company’s consolidated financial statements. In connection with the divestiture, the Company recorded a gain, net of transaction costs, of
$9 million
in the Automotive Experience Interiors segment within selling, general and administrative expenses on the consolidated statements of income. There was
no
change in goodwill as a result of this transaction.
During fiscal 2014, the Company adjusted the purchase price allocation of certain fiscal 2013 acquisitions and recorded additional goodwill of
$2 million
.
3. DISCONTINUED OPERATIONS
On March 31, 2015, the Company announced that it had reached a definitive agreement to sell the remainder of the GWS business to CBRE Group Inc. (CBRE), subject to regulatory and other approvals. The sale closed on September 1, 2015. The agreement includes a
10
-year strategic relationship between the Company and CBRE. The Company is the preferred provider of HVAC equipment, building automation systems and related services to the portfolio of real estate and corporate facilities managed globally by CBRE and GWS. The Company also engages GWS for facility management services. The annual cash flows resulting from these activities with the legacy GWS business are not currently significant nor are they expected to become significant in the future.
At March 31, 2015, the Company determined that its GWS segment met the criteria to be classified as a discontinued operation, The Company did not allocate any general corporate overhead to discontinued operations.
There were
no
amounts related to the GWS business classified as discontinued operations for the fiscal year ended September 30, 2016. The following table summarizes the results of GWS, reclassified as discontinued operations for the fiscal years ended September 30, 2015 and 2014 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
2015
|
|
2014
|
|
|
|
|
|
|
Net sales
|
$
|
3,025
|
|
|
$
|
4,079
|
|
|
|
|
|
|
|
Income from discontinued operations before income taxes
|
1,203
|
|
|
119
|
|
|
Provision for income taxes on discontinued operations
|
1,075
|
|
|
75
|
|
|
Income from discontinued operations attributable to noncontrolling interests, net of tax
|
4
|
|
|
15
|
|
|
Income from discontinued operations
|
$
|
124
|
|
|
$
|
29
|
|
For the fiscal year ended September 30, 2015, the income from discontinued operations before income taxes included a
$940 million
gain on divestiture for the remainder of the GWS business, a
$200 million
gain on divestiture of the Company's interest
in two GWS joint ventures and current year transaction costs of
$87 million
. For the fiscal year ended September 30, 2014, the income from discontinued operations before income taxes included a
$25 million
charge related to the indemnification of certain costs associated with a divested GWS business in 2004.
The effective tax rate is different than the U.S. statutory rate for fiscal 2015 primarily due to
$680 million
tax expense for repatriation of cash and other tax reserves, and the tax consequences of the sale of the GWS joint ventures (
$73 million
) and the remaining business (
$297 million
).
The effective tax rate is different than the U.S. statutory rate for fiscal 2014 primarily due to a tax charge of
$35 million
related to the change in the Company's assertion over reinvestment of foreign undistributed earnings as well as a non-benefited loss related to the indemnification of certain costs associated with a divested business in 2004, partially offset by foreign tax rate differentials.
In the second quarter of fiscal 2014, the Company announced that it had reached a definitive agreement to sell the remainder of the Automotive Experience Electronics business to Visteon Corporation, subject to regulatory and other approvals. The sale closed on July 1, 2014. At March 31, 2014, the Company determined that the Automotive Experience Electronics segment met the criteria to be classified as a discontinued operation, which required retrospective application to financial information for all periods presented. The Company did not allocate any general corporate overhead to discontinued operations.
There were
no
amounts related to the Automotive Experience Electronics business classified as discontinued operations for the fiscal year ended September 30, 2016 and 2015. The following table summarizes the results of the Automotive Experience Electronics business, classified as discontinued operations for the fiscal years ended September 30, 2014 (in millions):
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2014
|
|
|
|
|
|
Net sales
|
|
$
|
1,027
|
|
|
|
|
|
|
Loss from discontinued operations before income taxes
|
|
(8
|
)
|
|
Provision for income taxes on discontinued operations
|
|
202
|
|
|
Income from discontinued operations attributable to noncontrolling interests, net of tax
|
|
8
|
|
|
Loss from discontinued operations
|
|
$
|
(218
|
)
|
For the year ended September 30, 2014, the discontinued operations before income taxes included divestiture-related losses of
$80 million
comprised of asset and investment impairment charges of
$43 million
, transaction costs of
$27 million
and severance obligations of
$10 million
.
For the year ended September 30, 2014, the Company's effective tax rate for discontinued operations was different than the U.S. federal statutory rate primarily due to a second quarter discrete non-cash tax charge of
$180 million
related to the repatriation of foreign cash associated with the divestiture of the Electronics business and unbenefited foreign losses.
Assets and Liabilities Held for Sale
At September 30, 2016,
$17 million
of certain corporate assets were classified as held for sale.
At September 30, 2015,
$55 million
of assets and
$42 million
of liabilities related to certain product lines of the Automotive Experience Interiors segment which were not contributed to the automotive interiors joint venture were classified as held for sale. At
September 30, 2016
, these product lines no longer met the criteria to be classified as held for sale.
4. INVENTORIES
Inventories consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
Raw materials and supplies
|
$
|
1,186
|
|
|
$
|
1,084
|
|
|
Work-in-process
|
452
|
|
|
369
|
|
|
Finished goods
|
1,172
|
|
|
924
|
|
|
Inventories
|
$
|
2,810
|
|
|
$
|
2,377
|
|
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
Buildings and improvements
|
$
|
3,278
|
|
|
$
|
3,091
|
|
|
Machinery and equipment
|
9,119
|
|
|
8,566
|
|
|
Construction in progress
|
1,356
|
|
|
1,006
|
|
|
Land
|
481
|
|
|
338
|
|
|
Total property, plant and equipment
|
14,234
|
|
|
13,001
|
|
|
Less: accumulated depreciation
|
(7,585
|
)
|
|
(7,131
|
)
|
|
Property, plant and equipment - net
|
$
|
6,649
|
|
|
$
|
5,870
|
|
Interest costs capitalized during the fiscal years ended
September 30, 2016
,
2015
and
2014
were
$19 million
,
$25 million
and
$28 million
, respectively. Accumulated depreciation related to capital leases at
September 30, 2016
and
2015
was
$40 million
and
$54 million
, respectively.
At September 30, 2016, the Company is the lessor of properties included in land of
$21 million
, gross building and improvements of
$187 million
and accumulated depreciation of
$126 million
. At September 30, 2015, the Company is the lessor of properties included in land of
$13 million
, gross building and improvements of
$177 million
and accumulated depreciation of
$131 million
.
6. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill in each of the Company’s reportable segments for the fiscal years ended
September 30, 2016
and
2015
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2014
|
|
Business
Acquisitions
|
|
Business
Divestitures
|
|
Currency Translation and Other
|
|
September 30,
2015
|
|
Building Efficiency
|
|
|
|
|
|
|
|
|
|
|
Systems and Service North
America
|
$
|
982
|
|
|
$
|
—
|
|
|
$
|
(2
|
)
|
|
$
|
(2
|
)
|
|
$
|
978
|
|
|
Products North America
|
1,688
|
|
|
34
|
|
|
(14
|
)
|
|
(7
|
)
|
|
1,701
|
|
|
Asia
|
414
|
|
|
—
|
|
|
—
|
|
|
(25
|
)
|
|
389
|
|
|
Rest of World
|
345
|
|
|
—
|
|
|
—
|
|
|
(35
|
)
|
|
310
|
|
|
Automotive Experience
|
|
|
|
|
|
|
|
|
|
|
Seating
|
2,556
|
|
|
—
|
|
|
(4
|
)
|
|
(188
|
)
|
|
2,364
|
|
|
Interiors
|
—
|
|
|
9
|
|
|
(9
|
)
|
|
—
|
|
|
—
|
|
|
Power Solutions
|
1,142
|
|
|
—
|
|
|
—
|
|
|
(60
|
)
|
|
1,082
|
|
|
Total
|
$
|
7,127
|
|
|
$
|
43
|
|
|
$
|
(29
|
)
|
|
$
|
(317
|
)
|
|
$
|
6,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2015
|
|
Business
Acquisitions
|
|
Business
Divestitures
|
|
Currency Translation and Other
|
|
September 30,
2016
|
|
Building Efficiency
|
|
|
|
|
|
|
|
|
|
|
Systems and Service North
America
|
$
|
978
|
|
|
$
|
—
|
|
|
$
|
(3
|
)
|
|
$
|
—
|
|
|
$
|
975
|
|
|
Products North America
|
1,701
|
|
|
—
|
|
|
(3
|
)
|
|
(1
|
)
|
|
1,697
|
|
|
Asia
|
389
|
|
|
253
|
|
|
—
|
|
|
15
|
|
|
657
|
|
|
Rest of World
|
310
|
|
|
5
|
|
|
(13
|
)
|
|
(1
|
)
|
|
301
|
|
|
Automotive Experience
|
|
|
|
|
|
|
|
|
|
|
Seating
|
2,364
|
|
|
—
|
|
|
—
|
|
|
21
|
|
|
2,385
|
|
|
Power Solutions
|
1,082
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
1,086
|
|
|
Total
|
$
|
6,824
|
|
|
$
|
258
|
|
|
$
|
(19
|
)
|
|
$
|
38
|
|
|
$
|
7,101
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2014, accumulated goodwill impairment charges included
$430 million
and
$47 million
related to the Automotive Experience Interiors and Building Efficiency Rest of World - Latin America reporting units, respectively. There were
no
goodwill impairments resulting from fiscal 2016 and 2015 annual impairment tests. Except for recent acquisitions which are recorded at fair value, no reporting unit was determined to be at risk of failing step one of the goodwill impairment test.
At October 1, 2015, the Company assessed goodwill for impairment in the Building Efficiency business due to the change in reportable segments as described in Note 18, "Segment Information," of the notes to consolidated financial statements. As a result, the Company performed impairment testing for goodwill under the new segments and determined that the estimated fair value of each reporting unit substantially exceeded its corresponding carrying amount including recorded goodwill, and as such, no impairment existed at October 1, 2015. No reporting unit was determined to be at risk of failing step one of the goodwill impairment test.
During fiscal 2014, as a result of operating results, restructuring actions and expected future profitability, the Company's forecasted cash flow estimates used in the goodwill assessment were negatively impacted as of September 30, 2014 for the Building Efficiency Rest of World - Latin America reporting unit. As a result, the Company concluded that the carrying value of the Building Efficiency Rest of World - Latin America reporting unit exceeded its fair value as of September 30, 2014. The Company recorded a goodwill impairment charge of
$47 million
in the fourth quarter of fiscal 2014, which was determined by comparing the carrying value of the reporting unit's goodwill with the implied fair value of goodwill for the reporting unit. The Building Efficiency Rest of World - Latin America reporting unit has
no
remaining goodwill at
September 30, 2016
and
2015
.
The assumptions included in the impairment tests require judgment, and changes to these inputs could impact the results of the calculations. Other than management's projections of future cash flows, the primary assumptions used in the impairment tests were the weighted-average cost of capital and long-term growth rates. Although the Company's cash flow forecasts are based on assumptions that are considered reasonable by management and consistent with the plans and estimates management is using to operate the underlying businesses, there are significant judgments in determining the expected future cash flows attributable to a reporting unit. The impairment charges are non-cash expenses recorded within restructuring and impairment costs on the consolidated statements of income and did not adversely affect the Company's debt position, cash flow, liquidity or compliance with financial covenants.
The Company’s other intangible assets, primarily from business acquisitions valued based on independent appraisals, consisted of (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
September 30, 2015
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
Amortized intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Patented technology
|
$
|
45
|
|
|
$
|
(26
|
)
|
|
$
|
19
|
|
|
$
|
80
|
|
|
$
|
(59
|
)
|
|
$
|
21
|
|
|
Customer relationships
|
988
|
|
|
(256
|
)
|
|
732
|
|
|
975
|
|
|
(206
|
)
|
|
769
|
|
|
Miscellaneous
|
368
|
|
|
(149
|
)
|
|
219
|
|
|
307
|
|
|
(123
|
)
|
|
184
|
|
|
Total amortized intangible assets
|
1,401
|
|
|
(431
|
)
|
|
970
|
|
|
1,362
|
|
|
(388
|
)
|
|
974
|
|
|
Unamortized intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks/trade names
|
544
|
|
|
—
|
|
|
544
|
|
|
542
|
|
|
—
|
|
|
542
|
|
|
Total intangible assets
|
$
|
1,945
|
|
|
$
|
(431
|
)
|
|
$
|
1,514
|
|
|
$
|
1,904
|
|
|
$
|
(388
|
)
|
|
$
|
1,516
|
|
Amortization of intangible assets for the fiscal years ended
September 30, 2016
,
2015
and
2014
was
$99 million
,
$92 million
and
$86 million
, respectively. Excluding the impact of any future acquisitions, the Company anticipates amortization for fiscal
2017
,
2018
,
2019
,
2020
and
2021
will be approximately
$98 million
,
$98 million
,
$82 million
,
$76 million
and
$67 million
, respectively. There were
no
indefinite lived intangible asset impairments resulting from fiscal 2016, 2015 and 2014 annual impairment tests.
7. PRODUCT WARRANTIES
The Company offers warranties to its customers depending upon the specific product and terms of the customer purchase agreement. A typical warranty program requires that the Company replace defective products within a specified time period from the date of sale. The Company records an estimate for future warranty-related costs based on actual historical return rates and other known factors. Based on analysis of return rates and other factors, the Company’s warranty provisions are adjusted as necessary. The Company monitors its warranty activity and adjusts its reserve estimates when it is probable that future warranty costs will be different than those estimates.
The Company’s product warranty liability is recorded in the 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, including extended warranties for which deferred revenue is recorded, for the fiscal years ended
September 30, 2016
and
2015
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
September 30,
|
|
|
2016
|
|
2015
|
|
Balance at beginning of period
|
$
|
300
|
|
|
$
|
319
|
|
|
Accruals for warranties issued during the period
|
324
|
|
|
280
|
|
|
Accruals from acquisitions and divestitures
|
51
|
|
|
—
|
|
|
Accruals related to pre-existing warranties (including changes in estimates)
|
(13
|
)
|
|
(11
|
)
|
|
Settlements made (in cash or in kind) during the period
|
(301
|
)
|
|
(282
|
)
|
|
Currency translation
|
4
|
|
|
(6
|
)
|
|
Balance at end of period
|
$
|
365
|
|
|
$
|
300
|
|
8. LEASES
Certain administrative and production facilities and equipment are leased under long-term agreements. Most leases contain renewal options for varying periods, and certain leases include options to purchase the leased property during or at the end of the lease term. Leases generally require the Company to pay for insurance, taxes and maintenance of the property. Leased capital assets included in net property, plant and equipment, primarily buildings and improvements, were
$44 million
and
$46 million
at
September 30, 2016
and
2015
, respectively.
Other facilities and equipment are leased under arrangements that are accounted for as operating leases. Total rental expense for the fiscal years ended
September 30, 2016
,
2015
and
2014
was
$377 million
,
$413 million
and
$459 million
, respectively.
Future minimum capital and operating lease payments and the related present value of capital lease payments at
September 30, 2016
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Leases
|
|
Operating
Leases
|
|
2017
|
$
|
5
|
|
|
$
|
221
|
|
|
2018
|
4
|
|
|
163
|
|
|
2019
|
3
|
|
|
112
|
|
|
2020
|
3
|
|
|
77
|
|
|
2021
|
3
|
|
|
56
|
|
|
After 2021
|
12
|
|
|
88
|
|
|
Total minimum lease payments
|
30
|
|
|
$
|
717
|
|
|
Interest
|
(6
|
)
|
|
|
|
Present value of net minimum lease payments
|
$
|
24
|
|
|
|
9. DEBT AND FINANCING ARRANGEMENTS
Short-term debt consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
2016
|
|
2015
|
|
Bank borrowings
|
$
|
662
|
|
|
$
|
52
|
|
|
Weighted average interest rate on short-term debt outstanding
|
1.7
|
%
|
|
7.2
|
%
|
In connection with the Tyco Merger, JCI Inc. replaced its
$2.5 billion
committed
five
-year credit facility scheduled to mature in August 2018 with a
$2.0 billion
committed
four
-year credit facility scheduled to mature in August 2020. The facility is used to support the Company's outstanding commercial paper. There were
no
draws on either credit facility during the fiscal years ended September 30, 2016 and 2015. Average outstanding commercial paper for the fiscal year ended September 30, 2016 was
$1,397 million
, and there was
none
outstanding at September 30, 2016. Average outstanding commercial paper for the fiscal year ended September 30, 2015 was
$1,537 million
, and there was
none
outstanding at September 30, 2015.
In February 2016, the Company entered into a
nine
-month,
$100 million
floating rate term loan scheduled to mature in November 2016. Proceeds from the term loan were used for general corporate purposes.
In February 2016, the Company terminated a
37 million
euro committed revolving credit facility scheduled to mature in September 2016, and subsequently entered into a
nine
-month,
100 million
euro, floating rate term loan scheduled to mature in October 2016. Proceeds from the term loan were used for general corporate purposes.
In January 2016, the Company entered into a
ten
-month,
$200 million
, floating rate term loan scheduled to mature in October 2016. Proceeds from the term loan were used for general corporate purposes.
In January 2016, the Company entered into a
ten
-month,
$125 million
, floating rate term loan scheduled to mature in October 2016. Proceeds from the term loan were used for general corporate purposes.
Long-term debt consisted of the following (in millions; due dates by fiscal year):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
2016
|
|
2015
|
|
Unsecured notes
|
|
|
|
|
5.5% due in 2016 ($800 million par value)
|
$
|
—
|
|
|
$
|
800
|
|
|
7.125% due in 2017 ($150 million par value)
|
149
|
|
|
153
|
|
|
2.6% due in 2017 ($400 million par value)
|
404
|
|
|
404
|
|
|
2.355% due in 2017 ($46 million par value)
|
46
|
|
|
46
|
|
|
1.4% due in 2018 ($300 million par value)
|
301
|
|
|
303
|
|
|
5.0% due in 2020 ($500 million par value)
|
499
|
|
|
499
|
|
|
4.25% due 2021 ($500 million par value)
|
498
|
|
|
498
|
|
|
3.75% due in 2022 ($450 million par value)
|
448
|
|
|
448
|
|
|
3.625% due in 2024 ($500 million par value)
|
500
|
|
|
500
|
|
|
6.0% due in 2036 ($400 million par value)
|
396
|
|
|
395
|
|
|
5.7% due in 2041 ($300 million par value)
|
299
|
|
|
299
|
|
|
5.25% due in 2042 ($250 million par value)
|
250
|
|
|
250
|
|
|
4.625% due in 2044 ($450 million par value)
|
447
|
|
|
447
|
|
|
6.95% due in 2046 ($125 million par value)
|
125
|
|
|
125
|
|
|
4.95% due in 2064 ($450 million par value)
|
449
|
|
|
449
|
|
|
Adient - 3.5% due in 2024 (EUR 1,000 million par value)
|
1,119
|
|
|
—
|
|
|
Adient - 4.875% due in 2026 ($900 million par value)
|
900
|
|
|
—
|
|
|
Adient - Term Loan A - LIBOR plus 1.005% due in 2021
|
1,500
|
|
|
—
|
|
|
Capital lease obligations
|
24
|
|
|
48
|
|
|
Other foreign-denominated debt
|
|
|
|
|
Euro
|
61
|
|
|
529
|
|
|
Japanese Yen
|
367
|
|
|
308
|
|
|
Other
|
39
|
|
|
57
|
|
|
Gross long-term debt
|
8,821
|
|
|
6,558
|
|
|
Less: current portion
|
628
|
|
|
813
|
|
|
Net long-term debt
|
$
|
8,193
|
|
|
$
|
5,745
|
|
At
September 30, 2016
, the Company’s other foreign-denominated long-term debt was at fixed and floating rates with a weighted-average interest rate of
1.3%
. At
September 30, 2015
, the Company’s other foreign-denominated long-term debt was at fixed and floating rates with a weighted-average interest rate of
1.1%
.
The installments of long-term debt maturing in subsequent fiscal years are:
2017
-
$628 million
;
2018
-
$310 million
;
2019
-
$0 million
;
2020
-
$906 million
;
2021
-
$1,999 million
; 2022 and thereafter -
$4,978 million
. The Company’s long-term debt includes various financial covenants, none of which are expected to restrict future operations.
Total interest paid on both short and long-term debt for the fiscal years ended
September 30, 2016
,
2015
and
2014
was
$319 million
,
$373 million
and
$314 million
, respectively. The Company uses financial instruments to manage its interest rate exposure (see Note 10, "Derivative Instruments and Hedging Activities," and Note 11, "Fair Value Measurements," of the notes to consolidated financial statements). These instruments affect the weighted average interest rate of the Company’s debt and interest expense.
Financing Arrangements
Financing in connection with proposed Adient spin-off
In August 2016,
Adient Global Holdings, Ltd. (AGH)
, a wholly-owned subsidiary of Johnson Controls, issued a
one billion
euro,
3.5%
fixed rate,
8
-year senior unsecured note scheduled to mature in August 2024. AGH also issued a
$900 million
,
4.875%
,
10
-year senior unsecured note scheduled to mature in August 2026. The proceeds from the notes were deposited into escrow and are
expected to be released in connection with the spin-off. The notes have not been, and are not expected to be, guaranteed by the Company or any of its subsidiaries that will not be subsidiaries of Adient following the spin-off. Approximately
$1,500 million
of the proceeds will be distributed to
the Company in connection with the spin-off and approximately
$500 million
of the proceeds will be used for Adient's general corporate purposes.
In July 2016,
AGH
entered into a
5
-year,
$1,500 million
Term A loan facility and a
5
-year,
$1,500 million
revolving credit facility scheduled to mature in July 2021. The term loan was fully drawn in August 2016. As of September 30, 2016, there were
no
draws on the facility. Upon completion of the spin-off of Adient, AGH will become a wholly-owned subsidiary of Adient. On the date of the spin-off, Adient and certain of its wholly-owned subsidiaries will guarantee the debt, and the guarantees of Johnson Controls will automatically be released.The Company used the proceeds of the term loan to early repay
its
four
tranches of euro-denominated floating rate credit facilities, totaling
390 million
euro, that were outstanding as of September 30, 2015;
three
term loans of
$500 million
,
$200 million
and
$125 million
that were entered into during fiscal 2016, plus accrued interest, and a
$90 million
outstanding credit facility. The remainder of the proceeds were used for general corporate purposes
.
Other financing arrangements
At
September 30, 2016
, the Company had committed bilateral U.S. dollar denominated revolving credit facilities totaling
$135 million
, which are scheduled to expire in fiscal 2017. There were
no
draws on any of these revolving facilities as of September 30, 2016.
In January 2016, the Company retired
$800 million
in principal amount, plus accrued interest, of its
5.5%
fixed rate notes that matured in January 2016.
In September 2015, the Company retired, at maturity,
$500 million
,
$150 million
and
$100 million
floating rate term loans plus accrued interest that were entered into during fiscal 2015.
In June 2015, the Company entered into a
five
-year,
37 billion
yen floating rate syndicated term loan scheduled to mature in June 2020. Proceeds from the syndicated term loan were used for general corporate purposes.
In May 2015, the Company made a partial repayment of
32 million
euro in principal amount, plus accrued interest, of its
70 million
euro floating rate credit facility scheduled to mature in November 2017. The remaining outstanding portion as of September 30, 2015 was repaid during fiscal 2016.
In March 2015, the Company retired
$125 million
in principal amount, plus accrued interest, of its
7.7%
fixed rate notes that matured in March 2015.
Notes Payable Due to Affiliate
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
2016
|
|
2015
|
|
Affiliate notes
|
|
|
|
|
5.0% due in 2021 ($500 million principal amount)
|
$
|
500
|
|
|
$
|
—
|
|
|
5.0% due in 2021 ($500 million principal amount)
|
500
|
|
|
—
|
|
|
5.2% due in 2022 ($1,000 million principal amount)
|
1,000
|
|
|
—
|
|
|
5.4% due in 2023 ($2,000 million principal amount)
|
2,000
|
|
|
—
|
|
|
6.0% due in 2026 ($2,500 million principal amount)
|
2,500
|
|
|
—
|
|
|
Affiliate notes payable
|
$
|
6,500
|
|
|
$
|
—
|
|
On September 2, 2016, in conjunction with the Tyco Merger, the Company entered into promissory notes with total face value of
$6,500 million
. These notes have stated annual interest rates between
5.0%
and
6.0%
and are scheduled to mature between 2021 and 2026. The interest is payable quarterly and outstanding unpaid principal amount is due at maturity.
Net Financing Charges and Interest Expense Due to Affiliate
The Company's net financing charges and interest expense due to affiliate line items in the consolidated statements of income for the years ended
September 30, 2016
,
2015
and
2014
contained the following components (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
|
|
|
|
|
Interest expense, net of capitalized interest costs
|
$
|
295
|
|
|
$
|
288
|
|
|
$
|
254
|
|
|
Banking fees and bond cost amortization
|
32
|
|
|
23
|
|
|
18
|
|
|
Interest income
|
(12
|
)
|
|
(9
|
)
|
|
(10
|
)
|
|
Net foreign exchange results for financing activities
|
(15
|
)
|
|
(14
|
)
|
|
(18
|
)
|
|
Net financing charges
|
$
|
300
|
|
|
$
|
288
|
|
|
$
|
244
|
|
|
|
|
|
|
|
|
|
Interest expense due to affiliate
|
$
|
27
|
|
|
$
|
—
|
|
|
$
|
—
|
|
10. 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 11, "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.
Cash Flow Hedges
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 at
September 30, 2016
and
2015
.
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 at
September 30, 2016
and
2015
.
The Company had the following outstanding contracts to hedge forecasted commodity purchases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume Outstanding as of
|
|
Commodity
|
|
Units
|
|
September 30, 2016
|
|
September 30, 2015
|
|
Copper
|
|
Pounds
|
|
5,849,000
|
|
|
14,648,000
|
|
|
Lead
|
|
Metric Tons
|
|
5,185
|
|
|
6,785
|
|
|
Aluminum
|
|
Metric Tons
|
|
2,620
|
|
|
5,700
|
|
|
Tin
|
|
Metric Tons
|
|
185
|
|
|
2,080
|
|
In September 2005, the Company entered into
three
forward treasury lock agreements to reduce the market risk associated with changes in interest rates associated with the Company’s anticipated fixed-rate note issuance to finance the acquisition of York International Corp. (cash flow hedge). The
three
forward treasury lock agreements, which had a combined notional amount of
$1.3 billion
, fixed a portion of the future interest cost for 5-year, 10-year and 30-year notes. The fair value of each treasury lock agreement, or the difference between the treasury lock reference rate and the fixed rate at time of note issuance, is amortized to interest expense over the life of the respective note issuance. In January 2006, in connection with the Company’s debt refinancing, the
three
forward treasury lock agreements were terminated.
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. Changes in the fair value of the swap and hedged portion of the debt are recorded in the consolidated statements of income.
In the fourth quarter of fiscal 2013, the Company entered into
four
fixed to floating interest rate swaps totaling
$800 million
to hedge the coupon of its
5.5%
notes that matured in January 2016. 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 maturing 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. There were
eight
and
twelve
interest rate swaps outstanding as of
September 30, 2016
and
2015
, respectively.
Net Investment Hedges
The Company enters into cross-currency interest rate swaps and foreign currency denominated debt obligations to selectively hedge portions of its net investment in non-U.S. subsidiaries. The currency effects of the cross-currency interest rate swaps and debt obligations are reflected in the AOCI account within shareholders’ equity attributable to Johnson Controls, Inc. where they offset gains and losses recorded on the Company’s net investments globally. 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 a
one billion
euro bond designated as net investment hedge in the Company's net investment in Europe. The Company had
no
cross-currency interest rate swaps outstanding at September 30, 2016. At
September 30, 2015
, the Company had
four
cross-currency interest rate swaps outstanding totaling
20 billion
yen designated as a net investment hedge. The Company did not have any foreign denominated debt outstanding designated as a net investment hedge at
September 30, 2015
.
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
September 30, 2016
the Company had
no
equity swaps outstanding as a result of the Tyco Merger and proposed spin-off. As of
September 30, 2015
the Company had hedged approximately
4.0 million
shares of its common stock.
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.
Fair Value of Derivative Instruments
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives and Hedging Activities
Designated as Hedging Instruments
under ASC 815
|
|
Derivatives and Hedging Activities Not
Designated as Hedging Instruments
under ASC 815
|
|
|
September 30,
2016
|
|
September 30,
2015
|
|
September 30,
2016
|
|
September 30,
2015
|
|
Other current assets
|
|
|
|
|
|
|
|
|
Foreign currency exchange derivatives
|
$
|
41
|
|
|
$
|
31
|
|
|
$
|
33
|
|
|
$
|
27
|
|
|
Commodity derivatives
|
4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Interest rate swaps
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
Cross-currency interest rate swaps
|
—
|
|
|
5
|
|
|
—
|
|
|
—
|
|
|
Other noncurrent assets
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
1
|
|
|
5
|
|
|
—
|
|
|
—
|
|
|
Equity swap
|
—
|
|
|
—
|
|
|
—
|
|
|
164
|
|
|
Total assets
|
$
|
46
|
|
|
$
|
42
|
|
|
$
|
33
|
|
|
$
|
191
|
|
|
|
|
|
|
|
|
|
|
|
Other current liabilities
|
|
|
|
|
|
|
|
|
Foreign currency exchange derivatives
|
$
|
48
|
|
|
$
|
37
|
|
|
$
|
11
|
|
|
$
|
26
|
|
|
Commodity derivatives
|
—
|
|
|
7
|
|
|
—
|
|
|
—
|
|
|
Cross-currency interest rate swaps
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
Current portion of long-term debt
|
|
|
|
|
|
|
|
|
Fixed rate debt swapped to floating
|
551
|
|
|
801
|
|
|
—
|
|
|
—
|
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
Foreign currency denominated debt
|
1,486
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Fixed rate debt swapped to floating
|
301
|
|
|
855
|
|
|
—
|
|
|
—
|
|
|
Total liabilities
|
$
|
2,386
|
|
|
$
|
1,701
|
|
|
$
|
11
|
|
|
$
|
26
|
|
Counterparty Credit Risk
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
September 30, 2016
and
September 30, 2015
,
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Assets
|
|
Fair Value of Liabilities
|
|
|
September 30,
2016
|
|
September 30,
2015
|
|
September 30,
2016
|
|
September 30,
2015
|
|
Gross amount recognized
|
$
|
79
|
|
|
$
|
233
|
|
|
$
|
2,397
|
|
|
$
|
1,727
|
|
|
Gross amount eligible for offsetting
|
(17
|
)
|
|
(8
|
)
|
|
(17
|
)
|
|
(8
|
)
|
|
Net amount
|
$
|
62
|
|
|
$
|
225
|
|
|
$
|
2,380
|
|
|
$
|
1,719
|
|
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 fiscal years ended
September 30, 2016
,
2015
and
2014
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in ASC 815 Cash Flow Hedging Relationships
|
|
Year Ended September 30
|
|
|
2016
|
|
2015
|
|
2014
|
|
Foreign currency exchange derivatives
|
|
$
|
(18
|
)
|
|
$
|
(5
|
)
|
|
$
|
1
|
|
|
Commodity derivatives
|
|
3
|
|
|
(19
|
)
|
|
(7
|
)
|
|
Total
|
|
$
|
(15
|
)
|
|
$
|
(24
|
)
|
|
$
|
(6
|
)
|
The following tables presents 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 fiscal years ended
September 30, 2016
,
2015
and
2014
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in ASC 815 Cash Flow
Hedging Relationships
|
|
Location of Gain (Loss)
Recognized in Income on Derivative
|
|
Year Ended September 30,
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Foreign currency exchange derivatives
|
|
Cost of sales
|
|
$
|
(21
|
)
|
|
$
|
1
|
|
|
$
|
(2
|
)
|
|
Commodity derivatives
|
|
Cost of sales
|
|
(12
|
)
|
|
(11
|
)
|
|
1
|
|
|
Forward treasury locks
|
|
Net financing charges
|
|
1
|
|
|
1
|
|
|
1
|
|
|
Total
|
|
|
|
$
|
(32
|
)
|
|
$
|
(9
|
)
|
|
$
|
—
|
|
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 fiscal years ended
September 30, 2016
,
2015
and
2014
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in ASC 815 Fair Value Hedging Relationships
|
|
Location of Gain (Loss)
Recognized in Income on Derivative
|
|
Year Ended September 30,
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Interest rate swap
|
|
Net financing charges
|
|
$
|
(5
|
)
|
|
$
|
7
|
|
|
$
|
5
|
|
|
Fixed rate debt swapped to floating
|
|
Net financing charges
|
|
5
|
|
|
(7
|
)
|
|
(5
|
)
|
|
Total
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
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 fiscal years ended
September 30, 2016
,
2015
and
2014
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as Hedging Instruments under ASC 815
|
|
Location of Gain (Loss)
Recognized in Income on
Derivative
|
|
Year Ended September 30,
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Foreign currency exchange derivatives
|
|
Cost of sales
|
|
$
|
4
|
|
|
$
|
(3
|
)
|
|
$
|
1
|
|
|
Foreign currency exchange derivatives
|
|
Net financing charges
|
|
(11
|
)
|
|
(12
|
)
|
|
18
|
|
|
Foreign currency exchange derivatives
|
|
Income tax provision
|
|
4
|
|
|
—
|
|
|
—
|
|
|
Equity swap
|
|
Selling, general and administrative
|
|
14
|
|
|
(9
|
)
|
|
(1
|
)
|
|
Total
|
|
|
|
$
|
11
|
|
|
$
|
(24
|
)
|
|
$
|
18
|
|
The effective portion of pre-tax gains (losses) recorded in foreign currency translation adjustment within other comprehensive income (loss) related to net investment hedges were
$(82) million
,
$16 million
and
$24 million
for the years ended
September 30, 2016
,
2015
and
2014
, respectively. For the years ended
September 30, 2016
,
2015
and
2014
,
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.
11. 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.
Recurring Fair Value Measurements
The following tables present the Company’s fair value hierarchy for those assets and liabilities measured at fair value as of
September 30, 2016
and
2015
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using:
|
|
|
Total as of
September 30, 2016
|
|
Quoted Prices
in Active
Markets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Other current assets
|
|
|
|
|
|
|
|
|
Foreign currency exchange derivatives
|
$
|
74
|
|
|
$
|
—
|
|
|
$
|
74
|
|
|
$
|
—
|
|
|
Commodity derivatives
|
4
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
Other noncurrent assets
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
Investments in marketable common stock
|
3
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
Total assets
|
$
|
82
|
|
|
$
|
3
|
|
|
$
|
79
|
|
|
$
|
—
|
|
|
Other current liabilities
|
|
|
|
|
|
|
|
|
Foreign currency exchange derivatives
|
$
|
59
|
|
|
$
|
—
|
|
|
$
|
59
|
|
|
$
|
—
|
|
|
Current portion of long-term debt
|
|
|
|
|
|
|
|
|
Fixed rate debt swapped to floating
|
551
|
|
|
—
|
|
|
551
|
|
|
—
|
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
Foreign currency denominated debt
|
1,486
|
|
|
1,486
|
|
|
—
|
|
|
—
|
|
|
Fixed rate debt swapped to floating
|
301
|
|
|
—
|
|
|
301
|
|
|
—
|
|
|
Total liabilities
|
$
|
2,397
|
|
|
$
|
1,486
|
|
|
$
|
911
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using:
|
|
|
Total as of
September 30, 2015
|
|
Quoted Prices
in Active
Markets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Other current assets
|
|
|
|
|
|
|
|
|
Foreign currency exchange derivatives
|
$
|
58
|
|
|
$
|
—
|
|
|
$
|
58
|
|
|
$
|
—
|
|
|
Interest rate swaps
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
Cross-currency interest rate swaps
|
5
|
|
|
—
|
|
|
5
|
|
|
—
|
|
|
Other noncurrent assets
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
5
|
|
|
—
|
|
|
5
|
|
|
—
|
|
|
Investments in marketable common stock
|
4
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
Equity swap
|
164
|
|
|
164
|
|
|
—
|
|
|
—
|
|
|
Total assets
|
$
|
237
|
|
|
$
|
168
|
|
|
$
|
69
|
|
|
$
|
—
|
|
|
Other current liabilities
|
|
|
|
|
|
|
|
|
Foreign currency exchange derivatives
|
$
|
63
|
|
|
$
|
—
|
|
|
$
|
63
|
|
|
$
|
—
|
|
|
Commodity derivatives
|
7
|
|
|
—
|
|
|
7
|
|
|
—
|
|
|
Cross-currency interest rate swaps
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
Current portion of long-term debt
|
|
|
|
|
|
|
|
|
Fixed rate debt swapped to floating
|
801
|
|
|
—
|
|
|
801
|
|
|
—
|
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
Fixed rate debt swapped to floating
|
855
|
|
|
—
|
|
|
855
|
|
|
—
|
|
|
Total liabilities
|
$
|
1,727
|
|
|
$
|
—
|
|
|
$
|
1,727
|
|
|
$
|
—
|
|
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.
Equity swaps
: The equity swaps are valued under a market approach as the fair value of the swaps is equal to the Company’s stock price at the reporting period date.
Cross-currency interest rate swaps
: The cross-currency interest rate swaps are valued using observable market data.
Investments in marketable common stock:
The Company invests in certain marketable common stock, which is valued under a market approach using publicized share prices. There was an unrealized loss recorded on these investments of
$1 million
for the year ended September 30, 2016 within AOCI in the consolidated statements of financial position. There were
no
unrealized gains or losses recorded on these investments as of September 30, 2015.
Foreign currency denominated debt:
The Company had entered into foreign currency denominated debt obligations to selectively hedge portions of its net investment in non-U.S. subsidiaries. The currency effects of debt obligations are reflected in the AOCI account within shareholders’
equity attributable to Johnson Controls, Inc. where they offset gains and losses recorded on the Company’s net investm
ents globally. The foreign denominated debt obligation is remeasured to current exchange rates under a market approach using publicized spot prices. 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 bond designated as net investment hedge in the Company's net investment in Europe.
The Company did not have any foreign denominated debt outstanding designated as a net investment hedge at
September 30, 2015
.
The fair values of cash and cash equivalents, accounts receivable, short-term debt and accounts payable approximate their carrying values. The fair value of long-term debt, which was
$9.3 billion
and
$6.7 billion
at September 30, 2016 and 2015, respectively, was determined primarily using market quotes classified as Level 1 inputs within ASC 820 fair value hierarchy.
12. STOCK-BASED COMPENSATION
On September 2, 2016, the shareholders of JCI plc approved the Johnson Controls International plc 2012 Share and Incentive Plan (the "Plan"). The original effective date of this Plan was October 1, 2012. The Plan was amended and restated as of November 17, 2014 and was amended and restated again in connection with the Merger that was consummated on September 2, 2016 (the “Amendment Effective Date”). The amendment and restatement is intended to reflect the assumption into this Plan of the remaining share reserves under the Johnson Controls, Inc. 2012 Omnibus Incentive Plan and the Johnson Controls, Inc. 2003 Stock Plan for Outside Directors (the “Legacy Johnson Controls Plans”) as of the Amendment Effective Date. Following the Amendment Effective Date, no further awards may be made under the Legacy Johnson Controls Plans. The types of awards authorized by the Plan comprise of stock options, stock appreciation rights, performance shares, performance units and other stock-based awards. The Compensation Committee of JCI plc's Board of Directors will determine the types of awards to be granted to individual participants and the terms and conditions of the awards. The Plan provides that
76 million
shares of JCI plc common stock are reserved for issuance under the Plan, and
46 million
shares remained available for issuance at
September 30, 2016
.
Pursuant to the Merger Agreement, outstanding stock options held by JCI Inc. employees on September 2, 2016 (the “Merger Date”) were converted one-for-one into options to acquire the Company's shares in a manner designed to preserve the intrinsic value of such awards. In addition, pursuant to the Merger Agreement, nonvested restricted stock held by JCI Inc. employees on the Merger Date were converted one-for-one into nonvested restricted stock of the Company in a manner designed to preserve the intrinsic value of such awards. Outstanding performance share awards held by JCI Inc. employees on the Merger Date were converted to nonvested restricted stock of the Company based on certain performance factors. Except for the conversion of stock options, nonvested restricted stock and performance share awards discussed herein, the material terms of the awards remained unchanged, and no incremental fair value resulted from the conversion. References to the Company’s stock throughout Note 12 refer to stock of JCI Inc. prior to the Merger Date and to stock of JCI plc subsequent to the Merger Date.
The Company is a participant in
four
share-based compensation plans of JCI plc, which are described below. For the fiscal year ended September 30, 2016, compensation cost charged against income, excluding the offsetting impact of outstanding equity swaps, for those plans was approximately
$138 million
, of which
$123 million
was recorded in selling, general and administrative expenses and
$15 million
was recorded in restructuring and impairment costs in consolidated statement of income. For the fiscal years ended September 30, 2015 and 2014, compensation cost charged against income, excluding the offsetting impact of outstanding equity swaps, for those plans was approximately
$85 million
and
$81 million
, respectively, all of which was recorded in selling, general and administrative expenses. The total income tax benefit recognized in the consolidated statements of income for share-based compensation arrangements was approximately
$52 million
,
$34 million
and
$32 million
for the fiscal years ended
September 30, 2016
,
2015
and
2014
, respectively. The Company applies a non-substantive vesting period approach whereby expense is accelerated for those employees that receive awards and are eligible to retire prior to the award vesting.
Stock Options
Stock options are granted with an exercise price equal to the market price of the Company’s stock at the date of grant. Stock option awards typically vest between
two
and
three
years after the grant date and expire
ten
years from the grant date.
The fair value of each option is estimated on the date of grant using a Black-Scholes option valuation model that uses the assumptions noted in the following table. Expected volatilities are based on the historical volatility of the Company’s stock and other factors. The Company uses historical data to estimate option exercises and employee terminations within the valuation model. The expected term of options represents the period of time that options granted are expected to be outstanding. The risk-free 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.
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Expected life of option (years)
|
6.4
|
|
6.6
|
|
6.7
|
|
Risk-free interest rate
|
1.64% - 1.70%
|
|
1.61% - 1.93%
|
|
1.92%
|
|
Expected volatility of the Company’s stock
|
36.00%
|
|
36.00%
|
|
36.00%
|
|
Expected dividend yield on the Company’s stock
|
2.11%
|
|
2.02%
|
|
2.17%
|
A summary of stock option activity at
September 30, 2016
, and changes for the year then ended, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average
Option Price
|
|
Shares
Subject to
Option
|
|
Weighted
Average
Remaining
Contractual
Life (years)
|
|
Aggregate
Intrinsic
Value
(in millions)
|
|
Outstanding, September 30, 2015
|
$
|
31.17
|
|
|
13,039,240
|
|
|
|
|
|
|
Granted
|
43.83
|
|
|
961,705
|
|
|
|
|
|
|
Exercised
|
27.92
|
|
|
(2,380,398
|
)
|
|
|
|
|
|
Forfeited or expired
|
42.90
|
|
|
(170,390
|
)
|
|
|
|
|
|
Outstanding, September 30, 2016
|
$
|
32.74
|
|
|
11,450,157
|
|
|
4.9
|
|
$
|
162
|
|
|
Exercisable, September 30, 2016
|
$
|
30.06
|
|
|
9,623,505
|
|
|
4.3
|
|
$
|
159
|
|
The weighted-average grant-date fair value of options granted during the fiscal years ended
September 30, 2016
,
2015
and
2014
was
$13.14
,
$15.51
and
$14.70
, respectively.
The total intrinsic value of options exercised during the fiscal years ended
September 30, 2016
,
2015
and
2014
was approximately
$38 million
,
$227 million
and
$135 million
, respectively.
In conjunction with the exercise of stock options granted, the Company received cash payments for the fiscal years ended
September 30, 2016
,
2015
and
2014
of approximately
$67 million
,
$275 million
and
$186 million
, respectively.
The Company has elected to utilize the alternative transition method for calculating the tax effects of stock-based compensation. The alternative transition method includes computational guidance to establish the beginning balance of the additional paid-in capital pool (APIC Pool) related to the tax effects of employee stock-based compensation, and a simplified method to determine the subsequent impact on the APIC Pool for employee stock-based compensation awards that are vested and outstanding upon adoption of ASC 718, "Compensation - Stock Compensation." The tax benefit from the exercise of stock options, which is recorded in capital in excess of par value of JCI plc post-merger and the Company pre-merger, was
$11 million
,
$59 million
and
$34 million
for the fiscal years ended
September 30, 2016
,
2015
and
2014
, respectively. The Company does not settle stock options granted under share-based payment arrangements for cash.
At
September 30, 2016
, the Company had approximately
$3 million
of total unrecognized compensation cost related to nonvested stock options granted. That cost is expected to be recognized over a weighted-average period of
1.5
years.
Stock Appreciation Rights (SARs)
SARs vest under the same terms and conditions as stock option awards; however, they are settled in cash for the difference between the market price on the date of exercise and the exercise price. As a result, SARs are recorded in the Company’s consolidated statements of financial position as a liability until the date of exercise.
The fair value of each SAR award is estimated using a similar method described for stock options. The fair value of each SAR award is recalculated at the end of each reporting period and the liability and expense are adjusted based on the new fair value.
The assumptions used to determine the fair value of the SAR awards at
September 30, 2016
were as follows:
|
|
|
|
|
|
Expected life of SAR (years)
|
0.5 - 4.2
|
|
Risk-free interest rate
|
0.45% - 1.04%
|
|
Expected volatility of the Company’s stock
|
36.00%
|
|
Expected dividend yield on the Company’s stock
|
2.11%
|
A summary of SAR activity at
September 30, 2016
, and changes for the year then ended, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average
SAR Price
|
|
Shares
Subject to
SAR
|
|
Weighted
Average
Remaining
Contractual
Life (years)
|
|
Aggregate
Intrinsic
Value
(in millions)
|
|
Outstanding, September 30, 2015
|
$
|
29.53
|
|
|
1,740,100
|
|
|
|
|
|
|
Granted
|
43.86
|
|
|
54,749
|
|
|
|
|
|
|
Exercised
|
27.41
|
|
|
(494,480
|
)
|
|
|
|
|
|
Forfeited or expired
|
36.33
|
|
|
(99,204
|
)
|
|
|
|
|
|
Outstanding, September 30, 2016
|
$
|
30.49
|
|
|
1,201,165
|
|
|
4.6
|
|
$
|
19
|
|
|
Exercisable, September 30, 2016
|
$
|
29.23
|
|
|
1,114,543
|
|
|
4.3
|
|
$
|
19
|
|
In conjunction with the exercise of SARs granted, the Company made payments of
$8 million
,
$19 million
and
$21 million
during the fiscal years ended
September 30, 2016
,
2015
and
2014
, respectively.
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.
A summary of the status of the Company’s nonvested restricted stock awards at
September 30, 2016
, and changes for the fiscal year then ended, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average
Price
|
|
Shares/Units
Subject to
Restriction
|
|
Nonvested, September 30, 2015
|
$
|
45.75
|
|
|
2,370,155
|
|
|
Granted
|
45.24
|
|
|
3,666,989
|
|
|
Converted performance share awards *
|
49.20
|
|
|
1,108,036
|
|
|
Vested
|
30.78
|
|
|
(413,050
|
)
|
|
Forfeited
|
45.82
|
|
|
(352,949
|
)
|
|
Nonvested, September 30, 2016
|
$
|
47.02
|
|
|
6,379,181
|
|
*As of the Amendment Effective Date, performance share awards were converted to nonvested restricted stock based on certain performance factors.
At
September 30, 2016
, the Company has approximately
$116 million
of total unrecognized compensation cost related to nonvested restricted stock arrangements granted. That cost is expected to be recognized over a weighted-average period of
2.0
years.
Performance Share Awards
The Plan permits the grant of performance-based share unit ("PSU") awards. The number of PSUs granted is equal to the PSU award value divided by the closing price of the Company's common stock at the grant date. 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. Each PSU that is earned will be settled with a share of the Company's common stock 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.
A summary of the status of the Company’s nonvested PSUs at
September 30, 2016
, and changes for the fiscal year then ended, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average
Price
|
|
Shares/Units
Subject to
PSU
|
|
Nonvested, September 30, 2015
|
$
|
42.33
|
|
|
924,388
|
|
|
Vested
|
30.73
|
|
|
(344,318
|
)
|
|
Forfeited
|
49.73
|
|
|
(21,305
|
)
|
|
Nonvested, September 02, 2016
|
$
|
49.20
|
|
|
558,765
|
|
|
Conversion to nonvested restricted stock *
|
49.20
|
|
|
(558,765
|
)
|
|
Nonvested, September 30, 2016
|
$
|
—
|
|
|
—
|
|
* As of the Amendment Effective Date, PSUs were converted to nonvested restricted stock.
13. EQUITY AND NONCONTROLLING INTERESTS
Other comprehensive income includes activity relating to discontinued operations. The following schedules present changes in consolidated equity attributable to Johnson Controls, Inc. and noncontrolling interests (in millions, net of tax):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Attributable to Johnson Controls, Inc.
|
|
Equity Attributable to Noncontrolling Interests
|
|
Total Equity
|
|
At September 30, 2013
|
$
|
12,273
|
|
|
$
|
260
|
|
|
$
|
12,533
|
|
|
Total comprehensive income:
|
|
|
|
|
|
|
Net income
|
1,215
|
|
|
90
|
|
|
1,305
|
|
|
Foreign currency translation adjustments
|
(640
|
)
|
|
(2
|
)
|
|
(642
|
)
|
|
Realized and unrealized losses on derivatives
|
(3
|
)
|
|
—
|
|
|
(3
|
)
|
|
Realized and unrealized losses on marketable common
stock
|
(7
|
)
|
|
—
|
|
|
(7
|
)
|
|
Pension and postretirement plans
|
(5
|
)
|
|
—
|
|
|
(5
|
)
|
|
Other comprehensive loss
|
(655
|
)
|
|
(2
|
)
|
|
(657
|
)
|
|
Comprehensive income
|
560
|
|
|
88
|
|
|
648
|
|
|
Other changes in equity:
|
|
|
|
|
|
|
Cash dividends - common stock ($0.88 per share)
|
(586
|
)
|
|
—
|
|
|
(586
|
)
|
|
Dividends attributable to noncontrolling interests
|
—
|
|
|
(59
|
)
|
|
(59
|
)
|
|
Repurchases of common stock
|
(1,249
|
)
|
|
—
|
|
|
(1,249
|
)
|
|
Change in noncontrolling interest share
|
—
|
|
|
(32
|
)
|
|
(32
|
)
|
|
Other, including options exercised
|
272
|
|
|
(6
|
)
|
|
266
|
|
|
At September 30, 2014
|
11,270
|
|
|
251
|
|
|
11,521
|
|
|
Total comprehensive income:
|
|
|
|
|
|
|
Net income
|
1,563
|
|
|
65
|
|
|
1,628
|
|
|
Foreign currency translation adjustments
|
(799
|
)
|
|
(3
|
)
|
|
(802
|
)
|
|
Realized and unrealized losses on derivatives
|
(11
|
)
|
|
—
|
|
|
(11
|
)
|
|
Pension and postretirement plans
|
(10
|
)
|
|
—
|
|
|
(10
|
)
|
|
Other comprehensive loss
|
(820
|
)
|
|
(3
|
)
|
|
(823
|
)
|
|
Comprehensive income
|
743
|
|
|
62
|
|
|
805
|
|
|
Other changes in equity:
|
|
|
|
|
|
|
Cash dividends - common stock ($1.04 per share)
|
(681
|
)
|
|
—
|
|
|
(681
|
)
|
|
Dividends attributable to noncontrolling interests
|
—
|
|
|
(57
|
)
|
|
(57
|
)
|
|
Repurchases of common stock
|
(1,362
|
)
|
|
—
|
|
|
(1,362
|
)
|
|
Change in noncontrolling interest share
|
—
|
|
|
(93
|
)
|
|
(93
|
)
|
|
Other, including options exercised
|
365
|
|
|
—
|
|
|
365
|
|
|
At September 30, 2015
|
10,335
|
|
|
163
|
|
|
10,498
|
|
|
Total comprehensive income (loss):
|
|
|
|
|
|
|
Net income (loss)
|
(847
|
)
|
|
167
|
|
|
(680
|
)
|
|
Foreign currency translation adjustments
|
(39
|
)
|
|
9
|
|
|
(30
|
)
|
|
Realized and unrealized gains (losses) on derivatives
|
11
|
|
|
(1
|
)
|
|
10
|
|
|
Unrealized losses on marketable common stock
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
|
Pension and postretirement plans
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
|
Other comprehensive income (loss)
|
(30
|
)
|
|
8
|
|
|
(22
|
)
|
|
Comprehensive income (loss)
|
(877
|
)
|
|
175
|
|
|
(702
|
)
|
|
Other changes in equity:
|
|
|
|
|
|
|
Cash dividends - common stock ($1.16 per share)
|
(752
|
)
|
|
—
|
|
|
(752
|
)
|
|
Dividends attributable to noncontrolling interests
|
—
|
|
|
(92
|
)
|
|
(92
|
)
|
|
Repurchases of common stock
|
(501
|
)
|
|
—
|
|
|
(501
|
)
|
|
Result of contribution of Johnson Controls, Inc. to
Johnson Controls International plc
|
(6,500
|
)
|
|
—
|
|
|
(6,500
|
)
|
|
Change in noncontrolling interest share
|
—
|
|
|
692
|
|
|
692
|
|
|
Other, including options exercised
|
157
|
|
|
—
|
|
|
157
|
|
|
At September 30, 2016
|
$
|
1,862
|
|
|
$
|
938
|
|
|
$
|
2,800
|
|
The equity attributable to Johnson Controls, Inc. decreased by $6.5 billion as a result of the Tyco Merger. The decrease is due to the funding of the share exchange.
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
$691 million
.
As a result of the Tyco Merger, the Company is an indirect wholly-owned subsidiary of Johnson Controls International plc and has no equity securities that trade as of September 2, 2016. As such, the Company's
$3.65 billion
share repurchase program terminated on September 2, 2016. Prior to the Merger, the Company repurchased approximately
$501 million
of its common shares during fiscal 2016. During fiscal years
2015
and
2014
, the Company repurchased approximately
$1.4 billion
and
$1.2 billion
of its common shares, respectively.
The Company consolidates certain subsidiaries in which the noncontrolling interest party has within their control the right to require the Company to redeem all or a portion of its interest in the subsidiary. The redeemable noncontrolling interests are reported at their estimated redemption value. Any adjustment to the redemption value impacts retained earnings but does not impact net income. Redeemable noncontrolling interests which are redeemable only upon future events, the occurrence of which is not currently probable, are recorded at carrying value.
The following schedules present changes in the redeemable noncontrolling interests (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2016
|
|
Year Ended September 30, 2015
|
|
Year Ended September 30, 2014
|
|
Beginning balance, September 30
|
$
|
212
|
|
|
$
|
194
|
|
|
$
|
157
|
|
|
Net income
|
48
|
|
|
51
|
|
|
38
|
|
|
Foreign currency translation adjustments
|
2
|
|
|
(23
|
)
|
|
—
|
|
|
Realized and unrealized gains (losses) on
derivatives
|
(1
|
)
|
|
1
|
|
|
—
|
|
|
Dividends
|
(27
|
)
|
|
(11
|
)
|
|
(7
|
)
|
|
Other
|
—
|
|
|
—
|
|
|
6
|
|
|
Ending balance, September 30
|
$
|
234
|
|
|
$
|
212
|
|
|
$
|
194
|
|
The following schedules present changes in AOCI attributable to Johnson Controls, Inc. (in millions, net of tax):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2016
|
|
Year Ended September 30, 2015
|
|
Year Ended September 30, 2014
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
(1,047
|
)
|
|
$
|
(248
|
)
|
|
$
|
392
|
|
|
Aggregate adjustment for the period (net of tax effect of $(43), $(44) and $7) *
|
(39
|
)
|
|
(799
|
)
|
|
(640
|
)
|
|
Balance at end of period
|
(1,086
|
)
|
|
(1,047
|
)
|
|
(248
|
)
|
|
|
|
|
|
|
|
|
Realized and unrealized gains (losses) on derivatives
|
|
|
|
|
|
|
Balance at beginning of period
|
(7
|
)
|
|
4
|
|
|
7
|
|
|
Current period changes in fair value (net of tax effect of $(5), $(7) and $(3))
|
(10
|
)
|
|
(17
|
)
|
|
(3
|
)
|
|
Reclassification to income (net of tax effect of $11, $3 and $0) **
|
21
|
|
|
6
|
|
|
—
|
|
|
Balance at end of period
|
4
|
|
|
(7
|
)
|
|
4
|
|
|
|
|
|
|
|
|
|
Realize and unrealized gains (losses) on marketable common stock
|
|
|
|
|
|
|
Balance at beginning of period
|
—
|
|
|
—
|
|
|
7
|
|
|
Current period changes in fair value (net of tax effect of $0)
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
|
Reclassifications to income (net of tax effect of $0, $0 and $(2)) ***
|
—
|
|
|
—
|
|
|
(6
|
)
|
|
Balance at end of period
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Pension and postretirement plans
|
|
|
|
|
|
|
Balance at beginning of period
|
(3
|
)
|
|
7
|
|
|
12
|
|
|
Reclassification to income (net of tax effect of $0, $(3) and $(3)) ****
|
(1
|
)
|
|
(11
|
)
|
|
(4
|
)
|
|
Other changes (net of tax effect of $0)
|
—
|
|
|
1
|
|
|
(1
|
)
|
|
Balance at end of period
|
(4
|
)
|
|
(3
|
)
|
|
7
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss, end of period
|
$
|
(1,087
|
)
|
|
$
|
(1,057
|
)
|
|
$
|
(237
|
)
|
* During fiscal 2015,
($19) million
of cumulative CTA were recognized as part of the divestiture-related gain recognized within discontinued operations as a result of the divestiture of GWS. During fiscal 2014,
$203 million
of cumulative CTA were recognized as part of the divestiture-related losses recognized within discontinued operations as a result of the divestiture of the Automotive Experience Electronics business.
** Refer to Note 10, "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.
*** During fiscal 2014, the Company sold certain marketable common stock for approximately
$25 million
. As as result, the Company recorded
$8 million
of realized gains within selling, general and administrative expenses in the Automotive Experience Seating segment.
**** Refer to Note 14, "Retirement 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 year ended September 30, 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. For the year ended September 30, 2015 the amounts reclassified from AOCI into income for pension and postretirement plans were primarily recorded in selling, general and administrative expenses and income (loss) from discontinued operations, net of tax on the consolidated statements of income. For the year ended September 30, 2014, the amounts reclassified from AOCI into income for pension and postretirement plans were primarily recorded in cost of sales and income (loss) from discontinued operations, net of tax on the consolidated statements of income.
14. RETIREMENT PLANS
Pension Benefits
The Company has non-contributory defined benefit pension plans covering certain U.S. and non-U.S. employees. The benefits provided are primarily based on years of service and average compensation or a monthly retirement benefit amount. Effective January 1, 2006, certain of the Company’s U.S. pension plans were amended to prohibit new participants from entering the plans. Effective September 30, 2009, active participants continued to accrue benefits under the amended plans until December 31, 2014. Funding for U.S. pension plans equals or exceeds the minimum requirements of the Employee Retirement Income Security Act of 1974. Funding for non-U.S. plans observes the local legal and regulatory limits. Also, the Company makes contributions to union-trusteed pension funds for construction and service personnel.
For pension plans with accumulated benefit obligations (ABO) that exceed plan assets, the projected benefit obligation (PBO), ABO and fair value of plan assets of those plans were
$4,622 million
,
$4,480 million
and
$3,416 million
, respectively, as of
September 30, 2016
and
$3,636 million
,
$3,581 million
and
$2,939 million
, respectively, as of
September 30, 2015
.
In fiscal
2016
, total employer contributions to the defined benefit pension plans were
$136 million
, of which
$34 million
were voluntary contributions made by the Company. The Company expects to contribute approximately
$311 million
in cash to its defined benefit pension plans in fiscal
2017
, including
$247 million
due to change in control provisions triggered by the Tyco Merger. Projected benefit payments from the plans as of
September 30, 2016
are estimated as follows (in millions):
|
|
|
|
|
|
|
|
2017
|
$
|
485
|
|
|
2018
|
233
|
|
|
2019
|
240
|
|
|
2020
|
242
|
|
|
2021
|
246
|
|
|
2022-2026
|
1,348
|
|
Postretirement Benefits
The Company provides certain health care and life insurance benefits for eligible retirees and their dependents primarily in the U.S., Canada and Brazil. Most non-U.S. employees are covered by government sponsored programs, and the cost to the Company is not significant.
Eligibility for coverage is based on meeting certain years of service and retirement age qualifications. These benefits may be subject to deductibles, co-payment provisions and other limitations, and the Company has reserved the right to modify these benefits. Effective January 31, 1994, the Company modified certain salaried plans to place a limit on the Company’s cost of future annual retiree medical benefits at no more than
150%
of the 1993 cost.
The health care cost trend assumption does not have a significant effect on the amounts reported.
In fiscal
2016
, total employer and employee contributions to the postretirement plans were
$7 million
. The Company does not expect to make any significant contributions to its postretirement plans in fiscal year
2017
. Projected benefit payments from the plans as of
September 30, 2016
are estimated as follows (in millions):
|
|
|
|
|
|
|
|
2017
|
$
|
18
|
|
|
2018
|
18
|
|
|
2019
|
18
|
|
|
2020
|
18
|
|
|
2021
|
17
|
|
|
2022-2026
|
76
|
|
In December 2003, the U.S. Congress enacted the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (Act) for employers sponsoring postretirement care plans that provide prescription drug benefits. The Act introduces a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care benefit plans providing a benefit that is at least actuarially equivalent to Medicare Part D.1. Under the Act, the Medicare subsidy amount is received directly by the plan
sponsor and not the related plan. Further, the plan sponsor is not required to use the subsidy amount to fund postretirement benefits and may use the subsidy for any valid business purpose. Projected subsidy receipts are estimated to be approximately
$2 million
per year over the next ten years.
Savings and Investment Plans
The Company sponsors various defined contribution savings plans that allow employees to contribute a portion of their pre-tax and/or after-tax income in accordance with plan specified guidelines. Under specified conditions, the Company will contribute to certain savings plans based on the employees’ eligible pay and/or will match a percentage of the employee contributions up to certain limits. Matching contributions charged to expense amounted to
$124 million
,
$123 million
and
$132 million
for the fiscal years ended
2016
,
2015
and
2014
, respectively.
Multiemployer Benefit Plans
The Company contributes to multiemployer benefit plans based on obligations arising from collective bargaining agreements related to certain of its hourly employees in the U.S. These plans provide retirement benefits to participants based on their service to contributing employers. The benefits are paid from assets held in trust for that purpose. The trustees typically are responsible for determining the level of benefits to be provided to participants as well as for such matters as the investment of the assets and the administration of the plans.
The risks of participating in these multiemployer benefit plans are different from single-employer benefit plans in the following aspects:
|
|
|
|
•
|
Assets contributed to the multiemployer benefit plan by one employer may be used to provide benefits to employees of other participating employers.
|
|
|
|
|
•
|
If a participating employer stops contributing to the multiemployer benefit plan, the unfunded obligations of the plan may be borne by the remaining participating employers.
|
|
|
|
|
•
|
If the Company stops participating in some of its multiemployer benefit plans, the Company may be required to pay those plans an amount based on its allocable share of the underfunded status of the plan, referred to as a withdrawal liability.
|
The Company participates in approximately
275
multiemployer benefit plans, primarily related to its Building Efficiency business in the U.S., none of which are individually significant to the Company. The number of employees covered by the Company’s multiemployer benefit plans has remained consistent over the past three years, and there have been no significant changes that affect the comparability of fiscal
2016
,
2015
and
2014
contributions. The Company recognizes expense for the contractually-required contribution for each period. The Company contributed
$45 million
,
$45 million
and
$44 million
to multiemployer benefit plans in fiscal
2016
,
2015
and
2014
, respectively.
Based on the most recent information available, the Company believes that the present value of actuarial accrued liabilities in certain of these multiemployer benefit plans may exceed the value of the assets held in trust to pay benefits. Currently, the Company is not aware of any significant multiemployer benefits plans for which it is probable or reasonably possible that the Company will be obligated to make up any shortfall in funds. Moreover, if the Company were to exit certain markets or otherwise cease making contributions to these funds, the Company could trigger a withdrawal liability. Currently, the Company is not aware of any significant multiemployer benefit plans for which it is probable or reasonably possible that the Company will withdraw from the plan. Any accrual for a shortfall or withdrawal liability will be recorded when it is probable that a liability exists and it can be reasonably estimated.
Plan Assets
The Company’s investment policies employ an approach whereby a mix of equities, fixed income and alternative investments are used to maximize the long-term return of plan assets for a prudent level of risk. The investment portfolio primarily contains a diversified blend of equity and fixed income investments. Equity investments are diversified across U.S. and non-U.S. stocks, as well as growth, value and small to large capitalizations. Fixed income investments include corporate and government issues, with short-, mid- and long-term maturities, with a focus on investment grade when purchased and a target duration close to that of the plan liability. Investment and market risks are measured and monitored on an ongoing basis through regular investment portfolio reviews, annual liability measurements and periodic asset/liability studies. The majority of the real estate component of the portfolio is invested in a diversified portfolio of high-quality, operating properties with cash yields greater than the targeted appreciation. Investments in other alternative asset classes, including hedge funds and commodities, diversify the expected investment returns
relative to the equity and fixed income investments. As a result of our diversification strategies, there are no significant concentrations of risk within the portfolio of investments.
The Company’s actual asset allocations are in line with target allocations. The Company rebalances asset allocations as appropriate, in order to stay within a range of allocation for each asset category.
The expected return on plan assets is based on the Company’s expectation of the long-term average rate of return of the capital markets in which the plans invest. The average market returns are adjusted, where appropriate, for active asset management returns. The expected return reflects the investment policy target asset mix and considers the historical returns earned for each asset category.
The Company’s plan assets at
September 30, 2016
and
2015
, by asset category, are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using:
|
|
Asset Category
|
Total as of
September 30, 2016
|
|
Quoted Prices
in Active
Markets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
$
|
28
|
|
|
$
|
28
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities
|
|
|
|
|
|
|
|
|
Large-Cap
|
445
|
|
|
445
|
|
|
—
|
|
|
—
|
|
|
Small-Cap
|
241
|
|
|
241
|
|
|
—
|
|
|
—
|
|
|
International - Developed
|
517
|
|
|
517
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Income Securities
|
|
|
|
|
|
|
|
|
Government
|
271
|
|
|
249
|
|
|
22
|
|
|
—
|
|
|
Corporate/Other
|
745
|
|
|
633
|
|
|
112
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
346
|
|
|
—
|
|
|
—
|
|
|
346
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
2,593
|
|
|
$
|
2,113
|
|
|
$
|
134
|
|
|
$
|
346
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S. Pension
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
$
|
70
|
|
|
$
|
70
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities
|
|
|
|
|
|
|
|
|
Large-Cap
|
83
|
|
|
83
|
|
|
—
|
|
|
—
|
|
|
International - Developed
|
119
|
|
|
119
|
|
|
—
|
|
|
—
|
|
|
International - Emerging
|
19
|
|
|
19
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Income Securities
|
|
|
|
|
|
|
|
|
Government
|
543
|
|
|
412
|
|
|
131
|
|
|
—
|
|
|
Corporate/Other
|
341
|
|
|
314
|
|
|
27
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Hedge Fund
|
169
|
|
|
—
|
|
|
169
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
63
|
|
|
11
|
|
|
—
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
1,407
|
|
|
$
|
1,028
|
|
|
$
|
327
|
|
|
$
|
52
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
$
|
7
|
|
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities
|
|
|
|
|
|
|
|
|
Large-Cap
|
31
|
|
|
31
|
|
|
—
|
|
|
—
|
|
|
Small-Cap
|
10
|
|
|
10
|
|
|
—
|
|
|
—
|
|
|
International - Developed
|
23
|
|
|
23
|
|
|
—
|
|
|
—
|
|
|
International - Emerging
|
12
|
|
|
12
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Income Securities
|
|
|
|
|
|
|
|
|
Government
|
23
|
|
|
23
|
|
|
—
|
|
|
—
|
|
|
Corporate/Other
|
65
|
|
|
65
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Commodities
|
12
|
|
|
12
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
13
|
|
|
13
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
196
|
|
|
$
|
196
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using:
|
|
Asset Category
|
Total as of
September 30, 2015
|
|
Quoted Prices
in Active
Markets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
$
|
75
|
|
|
$
|
75
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities
|
|
|
|
|
|
|
|
|
Large-Cap
|
500
|
|
|
500
|
|
|
—
|
|
|
—
|
|
|
Small-Cap
|
235
|
|
|
235
|
|
|
—
|
|
|
—
|
|
|
International - Developed
|
472
|
|
|
472
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Income Securities
|
|
|
|
|
|
|
|
|
Government
|
248
|
|
|
217
|
|
|
31
|
|
|
—
|
|
|
Corporate/Other
|
753
|
|
|
615
|
|
|
138
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
323
|
|
|
—
|
|
|
—
|
|
|
323
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
2,606
|
|
|
$
|
2,114
|
|
|
$
|
169
|
|
|
$
|
323
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S. Pension
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
$
|
98
|
|
|
$
|
98
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities
|
|
|
|
|
|
|
|
|
Large-Cap
|
68
|
|
|
68
|
|
|
—
|
|
|
—
|
|
|
International - Developed
|
104
|
|
|
104
|
|
|
—
|
|
|
—
|
|
|
International - Emerging
|
16
|
|
|
16
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Income Securities
|
|
|
|
|
|
|
|
|
Government
|
441
|
|
|
319
|
|
|
122
|
|
|
—
|
|
|
Corporate/Other
|
220
|
|
|
192
|
|
|
28
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Hedge Fund
|
172
|
|
|
—
|
|
|
172
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
58
|
|
|
7
|
|
|
—
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
1,177
|
|
|
$
|
804
|
|
|
$
|
322
|
|
|
$
|
51
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
$
|
10
|
|
|
$
|
10
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities
|
|
|
|
|
|
|
|
|
Large-Cap
|
30
|
|
|
30
|
|
|
—
|
|
|
—
|
|
|
Small-Cap
|
10
|
|
|
10
|
|
|
—
|
|
|
—
|
|
|
International - Developed
|
22
|
|
|
22
|
|
|
—
|
|
|
—
|
|
|
International - Emerging
|
10
|
|
|
10
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Income Securities
|
|
|
|
|
|
|
|
|
Government
|
22
|
|
|
22
|
|
|
—
|
|
|
—
|
|
|
Corporate/Other
|
67
|
|
|
67
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Commodities
|
12
|
|
|
12
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
11
|
|
|
11
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
194
|
|
|
$
|
194
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The following is a description of the valuation methodologies used for assets measured at fair value.
Cash:
The fair value of cash is valued at cost.
Equity Securities:
The fair value of equity securities is determined by direct quoted market prices. The underlying holdings are direct quoted market prices on regulated financial exchanges.
Fixed Income Securities:
The fair value of fixed income securities is determined by direct or indirect quoted market prices. If indirect quoted market prices are utilized, the value of assets held in separate accounts is not published, but the investment managers report daily the underlying holdings. The underlying holdings are direct quoted market prices on regulated financial exchanges.
Commodities:
The fair value of the commodities is determined by quoted market prices of the underlying holdings on regulated financial exchanges.
Hedge Funds:
The fair value of hedge funds is accounted for by the custodian. The custodian obtains valuations from underlying managers based on market quotes for the most liquid assets and alternative methods for assets that do not have sufficient trading activity to derive prices. The Company and custodian review the methods used by the underlying managers to value the assets. The Company believes this is an appropriate methodology to obtain the fair value of these assets.
Real Estate:
The fair value of Real Estate Investment Trusts (REITs) is recorded as Level 1 as these securities are traded on an open exchange. The fair value of other investments in real estate is deemed Level 3 since these investments do not have a readily determinable fair value and requires the fund managers independently to arrive at fair value by calculating net asset value (NAV) per share. In order to calculate NAV per share, the fund managers value the real estate investments using any one, or a combination of, the following methods: independent third party appraisals, discounted cash flow analysis of net cash flows projected to be generated by the investment and recent sales of comparable investments. Assumptions used to revalue the properties are updated every quarter. Due to the fact that the fund managers calculate NAV per share, the Company utilizes a practical expedient for measuring the fair value of its Level 3 real-estate investments, as provided for under ASC 820, "Fair Value Measurement." In applying the practical expedient, the Company is not required to further adjust the NAV provided by the fund manager in order to determine the fair value of its investment as the NAV per share is calculated in a manner consistent with the measurement principles of ASC 946, "Financial Services - Investment Companies," and as of the Company's measurement date. The Company believes this is an appropriate methodology to obtain the fair value of these assets. For the component of the real estate portfolio under development, the investments are carried at cost until they are completed and valued by a third party appraiser.
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
The following sets forth a summary of changes in the fair value of assets measured using significant unobservable inputs (Level 3) (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Hedge Funds
|
|
Real Estate
|
|
U.S. Pension
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset value as of September 30, 2014
|
$
|
335
|
|
|
$
|
4
|
|
|
$
|
331
|
|
|
|
|
|
|
|
|
|
Additions net of redemptions
|
(59
|
)
|
|
(3
|
)
|
|
(56
|
)
|
|
Realized gain (loss)
|
28
|
|
|
(1
|
)
|
|
29
|
|
|
Unrealized gain
|
19
|
|
|
—
|
|
|
19
|
|
|
|
|
|
|
|
|
|
Asset value as of September 30, 2015
|
$
|
323
|
|
|
$
|
—
|
|
|
$
|
323
|
|
|
|
|
|
|
|
|
|
Additions net of redemptions
|
(6
|
)
|
|
—
|
|
|
(6
|
)
|
|
Realized gain
|
13
|
|
|
—
|
|
|
13
|
|
|
Unrealized gain
|
16
|
|
|
—
|
|
|
16
|
|
|
|
|
|
|
|
|
|
Asset value as of September 30, 2016
|
$
|
346
|
|
|
$
|
—
|
|
|
$
|
346
|
|
|
|
|
|
|
|
|
|
Non-U.S. Pension
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset value as of September 30, 2014
|
$
|
20
|
|
|
$
|
—
|
|
|
$
|
20
|
|
|
|
|
|
|
|
|
|
Additions net of redemptions
|
34
|
|
|
—
|
|
|
34
|
|
|
Unrealized loss
|
(3
|
)
|
|
—
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
Asset value as of September 30, 2015
|
$
|
51
|
|
|
$
|
—
|
|
|
$
|
51
|
|
|
|
|
|
|
|
|
|
Unrealized gain
|
1
|
|
|
—
|
|
|
1
|
|
|
|
|
|
|
|
|
|
Asset value as of September 30, 2016
|
$
|
52
|
|
|
$
|
—
|
|
|
$
|
52
|
|
Funded Status
The table that follows contains the ABO and reconciliations of the changes in the PBO, the changes in plan assets and the funded status (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Postretirement
Benefits
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
|
September 30,
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Benefit Obligation
|
$
|
3,158
|
|
|
$
|
2,985
|
|
|
$
|
1,821
|
|
|
$
|
1,388
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Projected Benefit Obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year
|
3,022
|
|
|
2,875
|
|
|
1,447
|
|
|
1,572
|
|
|
211
|
|
|
224
|
|
|
Service cost
|
16
|
|
|
31
|
|
|
29
|
|
|
25
|
|
|
2
|
|
|
3
|
|
|
Interest cost
|
101
|
|
|
122
|
|
|
42
|
|
|
46
|
|
|
6
|
|
|
9
|
|
|
Plan participant contributions
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
6
|
|
|
6
|
|
|
Acquisitions
|
—
|
|
|
—
|
|
|
279
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
Divestitures
|
—
|
|
|
—
|
|
|
—
|
|
|
(18
|
)
|
|
—
|
|
|
—
|
|
|
Actuarial loss
|
369
|
|
|
203
|
|
|
329
|
|
|
7
|
|
|
6
|
|
|
—
|
|
|
Benefits and settlements paid
|
(299
|
)
|
|
(209
|
)
|
|
(111
|
)
|
|
(65
|
)
|
|
(22
|
)
|
|
(24
|
)
|
|
Estimated subsidy received
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
Curtailment
|
—
|
|
|
—
|
|
|
—
|
|
|
(5
|
)
|
|
—
|
|
|
—
|
|
|
Other
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
43
|
|
|
—
|
|
|
(4
|
)
|
|
Currency translation adjustment
|
—
|
|
|
—
|
|
|
(58
|
)
|
|
(159
|
)
|
|
—
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at end of year
|
$
|
3,209
|
|
|
$
|
3,022
|
|
|
$
|
1,957
|
|
|
$
|
1,447
|
|
|
$
|
212
|
|
|
$
|
211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
$
|
2,606
|
|
|
$
|
2,504
|
|
|
$
|
1,177
|
|
|
$
|
1,201
|
|
|
$
|
194
|
|
|
$
|
219
|
|
|
Actual return on plan assets
|
270
|
|
|
(4
|
)
|
|
102
|
|
|
48
|
|
|
17
|
|
|
(9
|
)
|
|
Acquisitions
|
—
|
|
|
—
|
|
|
180
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Divestitures
|
—
|
|
|
—
|
|
|
—
|
|
|
(10
|
)
|
|
—
|
|
|
—
|
|
|
Employer and employee contributions
|
16
|
|
|
315
|
|
|
121
|
|
|
81
|
|
|
7
|
|
|
8
|
|
|
Benefits paid
|
(122
|
)
|
|
(201
|
)
|
|
(54
|
)
|
|
(55
|
)
|
|
(22
|
)
|
|
(24
|
)
|
|
Settlement payments
|
(177
|
)
|
|
(8
|
)
|
|
(57
|
)
|
|
(10
|
)
|
|
—
|
|
|
—
|
|
|
Other
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
39
|
|
|
—
|
|
|
—
|
|
|
Currency translation adjustment
|
—
|
|
|
—
|
|
|
(61
|
)
|
|
(117
|
)
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
$
|
2,593
|
|
|
$
|
2,606
|
|
|
$
|
1,407
|
|
|
$
|
1,177
|
|
|
$
|
196
|
|
|
$
|
194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
$
|
(616
|
)
|
|
$
|
(416
|
)
|
|
$
|
(550
|
)
|
|
$
|
(270
|
)
|
|
$
|
(16
|
)
|
|
$
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the statement of financial position consist of:
|
|
Prepaid benefit cost
|
$
|
22
|
|
|
$
|
17
|
|
|
$
|
31
|
|
|
$
|
30
|
|
|
$
|
53
|
|
|
$
|
37
|
|
|
Accrued benefit liability
|
(638
|
)
|
|
(433
|
)
|
|
(581
|
)
|
|
(300
|
)
|
|
(69
|
)
|
|
(54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
$
|
(616
|
)
|
|
$
|
(416
|
)
|
|
$
|
(550
|
)
|
|
$
|
(270
|
)
|
|
$
|
(16
|
)
|
|
$
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Assumptions (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate (2)
|
3.70
|
%
|
|
4.40
|
%
|
|
1.80
|
%
|
|
3.15
|
%
|
|
3.35
|
%
|
|
3.75
|
%
|
|
Rate of compensation increase
|
3.20
|
%
|
|
3.25
|
%
|
|
2.75
|
%
|
|
3.00
|
%
|
|
NA
|
|
|
NA
|
|
|
|
|
|
(1)
|
Plan assets and obligations are determined based on a September 30 measurement date at
September 30, 2016
and
2015
.
|
|
|
|
|
(2)
|
The Company considers the expected benefit payments on a plan-by-plan basis when setting assumed discount rates. As a result, the Company uses different discount rates for each plan depending on the plan jurisdiction, the demographics of participants and the expected timing of benefit payments. For the U.S. pension and postretirement plans, the Company uses a discount rate provided by an independent third party calculated based on an appropriate mix of high quality bonds.
|
For the non-U.S. pension and postretirement plans, the Company consistently uses the relevant country specific benchmark indices for determining the various discount rates.
At September 30, 2015, the Company changed the method used to estimate the service and interest components of net periodic benefit cost for pension and other postretirement benefits for plans that utilize a yield curve approach. This change compared to the previous method results in different service and interest components of net periodic benefit cost (credit). Historically, the Company estimated these service and interest cost components utilizing a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. The Company elected to utilize a full yield curve approach in the estimation of these components by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. The Company made this change to provide a more precise measurement of service and interest costs by improving the correlation between projected benefit cash flows to the corresponding spot yield curve rates. This change does not affect the measurement of the total benefit obligations or annual net periodic benefit cost (credit) as the change in the service and interest costs is completely offset in the net actuarial (gain) loss reported. The change in the service and interest costs was not significant. The Company accounted for this change as a change in accounting estimate.
Accumulated Other Comprehensive Income
The amounts in AOCI on the consolidated statements of financial position, exclusive of tax impacts, that have not yet been recognized as components of net periodic benefit cost at
September 30, 2016
are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
Postretirement
Benefits
|
|
Accumulated other comprehensive loss
|
|
|
|
|
Net transition asset
|
$
|
1
|
|
|
$
|
—
|
|
|
Net prior service cost
|
4
|
|
|
—
|
|
|
Total
|
$
|
5
|
|
|
$
|
—
|
|
The amounts in AOCI expected to be recognized as components of net periodic benefit cost over the next fiscal year are shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
Postretirement
Benefits
|
|
Amortization of:
|
|
|
|
|
Net transition obligation
|
$
|
—
|
|
|
$
|
—
|
|
|
Net prior service cost
|
1
|
|
|
—
|
|
|
Total
|
$
|
1
|
|
|
$
|
—
|
|
Net Periodic Benefit Cost
The table that follows contains the components of net periodic benefit cost (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Postretirement Benefits
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
|
Year ended September 30,
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
|
Components of Net Periodic Benefit Cost (Credit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
16
|
|
|
$
|
31
|
|
|
$
|
70
|
|
|
$
|
29
|
|
|
$
|
32
|
|
|
$
|
38
|
|
|
$
|
2
|
|
|
$
|
3
|
|
|
$
|
5
|
|
|
Interest cost
|
101
|
|
|
122
|
|
|
138
|
|
|
42
|
|
|
57
|
|
|
71
|
|
|
6
|
|
|
9
|
|
|
12
|
|
|
Expected return on plan assets
|
(187
|
)
|
|
(181
|
)
|
|
(207
|
)
|
|
(56
|
)
|
|
(71
|
)
|
|
(75
|
)
|
|
(10
|
)
|
|
(12
|
)
|
|
(12
|
)
|
|
Net actuarial (gain) loss
|
275
|
|
|
387
|
|
|
126
|
|
|
277
|
|
|
14
|
|
|
172
|
|
|
(1
|
)
|
|
21
|
|
|
(24
|
)
|
|
Amortization of prior service cost (credit)
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
(1
|
)
|
|
(1
|
)
|
|
(1
|
)
|
|
(1
|
)
|
|
(7
|
)
|
|
Curtailment gain
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(15
|
)
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Settlement loss
|
11
|
|
|
1
|
|
|
15
|
|
|
6
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net periodic benefit cost (credit)
|
216
|
|
|
360
|
|
|
143
|
|
|
299
|
|
|
16
|
|
|
204
|
|
|
(4
|
)
|
|
20
|
|
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit (cost) credit related to discontinued operations
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
14
|
|
|
(38
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost (credit) included in continuing operations
|
$
|
216
|
|
|
$
|
360
|
|
|
$
|
143
|
|
|
$
|
299
|
|
|
$
|
30
|
|
|
$
|
166
|
|
|
$
|
(4
|
)
|
|
$
|
20
|
|
|
$
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense Assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
4.40
|
%
|
|
4.35
|
%
|
|
4.90
|
%
|
|
3.15
|
%
|
|
3.00
|
%
|
|
3.60
|
%
|
|
3.75
|
%
|
|
4.35
|
%
|
|
4.90
|
%
|
|
Expected return on plan assets
|
7.50
|
%
|
|
7.50
|
%
|
|
8.00
|
%
|
|
4.45
|
%
|
|
4.50
|
%
|
|
4.75
|
%
|
|
5.45
|
%
|
|
5.75
|
%
|
|
5.80
|
%
|
|
Rate of compensation increase
|
3.25
|
%
|
|
3.25
|
%
|
|
3.30
|
%
|
|
3.30
|
%
|
|
2.60
|
%
|
|
2.60
|
%
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
15. 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 2016, the Company committed to a significant restructuring plan (2016 Plan) and recorded
$535 million
of restructuring and impairment costs in the consolidated statements of income, of which
$229 million
was recorded in the second quarter,
$102 million
was recorded in the third quarter and
$204 million
was recorded in the fourth quarter of fiscal 2016. 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 Automotive Experience, Building Efficiency and Power Solutions businesses and at Corporate. The costs consist primarily of workforce reductions, plant closures, asset impairments, change-in-control payments and immaterial changes in estimates to prior year plans. Of the restructuring and impairment costs recorded,
$284 million
related to the Automotive Experience Seating segment,
$115 million
related to Corporate,
$66 million
related to the Power Solutions segment,
$26 million
related to the Building Efficiency Asia segment,
$17 million
related to the Automotive Experience Interiors segment,
$16 million
related to the Building Efficiency Rest of World segment,
$9 million
related to the Building Efficiency Products North America 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 2017.
The following table summarizes the changes in the Company’s 2016 Plan reserve, included within other current liabilities in the consolidated statements of financial position (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Severance and Termination Benefits
|
|
Long-Lived Asset Impairments
|
|
Other
|
|
Currency
Translation
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Original Reserve
|
$
|
308
|
|
|
$
|
190
|
|
|
$
|
37
|
|
|
$
|
—
|
|
|
$
|
535
|
|
|
Utilized—cash
|
(29
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(29
|
)
|
|
Utilized—noncash
|
—
|
|
|
(190
|
)
|
|
(8
|
)
|
|
1
|
|
|
(197
|
)
|
|
Balance at September 30, 2016
|
$
|
279
|
|
|
$
|
—
|
|
|
$
|
29
|
|
|
$
|
1
|
|
|
$
|
309
|
|
In fiscal 2015, the Company committed to a significant restructuring plan (2015 Plan) and recorded
$397 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 Automotive Experience, Building Efficiency and Power Solutions businesses and at Corporate. The costs consist primarily of workforce reductions, plant closures and asset impairments. Of the restructuring and impairment costs recorded,
$182 million
related to the Automotive Experience Seating segment,
$166 million
related to Corporate,
$13 million
related to the Building Efficiency Rest of World segment,
$11 million
related to the Power Solutions segment,
$11 million
related to the Building Efficiency Asia segment,
$11 million
related to the Building Efficiency Products North America segment, and
$3 million
related to the Building Efficiency Systems and Service North America segment. The restructuring actions are expected to be substantially complete in 2016.
The following table summarizes the changes in the Company’s 2015 Plan reserve, included within other current liabilities in the consolidated statements of financial position (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Severance and Termination Benefits
|
|
Long-Lived Asset Impairments
|
|
Other
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Original Reserve
|
$
|
191
|
|
|
$
|
183
|
|
|
$
|
23
|
|
|
$
|
397
|
|
|
Utilized—noncash
|
—
|
|
|
(183
|
)
|
|
—
|
|
|
(183
|
)
|
|
Balance at September 30, 2015
|
$
|
191
|
|
|
$
|
—
|
|
|
$
|
23
|
|
|
$
|
214
|
|
|
Utilized—cash
|
(74
|
)
|
|
—
|
|
|
(23
|
)
|
|
(97
|
)
|
|
Balance at September 30, 2016
|
$
|
117
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
117
|
|
In fiscal 2014, the Company committed to a significant restructuring plan (2014 Plan) and recorded
$324 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 primarily to cost reduction initiatives in the Company’s Automotive Experience, Building Efficiency and Power Solutions businesses and included workforce reductions, plant closures, and asset and goodwill impairments. Of the restructuring and impairment costs recorded,
$130 million
related to the Automotive Experience Interiors segment,
$119 million
related to the Building Efficiency Rest of World segment,
$29 million
related to the Automotive Experience Seating segment,
$16 million
related to the Power Solutions segment,
$12 million
related to the Building Efficiency Systems and Service North America segment,
$7 million
related to the Building Efficiency Products North America segment,
$7 million
related to Corporate and
$4 million
related to the Building Efficiency Asia segment. The restructuring actions are expected to be substantially complete in 2016.
Additionally, the Company recorded
$53 million
of restructuring and impairment costs within discontinued operations related to the Automotive Experience Electronics business in fiscal 2014.
The following table summarizes the changes in the Company’s 2014 Plan reserve, included within other current liabilities in the consolidated statements of financial position (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Severance and Termination Benefits
|
|
Long-Lived Asset Impairments
|
|
Goodwill Impairment
|
|
Other
|
|
Currency
Translation
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original Reserve
|
$
|
191
|
|
|
$
|
134
|
|
|
$
|
47
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
377
|
|
|
Utilized—cash
|
(8
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(8
|
)
|
|
Utilized—noncash
|
—
|
|
|
(134
|
)
|
|
(47
|
)
|
|
—
|
|
|
(6
|
)
|
|
(187
|
)
|
|
Balance at September 30, 2014
|
$
|
183
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5
|
|
|
$
|
(6
|
)
|
|
$
|
182
|
|
|
Utilized—cash
|
(65
|
)
|
|
—
|
|
|
—
|
|
|
(5
|
)
|
|
—
|
|
|
(70
|
)
|
|
Utilized—noncash
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(13
|
)
|
|
(13
|
)
|
|
Balance at September 30, 2015
|
$
|
118
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(19
|
)
|
|
$
|
99
|
|
|
Utilized—cash
|
(74
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(74
|
)
|
|
Utilized—noncash
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
(2
|
)
|
|
Balance at September 30, 2016
|
$
|
44
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(21
|
)
|
|
$
|
23
|
|
In fiscal 2013, the Company committed to a significant restructuring plan (2013 Plan) and recorded
$903 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 Automotive Experience, Building Efficiency and Power Solutions businesses and included workforce reductions, plant closures, and asset and goodwill impairments. Of the restructuring and impairment costs recorded,
$560 million
related to the Automotive Experience Interiors segment,
$152 million
related to the Automotive Experience Seating segment,
$70 million
related to the Building Efficiency Rest of World segment,
$36 million
related to the Power Solutions segment,
$35 million
related to the Building Efficiency Systems and Service North America segment,
$28 million
related to the Building Efficiency Products North America segment,
$17 million
related to Corporate and
$5 million
related to the Building Efficiency Asia segment. The restructuring actions are expected to be substantially complete in 2016.
Additionally, the Company recorded
$82 million
of restructuring costs within discontinued operations, of which
$54 million
related to the GWS business and
$28 million
related to the Automotive Experience Electronics business in fiscal 2013.
The following table summarizes the changes in the Company’s 2013 Plan reserve, included within other current liabilities in the consolidated statements of financial position (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Severance and Termination Benefits
|
|
Long-Lived Asset Impairments
|
|
Goodwill Impairment
|
|
Other
|
|
Currency
Translation
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original Reserve
|
$
|
392
|
|
|
$
|
156
|
|
|
$
|
430
|
|
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
985
|
|
|
Utilized—cash
|
(26
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(26
|
)
|
|
Utilized—noncash
|
—
|
|
|
(156
|
)
|
|
(430
|
)
|
|
(4
|
)
|
|
4
|
|
|
(586
|
)
|
|
Transfer to liabilities held for sale
|
(31
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(31
|
)
|
|
Balance at September 30, 2013
|
$
|
335
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
4
|
|
|
$
|
342
|
|
|
Utilized—cash
|
(144
|
)
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
|
—
|
|
|
(147
|
)
|
|
Utilized—noncash
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(11
|
)
|
|
(11
|
)
|
|
Transfer from liabilities held for sale
|
31
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
31
|
|
|
Transfer to liabilities held for sale
|
(24
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(24
|
)
|
|
Balance at September 30, 2014
|
$
|
198
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(7
|
)
|
|
$
|
191
|
|
|
Utilized—cash
|
(113
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(113
|
)
|
|
Utilized—noncash
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(10
|
)
|
|
(10
|
)
|
|
Balance at September 30, 2015
|
$
|
85
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(17
|
)
|
|
$
|
68
|
|
|
Utilized—cash
|
(43
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(43
|
)
|
|
Utilized—noncash
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
|
Balance at September 30, 2016
|
$
|
42
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(18
|
)
|
|
$
|
24
|
|
The
$31 million
of transfers from liabilities held for sale represent restructuring reserves that were included in liabilities held for sale in the consolidated statements of financial position at September 30, 2013, but were excluded from liabilities held for sale at September 30, 2014 based on transaction negotiations. See Note 3, "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 fiscal 2016, 2015, 2014 and 2013 restructuring plans included workforce reductions of approximately
18,400
employees (
11,200
for the Automotive Experience business,
6,200
for the Building Efficiency business,
900
for the Power Solutions business and
100
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
September 30, 2016
, approximately
11,800
of the employees have been separated from the Company pursuant to the restructuring plans. In addition, the restructuring plans included
twenty-nine
plant closures (
twenty-two
for Automotive Experience and
seven
for Building Efficiency). As of
September 30, 2016
,
twelve
of the
twenty-nine
plants have been closed.
Refer to Note 16, "Impairment of Long-Lived Assets," of the notes to consolidated financial statements for further information regarding the long-lived asset impairment charges recorded as part of the restructuring actions.
Refer to Note 6, "Goodwill and Other Intangible Assets," of the notes to consolidated financial statements for further information regarding the goodwill impairment charges recorded.
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 low cost countries 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. Because of the importance of new vehicle sales by major automotive manufacturers to operations, the Company is affected by the general business conditions in this industry. Future adverse developments in the automotive industry could impact the Company’s liquidity position, lead to impairment charges and/or require additional restructuring of its operations.
16. IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets, including property, plant and equipment and other intangible assets with definite lives, for impairment whenever events or changes in circumstances indicate that the asset’s carrying amount may not be recoverable.
The Company conducts its long-lived asset impairment analyses in accordance with ASC 360-10-15, "Impairment or Disposal of Long-Lived Assets." ASC 360-10-15 requires the Company to group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows. If the undiscounted cash flows do not indicate the carrying amount of the asset is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals.
In the second, third and fourth quarters of fiscal 2016, 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 2016. As a result, the Company reviewed the long-lived assets for impairment and recorded
$190 million
of asset impairment charges within restructuring and impairment costs on the consolidated statements of income, of which
$29 million
was recorded in the second quarter,
$51 million
was recorded in the third quarter and
$110 million
was recorded in the fourth quarter. Of the total impairment charges,
$64 million
related to the Power Solutions segment,
$55 million
related to Corporate assets,
$55 million
related to the Automotive Experience Seating segment,
$8 million
related to the Building Efficiency Products North America segment,
$4 million
related to the Building Efficiency Asia segment,
$3 million
related to the Building Efficiency Rest of World segment and
$1 million
related to the Automotive Experience Interiors segment. Refer to Note 15, "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 fourth quarter of fiscal 2015, the Company concluded it had triggering events requiring assessment of impairment for certain of its long-lived assets in conjunction with its announced restructuring actions and the intention to spin-off the Automotive Experience business. As a result, the Company reviewed the long-lived assets for impairment and recorded a
$183 million
impairment charge within restructuring and impairment costs on the consolidated statements of income. Of the total impairment charge,
$139 million
related to Corporate assets,
$27 million
related to the Automotive Experience Seating segment,
$16 million
related to the Building Efficiency Rest of World segment and
$1 million
related to the Building Efficiency Systems and Service North America segment. Refer to Note 15, "Significant Restructuring and Impairment Costs," of the notes to consolidated financial statements for additional information. The impairment was measured, depending on the asset, either under an income approach utilizing forecasted discounted cash flows or a market approach utilizing an appraisal to determine fair values of the 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 third and fourth quarters of fiscal 2014, 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 2014. In addition, in the fourth quarter of fiscal 2014, the Company concluded that it had a triggering event requiring assessment of impairment of long-lived assets held by the Building Efficiency Rest of World - Latin America reporting unit due to the impairment of goodwill in the quarter. As a result, the Company reviewed the long-lived assets for impairment and recorded a
$91 million
impairment charge within restructuring and impairment costs on the consolidated statements of income, of which
$45 million
was recorded in the third quarter and
$46 million
in the fourth quarter of fiscal 2014. Of the total impairment charge,
$45 million
related to the Automotive Experience Interiors segment,
$34 million
related to the Building Efficiency Rest of World segment,
$7 million
related to the Automotive Experience Seating segment and
$5 million
related to Corporate assets. In addition, the Company recorded
$43 million
of asset and investment impairments within discontinued operations in the third quarter of fiscal 2014 related to the divestiture of the Automotive Experience Electronics business. Refer to Note 3, "Discontinued Operations," and Note 15, "Significant Restructuring and Impairment Costs," of the notes to consolidated financial statements for additional information. The impairment was measured, depending on the asset, either under an income approach utilizing forecasted discounted cash flows or a market approach utilizing an appraisal to determine fair values of the 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
September 30, 2016
,
2015
and
2014
, the Company concluded it did not have any other triggering events requiring assessment of impairment of its long-lived assets. Refer to Note 1, "Summary of Significant Accounting Policies," of the notes to consolidated financial statements for discussion of the Company’s goodwill impairment testing. Refer to Note 6, "Goodwill and Other Intangible Assets," of the notes to consolidated financial statements for further information regarding the goodwill impairment charges recorded in the fourth quarter of fiscal
2014
.
17. INCOME TAXES
The more significant components of the Company’s income tax provision from continuing operations are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Tax expense at federal statutory rate
|
$
|
570
|
|
|
$
|
753
|
|
|
$
|
671
|
|
|
State income taxes, net of federal benefit
|
3
|
|
|
(23
|
)
|
|
7
|
|
|
Foreign income tax expense at different rates and foreign losses without tax benefits
|
(165
|
)
|
|
(198
|
)
|
|
(196
|
)
|
|
U.S. tax on foreign income
|
(354
|
)
|
|
(203
|
)
|
|
(222
|
)
|
|
Reserve and valuation allowance adjustments
|
—
|
|
|
(99
|
)
|
|
34
|
|
|
U.S. credits and incentives
|
(20
|
)
|
|
(12
|
)
|
|
(9
|
)
|
|
Impact of transactions and business divestitures
|
2,141
|
|
|
354
|
|
|
71
|
|
|
Restructuring and impairment costs
|
113
|
|
|
52
|
|
|
75
|
|
|
Other
|
(29
|
)
|
|
(24
|
)
|
|
(24
|
)
|
|
Income tax provision
|
$
|
2,259
|
|
|
$
|
600
|
|
|
$
|
407
|
|
The effective rate is above the U.S. statutory rate for fiscal 2016 primarily due to the tax consequences surrounding the planned spin-off of the Automotive Experience business and related expenses, the jurisdictional mix of restructuring and impairment costs, and the tax impacts of the Merger and integration related costs, partially offset by the benefits of continuing global tax planning initiatives and foreign tax rate differentials. The effective rate is below the U.S. statutory rate for fiscal 2015 primarily due to the benefits of continuing global tax planning initiatives, income in certain non-U.S. jurisdictions with a tax rate lower than the U.S. statutory tax rate and adjustments due to tax audit resolutions, partially offset by the tax consequences of business divestitures, and significant restructuring and impairment costs. The effective rate is below the U.S. statutory rate for fiscal 2014 primarily due to the benefits of continuing global tax planning initiatives and income in certain non-U.S. jurisdictions with a tax rate lower than the U.S. statutory tax rate partially offset by the tax consequences of business divestitures, significant restructuring and impairment costs, and valuation allowance adjustments.
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 the fourth quarter of fiscal 2016, 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 no material changes were needed to its valuation allowances. Therefore there was
no
impact to income tax expense due to valuation allowance changes in the three month period or year ended September 30, 2016.
In the fourth quarter of fiscal 2015, 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 certain deferred tax assets primarily within Spain, Germany, and the United Kingdom would not be realized, and it is more likely than not that certain deferred tax assets of Poland and Germany will be realized. The impact of the net valuation allowance provision offset the benefit of valuation allowance releases and, as such, there was
no
net impact to income tax expense in the three month period ended September 30, 2015.
In the fourth quarter of fiscal 2014, 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 Italy would not be realized. Therefore, the Company recorded
$34 million
of net valuation allowances as income tax expense in the three month period ended September 30, 2014.
In the first quarter of fiscal 2014, the Company determined that it was more likely than not that the deferred tax asset associated with a capital loss in Mexico would not be utilized. Therefore, the Company recorded a
$21 million
valuation allowance as income tax expense.
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.
At September 30, 2016, the Company had gross tax effected unrecognized tax benefits of
$1,439 million
of which
$1,336 million
, if recognized, would impact the effective tax rate. Total net accrued interest at September 30, 2016 was approximately
$65 million
(net of tax benefit).
At September 30, 2015, the Company had gross tax effected unrecognized tax benefits of $
1,159 million
of which
$1,104 million
, if recognized, would impact the effective tax rate. Total net accrued interest at September 30, 2015 was approximately
$41 million
(net of tax benefit).
At September 30, 2014, the Company had gross tax effected unrecognized tax benefits of
$1,607 million
of which
$1,457 million
, if recognized, would impact the effective tax rate. Total net accrued interest at September 30, 2014 was approximately
$106 million
(net of tax benefit).
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Beginning balance, October 1
|
$
|
1,159
|
|
|
$
|
1,607
|
|
|
$
|
1,302
|
|
|
Additions for tax positions related to the current year
|
465
|
|
|
329
|
|
|
315
|
|
|
Additions for tax positions of prior years
|
15
|
|
|
23
|
|
|
31
|
|
|
Reductions for tax positions of prior years
|
(66
|
)
|
|
(118
|
)
|
|
(27
|
)
|
|
Settlements with taxing authorities
|
(104
|
)
|
|
(541
|
)
|
|
(9
|
)
|
|
Statute closings
|
(30
|
)
|
|
(18
|
)
|
|
(5
|
)
|
|
Audit resolutions
|
—
|
|
|
(123
|
)
|
|
—
|
|
|
Ending balance, September 30
|
$
|
1,439
|
|
|
$
|
1,159
|
|
|
$
|
1,607
|
|
During fiscal 2015, the Company settled a significant number of tax examinations in Germany, Mexico and the U.S., impacting fiscal years 1998 to fiscal 2012. The settlement of unrecognized tax benefits included cash payments for approximately
$440 million
and the loss of various tax attributes. The reduction for tax positions of prior years is substantially related to foreign exchange rates. In the fourth quarter of fiscal 2015, income tax audit resolutions resulted in a net
$99 million
benefit to income tax expense.
In the U.S., fiscal years
2013
through
2014
are currently under exam by the Internal Revenue Service ("IRS"). Additionally, the Company is currently under exam in the following major foreign jurisdictions:
|
|
|
|
|
|
|
Tax Jurisdiction
|
|
Tax Years Covered
|
|
|
|
|
|
Brazil
|
|
2004 - 2008, 2011 - 2012
|
|
Canada
|
|
2014
|
|
France
|
|
2011 - 2015
|
|
Germany
|
|
2007 - 2012
|
|
Italy
|
|
2006, 2011
|
|
Korea
|
|
2015
|
|
Poland
|
|
2015
|
|
Spain
|
|
2011 - 2014
|
|
United Kingdom
|
|
2011 - 2014
|
It is reasonably possible that certain tax examinations, tax appeals and /or tax litigation will conclude within the next twelve months, of which could be up to a
$100 million
impact to tax expense.
Other Tax Matters
During fiscal
2016
,
2015
and
2014
, the Company incurred significant charges for restructuring and impairment costs. Refer to Note 15, "Significant Restructuring and Impairment Costs," of the notes to consolidated financial statements for additional information. A substantial portion of these charges cannot be benefited for tax purposes due to the Company's current tax position in these jurisdictions and the underlying tax basis in the impaired assets, resulting in
$113 million
,
$52 million
and
$75 million
incremental tax expense in fiscal
2016
,
2015
and
2014
, respectively.
During the fourth quarter of fiscal 2016, the Company completed its Merger with Tyco. As a result of that transaction, the Company incurred incremental tax expense of
$129 million
. In preparation for the spin-off of the Automotive Experience business in the first quarter of fiscal 2017, the Company incurred incremental tax expense of
$121 million
in fiscal 2016. The Company also completed substantial business reorganizations which resulted in total tax charges of
$1,891 million
in fiscal 2016, along with incremental tax expense of
$121 million
. Included in this amount is the tax charge provided for in the third quarter of fiscal 2016 of
$85 million
for changes in entity tax status and the charge provided for in the second quarter of fiscal 2016 of
$780 million
for income tax expense on foreign undistributed earnings of certain non-U.S. subsidiaries.
In the fourth quarter of fiscal 2015, the Company completed its global automotive interiors joint venture with Yanfeng Automotive Trim Systems. Refer to Note 2, "Acquisitions and Divestitures," of the notes to consolidated financial statements for additional information. In connection with the divestiture of the Interiors business, the Company recorded a pre-tax gain on divestiture of
$145 million
,
$38 million
net of tax. The tax impact of the gain is due to the jurisdictional mix of gains and losses on the divestiture, which resulted in non-benefited expenses in certain countries and taxable gains in other countries. In addition, in the third and fourth quarters of fiscal 2015, the Company provided income tax expense for repatriation of cash and other tax reserves associated with the Automotive Experience Interiors joint venture transaction, which resulted in a tax charge of
$75 million
and
$223 million
, respectively.
During the fourth quarter of fiscal 2014, the Company recorded a discrete tax benefit of
$51 million
due to change in entity status.
In the third quarter of fiscal 2014, the Company disposed of its Automotive Experience Interiors headliner and sun visor product lines. Refer to Note 2, "Acquisitions and Divestitures," of the notes to consolidated financial statements for additional information. As a result, the Company recorded a pre-tax loss on divestiture of
$95 million
and income tax expense of
$38 million
. The income tax expense is due to the jurisdictional mix of gains and losses on the sale, which resulted in non-benefited losses in certain countries and taxable gains in other countries.
Impacts of Tax Legislation and Change in Statutory Tax Rates
After the fourth quarter of fiscal 2016, on October 13, 2016, the U.S. Department of the 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.
The "look-through rule," under subpart F of the U.S. Internal Revenue Code, expired for the Company on September 30, 2015. The "look-through rule" had provided an exception to the U.S. taxation of certain income generated by foreign subsidiaries. The rule was extended in December 2015 retroactive to the beginning of the Company’s 2016 fiscal year. The retroactive extension was signed into legislation and was made permanent through the Company's 2020 fiscal year.
In the second quarter of fiscal 2015, tax legislation was adopted in Japan which reduced its statutory income tax rate. As a result of the law change, the Company recorded income tax expense of
$17 million
in the second quarter of fiscal 2015.
As a result of changes to Mexican tax law in the first quarter of fiscal 2014, the Company recorded a benefit to income tax expense of
$25 million
.
During the fiscal years ended
2016
,
2015
and 2014, other tax legislation was adopted in various jurisdictions. These law changes did not have a material impact on the Company's consolidated financial statements.
Continuing Operations
Components of the provision for income taxes on continuing operations were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Current
|
|
|
|
|
|
|
Federal
|
$
|
1,972
|
|
|
$
|
(477
|
)
|
|
$
|
109
|
|
|
State
|
101
|
|
|
(21
|
)
|
|
15
|
|
|
Foreign
|
1,390
|
|
|
906
|
|
|
585
|
|
|
|
3,463
|
|
|
408
|
|
|
709
|
|
|
Deferred
|
|
|
|
|
|
|
Federal
|
(502
|
)
|
|
201
|
|
|
(175
|
)
|
|
State
|
(51
|
)
|
|
(31
|
)
|
|
(6
|
)
|
|
Foreign
|
(651
|
)
|
|
22
|
|
|
(121
|
)
|
|
|
(1,204
|
)
|
|
192
|
|
|
(302
|
)
|
|
|
|
|
|
|
|
|
Income tax provision
|
$
|
2,259
|
|
|
$
|
600
|
|
|
$
|
407
|
|
Consolidated domestic income from continuing operations before income taxes and noncontrolling interests for the fiscal years ended
September 30, 2016
,
2015
and
2014
was income of
$1,108 million
,
$1,051 million
and
$1,370 million
, respectively. Consolidated foreign income from continuing operations before income taxes and noncontrolling interests for the fiscal years ended
September 30, 2016
,
2015
and
2014
was income of
$519 million
,
$1,100 million
and
$546 million
, respectively.
Income taxes paid for the fiscal years ended
September 30, 2016
,
2015
and
2014
were
$1,380 million
,
$1,163 million
and
$782 million
, respectively. At
September 30, 2016
and
2015
, the Company recorded within the consolidated statements of financial position in other current liabilities approximately
$1,444 million
and
$337 million
, respectively, of accrued income tax liabilities.
The Company has not provided additional U.S. income taxes on approximately
$5.5 billion
of undistributed earnings of consolidated foreign subsidiaries included in shareholders’ equity attributable to Johnson Controls, Inc. Such earnings could become taxable upon the sale or liquidation of these foreign subsidiaries or upon dividend repatriation. The Company’s intent is for such earnings to be reinvested by the subsidiaries or to be repatriated only when it would be tax effective through the utilization of foreign tax credits. It is not practicable to estimate the amount of unrecognized withholding taxes and deferred tax liability on such earnings. In fiscal 2016, the Company did provide U.S. income tax expense related to the restructuring and repatriation of cash for certain non-U.S. subsidiaries in connection with the planned spin-off of the Automotive Experience business. The Company needs to complete the final steps of Automotive Experience legal entity restructuring and, as a result, the Company provided deferred taxes of
$24 million
for the U.S. income tax expense on undistributed earnings that will be triggered upon the completion of the restructuring. Refer to "Capitalization" within the "Liquidity and Capital Resources" section of Item 7 for discussion of domestic and foreign cash projections.
Deferred taxes were classified in the consolidated statements of financial position as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
2016
|
|
2015
|
|
Other noncurrent assets
|
$
|
2,818
|
|
|
$
|
1,873
|
|
|
Other noncurrent liabilities
|
(464
|
)
|
|
(391
|
)
|
|
|
|
|
|
|
Net deferred tax asset
|
$
|
2,354
|
|
|
$
|
1,482
|
|
Temporary differences and carryforwards which gave rise to deferred tax assets and liabilities included (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
2016
|
|
2015
|
|
Deferred tax assets
|
|
|
|
|
Accrued expenses and reserves
|
$
|
1,024
|
|
|
$
|
210
|
|
|
Employee and retiree benefits
|
482
|
|
|
270
|
|
|
Net operating loss and other credit carryforwards
|
1,871
|
|
|
2,471
|
|
|
Research and development
|
94
|
|
|
64
|
|
|
Joint ventures and partnerships
|
396
|
|
|
231
|
|
|
Other
|
26
|
|
|
16
|
|
|
|
3,893
|
|
|
3,262
|
|
|
Valuation allowances
|
(1,157
|
)
|
|
(1,256
|
)
|
|
|
2,736
|
|
|
2,006
|
|
|
Deferred tax liabilities
|
|
|
|
|
Property, plant and equipment
|
166
|
|
|
124
|
|
|
Intangible assets
|
216
|
|
|
400
|
|
|
|
382
|
|
|
524
|
|
|
|
|
|
|
|
Net deferred tax asset
|
$
|
2,354
|
|
|
$
|
1,482
|
|
At
September 30, 2016
, the Company had available net operating loss carryforwards of approximately
$5.2 billion
, of which
$2.4 billion
will expire at various dates between
2017
and
2036
, and the remainder has an indefinite carryforward period. The Company had available U.S. foreign tax credit carryforwards at
September 30, 2016
of
$80 million
, which will expire at various dates between
2020
and
2024
. The valuation allowance, generally, is for loss carryforwards for which realization is uncertain because it is unlikely that the losses will be realized given the lack of sustained profitability and/or limited carryforward periods in certain countries.
18. SEGMENT INFORMATION
ASC 280, "Segment Reporting," establishes the standards for reporting information about segments in financial statements. In applying the criteria set forth in ASC 280, the Company has determined that it has
seven
reportable segments for financial reporting purposes. The Company’s seven reportable segments are presented in the context of its
three
primary businesses - Building Efficiency, Automotive Experience and Power Solutions.
Building Efficiency
Building Efficiency designs, produces, markets and installs 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.
|
Automotive Experience
Automotive Experience designs and manufactures interior systems and products for passenger cars and light trucks, including vans, pick-up trucks and sport utility/crossover vehicles.
|
|
|
|
•
|
Seating produces automotive seat metal structures and mechanisms, foam, trim, fabric and complete seat systems.
|
|
|
|
|
•
|
Interiors produces instrument panels, floor consoles and door panels.
|
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.
Management evaluates the performance of the segments based primarily on segment earnings before interest and taxes (EBIT), which represents income from continuing operations before income taxes and noncontrolling interests excluding net financing charges, significant restructuring and impairment costs, and net mark-to-market adjustments on pension and postretirement plans. General corporate and other overhead expenses are allocated to the reportable segments in determining segment EBIT.
Financial information relating to the Company’s reportable segments is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Net Sales
|
|
|
|
|
|
|
Building Efficiency
|
|
|
|
|
|
|
Systems and Service North America
|
$
|
4,292
|
|
|
$
|
4,184
|
|
|
$
|
4,098
|
|
|
Products North America
|
2,488
|
|
|
2,450
|
|
|
1,807
|
|
|
Asia
|
4,830
|
|
|
1,985
|
|
|
2,077
|
|
|
Rest of World
|
1,766
|
|
|
1,891
|
|
|
2,103
|
|
|
|
13,376
|
|
|
10,510
|
|
|
10,085
|
|
|
Automotive Experience
|
|
|
|
|
|
|
Seating
|
16,355
|
|
|
16,539
|
|
|
17,531
|
|
|
Interiors
|
482
|
|
|
3,540
|
|
|
4,501
|
|
|
|
16,837
|
|
|
20,079
|
|
|
22,032
|
|
|
Power Solutions
|
6,653
|
|
|
6,590
|
|
|
6,632
|
|
|
|
|
|
|
|
|
|
Total net sales
|
$
|
36,866
|
|
|
$
|
37,179
|
|
|
$
|
38,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Segment EBIT
|
|
|
|
|
|
|
Building Efficiency
|
|
|
|
|
|
|
Systems and Service North America (1)
|
$
|
412
|
|
|
$
|
375
|
|
|
$
|
354
|
|
|
Products North America (2)
|
173
|
|
|
306
|
|
|
238
|
|
|
Asia (3)
|
431
|
|
|
191
|
|
|
270
|
|
|
Rest of World (4)
|
20
|
|
|
51
|
|
|
(45
|
)
|
|
|
1,036
|
|
|
923
|
|
|
817
|
|
|
Automotive Experience
|
|
|
|
|
|
|
Seating (5)
|
676
|
|
|
928
|
|
|
853
|
|
|
Interiors (6)
|
75
|
|
|
254
|
|
|
(1
|
)
|
|
|
751
|
|
|
1,182
|
|
|
852
|
|
|
Power Solutions (7)
|
1,253
|
|
|
1,153
|
|
|
1,052
|
|
|
|
|
|
|
|
|
|
Total segment EBIT
|
$
|
3,040
|
|
|
$
|
3,258
|
|
|
$
|
2,721
|
|
|
|
|
|
|
|
|
|
Net financing charges
|
(300
|
)
|
|
(288
|
)
|
|
(244
|
)
|
|
Interest expense due to affiliate
|
(27
|
)
|
|
—
|
|
|
—
|
|
|
Restructuring and impairment costs
|
(535
|
)
|
|
(397
|
)
|
|
(324
|
)
|
|
Net mark-to-market adjustments on pension and postretirement plans
|
(551
|
)
|
|
(422
|
)
|
|
(237
|
)
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
$
|
1,627
|
|
|
$
|
2,151
|
|
|
$
|
1,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Assets
|
|
|
|
|
|
|
Building Efficiency
|
|
|
|
|
|
|
Systems and Service North America
|
$
|
2,338
|
|
|
$
|
2,332
|
|
|
$
|
2,341
|
|
|
Products North America
|
4,236
|
|
|
4,193
|
|
|
4,157
|
|
|
Asia
|
3,668
|
|
|
1,387
|
|
|
1,418
|
|
|
Rest of World
|
1,416
|
|
|
1,471
|
|
|
1,642
|
|
|
|
11,658
|
|
|
9,383
|
|
|
9,558
|
|
|
Automotive Experience
|
|
|
|
|
|
|
Seating
|
8,888
|
|
|
8,611
|
|
|
8,969
|
|
|
Interiors (8)
|
1,264
|
|
|
1,265
|
|
|
321
|
|
|
|
10,152
|
|
|
9,876
|
|
|
9,290
|
|
|
Power Solutions
|
6,859
|
|
|
6,590
|
|
|
6,888
|
|
|
Assets held for sale
|
17
|
|
|
55
|
|
|
2,787
|
|
|
Unallocated
|
6,314
|
|
|
3,718
|
|
|
4,289
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
35,000
|
|
|
$
|
29,622
|
|
|
$
|
32,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Depreciation/Amortization
|
|
|
|
|
|
|
Building Efficiency
|
|
|
|
|
|
|
Systems and Service North America
|
$
|
38
|
|
|
$
|
32
|
|
|
$
|
32
|
|
|
Products North America
|
116
|
|
|
119
|
|
|
79
|
|
|
Asia
|
107
|
|
|
27
|
|
|
24
|
|
|
Rest of World
|
19
|
|
|
19
|
|
|
25
|
|
|
|
280
|
|
|
197
|
|
|
160
|
|
|
Automotive Experience
|
|
|
|
|
|
|
Seating
|
355
|
|
|
345
|
|
|
328
|
|
|
Interiors
|
13
|
|
|
21
|
|
|
128
|
|
|
|
368
|
|
|
366
|
|
|
456
|
|
|
Power Solutions
|
252
|
|
|
297
|
|
|
315
|
|
|
Discontinued Operations
|
—
|
|
|
—
|
|
|
24
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
900
|
|
|
$
|
860
|
|
|
$
|
955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Capital Expenditures
|
|
|
|
|
|
|
Building Efficiency
|
|
|
|
|
|
|
Systems and Service North America
|
$
|
15
|
|
|
$
|
22
|
|
|
$
|
27
|
|
|
Products North America
|
217
|
|
|
160
|
|
|
123
|
|
|
Global Workplace Solutions
|
—
|
|
|
16
|
|
|
16
|
|
|
Asia
|
119
|
|
|
32
|
|
|
39
|
|
|
Rest of World
|
25
|
|
|
38
|
|
|
34
|
|
|
|
376
|
|
|
268
|
|
|
239
|
|
|
Automotive Experience
|
|
|
|
|
|
|
Seating
|
444
|
|
|
437
|
|
|
420
|
|
|
Interiors
|
3
|
|
|
121
|
|
|
181
|
|
|
Electronics
|
—
|
|
|
—
|
|
|
31
|
|
|
|
447
|
|
|
558
|
|
|
632
|
|
|
Power Solutions
|
404
|
|
|
309
|
|
|
328
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
1,227
|
|
|
$
|
1,135
|
|
|
$
|
1,199
|
|
|
|
|
|
(1)
|
Building Efficiency - Systems and Service North America segment EBIT for the years ended September 30, 2016,
2015
and
2014
excludes
$2 million
,
$3 million
and
$12 million
, respectively, of restructuring and impairment costs.
|
|
|
|
|
(2)
|
Building Efficiency - Products North America segment EBIT for the years ended
September 30, 2016
,
2015
and
2014
excludes
$9 million
,
$11 million
and
$7 million
, respectively, of restructuring and impairment costs. For the years ended
September 30, 2016
,
2015
and
2014
, Products North America segment EBIT includes
$10 million
,
$9 million
and
$7 million
, respectively, of equity income.
|
|
|
|
|
(3)
|
Building Efficiency - Asia segment EBIT for the years ended
September 30, 2016
,
2015
and
2014
excludes
$26 million
,
$11 million
and
$4 million
, respectively, of restructuring and impairment costs. For the years ended
September 30, 2016
and
2014
, Asia segment EBIT includes
$100 million
and
$21 million
, respectively, of equity income.
|
|
|
|
|
(4)
|
Building Efficiency - Rest of World segment EBIT for the years ended
September 30, 2016
,
2015
and
2014
excludes
$16 million
,
$13 million
and
$119 million
, respectively, of restructuring and impairment costs. For the years ended
September 30, 2016
,
2015
and
2014
, Rest of World segment EBIT includes
$15 million
,
$14 million
and
$7 million
, respectively, of equity income.
|
|
|
|
|
(5)
|
Automotive Experience - Seating segment EBIT for the years ended
September 30, 2016
,
2015
and
2014
excludes
$284 million
,
$182 million
and
$29 million
, respectively, of restructuring and impairment costs. For the years ended
September 30, 2016
,
2015
and
2014
, Seating segment EBIT includes
$289 million
,
$264 million
and
$250 million
, respectively, of equity income.
|
|
|
|
|
(6)
|
Automotive Experience - Interiors segment EBIT for the years ended
September 30, 2016
and
2014
excludes
$17 million
and
$130 million
, respectively, of restructuring and impairment costs. For the years ended
September 30, 2016
,
2015
and
2014
, Interiors segment EBIT includes
$68 million
,
$31 million
and
$35 million
, respectively, of equity income.
|
|
|
|
|
(7)
|
Power Solutions segment EBIT for the years ended
September 30, 2016
,
2015
and
2014
excludes
$66 million
,
$11 million
and
$16 million
, respectively, of restructuring and impairment costs. For the years ended
September 30, 2016
,
2015
and
2014
, Power Solutions segment EBIT includes
$48 million
,
$57 million
and
$75 million
, respectively, of equity income.
|
|
|
|
|
(8)
|
Prior year amounts exclude assets held for sale. Refer to Note 3, "Discontinued Operations," of the notes to consolidated financial statements for further information regarding the Company's disposal groups classified as held for sale.
|
The Company has significant sales to the automotive industry. In fiscal years
2016
,
2015
and
2014
,
no
customer exceeded
10%
of consolidated net sales.
Geographic Segments
Financial information relating to the Company’s operations by geographic area is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Net Sales
|
|
|
|
|
|
|
United States
|
$
|
15,809
|
|
|
$
|
16,841
|
|
|
$
|
16,596
|
|
|
Germany
|
3,296
|
|
|
3,375
|
|
|
3,853
|
|
|
Mexico
|
1,628
|
|
|
1,933
|
|
|
2,001
|
|
|
Japan
|
2,262
|
|
|
753
|
|
|
1,064
|
|
|
Other European countries
|
6,709
|
|
|
7,320
|
|
|
8,913
|
|
|
Other foreign
|
7,162
|
|
|
6,957
|
|
|
6,322
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
36,866
|
|
|
$
|
37,179
|
|
|
$
|
38,749
|
|
|
|
|
|
|
|
|
|
Long-Lived Assets (Year-end)
|
|
|
|
|
|
|
United States
|
$
|
2,783
|
|
|
$
|
2,681
|
|
|
$
|
2,762
|
|
|
Germany
|
632
|
|
|
680
|
|
|
910
|
|
|
Mexico
|
684
|
|
|
594
|
|
|
567
|
|
|
Japan
|
253
|
|
|
74
|
|
|
77
|
|
|
Other European countries
|
1,054
|
|
|
1,006
|
|
|
1,064
|
|
|
Other foreign
|
1,243
|
|
|
835
|
|
|
934
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
6,649
|
|
|
$
|
5,870
|
|
|
$
|
6,314
|
|
Net sales attributed to geographic locations are based on the location of the assets producing the sales. Long-lived assets by geographic location consist of net property, plant and equipment.
19. NONCONSOLIDATED PARTIALLY-OWNED AFFILIATES
Investments in the net assets of nonconsolidated partially-owned affiliates are stated in the "Investments in partially-owned affiliates" line in the consolidated statements of financial position as of
September 30, 2016
and
2015
. Equity in the net income of nonconsolidated partially-owned affiliates is stated in the "Equity income" line in the consolidated statements of income for the years ended
September 30, 2016
,
2015
and
2014
.
The following table presents summarized financial data for the Company’s nonconsolidated partially-owned affiliates. The amounts included in the table below represent
100%
of the results of operations of such nonconsolidated partially-owned affiliates accounted for under the equity method.
Summarized balance sheet data as of September 30 is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Current assets
|
$
|
9,102
|
|
|
$
|
7,083
|
|
|
Noncurrent assets
|
4,164
|
|
|
3,294
|
|
|
Total assets
|
$
|
13,266
|
|
|
$
|
10,377
|
|
|
|
|
|
|
|
Current liabilities
|
$
|
7,678
|
|
|
$
|
6,268
|
|
|
Noncurrent liabilities
|
752
|
|
|
604
|
|
|
Noncontrolling interests
|
78
|
|
|
20
|
|
|
Shareholders’ equity
|
4,758
|
|
|
3,485
|
|
|
Total liabilities and shareholders’ equity
|
$
|
13,266
|
|
|
$
|
10,377
|
|
Summarized income statement data for the years ended September 30 is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Net sales
|
$
|
21,427
|
|
|
$
|
12,922
|
|
|
$
|
10,820
|
|
|
Gross profit
|
3,116
|
|
|
1,911
|
|
|
1,638
|
|
|
Net income
|
1,567
|
|
|
890
|
|
|
790
|
|
|
Income attributable to noncontrolling interests
|
26
|
|
|
10
|
|
|
3
|
|
|
Net income attributable to the entity
|
1,541
|
|
|
880
|
|
|
787
|
|
20. COMMITMENTS AND CONTINGENCIES
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
September 30, 2016
, reserves for environmental liabilities totaled
$27 million
, of which
$4 million
was recorded within other current liabilities and
$23 million
was recorded within other noncurrent liabilities. Reserves for environmental liabilities totaled
$23 million
at September 30,
2015
. The Company reviews the status of its environmental sites on a quarterly basis and adjusts its reserves accordingly. Such potential liabilities accrued by the Company do not take into consideration possible recoveries of future insurance proceeds. They do, however, take into account the likely share other parties will bear at remediation sites. It is difficult to estimate the Company’s ultimate level of liability at many remediation sites due to the large number of other parties that may be involved, the complexity of determining the relative liability among those parties, the uncertainty as to the nature and scope of the investigations and remediation to be conducted, the uncertainty in the application of law and risk assessment, the various choices and costs associated with diverse technologies that may be used in corrective actions at the sites, and the often quite lengthy periods over which eventual remediation may occur. Nevertheless, the Company does not currently believe that any claims, penalties or costs in connection with known environmental matters will have a material adverse effect on the Company’s financial position, results of operations or cash flows. In addition, the Company has identified asset retirement obligations for environmental matters that are expected to be addressed at the retirement, disposal, removal or abandonment of existing owned facilities, primarily in the Power Solutions and Building Efficiency businesses. At
September 30, 2016
and
2015
, the Company recorded conditional asset retirement obligations of
$71 million
and
$59 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 September 30, 2016, the Company's estimated asbestos related liability recorded on a discounted basis within the Company's consolidated statements of financial position is comprised of a liability for pending and future claims and related defense costs of
$116 million
, of which
$7 million
is recorded in other current liabilities and
$109 million
is recorded in other noncurrent liabilities. As of September 30, 2015, the Company's estimated asbestos related liability recorded on a discounted basis within the Company's consolidated statements of financial position is comprised of a liability for pending and future claims and related defense costs of
$136 million
and is primarily recorded in other noncurrent liabilities.
The Company's estimate of the liability 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 2049 (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 2049. 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 evaluates all of these factors and determines whether a change in the estimate of its liability for pending and future claims and defense costs is warranted.
Insurable Liabilities
The Company records liabilities for its workers' compensation, product, general 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 September 30, 2016 and 2015, the insurable liabilities totaled
$181 million
and
$194 million
, respectively, of which
$30 million
and
$28 million
was recorded within other current liabilities,
$15 million
and
$25 million
was recorded within accrued compensation and benefits, and
$136 million
and
$141 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 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.
21. 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 included in the consolidated statements of income were
$1.3 billion
and
$0.5 billion
, respectively, for fiscal 2016;
$1.3 billion
and
$0.4 billion
, respectively, for fiscal 2015; and
$1.2 billion
and
$0.4 billion
, respectively, for fiscal 2014.
The following table sets forth the amount of accounts receivable due from and payable to related parties in the consolidated statements of financial position (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
Receivable from related parties
|
|
$
|
239
|
|
|
$
|
389
|
|
|
Payable to related parties
|
|
92
|
|
|
285
|
|
The Company has also provided financial support to certain of its VIE's, see Note 1, "Summary of Significant Accounting Policies," of the notes to consolidated financial statements for additional information.
22. SUBSEQUENT EVENT
On October 31, 2016, JCI plc completed the spin-off of its Automotive Experience business by way of the transfer of the Automotive Experience Business from JCI plc to Adient plc and the issuance of ordinary shares of Adient directly to holders of JCI plc ordinary shares on a pro rata basis. Prior to the open of business on
October 31, 2016
, each of the JCI plc shareholders received
one
ordinary share of Adient plc for every
10
ordinary shares of JCI plc held as of the close of business on October 19, 2016, the record date for the distribution. 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 or JCI plc did not retain any equity interest in Adient plc. Beginning in the first quarter of fiscal 2017, Adient’s historical financial results will be reflected in the Company’s consolidated financial statements as a discontinued operation.