UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 2019
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For The Transition Period From ________ To ________
Commission File Number 001-13836
JOHNSON CONTROLS INTERNATIONAL PLC
(Exact name of registrant as specified in its charter)
Ireland
(Jurisdiction of Incorporation)
98-0390500
(I.R.S. Employer Identification No.)
One Albert Quay
Cork, Ireland, T12 X8N6
(Address of principal executive offices and postal code)
(353) 21-423-5000
(Registrant's telephone number)
Securities Registered Pursuant to Section 12(b) of the Exchange Act:
Title of Each Class
Ordinary Shares, Par Value $0.01
Trading Symbol
JCI
Name of Each Exchange on Which Registered
New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Exchange Act: None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth
company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Emerging growth company
þ
¨
☐
Accelerated filer
Smaller reporting company
¨
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ
As of March 31, 2019, the aggregate market value of Johnson Controls International plc Common Stock held by non-affiliates of the registrant was approximately $33.1
billion based on the closing sales price as reported on the New York Stock Exchange. As of October 31, 2019, 771,419,761 ordinary shares, par value $0.01 per share, were
outstanding.
Portions of the definitive Proxy Statement to be delivered to shareholders in connection with the annual general meeting of shareholders to be held on March 4, 2020 are
incorporated by reference into Part III.
DOCUMENTS INCORPORATED BY REFERENCE
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JOHNSON CONTROLS INTERNATIONAL PLC
Index to Annual Report on Form 10-K
Year Ended September 30, 2019
CAUTIONARY STATEMENTS FOR FORWARD-LOOKING INFORMATION
ITEM 1.
BUSINESS
ITEM 1A.
RISK FACTORS
ITEM 1B.
UNRESOLVED STAFF COMMENTS
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURES
EXECUTIVE OFFICERS OF THE REGISTRANT
PART I.
PART II.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.
ITEM 7.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES
SELECTED FINANCIAL DATA
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8.
ITEM 9.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A.
CONTROLS AND PROCEDURES
ITEM 9B.
OTHER INFORMATION
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11.
EXECUTIVE COMPENSATION
PART III.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 16.
FORM 10-K SUMMARY
PART IV.
SIGNATURES
INDEX TO EXHIBITS
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3
3
6
21
21
21
22
22
23
26
27
47
48
118
118
119
119
119
119
120
120
121
122
122
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CAUTIONARY STATEMENTS FOR FORWARD-LOOKING INFORMATION
Unless otherwise indicated, references to "Johnson Controls," the "Company," "we," "our" and "us" in this Annual Report on Form 10-K refer to Johnson Controls
International plc and its consolidated subsidiaries.
The Company has made statements in this document that are forward-looking and therefore are subject to risks and uncertainties. All statements in this document
other than statements of historical fact are, or could be, "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995.
In this document, statements regarding Johnson Controls' future financial position, sales, costs, earnings, cash flows, other measures of results of
operations, synergies and integration opportunities, capital expenditures and debt levels are forward-looking statements. Words such as "may," "will," "expect,"
"intend," "estimate," "anticipate," "believe," "should," "forecast," "project" or "plan" and terms of similar meaning are also generally intended to identify forward-
looking statements. However, the absence of these words does not mean that a statement is not forward-looking. Johnson Controls cautions that these statements
are subject to numerous important risks, uncertainties, assumptions and other factors, some of which are beyond Johnson Controls’ control, that could cause
Johnson Controls’ actual results to differ materially from those expressed or implied by such forward-looking statements, including, among others, risks related
to: any delay or inability of Johnson Controls to realize the expected benefits and synergies of recent portfolio transactions such as the merger with Tyco, the spin-
off of Adient and the disposition of the Power Solutions business, changes in tax laws (including but not limited to the recently enacted Tax Cuts and Jobs Act),
regulations, rates, policies or interpretations, the loss of key senior management, the tax treatment of recent portfolio transactions, significant transaction costs
and/or unknown liabilities associated with such transactions, the outcome of actual or potential litigation relating to such transactions, the risk that disruptions
from recent transactions will harm Johnson Controls’ business, the strength of the U.S. or other economies, changes to laws or policies governing foreign trade,
including increased tariffs or trade restrictions, mix and schedules, energy and commodity prices, the availability of raw materials and component products,
currency rates and cancellation of or changes to commercial arrangements. A detailed discussion of risks related to Johnson Controls’ business is included in the
section entitled "Risk Factors" (refer to Part I, Item 1A, of this Annual Report on Form 10-K). The forward-looking statements included in this document are made
only as of the date of this document, unless otherwise specified, and, except as required by law, Johnson Controls assumes no obligation, and disclaims any
obligation, to update such statements to reflect events or circumstances occurring after the date of this document.
PART I
ITEM 1
BUSINESS
General
Johnson Controls International plc, headquartered in Cork, Ireland, is a global diversified technology and multi industrial leader serving a wide range of customers
in more than 150 countries. The Company creates intelligent buildings, efficient energy solutions and integrated infrastructure that work seamlessly together to
deliver on the promise of smart cities and communities. The Company is committed to helping its customers win and creating greater value for all of its
stakeholders through its strategic focus on buildings.
Johnson Controls was originally incorporated in the state of Wisconsin in 1885 as Johnson Electric Service Company to manufacture, install and service automatic
temperature regulation systems for buildings. The Company was renamed to Johnson Controls, Inc. in 1974. In 2005, the Company acquired York International, a
global supplier of heating, ventilating, air-conditioning ("HVAC") and refrigeration equipment and services. In 2014, the Company acquired Air Distribution
Technologies, Inc., one of the largest independent providers of air distribution and ventilation products in North America. In 2015, the Company formed a joint
venture with Hitachi to expand its building related product offerings. In 2016, Johnson Controls, Inc. and Tyco completed their combination (the "Merger").
Following the Merger, Tyco changed its name to “Johnson Controls International plc.”
On November 13, 2018, the Company entered into a Stock and Asset Purchase Agreement (“Purchase Agreement”) with BCP Acquisitions LLC (“Purchaser”).
The Purchaser is a newly-formed entity controlled by investment funds managed by Brookfield Capital Partners LLC. Pursuant to the Purchase Agreement, on the
terms and subject to the conditions therein, the Company agreed to sell, and Purchaser agreed to acquire, the Company’s Power Solutions business for a purchase
price of $13.2 billion. The transaction closed on April 30, 2019 with net cash proceeds of $11.6 billion after tax and transaction-related expenses.
During the first quarter of fiscal 2019, the Company determined that its Power Solutions business met the criteria to be classified as a discontinued operation and,
as a result, Power Solutions' historical financial results are reflected in the Company's consolidated financial statements as a discontinued operation, and assets and
liabilities were retrospectively reclassified as assets and liabilities held for sale.
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The Company is a global market leader in engineering, developing, manufacturing and installing building products and systems around the world, including HVAC
equipment, HVAC controls, energy-management systems, security systems, fire detection systems and fire suppression solutions. The Company further serves
customers by providing technical services (in the HVAC, security and fire-protection space), energy-management consulting and data-driven solutions via its data-
enabled business. Finally, the Company has a strong presence in the North American residential air conditioning and heating systems market and is a global market
leader in industrial refrigeration products.
Products/Systems and Services
The Company sells its integrated control systems, security systems, fire-detection systems, equipment and services primarily through its extensive global network
of sales and service offices, with operations in approximately 70 countries. Significant sales are also generated through global third-party channels, such as
distributors of air-conditioning, security, fire-detection and commercial HVAC systems. The Company’s large base of current customers leads to significant repeat
business for the retrofit and replacement markets. In addition, the new commercial construction market is also important. Trusted Buildings brands, such as
YORK®, Hitachi Air Conditioning, Metasys®, Ansul, Ruskin®, Titus®, Frick®, PENN®, Sabroe®, Simplex® and Grinnell® give the Company the most diverse
portfolio in the building technology industry.
In fiscal 2019, approximately 26% of its sales originated from its service offerings.
Competition
The Company conducts its operations through thousands of individual contracts that are either negotiated or awarded on a competitive basis. Key factors in the
award of contracts include system and service performance, quality, price, design, reputation, technology, application engineering capability and construction or
project management expertise. Competitors for HVAC equipment, security, fire-detection, fire suppression and controls in the residential and non-residential
marketplace include many regional, national and international providers; larger competitors include Honeywell International, Inc.; Siemens Building Technologies,
an operating group of Siemens AG; Schneider Electric SA; Carrier Corporation, a subsidiary of United Technologies Corporation; Trane Incorporated, a subsidiary
of Ingersoll-Rand Public Limited Company; Daikin Industries, Ltd.; Lennox International, Inc.; GC Midea Holding Co, Ltd. and Gree Electric Appliances, Inc. In
addition to HVAC equipment, the Company competes in a highly fragmented HVAC services market, which is dominated by local providers. The loss of any
individual contract would not have a material adverse effect on the Company.
Backlog
The Company’s backlog is applicable to its sales of systems and services. At September 30, 2019, the backlog was $9.2 billion, of which $8.9 billion is attributable
to the field business. The backlog amount outstanding at any given time is not necessarily indicative of the amount of revenue to be earned in the upcoming fiscal
year.
In the first quarter of fiscal 2019, the Company adopted Accounting Standards Codification ("ASC") 606, “Revenue from Contracts with Customers,” and as a
result is required to disclose remaining performance obligations. At September 30, 2019, remaining performance obligations were $14.4 billion, which is $5.2
billion higher than the Company's backlog of $9.2 billion. Differences between the Company’s remaining performance obligations and backlog are primarily due
to:
•
•
•
Remaining performance obligations include large, multi-purpose contracts to construct hospitals, schools and other governmental buildings, which are
services to be performed over the building's lifetime with initial contract terms of 25 to 35 years for the entire term of the contract versus backlog which
includes only the lifecycle period of these contracts which approximates five years;
The Company has elected to exclude from remaining performance obligations certain contracts with customers with a term of one year or less or contracts
that are cancelable without substantial penalty while these contracts are included within backlog; and
Remaining performance obligations include the full remaining term of service contracts with substantial termination penalties versus backlog which
includes one year for all outstanding service contracts.
The Company will continue to report backlog as it believes it is a useful measure of evaluating the Company's operational performance and relationship to total
orders.
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Raw Materials
Raw materials used by the businesses in connection with their operations, including steel, aluminum, brass, copper, polypropylene and certain flurochemicals used
in fire suppression agents, were readily available during fiscal 2019, and the Company expects such availability to continue. In fiscal 2020, commodity prices
could fluctuate throughout the year and could significantly affect the results of operations.
Intellectual Property
Generally, the Company seeks statutory protection for strategic or financially important intellectual property developed in connection with its business. Certain
intellectual property, where appropriate, is protected by contracts, licenses, confidentiality or other agreements.
The Company owns numerous U.S. and non-U.S. patents (and their respective counterparts), the more important of which cover those technologies and inventions
embodied in current products or which are used in the manufacture of those products. While the Company believes patents are important to its business operations
and in the aggregate constitute a valuable asset, no single patent, or group of patents, is critical to the success of the business. The Company, from time to time,
grants licenses under its patents and technology and receives licenses under patents and technology of others.
The Company’s trademarks, certain of which are material to its business, are registered or otherwise legally protected in the U.S. and many non-U.S. countries
where products and services of the Company are sold. The Company, from time to time, becomes involved in trademark licensing transactions.
Most works of authorship produced for the Company, such as computer programs, catalogs and sales literature, carry appropriate notices indicating the Company’s
claim to copyright protection under U.S. law and appropriate international treaties.
Environmental, Health and Safety Matters
Laws addressing the protection of the environment (environmental laws) and workers’ safety and health (worker safety laws) govern the Company’s ongoing
global operations. They generally provide for civil and criminal penalties, as well as injunctive and remedial relief, for noncompliance or require remediation of
sites where Company-related materials have been released into the environment.
The Company has expended substantial resources globally, both financial and managerial, to comply with environmental laws and worker safety laws and
maintains procedures designed to foster and ensure compliance. Certain of the Company’s businesses are, or have been, engaged in the handling or use of
substances that may impact workplace health and safety or the environment. The Company is committed to protecting its workers and the environment against the
risks associated with these substances.
The Company’s operations and facilities have been, and in the future may become, the subject of formal or informal enforcement actions or proceedings for
noncompliance with environmental laws and worker safety laws or for the remediation of Company-related substances released into the environment. Such matters
typically are resolved with regulatory authorities through commitments to compliance, abatement or remediation programs and, in some cases, payment of
penalties. See Note 22, "Commitments and Contingencies," of the notes to consolidated financial statements for further discussion of environmental matters.
Environmental Capital Expenditures
The Company’s ongoing environmental compliance program often results in capital expenditures. Environmental considerations are a part of all significant capital
expenditure decisions; however, expenditures in fiscal 2019 related solely to environmental compliance were not material. It is management’s opinion that the
amount of any future capital expenditures related solely to environmental compliance will not have a material adverse effect on the Company’s financial results or
competitive position in any one year. See Note 22, "Commitments and Contingencies," of the notes to consolidated financial statements for further discussion of
environmental matters.
Government Regulation and Supervision
The Company's operations are subject to numerous federal, state and local laws and regulations, both within and outside the U.S., in areas such as: consumer
protection, government contracts, international trade, environmental protection, labor and employment, tax, licensing and others. For example, most U.S. states and
non-U.S. jurisdictions in which the Company operates have licensing
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laws directed specifically toward the alarm and fire suppression industries. The Company's security businesses currently rely extensively upon the use of wireline
and wireless telephone service to communicate signals. Wireline and wireless telephone companies in the U.S. are regulated by the federal and state governments.
In addition, government regulation of fire safety codes can impact the Company's fire businesses. These and other laws and regulations impact the manner in which
the Company conducts its business, and changes in legislation or government policies can affect the Company's worldwide operations, both favorably and
unfavorably. For a more detailed description of the various laws and regulations that affect the Company's business, see Item 1A. Risk Factors.
Employees
As of September 30, 2019, the Company employed approximately 104,000 people worldwide, of which approximately 39,000 were employed in the United States
and approximately 65,000 were outside the United States. Approximately 22,000 employees are covered by collective bargaining agreements or works councils
and the Company believes that its relations with the labor unions are generally good.
Seasonal Factors
Certain of the Company's sales are seasonal as the demand for residential air conditioning equipment generally increases in the summer months. This seasonality is
mitigated by the other products and services provided by the Company that have no material seasonal effect.
Research and Development Expenditures
Refer to Note 1, "Summary of Significant Accounting Policies," of the notes to consolidated financial statements for research and development expenditures.
Available Information
The Company’s filings with the U.S. Securities and Exchange Commission ("SEC"), including annual reports on Form 10-K, quarterly reports on Form 10-Q,
definitive proxy statements on Schedule 14A, current reports on Form 8-K, and any amendments to those reports filed pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, are made available free of charge through the Investor Relations section of the Company’s Internet website at
http://www.johnsoncontrols.com as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC. Copies of
any materials the Company files with the SEC can also be obtained free of charge through the SEC’s website at http://www.sec.gov. The Company also makes
available, free of charge, its Ethics Policy, Corporate Governance Guidelines, Board of Directors committee charters and other information related to the Company
on the Company’s Internet website or in printed form upon request. The Company is not including the information contained on the Company’s website as a part
of, or incorporating it by reference into, this Annual Report on Form 10-K.
ITEM 1A
RISK FACTORS
Risks Relating to Business Operations
General economic, credit and capital market conditions could adversely affect our financial performance, our ability to grow or sustain our businesses
and our ability to access the capital markets.
We compete around the world in various geographic regions and product markets. Global economic conditions affect each of our primary businesses. As we
discuss in greater detail in the specific risk factors for each of our businesses that appear below, any future financial distress in the industries and/or markets where
we compete could negatively affect our revenues and financial performance in future periods, result in future restructuring charges, and adversely impact our
ability to grow or sustain our businesses.
The capital and credit markets provide us with liquidity to operate and grow our businesses beyond the liquidity that operating cash flows provide. A worldwide
economic downturn and/or disruption of the credit markets could reduce our access to capital necessary for our operations and executing our strategic plan. If our
access to capital were to become significantly constrained, or if costs of capital increased significantly due to lowered credit ratings, prevailing industry conditions,
the volatility of the capital markets or other factors; then our financial condition, results of operations and cash flows could be adversely affected.
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Some of the industries in which we operate are cyclical and, accordingly, demand for our products and services could be adversely affected by downturns
in these industries.
Much of the demand for installation of HVAC, security products, and fire detection and suppression solutions is driven by commercial and residential construction
and industrial facility expansion and maintenance projects. Commercial and residential construction projects are heavily dependent on general economic
conditions, localized demand for commercial and residential real estate and availability of credit. Commercial and residential real estate markets are prone to
significant fluctuations in supply and demand. In addition, most commercial and residential real estate developers rely heavily on project financing in order to
initiate and complete projects. Declines in real estate values could lead to significant reductions in the availability of project financing, even in markets where
demand may otherwise be sufficient to support new construction. These factors could in turn temper demand for new HVAC, fire detection and suppression and
security installations.
Levels of industrial capital expenditures for facility expansions and maintenance turn on general economic conditions, economic conditions within specific
industries we serve, expectations of future market behavior and available financing. Additionally, volatility in commodity prices can negatively affect the level of
these activities and can result in postponement of capital spending decisions or the delay or cancellation of existing orders.
The businesses of many of our industrial customers, particularly oil and gas companies, chemical and petrochemical companies, mining and general industrial
companies, are to varying degrees cyclical and have experienced periodic downturns. During such economic downturns, customers in these industries historically
have tended to delay major capital projects, including greenfield construction, maintenance projects and upgrades. Additionally, demand for our products and
services may be affected by volatility in energy and commodity prices and fluctuating demand forecasts, as our customers may be more conservative in their
capital planning, which may reduce demand for our products and services. Although our industrial customers tend to be less dependent on project financing than
real estate developers, disruptions in financial markets and banking systems could make credit and capital markets difficult for our customers to access, and could
significantly raise the cost of new debt for our customers. Any difficulty in accessing these markets and the increased associated costs can have a negative effect on
investment in large capital projects, including necessary maintenance and upgrades, even during periods of favorable end-market conditions.
Many of our customers inside and outside of the industrial and commercial sectors, including governmental and institutional customers, have experienced
budgetary constraints as sources of revenue have been negatively impacted by adverse or stagnant economic conditions. These budgetary constraints have in the
past and may in the future reduce demand for our products and services among governmental and institutional customers.
Reduced demand for our products and services could result in the delay or cancellation of existing orders or lead to excess capacity, which unfavorably impacts our
absorption of fixed costs. This reduced demand may also erode average selling prices in the industries we serve. Any of these results could materially and
adversely affect our business, financial condition, results of operations and cash flows.
Volatility in commodity prices may adversely affect our results of operations.
Increases in commodity costs can negatively impact the profitability of orders in backlog as prices on such orders are typically fixed; therefore, in the short-term,
our ability to adjust for changes in certain commodity prices is limited. In these cases, if we are not able to recover commodity cost increases through price
increases to our customers on new orders, then such increases will have an adverse effect on our results of operations. In cases where commodity price risk cannot
be naturally offset or hedged through supply based fixed price contracts, we use commodity hedge contracts to minimize overall price risk associated with our
anticipated commodity purchases. Unfavorability in our hedging programs during a period of declining commodity prices could result in lower margins as we
reduce prices to match the market on a fixed commodity cost level. Additionally, to the extent we do not or are unable to hedge certain commodities and the
commodity prices substantially increase, such increases will have an adverse effect on our results of operations.
We rely on our global direct installation channel for a significant portion of our revenue. Failure to maintain and grow the installed base resulting from
direct channel sales could adversely affect our business.
Unlike many of our competitors, the Company relies on a direct sales channel for a substantial portion of our revenue. The direct channel provides for the
installation of fire and security solutions, and HVAC equipment manufactured by the Company. This represents a significant distribution channel for our products,
creates a large installed base of our fire and security solutions, and HVAC equipment, and creates opportunities for longer term service and monitoring revenue. If
we are unable to maintain or grow this installation business, whether due to changes in economic conditions, a failure to anticipate changing customer needs, a
failure
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to introduce innovative or technologically advanced solutions, or for any other reason, our installation revenue could decline, which could in turn adversely impact
our product pull through and our ability to grow service and monitoring revenue.
Our future growth is dependent upon our ability to develop or acquire new technologies that achieve market acceptance with acceptable margins.
Our future success depends on our ability to develop or acquire, manufacture and bring competitive, and increasingly complex, products and services to market
quickly and cost-effectively. Our ability to develop or acquire new products, services and technologies requires the investment of significant resources. These
acquisitions and development efforts divert resources from other potential investments in our businesses, and they may not lead to the development of new
technologies, products or services on a timely basis. Moreover, as we introduce new products, we may be unable to detect and correct defects in the design of a
product or in its application to a specified use, which could result in loss of sales or delays in market acceptance. Even after introduction, new or enhanced products
may not satisfy customer preferences and product failures may cause customers to reject our products. As a result, these products may not achieve market
acceptance and our brand image could suffer. We must also attract, develop and retain individuals with the requisite technical expertise and understanding of
customers' needs to develop new technologies and introduce new products, particularly as we increase investment in our digital solutions businesses. We must also
monitor disruptive technologies and business models. In addition, the markets for our products, services and technologies may not develop or grow as we
anticipate. The failure of our technology, products or services to gain market acceptance due to more attractive offerings by our competitors or the failure to
address any of the above factors could significantly reduce our revenues, increase our operating costs or otherwise materially and adversely affect our business,
financial condition, results of operations and cash flows.
Risks associated with our non-U.S. operations could adversely affect our business, financial condition and results of operations.
We have significant operations in a number of countries outside the U.S., some of which are located in emerging markets. Long-term economic uncertainty in
some of the regions of the world in which we operate, such as Asia, South America, the Middle East, Europe and emerging markets, could result in the disruption
of markets and negatively affect cash flows from our operations to cover our capital needs and debt service requirements.
In addition, as a result of our global presence, a significant portion of our revenues and expenses is denominated in currencies other than the U.S. dollar. We are
therefore subject to non-U.S. currency risks and non-U.S. exchange exposure. While we employ financial instruments to hedge some of our transactional foreign
exchange exposure, these activities do not insulate us completely from those exposures. Exchange rates can be volatile and a substantial weakening of foreign
currencies against the U.S. dollar could reduce our profit margin in various locations outside of the U.S. and adversely impact the comparability of results from
period to period.
There are other risks that are inherent in our non-U.S. operations, including the potential for changes in socio-economic conditions, laws and regulations, including
anti-trust, import, export, labor and environmental laws, and monetary and fiscal policies; protectionist measures that may prohibit acquisitions or joint ventures, or
impact trade volumes; unsettled political conditions; government-imposed plant or other operational shutdowns; backlash from foreign labor organizations related
to our restructuring actions; corruption; natural and man-made disasters, hazards and losses; violence, civil and labor unrest, and possible terrorist attacks.
These and other factors may have a material adverse effect on our business and results of operations.
Our businesses operate in regulated industries and are subject to a variety of complex and continually changing laws and regulations.
Our operations and employees are subject to various U.S. federal, state and local licensing laws, codes and standards and similar foreign laws, codes, standards and
regulations. Changes in laws or regulations could require us to change the way we operate or to utilize resources to maintain compliance, which could increase
costs or otherwise disrupt operations. In addition, failure to comply with any applicable laws or regulations could result in substantial fines or revocation of our
operating permits and licenses. Competition or other regulatory investigations can continue for several years, be costly to defend and can result in substantial fines.
If laws and regulations were to change or if we or our products failed to comply, our business, financial condition and results of operations could be adversely
affected.
Due to the international scope of our operations, the system of laws and regulations to which we are subject is complex and includes regulations issued by the U.S.
Customs and Border Protection, the U.S. Department of Commerce's Bureau of Industry and Security,
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the U.S. Treasury Department's Office of Foreign Assets Control and various non U.S. governmental agencies, including applicable export controls, anti-trust,
customs, currency exchange control and transfer pricing regulations, laws regulating the foreign ownership of assets, and laws governing certain materials that may
be in our products. No assurances can be made that we will continue to be found to be operating in compliance with, or be able to detect violations of, any such
laws or regulations. For example, existing free trade laws and regulations, such as the North American Free Trade Agreement, or any successor agreement, provide
certain beneficial duties and tariffs for qualifying imports and exports, subject to compliance with the applicable classification and other requirements. Changes in
laws or policies governing the terms of foreign trade, and in particular increased trade restrictions, tariffs or taxes on imports from countries where we manufacture
products or from where we import products or raw materials (either directly or through our suppliers) could have an impact on our competitive position, business
and financial results. For example, certain of our businesses have a significant presence in the United Kingdom (the “U.K.”), where the success of the Brexit
referendum in 2016 has continued to cause political and economic uncertainty. Although it is unknown what the full terms of the U.K.’s future relationship with
the European Union will be, it is possible that the U.K. may be at risk of losing access to free trade agreements for goods and services with the EU and other
countries, which may result in increased tariffs on U.K. imports and exports that could have an adverse effect on our profitability.
We cannot predict the nature, scope or effect of future regulatory requirements to which our operations might be subject or the manner in which existing laws
might be administered or interpreted.
Cybersecurity incidents could disrupt business operations, result in the loss of critical and confidential information, and adversely impact our reputation
and results of operations.
We rely upon the capacity, reliability and security of our IT and data security infrastructure and our ability to expand and continually update this infrastructure in
response to the changing needs of our business. As we implement new systems or integrate existing systems, they may not perform as expected. We also face the
challenge of supporting our older systems and implementing necessary upgrades. If we experience a problem with the functioning of an important IT system or a
security breach of our IT systems, including during system upgrades and/or new system implementations, the resulting disruptions could have an adverse effect on
our business.
Global cybersecurity threats and incidents can range from uncoordinated individual attempts to gain unauthorized access to IT systems to sophisticated and
targeted measures known as advanced persistent threats, directed at the Company, its products, its customers and/or its third party service providers, including
cloud providers. Our customers, including the U.S. government, are increasingly requiring cybersecurity protections and mandating cybersecurity standards in our
products, and we may incur additional costs to comply with such demands. While we have experienced, and expect to continue to experience, these types of threats
and incidents, none of them to date have been material to the Company. We seek to deploy comprehensive measures to deter, prevent, detect, respond to and
mitigate these threats, including identity and access controls, data protection, vulnerability assessments, product software designs which we believe are less
susceptible to cyber attacks, continuous monitoring of our IT networks and systems and maintenance of backup and protective systems. Despite these efforts,
cybersecurity incidents, depending on their nature and scope, could potentially result in the misappropriation, destruction, corruption or unavailability of critical
data and confidential or proprietary information (our own or that of third parties) and the disruption of business operations. Cybersecurity incidents aimed at the
software imbedded in our products could lead to third party claims that our product failures have caused a similar range of damages to our customers, and this risk
is enhanced by the increasingly connected nature of our products. The potential consequences of a material cybersecurity incident include financial loss,
reputational damage, litigation with third parties, theft of intellectual property, fines levied by the Federal Trade Commission, diminution in the value of our
investment in research, development and engineering, and increased cybersecurity protection and remediation costs due to the increasing sophistication and
proliferation of threats, which in turn could adversely affect our competitiveness and results of operations.
Data privacy, identity protection, and information security may require significant resources and presents certain risks.
We collect, store, have access to and otherwise process certain confidential or sensitive data, including proprietary business information, personal data or other
information that is subject to privacy and security laws, regulations and/or customer-imposed controls. Despite our efforts to protect such data, we may be
vulnerable to material security breaches, theft, misplaced or lost data, programming errors, or errors that could potentially lead to compromising such data,
improper use of our systems, software solutions or networks, unauthorized access, use, disclosure, modification or destruction of information, defective products,
production downtimes and operational disruptions. In addition, we operate in an environment in which there are different and potentially conflicting data privacy
laws in effect in the various U.S. states and foreign jurisdictions in which we operate and we must understand and comply with each law and standard in each of
these jurisdictions while ensuring the data is secure. For example, the State of California has passed legislation granting residents certain new data privacy rights
and regulating the security of Internet of Things devices, which will go into effect in January 2020; European laws require us to have an approved legal mechanism
to transfer personal data out of Europe; the European Union General Data Protection Regulation, which took effect in May 2018, superseded prior European Union
data protection legislation and imposes more stringent requirements in how we collect and process personal data and provides for significantly greater penalties for
noncompliance; and several other countries have
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passed laws that require personal data relating to their citizens to be maintained on local servers and impose additional data transfer restrictions. Government
enforcement actions can be costly and interrupt the regular operation of our business, and violations of data privacy laws can result in fines, reputational damage
and civil lawsuits, any of which may adversely affect our business, reputation and financial statements.
We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and similar anti-bribery laws around the
world.
The U.S. Foreign Corrupt Practices Act (the "FCPA"), the U.K. Bribery Act and similar anti-bribery laws in other jurisdictions generally prohibit companies and
their intermediaries from making improper payments to government officials or other persons for the purpose of obtaining or retaining business. Recent years have
seen a substantial increase in anti-bribery law enforcement activity, with more frequent and aggressive investigations and enforcement proceedings by both U.S.
and non-U.S. regulators, and increases in criminal and civil proceedings brought against companies and individuals. Our policies mandate compliance with these
anti-bribery laws. We operate in many parts of the world that are recognized as having governmental and commercial corruption and local customs and practices
that can be inconsistent with anti-bribery laws. We cannot assure you that our internal control policies and procedures will always protect us from reckless or
criminal acts committed by our employees or third party intermediaries. In the event that we believe or have reason to believe that our employees or agents have or
may have violated applicable anti-corruption laws, or if we are subject to allegations of any such violations, we may be required to investigate or have outside
counsel investigate the relevant facts and circumstances, which can be expensive and require significant time and attention from senior management. Violations of
these laws may result in criminal or civil sanctions, which could disrupt our business and result in a material adverse effect on our reputation, business, financial
condition, results of operations and cash flows. In addition, we could be subject to commercial impacts such as lost revenue from customers who decline to do
business with us as a result of such compliance matters, or we could be subject to lawsuits brought by private litigants, each of which could have a material adverse
effect on our reputation, business, financial condition, results of operations and cash flows.
We are subject to risks arising from regulations applicable to companies doing business with the U.S. government.
Our customers include many U.S. federal, state and local government authorities. Doing business with the U.S. government and state and local authorities subjects
us to unusual risks, including dependence on the level of government spending and compliance with and changes in governmental procurement and security
regulations. Agreements relating to the sale of products to government entities may be subject to termination, reduction or modification, either at the convenience
of the government or for failure to perform under the applicable contract. We are subject to potential government investigations of business practices and
compliance with government procurement and security regulations, which can be expensive and burdensome. If we were charged with wrongdoing as a result of an
investigation, we could be suspended from bidding on or receiving awards of new government contracts, which could have a material adverse effect on the
Company's results of operations. In addition, various U.S. federal and state legislative proposals have been made in the past that would deny governmental
contracts to U.S. companies that have moved their corporate location abroad. We are unable to predict the likelihood that, or final form in which, any such
proposed legislation might become law, the nature of regulations that may be promulgated under any future legislative enactments, or the effect such enactments
and increased regulatory scrutiny may have on our business.
Infringement or expiration of our intellectual property rights, or allegations that we have infringed the intellectual property rights of third parties, could
negatively affect us.
We rely on a combination of trademarks, trade secrets, patents, copyrights, know-how, confidentiality provisions and licensing arrangements to establish and
protect our proprietary rights. We cannot guarantee, however, that the steps we have taken to protect our intellectual property will be adequate to prevent
infringement of our rights or misappropriation or theft of our technology, trade secrets or know-how. For example, effective patent, trademark, copyright and trade
secret protection may be unavailable or limited in some of the countries in which we operate. In addition, while we generally enter into confidentiality agreements
with our employees and third parties to protect our trade secrets, know-how, business strategy and other proprietary information, such confidentiality agreements
could be breached or otherwise may not provide meaningful protection for our trade secrets and know-how related to the design, manufacture or operation of our
products. If it became necessary for us to resort to litigation to protect our intellectual property rights, any proceedings could be burdensome and costly, and we
may not prevail. Further, adequate remedies may not be available in the event of an unauthorized use or disclosure of our trade secrets and manufacturing
expertise. Finally, for those products in our portfolio that rely on patent protection, once a patent has expired, the product is generally open to competition.
Products under patent protection usually generate significantly higher revenues than those not protected by patents. If we fail to successfully enforce our
intellectual property rights, our competitive position could suffer, which could harm our business, financial condition, results of operations and cash flows.
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In addition, we are, from time to time, subject to claims of intellectual property infringement by third parties, including practicing entities and non-practicing
entities. Regardless of the merit of such claims, responding to infringement claims can be expensive and time-consuming, and the litigation process is subject to
inherent uncertainties, and we may not prevail in litigation matters regardless of the merits of our position. Intellectual property lawsuits or claims may become
extremely disruptive if the plaintiffs succeed in blocking the trade of our products and services and they may have a material adverse effect on our business,
financial condition, results of operations and cash flows.
Global climate change could negatively affect our business.
Increased public awareness and concern regarding global climate change may result in more regional and/or federal requirements to reduce or mitigate the effects
of greenhouse gas emissions. There continues to be a lack of consistent climate legislation, which creates economic and regulatory uncertainty. Such regulatory
uncertainty extends to incentives, which if discontinued, could adversely impact the demand for energy efficient buildings, and could increase costs of compliance.
These factors may impact the demand for our products, obsolescence of our products and our results of operations.
There is a general consensus that greenhouse gas emissions are linked to global climate changes. Climate changes, such as extreme weather conditions, create
financial risk to our business. For example, the demand for our products and services, such as residential air conditioning equipment, may be affected by
unseasonable weather conditions. Climate changes could also disrupt our operations by impacting the availability and cost of materials needed for manufacturing
and could increase insurance and other operating costs. These factors may impact our decisions to construct new facilities or maintain existing facilities in areas
most prone to physical climate risks. The Company could also face indirect financial risks passed through the supply chain, and process disruptions due to physical
climate changes could result in price modifications for our products and the resources needed to produce them.
Potential liability for environmental contamination could result in substantial costs.
We have projects underway at multiple current and former manufacturing and testing facilities to investigate and remediate environmental contamination resulting
from past operations by us or by other businesses that previously owned or used the properties, including our Fire Technology Center and Stanton Street
manufacturing facility located in Marinette, Wisconsin. These projects relate to a variety of activities, including arsenic, solvent, oil, metal, lead, perfluorooctane
sulfonate ("PFOS"), perfluorooctanoic acid ("PFOA") and/or other per- and poly fluorinated substances ("PFAS") and other hazardous substance contamination
cleanup; and structure decontamination and demolition, including asbestos abatement. Because of uncertainties associated with environmental regulation and
environmental remediation activities at sites where we may be liable, future expenses that we may incur to remediate identified sites could be considerably higher
than the current accrued liability on our consolidated statements of financial position, which could have a material adverse effect on our business, results of
operations and cash flows. See Note 22, “Commitments and Contingencies,” of the notes to consolidated financial statements for additional information on these
matters.
We are subject to requirements relating to environmental and safety regulations and environmental remediation matters which could adversely affect
our business, results of operation and reputation.
We are subject to numerous federal, state and local environmental laws and regulations governing, among other things, solid and hazardous waste storage,
treatment and disposal, and remediation of releases of hazardous materials. There are significant capital, operating and other costs associated with compliance with
these environmental laws and regulations. Environmental laws and regulations may become more stringent in the future, which could increase costs of compliance
or require us to manufacture with alternative technologies and materials.
Federal, state and local authorities also regulate a variety of matters, including, but not limited to, health, safety and permitting in addition to the environmental
matters discussed above. New legislation and regulations may require the Company to make material changes to its operations, resulting in significant increases to
the cost of production.
We are party to asbestos-related product litigation that could adversely affect our financial condition, results of operations and cash flows.
We and certain of our 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 typically involve 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. We cannot predict with certainty the extent to which we will be
successful in litigating or otherwise resolving lawsuits in the future and we continue to evaluate different strategies related to asbestos claims filed against us
including
11
entity restructuring and judicial relief. Unfavorable rulings, judgments or settlement terms could have a material adverse impact on our business and financial
condition, results of operations and cash flows.
The amounts we have recorded for asbestos-related liabilities and insurance-related assets in the consolidated statements of financial position are based on our
current strategy for resolving asbestos claims, currently available information, and a number of variables, estimates and assumptions. Key variables and
assumptions include the number and type of new claims that are filed each year, the average cost of resolution of claims, the identity of defendants and the
resolution of coverage issues with insurance carriers, amount of insurance, and the solvency risk with respect to the Company's insurance carriers. Many of these
factors are closely linked, such that a change in one variable or assumption will impact one or more of the others, and no single variable or assumption
predominately influences the determination of the Company's asbestos-related liabilities and insurance-related assets. Furthermore, predictions with respect to
these variables are subject to greater uncertainty in the later portion of the projection period. Other factors that may affect the Company's liability and cash
payments for asbestos-related matters include uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case, reforms of
state or federal tort legislation and the applicability of insurance policies among subsidiaries. As a result, actual liabilities or insurance recoveries could be
significantly higher or lower than those recorded if assumptions used in our calculations vary significantly from actual results. If actual liabilities are significantly
higher than those recorded, the cost of resolving such liabilities could have a material adverse effect on our financial position, results of operations and cash flows.
Risks related to our defined benefit retirement plans may adversely impact our results of operations and cash flow.
Significant changes in actual investment return on defined benefit plan assets, discount rates, mortality assumptions and other factors could adversely affect our
results of operations and the amounts of contributions we must make to our defined benefit plans in future periods. Because we mark-to-market our defined benefit
plan assets and liabilities on an annual basis, large non-cash gains or losses could be recorded in the fourth quarter of each fiscal year or when a remeasurement
event occurs. Generally accepted accounting principles in the U.S. require that we calculate income or expense for the plans using actuarial valuations. These
valuations reflect assumptions about financial markets and interest rates, which may change based on economic conditions. Funding requirements for our defined
benefit plans are dependent upon, among other factors, interest rates, underlying asset returns and the impact of legislative or regulatory changes related to defined
benefit funding obligations. For a discussion regarding the significant assumptions used to determine net periodic benefit cost, refer to "Critical Accounting
Estimates and Policies" included in Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations."
We may be unable to realize the expected benefits of our restructuring actions, which could adversely affect our profitability and operations.
To align our resources with our growth strategies, operate more efficiently and control costs, we periodically announce restructuring plans, which may include
workforce reductions, global plant closures and consolidations, asset impairments and other cost reduction initiatives. We may undertake additional restructuring
actions and workforce reductions in the future. As these plans and actions are complex, unforeseen factors could result in expected savings and benefits to be
delayed or not realized to the full extent planned, and our operations and business may be disrupted.
Negative or unexpected tax consequences could adversely affect our results of operations.
Adverse changes in the underlying profitability and financial outlook of our operations in several jurisdictions could lead to additional changes in our valuation
allowances against deferred tax assets and other tax reserves on our statement of financial position, and the future sale of certain businesses could potentially result
in the reversal of outside basis differences that could adversely affect our results of operations and cash flows. Additionally, changes in tax laws in the U.S., Ireland
or in other countries where we have significant operations could materially affect deferred tax assets and liabilities on our consolidated statements of financial
position and our income tax provision in our consolidated statements of income.
We are also subject to tax audits by governmental authorities. Negative unexpected results from one or more such tax audits could adversely affect our results of
operations.
Future changes in U.S. tax law could adversely affect us or our affiliates.
On December 22, 2017, the President of the United States signed into law a bill commonly referred to as the "Tax Cuts and Jobs Act" (the "TCJA"), which made
significant changes to certain U.S. tax laws relevant to us and our affiliates. While interpretations of the provisions of the TCJA continue to be subject to
uncertainty, and regulatory guidance on certain aspects of the TCJA has not yet been issued, the TJCA is expected to have an adverse effect on the U.S. federal
income taxation of our and our affiliates’
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operations, including limiting or eliminating various deductions or credits (including interest expense deductions and deductions relating to employee
compensation), imposing taxes on certain cross-border payments or transfers, imposing taxes on certain earnings of non-U.S. entities on a current basis, changing
the timing of the recognition of income or its character, limiting asset basis under certain circumstances, and imposing additional corporate taxes under certain
circumstances to combat perceived base erosion issues, among other changes.
The TCJA and any related legislation or regulations, as well as any other future changes in U.S. tax laws, could adversely affect the U.S. federal income taxation of
our and our affiliates’ ongoing operations and may also adversely affect the integration efforts relating to, and potential synergies from, past strategic transactions,
as described below. Any such changes and related consequences could have a material adverse impact on our financial results and cash flows. See Note 18,
“Income Taxes,” of the notes to consolidated financial statements for additional information on the impact the TCJA had on our business, financial performance
and results of operations.
Legal proceedings in which we are, or may be, a party may adversely affect us.
We are currently, and may in the future, become subject to legal proceedings and commercial or contractual disputes. These are typically claims that arise in the
normal course of business including, without limitation, commercial or contractual disputes with our suppliers or customers, intellectual property matters, third
party liability, including product liability claims and employment claims. In addition, we have been named, along with others, in a number of class action and other
lawsuits relating to the use of fire-fighting foam products by the U.S. Department of Defense, the U.S. military and others for fire suppression purposes and related
training exercises. Plaintiffs generally allege that the fire-fighting foam products contain or break down into the chemicals PFOS and PFOA and/or other PFAS
compounds and that the use of these products by others at various airbases, airports and other sites resulted in the release of these chemicals into the environment
and ultimately into communities’ drinking water supplies neighboring those airports, airbases and other sites. Plaintiffs in these cases generally seek compensatory
damages, including damages for alleged personal injuries, medical monitoring, diminution in property values, investigation and remediation costs, and natural
resources damages, and also seek punitive damages and injunctive relief to address remediation of the alleged contamination. It is difficult to predict the outcome
or ultimate financial exposure, if any, represented by these matters, and there can be no assurance that any such exposure will not be material. Such claims may
also negatively affect our reputation. See Note 22, “Commitments and Contingencies,” of the notes to consolidated financial statements for additional information
on these matters.
A downgrade in the ratings of our debt could restrict our ability to access the debt capital markets and increase our interest costs.
Unfavorable changes in the ratings that rating agencies assign to our debt may ultimately negatively impact our access to the debt capital markets and increase the
costs we incur to borrow funds. If ratings for our debt fall below investment grade, our access to the debt capital markets would become restricted. Future
tightening in the credit markets and a reduced level of liquidity in many financial markets due to turmoil in the financial and banking industries could affect our
access to the debt capital markets or the price we pay to issue debt. Historically, we have relied on our ability to issue commercial paper rather than to draw on our
credit facility to support our daily operations, which means that a downgrade in our ratings or volatility in the financial markets causing limitations to the debt
capital markets could have an adverse effect on our business or our ability to meet our liquidity needs.
Additionally, several of our credit agreements generally include an increase in interest rates if the ratings for our debt are downgraded. Further, an increase in the
level of our indebtedness may increase our vulnerability to adverse general economic and industry conditions and may affect our ability to obtain additional
financing.
The potential insolvency or financial distress of third parties could adversely impact our business and results of operations.
We are exposed to the risk that third parties to various arrangements who owe us money or goods and services, or who purchase goods and services from us, will
not be able to perform their obligations or continue to place orders due to insolvency or financial distress. If third parties fail to perform their obligations under
arrangements with us, we may be forced to replace the underlying commitment at current or above market prices or on other terms that are less favorable to us. In
such events, we may incur losses, or our results of operations, financial condition or liquidity could otherwise be adversely affected.
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We may be unable to complete or integrate acquisitions or joint ventures effectively, which may adversely affect our growth, profitability and results of
operations.
We expect acquisitions of businesses and assets, as well as joint ventures (or other strategic arrangements), to play a role in our future growth. We cannot be
certain that we will be able to identify attractive acquisition or joint venture targets, obtain financing for acquisitions on satisfactory terms, successfully acquire
identified targets or form joint ventures, or manage the timing of acquisitions with capital obligations across our businesses. Additionally, we may not be
successful in integrating acquired businesses or joint ventures into our existing operations and achieving projected synergies which could result in impairment of
assets, including goodwill and acquired intangible assets. Given the significance of the Company's past acquisitions, the goodwill and intangible assets recorded
were significant and impairment of such assets could result in a material adverse impact on our financial condition and results of operation. Competition for
acquisition opportunities in the various industries in which we operate may rise, thereby increasing our costs of making acquisitions or causing us to refrain from
making further acquisitions. If we were to use equity securities to finance a future acquisition, our then-current shareholders would experience dilution. We are also
subject to applicable antitrust laws and must avoid anticompetitive behavior. These and other factors related to acquisitions and joint ventures may negatively and
adversely impact our growth, profitability and results of operations.
Risks associated with joint venture investments may adversely affect our business and financial results.
We have entered into several joint ventures and we may enter into additional joint ventures in the future. Our joint venture partners may at any time have
economic, business or legal interests or goals that are inconsistent with our goals or with the goals of the joint venture. In addition, we may compete against our
joint venture partners in certain of our other markets. Disagreements with our business partners may impede our ability to maximize the benefits of our
partnerships. Our joint venture arrangements may require us, among other matters, to pay certain costs or to make certain capital investments or to seek our joint
venture partner’s consent to take certain actions. In addition, our joint venture partners may be unable or unwilling to meet their economic or other obligations
under the operative documents, and we may be required to either fulfill those obligations alone to ensure the ongoing success of a joint venture or to dissolve and
liquidate a joint venture. These risks could result in a material adverse effect on our business and financial results.
We are subject to business continuity risks associated with centralization of certain administrative functions.
We have been regionally centralizing certain administrative functions, primarily in North America, Europe and Asia, to improve efficiency and reduce costs. To
the extent that these central locations are disrupted or disabled, key business processes, such as invoicing, payments and general management operations, could be
interrupted, which could have an adverse impact on our business.
A material disruption of our operations, particularly at our monitoring and/or manufacturing facilities, could adversely affect our business.
If our operations, particularly at our monitoring facilities and/or manufacturing facilities, were to be disrupted as a result of significant equipment failures, natural
disasters, power outages, fires, explosions, terrorism, sabotage, adverse weather conditions, public health crises, labor disputes or other reasons, we may be unable
to effectively respond to alarm signals, fill customer orders and otherwise meet obligations to or demand from our customers, which could adversely affect our
financial performance.
Interruptions in production could increase our costs and reduce our sales. Any interruption in production capability could require us to make substantial capital
expenditures or purchase alternative material at higher costs to fill customer orders, which could negatively affect our profitability and financial condition. We
maintain property damage insurance that we believe to be adequate to provide for reconstruction of facilities and equipment, as well as business interruption
insurance to mitigate losses resulting from significant production interruption or shutdown caused by an insured loss. However, any recovery under our insurance
policies may not offset the lost sales or increased costs that may be experienced during the disruption of operations, which could adversely affect our business,
financial condition, results of operations and cash flow.
Our business success depends on attracting and retaining qualified personnel.
Our ability to sustain and grow our business requires us to hire, retain and develop a highly skilled and diverse management team and workforce. Failure to ensure
that we have the leadership capacity with the necessary skill set and experience could impede our ability to deliver our growth objectives and execute our strategic
plan. Organizational and reporting changes resulting from the Merger, or as a result of any future leadership transition or corporate initiatives could result in
increased turnover. Additionally, any unplanned turnover or inability to attract and retain key employees could have a negative effect on our results of operations.
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Our business may be adversely affected by work stoppages, union negotiations, labor disputes and other matters associated with our labor force.
We employ approximately 104,000 people worldwide. Approximately 21% of these employees are covered by collective bargaining agreements or works council.
Although we believe that our relations with the labor unions and works councils that represent our employees are generally good and we have experienced no
material strikes or work stoppages recently, no assurances can be made that we will not experience in the future these and other types of conflicts with labor
unions, works council, other groups representing employees or our employees generally, or that any future negotiations with our labor unions will not result in
significant increases in our cost of labor. Additionally, a work stoppage at one of our suppliers could materially and adversely affect our operations if an alternative
source of supply were not readily available. Stoppages by employees of our customers could also result in reduced demand for our products.
We are exposed to greater risks of liability for employee acts or omissions, or system failure, in our fire and security businesses than may be inherent in
other businesses.
If a customer or third party believes that he or she has suffered harm to person or property due to an actual or alleged act or omission of one of our employees or a
security or fire system failure, he or she may pursue legal action against us, and the cost of defending the legal action and of any judgment could be substantial. In
particular, because many of our products and services are intended to protect lives and real and personal property, we may have greater exposure to litigation risks
than businesses that provide other products and services. We could face liability for failure to respond adequately to alarm activations or failure of our fire
protection to operate as expected. The nature of the services we provide exposes us to the risks that we may be held liable for employee acts or omissions or system
failures. In an attempt to reduce this risk, our installation, service and monitoring agreements and other contracts contain provisions limiting our liability in such
circumstances, and we typically maintain product liability insurance to mitigate the risk that our products and services fail to operate as expected. However, in the
event of litigation, it is possible that contract limitations may be deemed not applicable or unenforceable, that our insurance coverage is not adequate, or that
insurance carriers deny coverage of our claims. As a result, such employee acts or omissions or system failures could have a material adverse effect on our
business, financial condition, results of operations and cash flows.
We do not own the right to use the ADT® brand name in the U.S. and Canada.
We own the ADT® brand name in jurisdictions outside of the U.S. and Canada, and The ADT Corporation ("ADT") owns the brand name in the U.S. and Canada.
Although Tyco has entered into agreements with ADT designed to protect the value of the ADT® brand, we cannot assure you that actions taken by ADT will not
negatively impact the value of the brand outside of the U.S. and Canada. These factors expose us to the risk that the ADT® brand name could suffer reputational
damage or devaluation for reasons outside of our control, including ADT's business conduct in the U.S. and Canada. Any of these factors may adversely affect our
business, financial condition, results of operations and cash flows.
Police departments could refuse to respond to calls from monitored security service companies.
Police departments in a limited number of jurisdictions do not respond to calls from monitored security service companies, either as a matter of policy or by local
ordinance. We have offered affected customers the option of receiving responses from private guard companies, in most cases through contracts with us, which
increases the overall cost to customers. If more police departments, whether inside or outside the U.S., were to refuse to respond or be prohibited from responding
to calls from monitored security service companies, our ability to attract and retain customers could be negatively impacted and our results of operations and cash
flow could be adversely affected.
A variety of other factors could adversely affect the results of operations of our business.
Any of the following could materially and adversely impact the results of operations of our business: loss of, changes in, or failure to perform under guaranteed
performance contracts with our major customers; cancellation of, or significant delays in, projects in our backlog; delays or difficulties in new product
development; the potential introduction of similar or superior technologies; financial instability or market declines of our major component suppliers; the
unavailability of raw materials (primarily steel, copper and electronic components) necessary for production of our products; price increases of limited-source
components, products and services that we are unable to pass on to the market; unseasonable weather conditions in various parts of the world; changes in energy
costs or governmental regulations that would decrease the incentive for customers to update or improve their building control systems; revisions to energy
efficiency or refrigerant legislation; and natural or man-made disasters or losses that impact our ability to deliver products and services to our customers.
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Risks Relating to Strategic Transactions
We may fail to realize the anticipated benefits of the business combination between Johnson Controls, Inc. and Tyco International plc.
The success of the Merger will depend on, among other things, our ability to combine the legacy businesses of Johnson Controls and Tyco in a manner that realizes
anticipated synergies and facilitates growth opportunities, and achieves the projected stand-alone cost savings and revenue growth trends identified by us. We
expect to benefit from operational and general and administrative cost synergies resulting from the consolidation of capabilities and branch optimization, as well as
greater tax efficiencies from global management and global cash movement. We may also enjoy revenue synergies, including product and service cross-selling, a
more diversified and expanded product offering and balance across geographic regions. However, we must successfully combine the legacy businesses of Johnson
Controls and Tyco in a manner that permits these cost savings and synergies to be realized. In addition, we must achieve the anticipated savings and synergies
without adversely affecting current revenues and investments in future growth. If we are not able to successfully achieve these objectives, we may not realize fully,
or at all, the anticipated benefits of the Merger, or it may take longer to realize the benefits than expected.
Other factors may prevent us from realizing the anticipated benefits of the Merger or impact our future performance. These include, among other items, the
possibility that the contingent liabilities of either party (including contingent tax liabilities) are larger than expected, the existence of unknown liabilities, adverse
consequences and unforeseen increased expenses associated with the Merger and possible adverse tax consequences pursuant to changes in applicable tax laws
(including most recently the TCJA), regulations or other administrative guidance. In addition, we may be subject to additional restrictions as a result of the
Company's Irish domicile.
We may encounter significant difficulties in combining the legacy Johnson Controls and Tyco businesses.
The combination of two independent businesses is a complex, costly and time-consuming process. As a result, we continue to devote significant management
attention and resources to combining the business practices and operations of the legacy Johnson Controls and Tyco businesses. This process may disrupt the
businesses. The failure to meet the challenges involved in combining the two businesses and to realize the anticipated benefits of the transactions could cause an
interruption of, or a loss of momentum in, the activities of the combined company and could adversely affect our results of operations. The overall combination of
legacy Johnson Controls and Tyco businesses may also result in material unanticipated problems, expenses, liabilities, competitive responses, loss of customer and
other business relationships and diversion of management attention. The difficulties of combining the operations of the companies include, among others:
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the diversion of management attention to integration matters;
difficulties in integrating operations and systems;
challenges in conforming standards, controls, procedures and accounting and other policies, business cultures and
compensation structures between the two companies;
difficulties in assimilating employees and in attracting and retaining key personnel;
challenges in keeping existing customers and obtaining new customers;
difficulties in achieving anticipated cost savings, synergies, business opportunities and growth prospects from the
combination;
difficulties in managing the expanded operations of a significantly larger and more complex company;
contingent liabilities (including contingent tax liabilities) that are larger than expected; and
potential unknown liabilities, adverse consequences and unforeseen increased expenses associated with the Merger,
including possible adverse tax consequences to the combined company pursuant to changes in applicable tax laws or
regulations.
Many of these factors are outside of our control, and any one of them could result in increased costs, decreased expected revenues and diversion of management
time and energy, which could materially impact the business, financial condition and results of operations of the combined company.
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Divestitures of some of our businesses or product lines may materially adversely affect our financial condition, results of operations or cash flows.
We continually evaluate the performance and strategic fit of all of our businesses and may sell businesses or product lines. For example, on October 31, 2016, we
completed the spin-off of our Automotive Experience business and sold our Scott Safety business in October 2017. In addition, on April 30, 2019, we sold our
Power Solutions business to BCP Acquisitions LLC. Divestitures involve risks, including difficulties in the separation of operations, services, products and
personnel, the diversion of management's attention from other business concerns, the disruption of our business, the potential loss of key employees and the
retention of uncertain environmental or other contingent liabilities related to the divested business. Some divestitures, like the Power Solutions divestiture, may be
dilutive to earnings. In addition, divestitures may result in significant asset impairment charges, including those related to goodwill and other intangible assets,
which could have a material adverse effect on our financial condition and results of operations. We cannot assure you that we will be successful in managing these
or any other significant risks that we encounter in divesting a business or product line, and any divestiture we undertake could materially and adversely affect our
business, financial condition, results of operations and cash flows, and may also result in a diversion of management attention, operational difficulties and losses.
With respect to the Power Solutions divestiture, there can be no assurance whether the strategic benefits and expected financial impact of the divestiture will be
achieved.
The Internal Revenue Service ("IRS") may not agree that we should be treated as a non-U.S. corporation for U.S. federal tax purposes and may not agree
that the our U.S. affiliates should not be subject to certain adverse U.S. federal income tax rules.
Under current U.S. federal tax law, a corporation is generally considered for U.S. federal tax purposes to be a tax resident in the jurisdiction of its organization or
incorporation. Because Johnson Controls International plc is an Irish incorporated entity, it would generally be classified as a non-U.S. corporation (and, therefore,
a non-U.S. tax resident) under these rules. However, Section 7874 of the Code ("Section 7874") provides an exception to this general rule under which a non-U.S.
incorporated entity may, in certain circumstances, be treated as a U.S. corporation for U.S. federal tax purposes.
Under Section 7874, if (1) former Johnson Controls, Inc. shareholders owned (within the meaning of Section 7874) 80% or more (by vote or value) of our ordinary
shares after the Merger by reason of holding Johnson Controls, Inc. common stock (the "80% ownership test," and such ownership percentage the "Section 7874
ownership percentage"), and (2) our "expanded affiliated group" did not have "substantial business activities" in Ireland ("the substantial business activities test"),
we will be treated as a U.S. corporation for U.S. federal tax purposes. If the Section 7874 ownership percentage of the former Johnson Controls, Inc. shareholders
after the Merger was less than 80% but at least 60% (the "60% ownership test"), and the substantial business activities test was not met, we and our U.S. affiliates
(including the U.S. affiliates historically owned by Tyco) may, in some circumstances, be subject to certain adverse U.S. federal income tax rules (which, among
other things, could limit their ability to utilize certain U.S. tax attributes to offset U.S. taxable income or gain resulting from certain transactions).
Based on the terms of the Merger, the rules for determining share ownership under Section 7874 and certain factual assumptions, we believe that former Johnson
Controls, Inc. shareholders owned (within the meaning of Section 7874) less than 60% (by both vote and value) of our ordinary shares after the Merger by reason
of holding shares of Johnson Controls, Inc. common stock. Therefore, under current law, we believe that we should not be treated as a U.S. corporation for U.S.
federal tax purposes and that Section 7874 should otherwise not apply to us or our affiliates as a result of the Merger.
However, the rules under Section 7874 are complex and there is limited guidance regarding their application. In particular, ownership for purposes of Section 7874
is subject to various adjustments under the Code and the Treasury regulations promulgated thereunder, and there is limited guidance regarding Section 7874,
including with respect to the application of the ownership tests described therein. As a result, the determination of the Section 7874 ownership percentage is
complex and is subject to factual and legal uncertainties. Thus, there can be no assurance that the IRS will agree with the position that we should not be treated as a
U.S. corporation for U.S. federal tax purposes or that Section 7874 does not otherwise apply as a result of the Merger.
In addition, on January 13, 2017 and July 11, 2018, the U.S. Treasury and the IRS finalized certain Treasury regulations issued under Section 7874 and revised
certain related temporary regulations (the "Section 7874 Regulations"), which, among other things, require certain adjustments that generally increase, for purposes
of the Section 7874 ownership tests, the percentage of the stock of a foreign acquiring corporation deemed owned (within the meaning of Section 7874) by the
former shareholders of an acquired U.S. corporation by reason of holding stock in such U.S. corporation. For example, these regulations disregard, for purposes of
determining this ownership percentage, (1) any "non-ordinary course distributions" (within the meaning of the regulations) made by the acquired U.S. corporation
(such as Johnson Controls, Inc.) during the 36 months preceding the acquisition, including certain dividends and share repurchases, (2) potentially any cash
consideration received by the shareholders of such U.S. corporation in the acquisition to the extent such cash is, directly or indirectly, provided by the U.S.
corporation, as well as (3) certain stock of
17
the foreign acquiring corporation that was issued as consideration in a prior acquisition of another U.S. corporation (or U.S. partnership) during the 36 months
preceding the signing date of a binding contract for the acquisition being tested. Taking into account the effect of these regulations, we believe that the Section
7874 ownership percentage of former Johnson Controls, Inc. shareholders in us was less than 60%. However, these regulations are complex and there is limited
guidance regarding their application. Accordingly, there can be no assurance that the IRS will not successfully assert that either the 80% ownership test or the 60%
ownership test was met after the Merger.
If the 80% ownership test was met after the Merger and we were accordingly treated as a U.S. corporation for U.S. federal tax purposes under Section 7874, we
would be subject to substantial additional U.S. tax liability. Additionally, in such case, our non-U.S. shareholders would be subject to U.S. withholding tax on the
gross amount of any dividends we pay to such shareholders (subject to an exemption or reduced rate available under an applicable tax treaty). Regardless of any
application of Section 7874, we are treated as an Irish tax resident for Irish tax purposes. Consequently, if we were to be treated as a U.S. corporation for U.S.
federal tax purposes under Section 7874, we could be liable for both U.S. and Irish taxes, which could have a material adverse effect on our financial condition and
results of operations.
If the 60% ownership test were met, several adverse U.S. federal income tax rules could apply to our U.S. affiliates. In particular, in such case, Section 7874 could
limit the ability of such U.S. affiliates to utilize certain U.S. tax attributes (including net operating losses and certain tax credits) to offset any taxable income or
gain resulting from certain transactions, including any transfers or licenses of property to a foreign related person during the 10-year period following the Merger.
The Section 7874 Regulations generally expand the scope of these rules. If the 60% ownership test were met after the Merger, such current and future limitations
would apply to our U.S. affiliates (including the U.S. affiliates historically owned by Tyco), and their application could limit their ability to utilize such U.S. tax
attributes against any income or gain recognized in connection with the Adient spin-off. In such case, the application of such rules could result in significant
additional U.S. tax liability. In addition, the Section 7874 Regulations (and certain related temporary regulations issued under other provisions of the Code) include
rules that would apply if the 60% ownership test were met, which, in such situation, may limit our ability to restructure or access cash earned by certain of our non-
U.S. subsidiaries, in each case, without incurring substantial U.S. tax liabilities.
Future potential changes to the tax laws could result in our being treated as a U.S. corporation for U.S. federal tax purposes or in us and our U.S.
affiliates (including the U.S. affiliates historically owned by Tyco) being subject to certain adverse U.S. federal income tax rules.
As discussed above, under current law, we believe that we should be treated as a non-U.S. corporation for U.S. federal tax purposes and that Section 7874 does not
otherwise apply as a result of the Merger. However, changes to Section 7874, or the U.S. Treasury regulations promulgated thereunder, could affect our status as a
non-U.S. corporation for U.S. federal tax purposes or could result in the application of certain adverse U.S. federal income tax rules to us and our U.S. affiliates
(including the U.S. affiliates historically owned by Tyco). Any such changes could have prospective or retroactive application, and may apply even though the
Merger has been consummated. If we were to be treated as a U.S. corporation for federal tax purposes or if we or our U.S. affiliates (including the U.S. affiliates
historically owned by Tyco) were to become subject to such adverse U.S. federal income tax rules, we and our U.S. affiliates could be subject to substantially
greater U.S. tax liability than currently contemplated.
Certain legislative and other proposals have aimed to expand the scope of U.S. corporate tax residence, including in such a way as would cause us to be treated as a
U.S. corporation if our place of management and control or the place of management and control of our non-U.S. affiliates were determined to be located primarily
in the United States. In addition, certain legislative and other proposals have aimed to expand the scope of Section 7874, or otherwise address certain perceived
issues arising in connection with so-called inversion transactions. For example, multiple proposals introduced by certain Democratic members of both houses of
Congress, which, if enacted in their present form, would be effective retroactively to certain transactions (including the Merger), would, among other things, treat a
foreign acquiring corporation as a U.S. corporation for U.S. federal tax purposes under Section 7874 if the former shareholders of a U.S. corporation acquired by
such foreign acquiring corporation own more than 50% of the shares of the foreign acquiring corporation after the acquisition. These proposals, if enacted in their
present form and made retroactive to a date before the date of the closing of the Merger, would cause us to be treated as a U.S. corporation for U.S. federal tax
purposes. In such case, we would be subject to substantially greater U.S. tax liability than currently contemplated. It is presently uncertain whether any such
proposals or other legislative action relating to the scope of U.S. tax residence, Section 7874 or so-called inversion transactions and inverted groups will be enacted
into law.
Other legislative and/or other proposals relating to U.S. taxation could also have a material impact on our future financial results. The recently enacted TCJA
introduced significant changes to certain U.S. tax laws relevant to us and our affiliates, including limitations on the deductibility of certain interest expense and
employee compensation, limitations on various other deductions and credits, the imposition of taxes in respect of certain cross-border payments or transfers, the
imposition of taxes on certain earnings of non-U.S. entities on a current basis, and changes in the timing of the recognition of income or its character. These
18
changes, any future regulatory guidance implementing the TCJA, as well as any other legislative or other proposals or changes relating to U.S. taxation (which may
or may not be adopted and may apply, on a prospective or retroactive basis), could have a significant adverse effect on us and our affiliates.
Adient may fail to perform under various transaction agreements that we have executed as part of the Adient spin-off.
On October 31, 2016, we completed the separation of our Automotive Experience business through the spin-off of Adient plc to shareholders.
In connection with the spin-off of Adient, we and Adient have entered into a separation and distribution agreement and various other agreements, including a
transition services agreement, a tax matters agreement, an employee matters agreement and a transitional trademark license agreement. Certain of these agreements
provide for the performance of services by each company for the benefit of the other for a period of time after the spin-off. We will rely on Adient to satisfy its
performance and payment obligations under these agreements. If Adient is unable to satisfy its obligations under these agreements, including its indemnification
obligations, we could incur operational difficulties or losses.
Risks Relating to Our Jurisdiction of Incorporation
Legislative action in the U.S. could materially and adversely affect us.
Legislative action may be taken by the U.S. Congress which, if ultimately enacted, could limit the availability of tax benefits or deductions that we currently claim,
override tax treaties upon which we rely, affect our status as a non-U.S. corporation for U.S. federal income tax purposes, impose additional taxes on payments
made by our U.S. subsidiaries to non-U.S. affiliates, or otherwise affect the taxes that the U.S. imposes on our worldwide operations. Such changes could have
retroactive effect and could have a material adverse effect on our effective tax rate and/or require us to take further action, at potentially significant expense, to
seek to preserve our effective tax rate. In addition, if proposals were enacted that had the effect of disregarding or limiting our ability, as an Irish company, to take
advantage of tax treaties with the U.S., we could incur additional tax expense and/or otherwise incur business detriment.
Legislation relating to governmental contracts could materially and adversely affect us.
Various U.S. federal and state legislative proposals that would deny governmental contracts to U.S. companies that have moved their corporate location abroad
may affect us. We are unable to predict the likelihood that, or final form in which, any such proposed legislation might become law, the nature of regulations that
may be promulgated under any future legislative enactments, or the effect such enactments and increased regulatory scrutiny may have on our business.
Irish law differs from the laws in effect in the U.S. and may afford less protection to holders of our securities.
It may not be possible to enforce court judgments obtained in the U.S. against us in Ireland based on the civil liability provisions of the U.S. federal or state
securities laws. In addition, there is some uncertainty as to whether the courts of Ireland would recognize or enforce judgments of U.S. courts obtained against us
or our directors or officers based on the civil liabilities provisions of the U.S. federal or state securities laws or hear actions against us or those persons based on
those laws. We have been advised that the U.S. currently does not have a treaty with Ireland providing for the reciprocal recognition and enforcement of judgments
in civil and commercial matters. Therefore, a final judgment for the payment of money rendered by any U.S. federal or state court based on civil liability, whether
or not based solely on U.S. federal or state securities laws, would not automatically be enforceable in Ireland.
A judgment obtained against the combined company will be enforced by the courts of Ireland if the following general requirements are met:
•
•
U.S. courts must have had jurisdiction in relation to the particular defendant according to Irish conflict of law rules (the submission to jurisdiction by the
defendant would satisfy this rule); and
the judgment must be final and conclusive and the decree must be final and unalterable in the court which pronounces it.
A judgment can be final and conclusive even if it is subject to appeal or even if an appeal is pending. But where the effect of lodging an appeal under the applicable
law is to stay execution of the judgment, it is possible that in the meantime the judgment may not be actionable in Ireland. It remains to be determined whether
final judgment given in default of appearance is final and conclusive. Irish courts may also refuse to enforce a judgment of the U.S. courts which meets the above
requirements for one of the following reasons:
19
•
•
•
•
•
the judgment is not for a definite sum of money;
the judgment was obtained by fraud;
the enforcement of the judgment in Ireland would be contrary to natural or constitutional justice;
the judgment is contrary to Irish public policy or involves certain U.S. laws which will not be enforced in Ireland; or
jurisdiction cannot be obtained by the Irish courts over the judgment debtors in the enforcement proceedings by personal service Ireland or outside Ireland
under Order 11 of the Irish Superior Courts Rules.
As an Irish company, Johnson Controls is governed by the Irish Companies Acts, which differ in some material respects from laws generally applicable to U.S.
corporations and shareholders, including, among others, differences relating to interested director and officer transactions and shareholder lawsuits. Likewise, the
duties of directors and officers of an Irish company generally are owed to the company only. Shareholders of Irish companies generally do not have a personal
right of action against directors or officers of the company and may exercise such rights of action on behalf of the company only in limited circumstances.
Accordingly, holders of Johnson Controls International plc securities may have more difficulty protecting their interests than would holders of securities of a
corporation incorporated in a jurisdiction of the U.S.
Our effective tax rate may increase.
There is uncertainty regarding the tax policies of the jurisdictions where we operate, which if enacted could result in an increase in our effective tax rate.
Additionally, the tax laws of Ireland and other jurisdictions could change in the future, and such changes could cause a material increase in our effective tax rate.
Changes to the U.S. model income tax treaty could adversely affect us.
On February 17, 2016, the U.S. Treasury released a revised U.S. model income tax convention (the "new model"), which is the baseline text used by the U.S.
Treasury to negotiate tax treaties. If any or all of the modifications to the model treaty are adopted in the main jurisdictions in which we do business, they could,
among other things, cause double taxation, increase audit risk and substantially increase our worldwide tax liability. We cannot predict the outcome of any specific
modifications to the model treaty, and we cannot provide assurance that any such modifications will not apply to us.
Transfers of Johnson Controls ordinary shares may be subject to Irish stamp duty.
For the majority of transfers of Johnson Controls ordinary shares, there is no Irish stamp duty. However, Irish stamp duty is payable for certain share transfers. A
transfer of Johnson Controls ordinary shares from a seller who holds shares beneficially (i.e. through the Depository Trust Company ("DTC")) to a buyer who
holds the acquired shares beneficially is not subject to Irish stamp duty (unless the transfer involves a change in the nominee that is the record holder of the
transferred shares). A transfer of Johnson Controls ordinary shares by a seller who holds shares directly (i.e. not through DTC) to any buyer, or by a seller who
holds the shares beneficially to a buyer who holds the acquired shares directly, may be subject to Irish stamp duty (currently at the rate of 1% of the price paid or
the market value of the shares acquired, if higher) payable by the buyer. A shareholder who directly holds shares may transfer those shares into his or her own
broker account to be held through DTC without giving rise to Irish stamp duty provided that the shareholder has confirmed to Johnson Controls transfer agent that
there is no change in the ultimate beneficial ownership of the shares as a result of the transfer and, at the time of the transfer, there is no agreement in place for a
sale of the shares.
We currently intend to pay, or cause one of our affiliates to pay, stamp duty in connection with share transfers made in the ordinary course of trading by a seller
who holds shares directly to a buyer who holds the acquired shares beneficially. In other cases Johnson Controls may, in its absolute discretion, pay or cause one of
its affiliates to pay any stamp duty. Johnson Controls Memorandum and Articles of Association provide that, in the event of any such payment, Johnson Controls
(i) may seek reimbursement from the buyer, (ii) may have a lien against the Johnson Controls ordinary shares acquired by such buyer and any dividends paid on
such shares and (iii) may set-off the amount of the stamp duty against future dividends on such shares. Parties to a share transfer may assume that any stamp duty
arising in respect of a transaction in Johnson Controls ordinary shares has been paid unless one or both of such parties is otherwise notified by Johnson Controls.
Dividends paid by us may be subject to Irish dividend withholding tax.
In certain circumstances, as an Irish tax resident company, we will be required to deduct Irish dividend withholding tax (currently at the rate of 20%) from
dividends paid to our shareholders. Shareholders that are resident in the U.S., European Union countries (other than Ireland) or other countries with which Ireland
has signed a tax treaty (whether the treaty has been ratified or not) generally should not be subject to Irish withholding tax so long as the shareholder has provided
its broker, for onward transmission
20
to our qualifying intermediary or other designated agent (in the case of shares held beneficially), or us or our transfer agent (in the case of shares held directly),
with all the necessary documentation by the appropriate due date prior to payment of the dividend. However, some shareholders may be subject to withholding tax,
which could adversely affect the price of our ordinary shares.
Dividends received by you could be subject to Irish income tax.
Dividends paid in respect of Johnson Controls ordinary shares generally are not subject to Irish income tax where the beneficial owner of these dividends is exempt
from dividend withholding tax, unless the beneficial owner of the dividend has some connection with Ireland other than his or her shareholding in Johnson
Controls.
Johnson Controls shareholders who receive their dividends subject to Irish dividend withholding tax generally will have no further liability to Irish income tax on
the dividend unless the beneficial owner of the dividend has some connection with Ireland other than his or her shareholding in Johnson Controls.
ITEM 1B
UNRESOLVED STAFF COMMENTS
The Company has no unresolved written comments regarding its periodic or current reports from the staff of the SEC.
ITEM 2
PROPERTIES
The Company conducts its operations in approximately 70 countries throughout the world, with its world headquarters located in Cork, Ireland and its North
American operational headquarters located in Milwaukee, Wisconsin USA. The Company’s wholly- and majority-owned facilities primarily consist of
manufacturing, sales and service offices, research and development facilities, monitoring centers, and assembly and/or warehouse centers. At September 30, 2019,
these properties totaled approximately 44 million square feet of floor space of which 18 million square feet are owned and 26 million square feet are leased. The
Company considers its facilities to be suitable for their current uses and adequate for current needs. The majority of the facilities are operating at normal levels
based on capacity. The Company does not anticipate difficulty in renewing existing leases as they expire or in finding alternative facilities.
ITEM 3
LEGAL PROCEEDINGS
Gumm v. Molinaroli, et al.
On August 16, 2016, a putative class action lawsuit, Gumm v. Molinaroli, et al., Case No. 16-cv-1093, was filed in the United States District Court for the Eastern
District of Wisconsin, naming Johnson Controls, Inc., the individual members of its board of directors at the time of the merger with the Company’s merger
subsidiary and certain of its officers, the Company and the Company’s merger subsidiary as defendants. The complaint asserted various causes of action under the
federal securities laws, state law and the Taxpayer Bill of Rights, including that the individual defendants allegedly breached their fiduciary duties and unjustly
enriched themselves by structuring the merger among the Company, Tyco and the merger subsidiary in a manner that would result in a United States federal
income tax realization event for the putative class of certain Johnson Controls, Inc. shareholders and allegedly result in certain benefits to the defendants, as well as
related claims regarding alleged misstatements in the proxy statement/prospectus distributed to the Johnson Controls, Inc. shareholders, conversion and breach of
contract. The complaint also asserted that Johnson Controls, Inc., the Company and the Company’s merger subsidiary aided and abetted the individual defendants
in their breach of fiduciary duties and unjust enrichment. The complaint seeks, among other things, disgorgement of profits and damages. On September 30, 2016,
approximately one month after the closing of the merger, plaintiffs filed a preliminary injunction motion seeking, among other items, to compel Johnson Controls,
Inc. to make certain intercompany payments that plaintiffs contend will impact the United States federal income tax consequences of the merger to the putative
class of certain Johnson Controls, Inc. shareholders and to enjoin Johnson Controls, Inc. from reporting to the Internal Revenue Service the capital gains taxes
payable by this putative class as a result of the closing of the merger. The court held a hearing on the preliminary injunction motion on January 4, 2017, and on
January 25, 2017, the judge denied the plaintiffs' motion. Plaintiffs filed an amended complaint on February 15, 2017, and the Company filed a motion to dismiss
on April 3, 2017. On October 17, 2019, the court heard oral argument on the motion to dismiss and took the matter under advisement. Although the Company
believes it has substantial defenses to plaintiffs’ claims, it is not able to predict the outcome of this action.
Refer to Note 22, "Commitments and Contingencies," of the notes to consolidated financial statements for discussion of environmental, asbestos, insurable
liabilities and other litigation matters, which is incorporated by reference herein and is considered an integral part of Part I, Item 3, "Legal Proceedings."
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ITEM 4
MINE SAFETY DISCLOSURES
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3) of Form 10-K, the following list of executive officers of the Company as of November 21, 2019 is included as an unnumbered
Item in Part I of this report in lieu of being included in the Company’s Proxy Statement relating to the annual general meeting of shareholders to be held on March
4, 2020.
Tomas Brannemo, 48, was elected Vice President and President, Building Solutions, Europe, Middle East, Africa and Latin America in September
2019. He previously served as Senior Vice President and President, Water Infrastructure and Europe Commercial Team of Xylem Inc., a leading global water
technology company. At Xylem, he also served as Senior Vice President and President, Transport and Treatment, from 2017 to 2019 and other roles from
2010 to 2017. Between 2006 and 2010, he held various marketing, sales and engineering positions at Volvo Construction Company.
John Donofrio, 57, has served as Executive Vice President and General Counsel of the Company since November 15, 2017. He previously served as
Vice President, General Counsel and Secretary of Mars, Incorporated, a global food manufacturer from October 2013 to November 2017. Before joining Mars
in October 2013, Mr. Donofrio was Executive Vice President, General Counsel and Secretary for The Shaw Group Inc., a global engineering and construction
company, from October 2009 until February 2013. Prior to joining Shaw, Mr. Donofrio was Senior Vice President, General Counsel and Chief Compliance
Officer at Visteon Corporation, a global automotive supplier, a position he held from 2005 until October 2009. Mr. Donofrio has been a Director of FARO
Technologies, Inc., a designer, developer, manufacturer and marketer of software driven, 3D measurement, imaging and realization systems, since 2008.
Michael J. Ellis, 63, was elected Executive Vice President and Chief Customer & Digital Officer, effective October 2019. From May 2018 to
October 2019, he served as a Managing Director at Accenture, a global provider of professional services in strategy, consulting, digital, technology and
operations. He previously served as Chairman and CEO of ForgeRock, a global digital security software company, from 2012 to 2018. Prior to joining
ForgeRock, from 2008 to 2012, he held various senior executive roles at SAP SE, a global provider of enterprise software solutions. Previously, he also served
as Chief Executive Officer of Univa, a leading innovator in enterprise-grade workload management and optimization solutions, and as Senior Vice President
Business Development at i2 Technologies, a provider of supply chain solutions.
Visal Leng, 49, was elected Vice President and President, Building Solutions, Asia Pacific in September 2018. He previously served as President
Asia Pacific of Baker Hughes, the world’s first and only full stream provider of integrated oilfield products, services and digital solutions, from July 2017 to
September 2018. Prior to the merger of Baker Hughes with General Electric in 2017, he held a number of roles with increasing responsibility in General
Electric from his hire in November 1996, including President of its Asia Pacific oil and gas operations from January 2014 to July 2017; and Asia Pacific
Regional General Manager from October 2011 to December 2013.
Lynn Minella, 61, has served as Executive Vice President and Chief Human Resources Officer since June 2017. Prior to joining Johnson Controls, she
served as Group Human Resources Director at BAE Systems Plc from June 2012 to June 2017. Prior to BAE Systems, she was with Air Products and
Chemicals, Inc. from 2004 until 2012 where she was the Senior Vice President of Human Resources and Communications. Earlier in her career she also held a
variety of human resources roles of increasing responsibility at International Business Machines Corporation.
George R. Oliver, 60, has served as Chief Executive Officer and Chairman of the Board since September 2017. He previously served as our President and
Chief Operating Officer following the completion of the merger in September 2016. Prior to that, Mr. Oliver was Tyco's Chief Executive Officer, a position he
held since September 2012. He joined Tyco in July 2006, and served as President of a number of operating segments from 2007 through 2011. Before joining
Tyco, he served in operational leadership roles of increasing responsibility at several General Electric divisions. Mr. Oliver also serves as a Director on the
board of Raytheon Company, a company specializing in cybersecurity and defense throughout the world.
Rodney M. Rushing, 53, was elected Vice President and President, Building Solutions, North America in November 2016. From 2015 to November 2016 he
served as Global Vice President and General Manager, Global Products - Direct Expansion, overseeing the integration of Johnson Controls, Inc.’s joint
venture with Hitachi Air Conditioning. Prior thereto, from 2013 to 2015 he was Vice President and General Manager, Products and Distribution North
America and from 2009 to 2013 he was Vice President and General Manager of Unitary Products. Mr. Rushing first joined Johnson Controls, Inc. in 1990, and
has held a number of roles of increasing responsibility in its field and product organization.
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Brian J. Stief, 63, has served as Vice Chairman and Chief Financial Officer since November 2019. He also serves as the Company's Principal Financial
Officer. He was elected Executive Vice President and Chief Financial Officer following the completion of the Merger in September 2016 and served in that
role until November 2019. Prior to the Merger, he was elected Executive Vice President and Chief Financial Officer of Johnson Controls, Inc. in September
2014. He previously served Johnson Controls, Inc. as Vice President and Corporate Controller from 2010 to 2014. Prior to joining Johnson Controls, Inc. in
2010, Mr. Stief was a partner with PricewaterhouseCoopers LLP (an audit and assurance, tax and consulting services provider), which he joined in 1979 and in
which he became partner in 1989.
Robert VanHimbergen, 43, has served as Vice President and Corporate Controller since December 2017. Mr. VanHimbergen joined Johnson
Controls in 2007 as the Corporate Director of Global Accounting and has held various Corporate and Power Solutions positions of increasing responsibility.
His most recent position was serving as the Chief Financial Officer of Yanfeng Automotive Interiors, an Adient joint venture, formed in 2015. Mr.
VanHimbergen began his career at PricewaterhouseCoopers in 1998.
Jeff M. Williams, 58, has served as Vice President and President, Global Products, Building Technologies and Solutions since July 2019. He previously served
as Vice President and President, Building Solutions, Europe, Middle East, Africa and Latin America from March 2017 to July 2019. Prior thereto, he served as
Vice President - Enterprise Operations - Engineering and Supply Chain from January 2015 through the Merger to March 2017. With respect to roles at
Johnson Controls, Inc., he served as Vice President, Program Management Office from 2015 to 2016, as Group Vice President and General Manager Global
Seating & Supply Chain from 2013 to 2014, and as Group Vice President and General Manager Customer Group Americas from 2010 to 2012. Mr. Williams
joined Johnson Controls, Inc. in 1984.
There are no family relationships, as defined by the instructions to this item, among the Company’s executive officers.
PART II
ITEM 5
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
The shares of the Company’s ordinary shares are traded on the New York Stock Exchange under the symbol "JCI."
Title of Class
Number of Record Holders
as of September 30, 2019
Ordinary Shares, $0.01 par value
35,367
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year
Dividends
2019
2018
$
$
0.26 $
0.26
0.26
0.26
1.04 $
0.26
0.26
0.26
0.26
1.04
In November 2018, the Company's Board of Directors approved a $1 billion increase to its existing share repurchase authorization. In March 2019, the Company's
Board of Directors approved an additional $8.5 billion increase to its existing share repurchase authorization, subject to the completion of the previously
announced sale of the Company's Power Solutions business, which closed on April 30, 2019. The share repurchase program does not have an expiration date and
may be amended or terminated by the Board of Directors at any time without prior notice. During fiscal year 2019, the Company repurchased approximately
$5,983 million of its ordinary shares, of which $4,035 million of its ordinary shares were purchased through publicly announced "modified Dutch auction" tender
offer and $1,948 million of its ordinary shares were purchased on an open market. As of September 30, 2019, approximately $4.6 billion remains available under
the share repurchase program.
23
The following table presents information regarding the repurchase of the Company’s ordinary shares by the Company as part of the publicly announced program
during the three months ended September 30, 2019.
Period
7/1/19 - 7/31/19
Purchases by Company
8/1/19 - 8/31/19
Purchases by Company
9/1/19 - 9/30/19
Purchases by Company
Total Number of Shares
Purchased
Average Price Paid per
Share
Total Number of Shares
Purchased as Part of the
Publicly Announced
Program
Approximate Dollar
Value of Shares that
May Yet be Purchased
under the Programs
7,004,690 $
41.39
7,004,690 $
5,136,315,065
7,225,000
42.08
7,225,000
4,832,308,943
6,130,000
43.43
6,130,000
4,566,076,675
During the three months ended September 30, 2019, acquisitions of shares by the Company from certain employees in order to satisfy employee tax withholding
requirements in connection with the vesting of restricted shares were not material.
24
The following information in Item 5 is not deemed to be "soliciting material" or to be "filed" with the SEC or subject to Regulation 14A or 14C under the
Securities Exchange Act of 1934 ("Exchange Act") or to the liabilities of Section 18 of the Exchange Act, and will not be deemed to be incorporated by reference
into any filing under the Securities Act of 1933 or the Exchange Act, except to the extent the Company specifically incorporates it by reference into such a filing.
The line graph below compares the cumulative total shareholder return on the Company's ordinary shares with the cumulative total return of companies on the
Standard & Poor’s ("S&P’s") 500 Stock Index and the companies on the S&P 500 Industrials Index. This graph assumes the investment of $100 on September 30,
2014 and the reinvestment of all dividends since that date.
The Company’s transfer agent’s contact information is as follows:
EQ Shareowner Services
P.O. Box 64874
St. Paul, MN 55164-0874
(877) 602-7397
25
ITEM 6
SELECTED FINANCIAL DATA
The following selected financial data reflects the results of operations, financial position data and ordinary share information for the fiscal years ended
September 30, 2015 through September 30, 2019 (dollars in millions, except per share data). Certain amounts have been revised to reflect the retrospective
application of the classification of the Power Solutions business as a discontinued operation for all periods presented.
2019
2018
2017
2016
2015
Year ended September 30,
OPERATING RESULTS
Net sales
Segment EBITA (1)
Income (loss) from continuing operations attributable to Johnson
Controls (6)
Net income (loss) attributable to Johnson Controls
Earnings (loss) per share from continuing operations (6)
Basic
Diluted
Return on average shareholders’ equity attributable to Johnson
Controls (2) (6)
Capital expenditures
Depreciation and amortization
Number of employees
FINANCIAL POSITION
Working capital (as defined) (3)
Total assets
Long-term debt
Total debt
Shareholders' equity attributable to Johnson Controls
Total debt to capitalization (4)
Net book value per share (5)
ORDINARY SHARE INFORMATION
Dividends per share
Market prices
High
Low
Weighted average shares (in millions)
Basic
Diluted
Number of shareholders
$
23,968
$
23,400
$
22,835
$
14,184
$
3,041
1,100
5,674
$
1.26
1.26
5%
$
586
825
3,138
1,175
2,162
$
1.27
1.26
6%
$
645
824
2,831
672
1,611
0.72
0.71
1,427
(10)
(868)
$
(0.01)
$
(0.01)
10,510
1,086
42
1,563
0.06
0.06
3%
$
760
919
— %
$
491
382
—%
418
240
104,000
122,000
121,000
209,000
139,000
975
$
471
$
449
$
(619)
$
(220)
42,287
6,708
7,219
19,766
48,797
9,623
10,930
21,164
51,884
11,885
13,465
20,447
63,179
10,966
12,636
24,118
29,590
5,237
6,073
10,335
27%
34%
40%
34 %
37%
25.42
$
22.88
$
22.03
$
25.77
$
15.96
1.04
$
1.04
$
1.00
$
1.16
$
1.04
44.65
$
42.60
$
46.17
$
28.30
32.89
36.74
$
48.97
30.30
870.2
874.3
35,367
925.7
931.7
37,836
935.3
944.6
40,260
667.4
672.6
41,299
54.52
38.48
655.2
661.5
35,425
$
$
$
$
$
$
(1)
Segment earnings before interest, taxes and amortization ("EBITA") is calculated as income from continuing operations before income taxes and
noncontrolling interests, excluding general corporate expenses, intangible asset amortization, net financing charges, restructuring and impairment costs, and
net mark-to-market adjustments related to pension and postretirement plans and restricted asbestos investments. Refer to Note 19, “Segment Information,”
of the notes to consolidated financial statements for a reconciliation of segment EBITA to income from continuing operations before income taxes.
(2)
Return on average shareholders’ equity attributable to Johnson Controls represents income from continuing operations attributable to Johnson Controls
divided by average shareholders’ equity attributable to Johnson Controls.
26
(3)
(4)
(5)
(6)
Working capital is defined as current assets less current liabilities, excluding cash, short-term debt, the current portion of long-term debt, and the current
portions of assets and liabilities held for sale.
Total debt to total capitalization represents total debt divided by the sum of total debt and shareholders’ equity attributable to Johnson Controls.
Net book value per share represents shareholders’ equity attributable to Johnson Controls divided by the number of shares outstanding at the end of the
period.
Income (loss) from continuing operations attributable to Johnson Controls includes $235 million, $255 million, $347 million, $222 million and $204
million of significant restructuring and impairment costs in fiscal year 2019, 2018, 2017, 2016 and 2015, respectively. It also includes $618 million, $(24)
million, $(384) million, $341 million and $368 million of net mark-to-market losses (gains) in fiscal year 2019, 2018, 2017, 2016 and 2015, respectively.
The preceding amounts are stated on a pre-tax basis.
ITEM 7
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company provides facility systems and services including comfort and energy management for the residential and non-residential buildings markets, security
products and services, and fire detection and suppression products and services.
This discussion summarizes the significant factors affecting the consolidated operating results, financial condition and liquidity of the Company for the three-year
period ended September 30, 2019. This discussion should be read in conjunction with Item 8, the consolidated financial statements and the notes to consolidated
financial statements.
FISCAL YEAR 2019 COMPARED TO FISCAL YEAR 2018
Net Sales
(in millions)
Net sales
Year Ended
September 30,
2019
2018
Change
$
23,968 $
23,400
2%
The increase in net sales was due to higher organic sales ($1,181 million) and acquisitions ($22 million), partially offset by the unfavorable impact of foreign
currency translation ($463 million) and lower sales due to business divestitures ($172 million). The increase in organic sales related to higher volumes across all
segments. Excluding the impact of foreign currency translation and business acquisitions and divestitures, net sales increased 5% as compared to the prior year.
Refer to the "Segment Analysis" below within Item 7 for a discussion of net sales by segment.
Cost of Sales / Gross Profit
(in millions)
Cost of sales
Gross profit
% of sales
Year Ended
September 30,
2019
2018
Change
$
16,275
$
7,693
32.1%
15,733
7,667
32.8%
3%
—%
Cost of sales increased and gross profit as a percentage of sales decreased by 70 basis points. Gross profit increased due to higher volumes across all segments,
partially offset by business divestitures and higher operating costs. Net mark-to-market adjustments had a net unfavorable year-over-year impact on cost of sales of
$123 million ($128 million charge in fiscal 2019 compared to a $5 million charge in fiscal 2018) primarily due to a decrease in discount rates in the current year.
Foreign currency translation had a favorable impact on cost of sales of approximately $304 million. Refer to the "Segment Analysis" below within Item 7 for a
discussion of segment earnings before interest, taxes and amortization ("EBITA") by segment.
27
Selling, General and Administrative Expenses
Year Ended
September 30,
(in millions)
Selling, general and administrative expenses
$
% of sales
2019
2018
Change
6,244
$
26.1%
5,642
24.1%
11%
Selling, general and administrative expenses ("SG&A") increased by $602 million, and SG&A as a percentage of sales increased by 200 basis points. The increase
in SG&A was primarily due to net mark-to-market adjustments, a $114 million gain on sale of the Scott Safety business in the Global Products segment in the prior
year and a current year environmental charge, partially offset by productivity savings and cost synergies, net of incremental investments, and a current year tax
indemnification reserve release. The net mark-to-market adjustments had a net unfavorable year-over-year impact on SG&A of $519 million ($490 million loss in
fiscal 2019 compared to a $29 million gain in fiscal 2018) primarily due to a decrease in discount rates in the current year. Foreign currency translation had a
favorable impact on SG&A of $94 million. Refer to the "Segment Analysis" below within Item 7 for a discussion of segment EBITA by segment.
Restructuring and Impairment Costs
Year Ended
September 30,
(in millions)
2019
2018
Change
Restructuring and impairment costs
$
235 $
255
-8 %
Refer to Note 16, "Significant Restructuring and Impairment Costs," and Note 17, "Impairment of Long-Lived Assets," of the notes to consolidated financial
statements for further disclosure related to the Company's restructuring plans and impairment costs.
Net Financing Charges
(in millions)
Net financing charges
Year Ended
September 30,
2019
2018
Change
$
350 $
401
-13 %
Refer to Note 9, "Debt and Financing Arrangements," of the notes to consolidated financial statements for further disclosure related to the Company's net financing
charges.
Equity Income
(in millions)
Equity income
Year Ended
September 30,
2019
2018
Change
$
192 $
177
8%
The increase in equity income was primarily due to higher income at certain partially-owned affiliates within the Building Solutions EMEA/LA segment and the
Johnson Controls - Hitachi joint venture. Refer to the "Segment Analysis" below within Item 7 for a discussion of segment EBITA by segment.
Income Tax Provision
(in millions)
Income tax provision (benefit)
Effective tax rate
* Measure not meaningful
Year Ended
September 30,
2019
2018
Change
$
(233)
$
-22 %
197
13%
*
28
The statutory tax rate in Ireland is being used as a comparison since the Company is domiciled in Ireland. The effective rate for continuing operations is below the
statutory rate of 12.5% for fiscal 2019 primarily due to tax audit reserve adjustments, the income tax effects of mark-to-market adjustments, a tax indemnification
reserve release, the tax benefits of an asset held for sale impairment charge and continuing global tax planning initiatives, partially offset by valuation allowance
adjustments as a result of tax law changes, a discrete tax charge related to newly enacted regulations related to U.S. Tax Reform and tax rate differentials. The
effective rate for continuing operations is above the statutory rate of 12.5% for fiscal 2018 primarily due to the discrete net impacts of U.S. Tax Reform, final
income tax effects of the completed divestiture of the Scott Safety business and valuation allowance adjustments, partially offset by tax audit closures, tax benefits
due to change in entity tax status, the benefits of continuing global tax planning initiatives and tax rate differentials. The fiscal 2019 effective tax rate decreased as
compared to the fiscal 2018 effective tax rate primarily due to the discrete tax items described below and tax planning initiatives. The fiscal year 2019 and 2018
global tax planning initiatives related primarily to changes in entity tax status, global financing structures and alignment of the Company's global business
functions in a tax efficient manner. Refer to Note 18, "Income Taxes," of the notes to consolidated financial statements for further details.
Income From Discontinued Operations, Net of Tax
(in millions)
Income from discontinued operations, net of tax
* Measure not meaningful
Year Ended
September 30,
2019
2018
Change
$
4,598 $
1,034
*
Refer to Note 3, "Discontinued Operations," of the notes to consolidated financial statements for further information.
Income Attributable to Noncontrolling Interests
(in millions)
2019
2018
Change
Income from continuing operations attributable
to noncontrolling interests
Income from discontinued operations attributable
to noncontrolling interests
$
189 $
24
174
47
9 %
-49 %
Year Ended
September 30,
The increase in income from continuing operations attributable to noncontrolling interests was primarily due to higher net income at certain partially-owned
affiliates within the Global Products segment.
Refer to Note 3, "Discontinued Operations," of the notes to consolidated financial statements for further information regarding the Company's discontinued
operations.
Net Income Attributable to Johnson Controls
(in millions)
Net income attributable to Johnson Controls
* Measure not meaningful
Year Ended
September 30,
2019
2018
Change
$
5,674 $
2,162
*
The increase in net income attributable to Johnson Controls was primarily due to the gain on sale of the Power Solutions business and lower income tax provision,
partially offset by higher SG&A. Fiscal 2019 diluted earnings per share attributable to Johnson Controls was $6.49 compared to $2.32 in fiscal 2018.
29
Comprehensive Income Attributable to Johnson Controls
(in millions)
Comprehensive income attributable to
Johnson Controls
* Measure not meaningful
Year Ended
September 30,
2019
2018
Change
$
5,350 $
1,689
*
The increase in comprehensive income attributable to Johnson Controls was due to higher net income attributable to Johnson Controls ($3,512 million) and an
increase in other comprehensive income attributable to Johnson Controls ($149 million) resulting primarily from foreign currency translation adjustments. These
year-over-year favorable foreign currency translation adjustments were primarily driven by the weakening of the euro and British pound currencies against the U.S.
dollar in the prior year.
SEGMENT ANALYSIS
On October 1, 2018, the Company adopted Accounting Standards Update ("ASU") No. 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition
and Measurement of Financial Assets and Financial Liabilities." The new standard requires the mark-to-market of marketable securities investments previously
recorded within accumulated other comprehensive income on the statement of financial position be recorded in the statement of income on a prospective basis
beginning as of the adoption date. As these restricted investments do not relate to the underlying operating performance of its business, the Company’s definition
of segment earnings excludes the mark-to-market adjustments beginning in the first quarter of fiscal 2019.
Management evaluates the performance of its business units based primarily on segment EBITA, which represents income from continuing operations before
income taxes and noncontrolling interests, excluding general corporate expenses, intangible asset amortization, net financing charges, restructuring and impairment
costs, and net mark-to-market adjustments related to pension and postretirement plans and restricted asbestos investments.
(in millions)
2019
2018
Change
2019
2018
Change
Net Sales
for the Year Ended
September 30,
Segment EBITA
for the Year Ended
September 30,
Building Solutions North America
$
9,031 $
Building Solutions EMEA/LA
Building Solutions Asia Pacific
Global Products
3,655
2,658
8,624
8,679
3,696
2,553
8,472
4 % $
1,153 $
1,109
-1 %
4 %
2 %
368
341
1,179
344
347
1,338
3,138
4 %
7 %
-2 %
-12 %
-3 %
$
23,968 $
23,400
2 % $
3,041 $
Net Sales:
•
•
•
•
The increase in Building Solutions North America was due to higher volumes ($380 million), partially offset by the unfavorable impact of foreign
currency translation ($28 million). The increase in volumes was primarily attributable to higher installation / service sales.
The decrease in Building Solutions EMEA/LA was due to the unfavorable impact of foreign currency translation ($206 million) and lower volumes due to
business divestitures ($5 million), partially offset by higher volumes ($165 million) and incremental sales related to a business acquisition ($5 million).
The increase in volumes was primarily attributable to higher installation / service sales.
The increase in Building Solutions Asia Pacific was due to higher volumes ($190 million) and incremental sales related to a business acquisition ($1
million), partially offset by the unfavorable impact of foreign currency translation ($86 million). The increase in volumes was primarily attributable to
higher installation / service sales.
The increase in Global Products was due to higher volumes ($446 million) and incremental sales related to business acquisitions ($16 million), partially
offset by lower volumes related to business divestitures ($167 million) and the
30
unfavorable impact of foreign currency translation ($143 million). The increase in volumes was primarily attributable to higher building management,
HVAC and refrigeration equipment, and specialty products sales.
Segment EBITA:
•
•
•
•
The increase in Building Solutions North America was due to favorable volumes ($92 million) and prior year integration costs ($25 million), partially
offset by higher SG&A, including incremental salesforce investments, and unfavorable mix ($45 million), current year integration costs ($26 million) and
the unfavorable impact of foreign currency translation ($2 million).
The increase in Building Solutions EMEA/LA was due to favorable volumes / mix ($57 million), higher equity income ($11 million), prior year
integration costs ($6 million) and incremental income related to a business acquisition ($1 million), partially offset by the unfavorable impact of foreign
currency translation ($35 million), higher SG&A, including incremental salesforce investments ($12 million) and current year integration costs ($4
million).
The decrease in Building Solutions Asia Pacific was due to higher SG&A, including incremental salesforce investments ($18 million), the unfavorable
impact of foreign currency translation ($8 million), current year integration costs ($2 million) and lower equity income ($1 million), partially offset by net
favorable volumes / mix ($23 million).
The decrease in Global Products was due to a current year environmental charge ($140 million), a prior year gain on sale of Scott Safety ($114 million),
higher SG&A and operating expenses, including product investments and prior year gains on business divestitures, net of productivity savings ($32
million), current year integration costs ($30 million), the unfavorable impact of foreign currency translation ($20 million), and lower income due to
business divestitures and acquisitions ($19 million). These items were partially offset by favorable volumes / mix ($166 million), prior year integration
costs ($27 million) and higher equity income ($3 million).
FISCAL YEAR 2018 COMPARED TO FISCAL YEAR 2017
Net Sales
(in millions)
Net sales
Year Ended
September 30,
2018
2017
Change
$
23,400 $
22,835
2%
The increase in net sales was due to higher sales ($1,004 million) and the favorable impact of foreign currency translation ($316 million), partially offset by lower
sales due to business divestitures ($755 million). The increase in sales related to higher volumes across all segments. Excluding the impact of foreign currency
translation, business divestitures and nonrecurring purchase accounting adjustments, net sales increased 5% as compared to the prior year. Refer to the segment
analysis below within Item 7 for a discussion of net sales by segment.
Cost of Sales / Gross Profit
(in millions)
Cost of sales
Gross profit
% of sales
Year Ended
September 30,
2018
2017
Change
$
15,733
$
7,667
32.8%
15,305
7,530
33.0%
3%
2%
Cost of sales increased and gross profit as a percentage of sales decreased by 20 basis points. Gross profit increased due to prior year nonrecurring purchase
accounting adjustments ($68 million), and higher volumes and favorable mix across all segments, partially offset by business divestitures and higher operating
costs. Net mark-to-market adjustments had a net unfavorable year-over-year impact on cost of sales of $45 million ($5 million charge in fiscal 2018 compared to a
$40 million gain in fiscal 2017) primarily due to a decrease in U.S. investment returns. Foreign currency translation had an unfavorable impact on cost of sales of
approximately $221 million. Refer to the segment analysis below within Item 7 for a discussion of EBITA by segment.
31
Selling, General and Administrative Expenses
Year Ended
September 30,
(in millions)
Selling, general and administrative expenses
$
% of sales
2018
2017
Change
5,642
$
24.1%
5,723
25.1%
-1 %
SG&A decreased by $81 million, and SG&A as a percentage of sales decreased by 100 basis points. The decrease in SG&A was primarily due to productivity
savings and costs synergies, business divestitures and a gain on sale of the Scott Safety business in the Global Products segment ($114 million). The net favorable
year-over-year impact on SG&A resulting from transaction and integration costs was $184 million. Foreign currency translation had an unfavorable impact on
SG&A of $66 million. The net mark-to-market adjustments had a net unfavorable year-over-year impact on SG&A of $315 million ($29 million gain in fiscal 2018
compared to a $344 million gain in fiscal 2017) primarily due to a decrease in U.S. investment returns. Refer to the segment analysis below within Item 7 for a
discussion of segment EBITA by segment.
Restructuring and Impairment Costs
Year Ended
September 30,
(in millions)
2018
2017
Change
Restructuring and impairment costs
$
255 $
347
-27 %
Refer to Note 16, "Significant Restructuring and Impairment Costs," of the notes to consolidated financial statements for further disclosure related to the
Company's restructuring plans.
Net Financing Charges
(in millions)
Net financing charges
Year Ended
September 30,
2018
2017
Change
$
401 $
466
-14 %
Refer to Note 9, "Debt and Financing Arrangements," of the notes to consolidated financial statements for further disclosure related to the Company's net financing
charges.
Equity Income
(in millions)
Equity income
Year Ended
September 30,
2018
2017
Change
$
177 $
157
13%
The increase in equity income was primarily due to higher income at the Johnson Controls - Hitachi joint venture. Refer to the segment analysis below within
Item 7 for a discussion of segment EBITA by segment.
Income Tax Provision
(in millions)
Income tax provision
Effective tax rate
Year Ended
September 30,
2018
2017
Change
$
197
$
13%
322
28%
-39 %
The statutory tax rate in Ireland is being used as a comparison since the Company is domiciled in Ireland. The effective rate for continuing operations is above the
statutory rate of 12.5% for fiscal 2018 primarily due to the discrete net impacts of U.S. Tax Reform, final income tax effects of the completed divestiture of the
Scott Safety business and valuation allowance adjustments,
32
partially offset by tax audit closures, tax benefits due to change in entity tax status, the benefits of continuing global tax planning initiatives and tax rate
differentials. The effective rate is above the statutory rate of 12.5% for fiscal 2017 primarily due to the establishment of a deferred tax liability on the outside basis
difference of the Company's investment in certain subsidiaries related to the divestiture of the Scott Safety business, the income tax effects of mark-to-market
adjustments and tax rate differentials, partially offset by the jurisdictional mix of significant restructuring and impairment costs, Tyco Merger transaction and
integration costs, purchase accounting adjustments, tax audit closures, a tax benefit due to changes in entity tax status and the benefits of continuing global tax
planning initiatives. The fiscal 2018 effective tax rate decreased as compared to the fiscal 2017 effective tax rate primarily due to discrete tax items and tax
planning initiatives. The fiscal year 2018 and 2017 global tax planning initiatives related primarily to foreign tax credit planning, changes in entity tax status,
global financing structures and alignment of the Company's global business functions in a tax efficient manner. Refer to Note 18, "Income Taxes," of the notes to
consolidated financial statements for further details.
Loss From Discontinued Operations, Net of Tax
Year Ended
September 30,
(in millions)
2018
2017
Change
Income from discontinued operations, net of tax
$
1,034 $
990
4%
Refer to Note 3, "Discontinued Operations," of the notes to consolidated financial statements for further information.
Income Attributable to Noncontrolling Interests
(in millions)
2018
2017
Change
Income from continuing operations attributable
to noncontrolling interests
Income from discontinued operations
attributable to noncontrolling interests
$
174 $
47
157
51
11 %
-8 %
Year Ended
September 30,
The increase in income from continuing operations attributable to noncontrolling interests was primarily due to higher net income related to the Johnson Controls -
Hitachi joint venture.
Refer to Note 3, "Discontinued Operations," of the notes to consolidated financial statements for further information regarding the Company's discontinued
operations.
Net Income Attributable to Johnson Controls
Year Ended
September 30,
(in millions)
2018
2017
Change
Net income attributable to Johnson Controls
$
2,162 $
1,611
34%
The increase in net income attributable to Johnson Controls was primarily due to higher gross profit, lower income tax provision, lower restructuring and
impairment costs, lower SG&A and lower net financing charges. Fiscal 2018 diluted earnings per share attributable to Johnson Controls was $2.32 compared to
$1.71 in fiscal 2017.
Comprehensive Income Attributable to Johnson Controls
(in millions)
Comprehensive income attributable to
Johnson Controls
Year Ended
September 30,
2018
2017
Change
$
1,689 $
1,710
-1 %
33
The decrease in comprehensive income attributable to Johnson Controls was due to a decrease in other comprehensive income attributable to Johnson Controls
($572 million) resulting primarily from unfavorable foreign currency translation adjustments, partially offset by higher net income attributable to Johnson Controls
($551 million). These year-over-year unfavorable foreign currency translation adjustments were primarily driven by the weakening of the British pound and euro
currencies against the U.S. dollar.
Segment Analysis
Management evaluates the performance of its business units based primarily on segment EBITA, which represents income from continuing operations before
income taxes and noncontrolling interests, excluding general corporate expenses, intangible asset amortization, net financing charges, restructuring and impairment
costs, and net mark-to-market adjustments related to pension and postretirement plans and restricted asbestos investments.
(in millions)
Building Solutions North America
Building Solutions EMEA/LA
Building Solutions Asia Pacific
Global Products
* Measure not meaningful
Net Sales:
$
$
Net Sales
for the Year Ended
September 30,
Segment EBITA
for the Year Ended
September 30,
2018
2017
Change
2018
2017
Change
8,679 $
3,696
2,553
8,472
8,341
3,595
2,444
8,455
4% $
1,109 $
1,039
3%
4%
—%
344
347
1,338
290
323
1,179
2,831
7%
19%
7%
13%
11%
23,400 $
22,835
2% $
3,138 $
•
•
•
•
The increase in Building Solutions North America was due to higher volumes ($343 million) and the favorable impact of foreign currency translation ($20
million), partially offset by the impact of prior year nonrecurring purchase accounting adjustments ($25 million). The increase in volumes was primarily
attributable to higher HVAC, controls, fire and security sales.
The increase in Building Solutions EMEA/LA was due to the favorable impact of foreign currency translation ($132 million), higher volumes ($63
million) and incremental sales related to a business acquisition ($2 million), partially offset by lower volumes related to a business divestiture ($80
million) and the impact of prior year nonrecurring purchase accounting adjustments ($16 million). The increase in volumes was primarily attributable to
strong service growth which was positive across all regions led by Europe and Latin America.
The increase in Building Solutions Asia Pacific was due to higher volumes ($61 million), the favorable impact of foreign currency translation ($61
million) and the impact of prior year nonrecurring purchase accounting adjustments ($1 million), partially offset by lower volumes related to a business
divestiture ($14 million). The increase in volumes was primarily attributable to higher service sales.
The increase in Global Products was due to higher volumes ($571 million), the favorable impact of foreign currency translation ($103 million) and the
impact of prior year nonrecurring purchase accounting adjustments ($6 million), partially offset by lower volumes related to business divestitures ($663
million). The increase in volumes was primarily attributable to higher building management, HVAC and refrigeration equipment, and specialty products
sales.
Segment EBITA:
•
•
The increase in Building Solutions North America was due to favorable volumes / mix ($100 million), prior year integration costs ($42 million), prior
year transaction costs ($13 million), and the favorable impact of foreign currency translation ($1 million), partially offset by higher SG&A including
incremental salesforce investments ($37 million), current year integration costs ($25 million) and prior year nonrecurring purchase accounting
adjustments ($24 million).
The increase in Building Solutions EMEA/LA was due to a prior year unfavorable arbitration award ($50 million), favorable volumes / mix ($26 million),
lower SG&A ($14 million), the favorable impact of foreign currency translation ($7 million), prior year integration costs ($6 million) and prior year
transaction costs ($5 million), partially offset by prior
34
year nonrecurring purchase accounting adjustments ($23 million), incremental salesforce investments ($14 million), current year integration costs ($6
million), higher operating costs ($5 million), lower equity income ($4 million) and lower income due to a business divestiture ($2 million).
•
•
The increase in Building Solutions Asia Pacific was due to higher volumes / mix ($33 million), prior year integration costs ($5 million), prior year
transaction costs ($2 million), prior year nonrecurring purchase accounting adjustments ($2 million) and the favorable impact of foreign currency
translation ($1 million), partially offset by higher SG&A including incremental salesforce investments ($15 million), and unfavorable pricing ($4 million).
The increase in Global Products was due to favorable volumes / mix ($219 million), a gain on sale of Scott Safety ($114 million), prior year nonrecurring
purchase accounting adjustments ($71 million), higher equity income ($25 million), prior year integration costs ($25 million), the favorable impact of
foreign currency translation ($20 million) and prior year transaction costs ($13 million). These items were partially offset by lower income due to business
divestitures ($167 million), higher SG&A and operating expenses including planned incremental global product and channel investments, partially offset
by productivity savings and gains on business divestitures ($134 million), and current year integration costs ($27 million).
GOODWILL, LONG-LIVED ASSETS AND OTHER INVESTMENTS
Goodwill at September 30, 2019 was $18.2 billion, $0.2 billion lower than the prior year. The decrease was primarily due to the impact of foreign currency
translation.
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 published multiples of earnings of comparable entities with similar operations and economic
characteristics and applies to the Company's average of historical and future financial results. 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.
The assumptions included in the impairment tests require judgment, and changes to these inputs could impact the results of the calculations. The primary
assumptions used in the impairment tests were management's projections of future cash flows. 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.
Indefinite-lived other intangible assets are also subject to at least annual impairment testing. A considerable amount of management judgment and assumptions are
required in performing the impairment tests.
While the Company believes the judgments and assumptions used in the impairment tests are reasonable and no impairments of goodwill or indefinite-lived assets
existed during fiscal years 2019, 2018 and 2017, different assumptions could change the estimated fair values and, therefore, impairment charges could be
required, which could be material to the consolidated financial statements.
The Company reviews long-lived assets, including tangible assets and other intangible assets with definitive 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 350-30, "General Intangibles Other than Goodwill" and ASC 985-20, "Costs of
Software to be Sold, Leased, or Marketed." ASC 360-10-15 requires the Company to group assets and liabilities at the lowest level for which identifiable cash
flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows. If
the undiscounted cash flows do not indicate the carrying amount of the asset group is recoverable, an impairment charge is measured as the amount by which the
carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals. ASC 350-30 requires intangible assets acquired in a
business combination that are used in research and development activities to be considered indefinite lived until the completion or abandonment of the associated
35
research and development efforts. During the period that those assets are considered indefinite lived, they shall not be amortized but shall be tested for
impairment annually and more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired. If the carrying
amount of an intangible asset exceeds its fair value, an entity shall recognize an impairment loss in an amount equal to that excess. ASC 985-20 requires the
unamortized capitalized costs of a computer software product be compared to the net realizable value of that product. The amount by which the unamortized
capitalized costs of a computer software product exceed the net realizable value of that asset shall be written off.
In fiscal 2019, the Company concluded it had a triggering event requiring assessment of impairment for certain of its long-lived assets in conjunction with the plans
to dispose of a business within its Global Products segment that met the criteria to be classified as held for sale. Assets and liabilities held for sale are required to
be recorded at the lower of carrying value or fair value less any costs to sell. Accordingly, the Company recorded an impairment charge of $235 million within
restructuring and impairment costs in the consolidated statements of income in fiscal 2019 to write down the carrying value of the assets held for sale to fair value
less any costs to sell. 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 fiscal 2018, the Company concluded it had a triggering event requiring assessment of impairment for certain of its long-lived assets in conjunction with its
restructuring actions announced in fiscal 2018. As a result, the Company reviewed the long-lived assets for impairment and recorded $36 million of asset
impairment charges within restructuring and impairment costs in the consolidated statements of income. Of the total impairment charges, $31 million related to the
Global Products segment and $5 million related to Corporate assets. In addition, the Company recorded $6 million of asset impairments within discontinued
operations related to the Power Solutions segment in fiscal 2018. Refer to Note 16, "Significant Restructuring and Impairment Costs," of the notes to consolidated
financial statements for additional information. The impairments were measured under a market approach utilizing an appraisal to determine fair values of the
impaired assets. This method is 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 fiscal 2017, the Company concluded it had triggering events requiring assessment of impairment for certain of its long-lived assets in conjunction with its
restructuring actions announced in fiscal 2017. As a result, the Company reviewed the long-lived assets for impairment and recorded $70 million of asset
impairment charges within restructuring and impairment costs on the consolidated statements of income. Of the total impairment charges, $30 million related to the
Building Solutions North America segment, $20 million related to the Global Products segment, $19 million related to Corporate assets and $1 million related to
the Building Solutions Asia Pacific segment. In addition, the Company recorded $7 million of asset impairments within discontinued operations related to the
Power Solutions segment in fiscal 2017. Refer to Note 16, "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."
Investments in partially-owned affiliates ("affiliates") at September 30, 2019 were $853 million, $5 million higher than the prior year.
36
LIQUIDITY AND CAPITAL RESOURCES
Working Capital
(in millions)
Current assets
Current liabilities
Less: Cash
Add: Short-term debt
Add: Current portion of long-term debt
Less: Assets held for sale
Add: Liabilities held for sale
Working capital (as defined)
Accounts receivable
Inventories
Accounts payable
* Measure not meaningful
September 30,
2019
September 30,
2018
Change
$
$
$
12,393
$
(9,070)
3,323
(2,805)
10
501
(98)
44
975
$
5,770
$
1,814
3,582
11,823
(11,250)
573
(185)
1,306
1
(3,015)
1,791
471
5,622
1,819
3,407
*
*
3 %
— %
5 %
•
•
•
•
•
The Company defines working capital as current assets less current liabilities, excluding cash, short-term debt, the current portion of long-term debt, and
the current portions of assets and liabilities held for sale. Management believes that this measure of working capital, which excludes financing-related items
and businesses to be divested, provides a more useful measurement of the Company’s operating performance.
The increase in working capital at September 30, 2019 as compared to September 30, 2018, was primarily due to an increase in accounts receivable due to
organic sales growth and other current assets, partially offset by an increase in accounts payable due to timing and mix of supplier payments, and other
current liabilities.
The Company’s days sales in accounts receivable at September 30, 2019 were 67, a slight decrease from 68 at September 30, 2018. There has been no
significant adverse change in the level of overdue receivables or significant changes in revenue recognition methods.
The Company’s inventory turns for the year ended September 30, 2019 were slightly higher than the comparable period ended September 30, 2018
primarily due to changes in inventory production levels.
Days in accounts payable at September 30, 2019 were 72 days, the same as at the comparable period ended September 30, 2018.
Cash Flows From Continuing Operations
(in millions)
Cash provided by operating activities
Cash provided (used) by investing activities
Cash used by financing activities
Year Ended September 30,
2019
2018
$
1,743 $
(533)
(10,519)
1,520
1,568
(3,749)
•
•
The increase in cash provided by operating activities was primarily due to lower restructuring payments and higher partially-owned affiliate dividends.
The increase in cash used by investing activities was primarily due to net cash proceeds received from the Scott Safety business divestiture in the prior
year, partially offset by lower capital expenditures.
37
•
The increase in cash used by financing activities was primarily due to higher stock repurchases and higher net repayments of debt.
Capitalization
(in millions)
Short-term debt
Current portion of long-term debt
Long-term debt
Total debt
Less: cash and cash equivalents
Total net debt
Shareholders’ equity attributable to Johnson Controls ordinary
shareholders
Total capitalization
September 30,
2019
September 30,
2018
Change
$
$
$
$
10
501
6,708
7,219
2,805
4,414
19,766
24,180
$
$
$
$
1,306
1
9,623
10,930
185
10,745
21,164
31,909
-34 %
-59 %
-7 %
-24 %
Total net debt as a % of total capitalization
18.3%
33.7%
•
•
•
•
•
•
Net debt and net debt as a percentage of total capitalization are non-GAAP financial measures. The Company believes the percentage of total net debt to
total capitalization is useful to understanding the Company’s financial condition as it provides a review of the extent to which the Company relies on
external debt financing for its funding and is a measure of risk to its shareholders.
In the third quarter of fiscal 2019, the Company began deploying the net cash proceeds from the Power Solution sale, which included a reduction in debt of
approximately $3.4 billion and share repurchases. The debt reduction included short-term and long-term debt repayments, including a $1.5 billion debt
tender as further described below.
The Company believes its capital resources and liquidity position at September 30, 2019 are adequate to meet projected needs. The Company believes
requirements for working capital, capital expenditures, dividends, stock repurchases, minimum pension contributions, debt maturities and any potential
acquisitions in fiscal 2020 will continue to be funded from operations, supplemented by short- and long-term borrowings, if required. The Company
currently manages its short-term debt position in the U.S. and euro commercial paper markets and bank loan markets. In the event the Company is unable
to issue commercial paper, it would have the ability to draw on its $2.0 billion revolving credit facility. The facility matures in August 2020. There were no
draws on the revolving credit facility as of September 30, 2019 and 2018. The Company also selectively makes use of short-term credit lines other than its
revolving credit facility. The Company, as of September 30, 2019, could borrow up to $2.8 billion based on committed credit lines. In addition, the
Company held cash and cash equivalents of $2.8 billion as of September 30, 2019. As such, the Company believes it has sufficient financial resources to
fund operations and meet its obligations for the foreseeable future.
In June 2019, the Company completed a "modified Dutch auction" tender offer to repurchase approximately $4.0 billion of its ordinary shares at a price of
$39.25 per share.
In May 2019, the Company completed the debt tender offer to purchase up to $1.5 billion in aggregate principal amount of certain of its outstanding notes
for $1.6 billion total consideration. The Company recognized a loss on the extinguishment of debt of $60 million, which was recorded within the net
financing charges in the consolidated statements of income.
The Company’s debt financial covenant in its revolving credit facility requires a minimum consolidated shareholders’ equity attributable to Johnson
Controls of at least $3.5 billion at all times. The revolving credit facility also limits the amount of debt secured by liens that may be incurred to a maximum
aggregated amount of 10% of consolidated shareholders’ equity attributable to Johnson Controls for liens and pledges. For purposes of calculating these
covenants, consolidated shareholders’ equity attributable to Johnson Controls is calculated without giving effect to (i) the application of Accounting
Standards Codification ("ASC") 715-60, "Defined Benefit Plans - Other Postretirement," or (ii) the cumulative foreign currency translation adjustment. As
of September 30, 2019, the Company was in compliance with all covenants and other requirements set forth in its credit agreements and the indentures,
governing its notes, and expect to remain in compliance
38
•
•
•
•
for the foreseeable future. None of the Company’s debt agreements limit access to stated borrowing levels or require accelerated repayment in the event of
a decrease in the Company's credit rating.
The Company earns a significant amount of its income outside of the parent company. Outside basis differences in these subsidiaries are deemed to be
permanently reinvested except in limited circumstances. However, in fiscal 2019, the Company provided income tax expense related to a change in the
Company's assertion over the outside basis differences of the Company’s investment in certain subsidiaries as a result of the planned divestiture of the
Power Solutions business. Also, in fiscal 2018, due to U.S. Tax Reform, the Company provided income tax related to the change in the Company’s
assertion over the outside basis difference of certain non-U.S. subsidiaries owned directly or indirectly by U.S. subsidiaries. Under U.S. Tax Reform, the
U.S. has enacted a tax system that provides an exemption for dividends received by U.S. corporations from 10% or more owned non-U.S. corporations.
However, certain non-U.S, U.S. state and withholding taxes may still apply when closing an outside basis difference via distribution or other transactions.
In addition, in fiscal 2017, the Company provided income tax expense related to a change in the Company’s assertion over the outside basis difference of
the Scott Safety business as a result of the pending divestiture as well as the outside basis of certain nonconsolidated subsidiaries. The Company currently
does not intend nor foresee a need to repatriate undistributed earnings included in the outside basis differences other than in tax efficient manners. Except
as noted, the Company’s intent is to reduce basis differences only when it would be tax efficient. The Company expects existing U.S. cash and liquidity to
continue to be sufficient to fund the Company’s U.S. operating activities and cash commitments for investing and financing activities for at least the next
twelve months and thereafter for the foreseeable future. In the U.S., should the Company require more capital than is generated by its operations, the
Company could elect to raise capital in the U.S. through debt or equity issuances. The Company has borrowed funds in the U.S. and continues to have the
ability to borrow funds in the U.S. at reasonable interest rates. In addition, the Company expects existing non-U.S. cash, cash equivalents, short-term
investments and cash flows from operations to continue to be sufficient to fund the Company’s non-U.S. operating activities and cash commitments for
investing activities, such as material capital expenditures, for at least the next twelve months and thereafter for the foreseeable future. Should the Company
require more capital at the Luxembourg and Ireland holding and financing entities, other than amounts that can be provided in tax efficient methods, the
Company could also elect to raise capital through debt or equity issuances. These alternatives could result in increased interest expense or other dilution of
the Company’s earnings.
To better align its resources with its growth strategies and reduce the cost structure of its global operations in certain underlying markets, the Company
committed to a significant restructuring plan in fiscal 2018 and recorded $255 million of restructuring and impairment costs for continuing operations in
the consolidated statements of income. The restructuring action related to cost reduction initiatives in the Company’s Building Technologies & Solutions
business and at Corporate. The costs consist primarily of workforce reductions, plant closures and asset impairments. The Company currently estimates
that upon completion of the restructuring action, the fiscal 2018 restructuring plan will reduce annual operating costs for continuing operations by
approximately $300 million, which is primarily the result of lower cost of sales and SG&A due to reduced employee-related costs, depreciation and
amortization expense. The Company expects the annual benefit of these actions will be substantially realized in 2020. For fiscal 2019, the savings, net of
execution costs, were approximately 70% of the expected annual operating cost reduction. The restructuring action is expected to be substantially complete
in 2020. The restructuring plan reserve balance of $102 million at September 30, 2019 is expected to be paid in cash.
To better align its resources with its growth strategies and reduce the cost structure of its global operations in certain underlying markets, the Company
committed to a significant restructuring plan in fiscal 2017 and recorded $347 million of restructuring and impairment costs for continuing operations in
the consolidated statements of income. The restructuring action related to cost reduction initiatives in the Company’s Building Technologies & Solutions
business and at Corporate. The costs consist primarily of workforce reductions, plant closures and asset impairments. The Company currently estimates
that upon completion of the restructuring action, the fiscal 2017 restructuring plan will reduce annual operating costs from continuing operations for
continuing operations by approximately $260 million, which is primarily the result of lower cost of sales and SG&A expenses due to reduced employee-
related costs, depreciation and amortization expense. The Company substantially realized the annual benefit of these actions in fiscal 2019. The
restructuring actions are expected to be substantially complete in fiscal 2020. The restructuring plan reserve balance of $61 million at September 30,
2019 is expected to be paid in cash.
To better align its resources with its growth strategies and reduce the cost structure of its global operations to address the softness in certain underlying
markets, the Company committed to a significant restructuring plan in fiscal 2016 and recorded $222 million of restructuring and impairment costs for
continuing operations in the consolidated statements of income. The restructuring action related to cost reduction initiatives in the Company’s Building
Technologies & Solutions business and at Corporate. The costs consist primarily of workforce reductions, plant closures, asset impairments and change-in-
control payments. The restructuring action has reduced annual operating costs for continuing operations by
39
approximately $127 million, which is primarily the result of lower cost of sales and SG&A due to reduced employee-related costs, depreciation and
amortization expense. The restructuring actions are substantially complete, and final payments are expected to be made in fiscal 2020. The restructuring
plan reserve balance of $32 million at September 30, 2019 is expected to be paid in cash.
•
Refer to Note 9, "Debt and Financing Arrangements," of the notes to consolidated financial statements for additional information on items impacting
capitalization.
A summary of the Company’s significant contractual obligations for continuing operations as of September 30, 2019 is as follows (in millions):
Contractual Obligations
Long-term debt*
Interest on long-term debt*
Operating leases
Purchase obligations
Pension and postretirement contributions
Total contractual cash obligations
Total
2020
2021-2022
2023-2024
2025
and Beyond
$
$
7,240 $
501 $
1,500 $
1,486 $
3,834
1,193
1,072
415
220
352
907
54
384
487
147
69
358
182
18
76
13,754 $
2,034 $
2,587 $
2,120 $
3,753
2,872
172
—
216
7,013
* Refer to Note 9, "Debt and Financing Arrangements," of the notes to consolidated financial statements for information related to the Company's long-term debt.
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
The Company prepares its consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("U.S.
GAAP"). This requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those
estimates. The following policies are considered by management to be the most critical in understanding the judgments that are involved in the preparation of the
Company’s consolidated financial statements and the uncertainties that could impact the Company’s results of operations, financial position and cash flows.
Revenue Recognition
The Company recognizes revenue from certain long-term contracts to design, manufacture and install building products and systems as well as unscheduled repair
or replacement services on an over time basis, with progress towards completion measured using a cost-to-cost input method based on the relationship between
actual costs incurred and total estimated costs at completion. The cost-to-cost input method is used as it best depicts the transfer of control to the customer that
occurs as the Company incurs costs. Changes to the original estimates may be required during the life of the contract and such estimates are reviewed monthly. If
contract modifications result in additional goods or services that are distinct from those transferred before the modification, they are accounted for prospectively as
if the Company entered into a new contract. If the goods or services in the modification are not distinct from those in the original contract, 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.
The Company does not adjust the promised amount of consideration for the effects of a significant financing component as at contract inception the Company
expects to receive the payment within twelve months of transfer of goods or services.
The Company enters into extended warranties and long-term service and maintenance agreements with certain customers. For these arrangements, revenue is
recognized over time on a straight-line basis over the respective contract term.
40
The Company also sells certain HVAC and refrigeration products and services in bundled arrangements with multiple performance obligations, such as equipment,
commissioning, service labor and extended warranties. 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 addition, the Company sells security monitoring systems that may have multiple performance obligations, including equipment, installation, monitoring
services and maintenance agreements. Revenues associated with sale of equipment and related installations are recognized over time on a cost-to-cost input
method, while the revenue for monitoring and maintenance services are recognized over time as services are rendered. The transaction price is allocated to each
performance obligation based on the relative selling price method. In order to estimate relative selling price, market data and transfer price studies are utilized. If
the standalone selling price is not directly observable, the Company estimates the standalone selling price using an adjusted market assessment approach or
expected cost plus margin approach. For transactions in which the Company retains ownership of the subscriber system asset, fees for monitoring and maintenance
services are recognized over time on a straight-line basis over the contract term. Non-refundable fees received in connection with the initiation of a monitoring
contract, along with associated direct and incremental selling costs, are deferred and amortized over the estimated life of the contract.
In all other cases, the Company recognizes revenue at the point in time when control over the goods or services transfers to the customer.
The Company considers the contractual consideration payable by the customer and assesses variable consideration that may affect the total transaction price,
including discounts, rebates, refunds, credits or other similar sources of variable consideration, when determining the transaction price of each contract. The
Company includes variable consideration in the estimated transaction price when it is probable that significant reversal of revenue recognized would not occur
when the uncertainty associated with variable consideration is subsequently resolved. These estimates are based on the amount of consideration that the Company
expects to be entitled to.
Shipping and handling costs billed to customers are included in sales and the related costs are included in cost of sales when control transfers to the customer. The
Company presents amounts collected from customers for sales and other taxes net of the related amounts remitted. Refer to Note 4, "Revenue Recognition," of the
notes to consolidated financial statements for disclosure of the Company's revenue recognition activity.
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 published multiples of earnings of comparable entities with similar operations and economic
characteristics and applies to the Company's average of historical and future financial results. 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 7, "Goodwill
and Other Intangible Assets," of the notes to consolidated financial statements for information regarding the goodwill impairment testing performed in fiscal years
2019, 2018 and 2017.
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 tangible assets and other intangible assets with definitive 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 350-30, "General Intangibles Other than Goodwill" and ASC 985-20, "Costs of
Software to be Sold, Leased, or Marketed." 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
41
undiscounted future cash flows. If the undiscounted cash flows do not indicate the carrying amount of the asset group is recoverable, an impairment charge is
measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals. ASC 350-30
requires intangible assets acquired in a business combination that are used in research and development activities be considered indefinite lived until the
completion or abandonment of the associated research and development efforts. During the period that those assets are considered indefinite lived, they shall not be
amortized but shall be tested for impairment annually and more frequently if events or changes in circumstances indicate that it is more likely than not that the
asset is impaired. If the carrying amount of an intangible asset exceeds its fair value, an entity shall recognize an impairment loss in an amount equal to that excess.
ASC 985-20 requires the unamortized capitalized costs of a computer software product be compared to the net realizable value of that product. The amount by
which the unamortized capitalized costs of a computer software product exceed the net realizable value of that asset shall be written off. Refer to Note 17,
"Impairment of Long-Lived Assets," of the notes to consolidated financial statements for information regarding the impairment testing performed in fiscal years
2019, 2018 and 2017.
Employee Benefit Plans
The Company provides a range of benefits to its employees and retired employees, including pensions and postretirement benefits. Plan assets and obligations are
measured annually, or more frequently if there is a significant remeasurement event, based on the Company’s measurement date utilizing various actuarial
assumptions such as discount rates, assumed rates of return, compensation increases, turnover rates and health care cost trend rates as of that date. The Company
reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when appropriate.
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
15, "Retirement Plans," of the notes to consolidated financial statements for disclosure of the Company's pension and postretirement benefit plans.
U.S. GAAP requires that companies recognize in the statement of financial position a liability for defined benefit pension and postretirement plans that are
underfunded or unfunded, or an asset for defined benefit pension and postretirement plans that are overfunded. U.S. GAAP also requires that companies measure
the benefit obligations and fair value of plan assets that determine a benefit plan’s funded status as of the date of the employer’s fiscal year end.
The Company considers the expected benefit payments on a plan-by-plan basis when setting assumed discount rates. As a result, the Company uses different
discount rates for each plan depending on the plan jurisdiction, the demographics of participants and the expected timing of benefit payments. For the U.S. pension
and postretirement plans, the Company uses a discount rate provided by an independent third party calculated based on an appropriate mix of high quality bonds.
For the non-U.S. pension and postretirement plans, the Company consistently uses the relevant country specific benchmark indices for determining the various
discount rates. The Company’s weighted average discount rate on U.S. pension plans was 2.95% and 4.10% at September 30, 2019 and 2018, respectively. The
Company’s weighted average discount rate on postretirement plans was 2.90% and 3.80% at September 30, 2019 and 2018, respectively. The Company’s weighted
average discount rate on non-U.S. pension plans was 1.50% and 2.45% at September 30, 2019 and 2018, respectively.
In estimating the expected return on plan assets, the Company considers the historical returns on plan assets, adjusted for forward-looking considerations, inflation
assumptions and the impact of the active management of the plans’ invested assets. Reflecting the relatively long-term nature of the plans’ obligations,
approximately 28% of the plans’ assets are invested in equity securities and 59% in fixed income securities, with the remainder primarily invested in alternative
investments. For the years ending September 30, 2019 and 2018, the Company’s expected long-term return on U.S. pension plan assets used to determine net
periodic benefit cost was 7.10% and 7.50%, respectively. The actual rate of return on U.S. pension plans was above 7.10% in fiscal year 2019 and below 7.50% in
fiscal year 2018. For the years ending September 30, 2019 and 2018, the Company’s weighted average expected long-term return on non-U.S. pension plan assets
was 5.20% and 5.35%, respectively. The actual rate of return on non-U.S. pension plans was above 5.20% in fiscal year 2019 and below 5.35% in fiscal year 2018.
For the years ending September 30, 2019 and 2018, the Company’s weighted average expected long-term return on postretirement plan assets was 5.65%. The
actual rate of return on postretirement plan assets was below 5.65% in fiscal year 2019 and 2018.
Beginning in fiscal 2020, the Company believes the long-term rate of return will approximate 6.90%, 5.20% and 5.70% for U.S. pension, non-U.S. pension and
postretirement plans, respectively. Any differences between actual investment results and the expected long-term asset returns will be reflected in net periodic
benefit costs in the fourth quarter of each fiscal year or at the date of a significant remeasurement event. If the Company’s actual returns on plan assets are less than
the Company’s expectations, additional contributions may be required.
42
In fiscal 2019, total employer contributions for continuing operations to the defined benefit pension plans were $50 million, none of which were voluntary
contributions made by the Company. The Company expects to contribute approximately $50 million in cash to its defined benefit pension plans in fiscal 2020. In
fiscal 2019, total employer contributions for continuing operations to the postretirement plans were $3 million. The Company expects to contribute approximately
$4 million in cash to its postretirement plans in fiscal 2020.
Based on information provided by its independent actuaries and other relevant sources, the Company believes that the assumptions used are reasonable; however,
changes in these assumptions could impact the Company’s financial position, results of operations or cash flows.
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 22, "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. The Company
maintains captive insurance companies to manage its insurable liabilities.
Asbestos-Related Contingencies and Insurance Receivables
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 and corresponding insurance recovery for pending and future claims and defense costs is
based on the Company's historical claim experience, and estimates of the number and resolution cost of potential future claims that may be filed and is discounted
to present value from 2068 (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 2068. Annually, the Company assesses the
sufficiency of its estimated liability for pending and future claims and defense costs by evaluating actual experience regarding claims filed, settled and dismissed,
and amounts paid in settlements. In addition to claims and settlement experience, the Company considers additional quantitative and qualitative factors such as
changes in legislation, the legal environment, and the Company's defense strategy. The Company also evaluates the recoverability of its insurance receivable on an
annual basis. The Company evaluates all of these factors and determines whether a change in the estimate of its liability for pending and future claims and defense
costs or insurance receivable is warranted.
In connection with the recognition of liabilities for asbestos-related matters, the Company records asbestos-related insurance recoveries that are probable. The
Company's estimate of asbestos-related insurance recoveries represents estimated amounts due to the Company for previously paid and settled claims and the
probable reimbursements relating to its estimated liability for pending and future claims discounted to present value. In determining the amount of insurance
recoverable, the Company considers available insurance, allocation methodologies, solvency and creditworthiness of the insurers. Refer to Note 22, "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 assets and liabilities.
43
Product Warranties
The Company offers warranties to its customers depending upon the specific product and terms of the customer purchase agreement. A typical warranty program
requires that the Company replace defective products within a specified time period from the date of sale. The Company records an estimate of future warranty-
related costs based on actual historical return rates and other known factors. Based on analysis of return rates and other factors, the Company’s warranty provisions
are adjusted as necessary. At September 30, 2019, the Company had recorded $285 million of warranty reserves for continuing operations, including extended
warranties for which deferred revenue is recorded. 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. Refer to Note 21, "Guarantees," of the notes to consolidated financial statements for disclosure of the
Company's product warranty liabilities.
Income Taxes
The Company accounts for income taxes in accordance with ASC 740, "Income Taxes." Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating
loss and other loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The Company records a valuation allowance that primarily represents non-U.S. operating and
other loss carryforwards for which realization is uncertain. Management judgment is required in determining the Company’s provision for income taxes, deferred
tax assets and liabilities, and the valuation allowance recorded against the Company’s net deferred tax assets. In calculating the provision for income taxes on an
interim basis, the Company uses an estimate of the annual effective tax rate based upon the facts and circumstances known at each interim period. On a quarterly
basis, the actual effective tax rate is adjusted as appropriate based upon the actual results as compared to those forecasted at the beginning of the fiscal year.
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. At September 30, 2019, the Company had a valuation
allowance of $5.1 billion for continuing operations, of which $4.5 billion relates to net operating loss carryforwards primarily in Australia, Brazil, France,
Germany, Ireland, Luxembourg, Spain, Switzerland, United Kingdom, and the U.S. for which sustainable taxable income has not been demonstrated; and $600
million for other deferred tax assets.
The Company’s federal income tax returns and certain non-U.S. income tax returns for various fiscal years remain under various stages of audit by the IRS and
respective non-U.S. tax authorities. Although the outcome of tax audits is always uncertain, management believes that it has appropriate support for the positions
taken on its tax returns and that its annual tax provisions included amounts sufficient to pay assessments, if any, which may be proposed by the taxing authorities.
At September 30, 2019, the Company had recorded a liability of $2.5 billion for its best estimate of the probable loss on certain of its tax positions, the majority of
which is included in other noncurrent liabilities in the consolidated statements of financial position. Nonetheless, the amounts ultimately paid, if any, upon
resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year.
The Company does not generally provide additional U.S. or non-U.S. income taxes on outside basis differences of consolidated subsidiaries included in
shareholders’ equity attributable to Johnson Controls International plc, except in limited circumstances including anticipated taxation on planned divestitures. The
reduction of the outside basis differences via the sale or liquidation of these subsidiaries and/or distributions could create taxable income. The Company’s intent is
to reduce the outside basis differences only when it would be tax efficient. Refer to "Capitalization" within the "Liquidity and Capital Resources" section for
discussion of U.S. and non-U.S. cash projections.
Refer to Note 18, "Income Taxes," of the notes to consolidated financial statements for the Company's income tax disclosures.
NEW ACCOUNTING PRONOUNCEMENTS
Refer to the "New Accounting Pronouncements" section within Note 1, "Summary of Significant Accounting Policies," of the notes to consolidated financial
statements.
44
RISK MANAGEMENT
The Company selectively uses derivative instruments to reduce market risk associated with changes in foreign currency, commodities and stock-based
compensation. All hedging transactions are authorized and executed pursuant to clearly defined policies and procedures, which strictly prohibit the use of financial
instruments for speculative purposes. At the inception of the hedge, the Company assesses the effectiveness of the hedge instrument and designates the hedge
instrument as either (1) a hedge of a recognized asset or liability or of a recognized firm commitment (a fair value hedge), (2) a hedge of a forecasted transaction or
of the variability of cash flows to be received or paid related to an unrecognized asset or liability (a cash flow hedge) or (3) a hedge of a net investment in a non-
U.S. operation (a net investment hedge). The Company performs hedge effectiveness testing on an ongoing basis depending on the type of hedging instrument
used. All other derivatives not designated as hedging instruments under ASC 815, "Derivatives and Hedging," are revalued in the consolidated statements of
income.
For all foreign currency derivative instruments designated as cash flow hedges, retrospective effectiveness is tested on a monthly basis using a cumulative dollar
offset test. The fair value of the hedged exposures and the fair value of the hedge instruments are revalued, and the ratio of the cumulative sum of the periodic
changes in the value of the hedge instruments to the cumulative sum of the periodic changes in the value of the hedge is calculated. The hedge is deemed as highly
effective if the ratio is between 80% and 125%. For commodity derivative contracts designated as cash flow hedges, effectiveness is tested using a regression
calculation. Ineffectiveness is minimal as the Company aligns most of the critical terms of its derivatives with the supply contracts.
For net investment hedges, the Company assesses its net investment positions in the non-U.S. operations and compares it with the outstanding net investment
hedges on a quarterly basis. The hedge is deemed effective if the aggregate outstanding principal of the hedge instruments designated as the net investment hedge
in a non-U.S. operation does not exceed the Company’s net investment positions in the respective non-U.S. operation.
Equity swaps and any other derivative instruments not designated as hedging instruments under ASC 815 require no assessment of effectiveness.
A discussion of the Company’s accounting policies for derivative financial instruments is included in Note 1, "Summary of Significant Accounting Policies," of the
notes to consolidated financial statements, and further disclosure relating to derivatives and hedging activities is included in Note 10, "Derivative Instruments and
Hedging Activities," and Note 11, "Fair Value Measurements," of the notes to consolidated financial statements.
Foreign Exchange
The Company has manufacturing, sales and distribution facilities around the world and thus makes investments and enters into transactions denominated in various
foreign currencies. In order to maintain strict control and achieve the benefits of the Company’s global diversification, foreign exchange exposures for each
currency are netted internally so that only its net foreign exchange exposures are, as appropriate, hedged with financial instruments.
The Company hedges 70% to 90% of the nominal amount of each of its known foreign exchange transactional exposures. The Company primarily enters into
foreign currency exchange contracts to reduce the earnings and cash flow impact of the variation of non-functional currency denominated receivables and payables.
Gains and losses resulting from hedging instruments offset the foreign exchange gains or losses on the underlying assets and liabilities being hedged. The
maturities of the forward exchange contracts generally coincide with the settlement dates of the related transactions. Realized and unrealized gains and losses on
these contracts are recognized in the same period as gains and losses on the hedged items. The Company also selectively hedges anticipated transactions that are
subject to foreign exchange exposure, primarily with foreign currency exchange contracts, which are designated as cash flow hedges in accordance with ASC 815.
The Company has 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 accumulated other comprehensive income ("AOCI") account within shareholders’ equity attributable to
Johnson Controls ordinary shareholders where they offset gains and losses recorded on the Company’s net investments globally.
At September 30, 2019 and 2018, the Company estimates that an unfavorable 10% change in the exchange rates would have decreased net unrealized gains by
approximately $358 million and $212 million, respectively.
45
Interest Rates
Substantially all of the Company's outstanding debt has fixed interest rates. A 10% increase in the average cost of the Company’s variable rate debt would have
had an immaterial impact on pre-tax interest expense for the year ended September 30, 2019 and an unfavorable impact of approximately $5 million for the year
ended September 30, 2018.
Commodities
The Company uses commodity hedge contracts in the financial derivatives market in cases where commodity price risk cannot be naturally offset or hedged
through supply base fixed price contracts. Commodity risks are systematically managed pursuant to policy guidelines. As a cash flow hedge, gains and losses
resulting from the hedging instruments offset the gains or losses on purchases of the underlying commodities that will be used in the business. The maturities of the
commodity hedge contracts coincide with the expected purchase of the commodities.
ENVIRONMENTAL, HEALTH AND SAFETY AND OTHER MATTERS
The Company’s global operations are governed by environmental laws and worker safety laws. Under various circumstances, these laws impose civil and criminal
penalties and fines, as well as injunctive and remedial relief, for noncompliance and require remediation at sites where Company-related substances have been
released into the environment.
The Company has expended substantial resources globally, both financial and managerial, to comply with applicable environmental laws and worker safety laws
and to protect the environment and workers. The Company believes it is in substantial compliance with such laws and maintains procedures designed to foster and
ensure compliance. However, the Company has been, and in the future may become, the subject of formal or informal enforcement actions or proceedings
regarding noncompliance with such laws or the remediation of Company-related substances released into the environment. Such matters typically are resolved with
regulatory authorities through commitments to compliance, abatement or remediation programs and in some cases payment of penalties. Historically, neither such
commitments nor penalties imposed on the Company have been material.
Refer to Note 22, "Commitments and Contingencies," of the notes to consolidated financial statements for additional information.
QUARTERLY FINANCIAL DATA
(in millions, except per share data)
(quarterly amounts unaudited)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Full
Year
2019
$
2018
$
Net sales
Gross profit
Net income (1)
Net income attributable to Johnson Controls
Earnings per share (2)
Basic
Diluted
Net sales
Gross profit
Net income (3)
Net income attributable to Johnson Controls
Earnings per share (2)
Basic
Diluted
5,779 $
1,844
558
515
0.57
0.57
5,630 $
1,824
483
438
0.47
0.47
5,464 $
1,725
399
355
0.39
0.38
5,305 $
1,698
271
230
0.25
0.25
46
6,451 $
2,144
4,276
4,192
4.81
4.79
6,282 $
2,088
804
723
0.78
0.78
6,274 $
1,980
654
612
0.78
0.77
6,183 $
2,057
825
771
0.83
0.83
23,968
7,693
5,887
5,674
6.52
6.49
23,400
7,667
2,383
2,162
2.34
2.32
(1)
(2)
(3)
The fiscal 2019 first quarter net income includes $50 million of transaction and integration costs and $21 million of mark-to-market losses. The fiscal 2019
second quarter net income includes $70 million of transaction and integration costs and $20 million of mark-to-market gains. The fiscal 2019 third quarter
net income includes a $5.2 billion gain on sale of the Power Solutions business, net of transaction and other costs, $235 million of significant restructuring
and impairment costs, $226 million of tax indemnification reserve release, $140 million of environmental charge, $86 million of transaction and integration
costs, $60 million of loss on debt extinguishment and $9 million of mark-to-market gains. The fiscal 2019 fourth quarter net income includes $626 million
of net mark-to-market losses and $111 million of transaction and integration costs. The preceding amounts are stated on a pre-tax and pre-noncontrolling
interest impact basis and include both continuing and discontinued operations activity.
Due to the use of the weighted-average shares outstanding for each quarter for computing earnings per share, the sum of the quarterly per share amounts
may not equal the per share amount for the year.
The fiscal 2018 first quarter net income includes a $114 million gain on sale of Scott Safety, $158 million of significant restructuring and impairment costs,
and $50 million of transaction and integration costs. The fiscal 2018 second quarter net income includes $64 million of transaction and integration costs.
The fiscal 2018 third quarter net income includes $51 million of transaction and integration costs. The fiscal 2018 fourth quarter net income includes $10
million of net mark-to-market gains on pension and postretirement plans, $105 million of significant restructuring and impairment costs, and $69 million of
transaction and integration costs. The preceding amounts are stated on a pre-tax and pre-noncontrolling interest impact basis and include both continuing
and discontinued operations activity.
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Risk Management" included in Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations.
47
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Income for the years ended September 30, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Income (Loss) for the years ended September 30, 2019, 2018
and 2017
Consolidated Statements of Financial Position as of September 30, 2019 and 2018
Consolidated Statements of Cash Flows for the years ended September 30, 2019, 2018 and 2017
Consolidated Statements of Shareholders' Equity Attributable to Johnson Controls Ordinary Shareholders
for the years ended September 30, 2019, 2018 and 2017
Notes to Consolidated Financial Statements
Schedule II - Valuation and Qualifying Accounts for the years ended September 30, 2019, 2018 and 2017
48
Page
49
52
53
54
55
56
57
118
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Johnson Controls International plc
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated statements of financial position of Johnson Controls International plc and its subsidiaries (the “Company”) as of
September 30, 2019 and 2018, and the related consolidated statements of income, comprehensive income (loss), shareholders’ equity attributable to Johnson
Controls ordinary shareholders, and cash flows for each of the three years in the period ended September 30, 2019, including the related notes and financial
statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). We also have audited the Company's
internal control over financial reporting as of September 30, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September
30, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2019 in conformity with
accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of September 30, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for
its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting
appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over
financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal
control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally
49
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated
or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and
(ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on
the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the
critical audit matters or on the accounts or disclosures to which they relate.
Goodwill Impairment Assessment
As described in Notes 1 and 7 to the consolidated financial statements, the Company’s consolidated goodwill balance was $18,178 million as of September 30,
2019. Management reviews goodwill for impairment as of July 31 of each fiscal year, or more frequently if events or changes in circumstances indicate the asset
might be impaired. The estimated fair value of each reporting unit, using a fair value method based on management’s judgments and assumptions, is compared
with the carrying amount of each reporting unit, including recorded goodwill. 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 of each reporting unit, management uses
multiples of earnings based on the average of published multiples of earnings of comparable entities with similar operations and economic characteristics, applied
to the Company’s average of historical and future financial results.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment is a critical audit matter are there
was significant judgment by management when developing the fair value of each reporting unit. This, in turn, led to a high degree of auditor judgment,
subjectivity, and effort in performing procedures to evaluate management’s significant assumptions, including multiples of earnings of comparable entities with
similar operations and economic characteristics. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in
performing these procedures and evaluating the audit evidence obtained.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial
statements. The procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the
fair value of the Company’s reporting units. These procedures also included, among others, (i) testing management’s process for developing the fair value
estimates, (ii) evaluating the appropriateness of the multiples of earnings model, (iii) testing the completeness, accuracy, and relevance of underlying data used in
the model, and evaluating the significant assumptions used by management, including the multiples of earnings of comparable entities with similar operations and
economic characteristics. Evaluating management’s assumptions related to multiples of earnings involved evaluating whether the assumptions used by
management were reasonable considering (i) the consistency with external market and industry data, and (ii) whether these assumptions were consistent with
evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s multiples
of earnings model and certain significant assumptions, including multiples of earnings of comparable entities with similar operations and economic characteristics.
Uncertain Tax Positions
As described in Note 18 to the consolidated financial statements, the Company recorded uncertain tax position liabilities totaling $2,451 million, primarily as a
non-current liability, as of September 30, 2019. The Company is subject to income taxes in the U.S. and in numerous foreign jurisdictions. Judgment is required by
management in determining the Company’s worldwide provision for income taxes and recording the related income tax assets and liabilities. As described by
management,
50
the Company has recorded a liability for its best estimate of the probable loss on certain of the tax positions. The Company’s income tax filings are regularly under
audit by tax authorities. The amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts
accrued for each year.
The principal considerations for our determination that performing procedures relating to uncertain tax positions is a critical audit matter are there was significant
judgment by management in identifying and recording the estimated probable loss for each uncertain tax position. This, in turn, led to a high degree of auditor
judgment, subjectivity, and effort in performing procedures to evaluate the timely identification and accurate measurement of uncertain tax positions. Also, the
evaluation of audit evidence available to support the tax liabilities for uncertain tax positions is complex and required significant auditor judgment as the nature of
the evidence is often highly subjective. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing
these procedures and evaluating the audit evidence obtained.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial
statements. These procedures included testing the effectiveness of controls relating to management’s assessment of uncertain tax positions, including controls over
the identification and estimate of probable loss for each uncertain tax position. These procedures also included, among others, (i) testing the information used in the
calculation of the estimate of probable loss for uncertain tax positions, (ii) testing the calculation of the liability for uncertain tax positions by jurisdiction, (iii)
testing the completeness of management’s assessment of the identification of uncertain tax positions, and (iv) evaluating the status and results of income tax audits
with the relevant tax authorities, as applicable. Professionals with specialized skill and knowledge were used to assist in the evaluation of the completeness and
measurement of the Company’s uncertain tax positions, including evaluating the reasonableness of management’s assessment of whether tax positions are more-
likely-than-not of being sustained and the amount of potential benefit to be realized, the application of relevant tax laws, and estimated interest and penalties.
/s/ PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
November 21, 2019
We have served as the Company’s auditor since 1957.
51
Johnson Controls International plc
Consolidated Statements of Income
Year Ended September 30,
2019
2018
2017
Income from continuing operations before income taxes
1,056
1,546
(in millions, except per share data)
Net sales
Products and systems
Services
Cost of sales
Products and systems
Services
Gross profit
Selling, general and administrative expenses
Restructuring and impairment costs
Net financing charges
Equity income
Income tax provision (benefit)
Income from continuing operations
Income from discontinued operations, net of tax (Note 3)
Net income
Income from continuing operations attributable to noncontrolling interests
Income from discontinued operations attributable to noncontrolling interests
Net income attributable to Johnson Controls
Amounts attributable to Johnson Controls ordinary shareholders:
Income from continuing operations
Income from discontinued operations
Net income
Basic earnings per share attributable to Johnson Controls
Continuing operations
Discontinued operations
Net income
Diluted earnings per share attributable to Johnson Controls
Continuing operations
Discontinued operations
Net income *
*
Certain items do not sum due to rounding.
The accompanying notes are an integral part of the consolidated financial statements.
52
$
17,711 $
17,332 $
6,257
23,968
12,577
3,698
16,275
6,068
23,400
12,315
3,418
15,733
7,693
7,667
(6,244)
(235)
(350)
192
(5,642)
(255)
(401)
177
(233)
1,289
4,598
5,887
189
24
197
1,349
1,034
2,383
174
47
16,762
6,073
22,835
11,692
3,613
15,305
7,530
(5,723)
(347)
(466)
157
1,151
322
829
990
1,819
157
51
$
$
$
$
$
$
$
5,674 $
2,162 $
1,611
1,100 $
4,574
5,674 $
1.26 $
5.26
6.52 $
1.26 $
5.23
6.49 $
1,175 $
987
2,162 $
1.27 $
1.07
2.34 $
1.26 $
1.06
2.32 $
672
939
1,611
0.72
1.00
1.72
0.71
0.99
1.71
(in millions)
Net income
Johnson Controls International plc
Consolidated Statements of Comprehensive Income (Loss)
Year Ended September 30,
2019
2018
2017
$
5,887 $
2,383 $
1,819
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments
Realized and unrealized gains (losses) on derivatives
Realized and unrealized gains on marketable securities
Pension and postretirement plans
(342)
6
—
(6)
(483)
(29)
4
—
Other comprehensive income (loss)
(342)
(508)
103
(14)
5
—
94
Total comprehensive income
5,545
1,875
1,913
Comprehensive income attributable to noncontrolling interests
195
186
203
Comprehensive income attributable to Johnson Controls
$
5,350 $
1,689 $
1,710
The accompanying notes are an integral part of the consolidated financial statements.
53
Johnson Controls International plc
Consolidated Statements of Financial Position
September 30,
2019
2018
$
2,805 $
(in millions, except par value and share data)
Assets
Cash and cash equivalents
Accounts receivable, less allowance for doubtful
accounts of $173 and $169, respectively
Inventories
Assets held for sale
Other current assets
Current assets
Property, plant and equipment - net
Goodwill
Other intangible assets - net
Investments in partially-owned affiliates
Noncurrent assets held for sale
Other noncurrent assets
Total assets
Liabilities and Equity
Short-term debt
Current portion of long-term debt
Accounts payable
Accrued compensation and benefits
Deferred revenue
Liabilities held for sale
Other current liabilities
Current liabilities
Long-term debt
Pension and postretirement benefits
Noncurrent liabilities held for sale
Other noncurrent liabilities
Long-term liabilities
Commitments and contingencies (Note 22)
Ordinary shares (par value $0.01; 2.0 billion shares authorized; shares issued: 2019 -
804,495,430; 2018 - 950,969,965)
Ordinary A shares (par value €1.00; 40,000 shares authorized, none outstanding as of
September 30, 2019 and 2018)
Preferred shares (par value $0.01; 200,000,000 shares authorized, none outstanding as of
September 30, 2019 and 2018)
Ordinary shares held in treasury, at cost (shares held: 2019 - 26,864,793; 2018 - 25,963,004)
Capital in excess of par value
Retained earnings
Accumulated other comprehensive loss
Shareholders’ equity attributable to Johnson Controls
Noncontrolling interests
Total equity
Total liabilities and equity
The accompanying notes are an integral part of the consolidated financial statements.
54
$
$
5,770
1,814
98
1,906
12,393
3,348
18,178
5,632
853
60
1,823
42,287 $
10 $
501
3,582
953
1,407
44
2,573
9,070
6,708
1,044
—
4,636
12,388
8
—
—
(1,086)
16,812
4,827
(795)
19,766
1,063
20,829
$
42,287 $
185
5,622
1,819
3,015
1,182
11,823
3,300
18,381
6,187
848
5,188
3,070
48,797
1,306
1
3,407
1,021
1,326
1,791
2,398
11,250
9,623
616
207
4,643
15,089
10
—
—
(1,053)
16,549
6,604
(946)
21,164
1,294
22,458
48,797
Johnson Controls International plc
Consolidated Statements of Cash Flows
(in millions)
Operating Activities of Continuing Operations
Net income from continuing operations attributable to Johnson Controls
Income from continuing operations attributable to noncontrolling interests
Net income from continuing operations
Adjustments to reconcile net income from continuing operations to cash provided by operating activities:
Depreciation and amortization
Pension and postretirement benefit expense (income)
Pension and postretirement contributions
Equity in earnings of partially-owned affiliates, net of dividends received
Deferred income taxes
Non-cash restructuring and impairment charges
Gain on Scott Safety business divestiture
Equity-based compensation
Other - net
Changes in assets and liabilities, excluding acquisitions and divestitures:
Accounts receivable
Inventories
Other assets
Restructuring reserves
Accounts payable and accrued liabilities
Accrued income taxes
Cash provided by operating activities from continuing operations
Investing Activities of Continuing Operations
Capital expenditures
Sale of property, plant and equipment
Acquisition of businesses, net of cash acquired
Business divestitures, net of cash divested
Changes in long-term investments
Proceeds (payments) for equity swap
Cash provided (used) by investing activities from continuing operations
Financing Activities of Continuing Operations
Increase (decrease) in short-term debt - net
Increase in long-term debt
Repayment of long-term debt
Debt financing costs
Stock repurchases
Payment of cash dividends
Proceeds from the exercise of stock options
Dividends paid to noncontrolling interests
Cash paid to prior acquisitions
Cash received for prior divestitures
Employee equity-based compensation withholding
Other - net
Cash used by financing activities from continuing operations
Discontinued Operations
Cash provided (used) by operating activities
Cash provided (used) by investing activities
Cash used by financing activities
Cash provided (used) by discontinued operations
Year Ended September 30,
2019
2018
2017
$
1,100
$
189
1,289
825
515
(53)
(34)
612
235
—
95
29
(312)
(72)
(99)
(121)
56
(1,222)
1,743
(586)
27
(25)
12
25
14
(533)
(1,296)
—
(2,333)
—
(5,983)
(920)
171
(132)
—
4
(31)
1
(10,519)
(541)
12,611
(35)
12,035
1,175 $
174
1,349
824
(170)
(56)
(128)
(739)
36
(114)
106
(35)
(475)
(103)
(171)
1
340
855
1,520
(645)
48
(21)
2,202
(1)
(15)
1,568
96
1,136
(3,704)
(4)
(300)
(954)
66
(43)
—
—
(42)
—
(3,749)
996
(372)
(3)
621
672
157
829
919
(533)
(342)
(92)
573
71
—
134
(12)
(225)
(51)
(112)
95
(130)
(753)
371
(760)
29
(6)
168
(21)
(58)
(648)
143
1,857
(1,275)
(18)
(651)
(702)
157
(57)
(75)
—
(34)
6
(649)
(271)
(599)
(703)
(1,573)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
Change in cash, cash equivalents and restricted cash held for sale
Increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of period
Cash, cash equivalents and restricted cash at end of period
Less: Restricted cash
Cash and cash equivalents at end of period
(120)
15
2,621
200
2,821
16
$
2,805
$
(106)
14
(132)
332
200
15
185 $
54
2,123
(322)
654
332
31
301
The accompanying notes are an integral part of the consolidated financial statements.
55
Johnson Controls International plc
Consolidated Statements of Shareholders’ Equity Attributable to Johnson Controls Ordinary Shareholders
(in millions, except per share data)
Total
Ordinary
Shares
Capital in
Excess of
Par Value
Retained
Earnings
Treasury
Stock,
at Cost
At September 30, 2016
Comprehensive income
Cash dividends
Ordinary ($1.00 per share)
Repurchases of ordinary shares
Spin-off of Adient
Other, including options exercised
At September 30, 2017
Comprehensive income (loss)
Cash dividends
Ordinary ($1.04 per share)
Repurchases of ordinary shares
Adoption of ASU 2016-09
Other, including options exercised
At September 30, 2018
Comprehensive income (loss)
Cash dividends
Ordinary ($1.04 per share)
Repurchases and retirements of ordinary shares
Divestiture of Power Solutions
Adoption of ASC 606
Adoption of ASU 2016-01
Adoption of ASU 2016-16
Other, including options exercised
At September 30, 2019
$
24,118 $
9
$
16,105 $
9,177 $
1,710
—
—
1,611
(20) $
—
(938)
(651)
(4,038)
246
20,447
1,689
(968)
(300)
179
117
21,164
5,350
(887)
(5,983)
483
(45)
—
(546)
230
—
—
—
—
9
—
—
—
—
1
10
—
—
(2)
—
—
—
—
—
—
—
—
285
16,390
—
—
—
—
159
16,549
—
—
—
—
—
—
—
263
(938)
—
(4,619)
—
5,231
2,162
(968)
—
179
—
6,604
5,674
(887)
(5,981)
—
(45)
8
(546)
—
—
(651)
—
(39)
(710)
—
—
(300)
—
(43)
(1,053)
—
—
—
—
—
—
—
(33)
$
19,766 $
8
$
16,812 $
4,827 $
(1,086) $
The accompanying notes are an integral part of the consolidated financial statements.
56
Accumulated
Other
Comprehensive
Income (Loss)
(1,153)
99
—
—
581
—
(473)
(473)
—
—
—
—
(946)
(324)
—
—
483
—
(8)
—
—
(795)
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Johnson Controls International plc
Notes to Consolidated Financial Statements
The consolidated financial statements include the consolidated accounts of Johnson Controls International plc, a corporation organized under the laws of Ireland,
and its subsidiaries (Johnson Controls International plc and all its subsidiaries, hereinafter collectively referred to as the "Company," "Johnson Controls" or "JCI
plc").
Nature of Operations
Johnson Controls International plc, headquartered in Cork, Ireland, is a global diversified technology and multi industrial leader serving a wide range of customers
in more than 150 countries. The Company creates intelligent buildings, efficient energy solutions and integrated infrastructure that work seamlessly together to
deliver on the promise of smart cities and communities. The Company is committed to helping its customers win and creating greater value for all of its
stakeholders through its strategic focus on buildings.
In the fourth quarter of fiscal 2016, Johnson Controls, Inc. ("JCI Inc.") and Tyco International plc ("Tyco") completed their combination, with JCI Inc. merging
with a wholly owned, indirect subsidiary of Tyco (the "Merger"). Following the Merger, Tyco changed its name to “Johnson Controls International plc” and JCI
Inc. is a wholly-owned subsidiary of Johnson Controls International plc. The Merger was accounted for as a reverse acquisition using the acquisition method of
accounting in accordance with Accounting Standards Codification ("ASC") 805, "Business Combinations." JCI Inc. was the accounting acquirer for financial
reporting purposes. Accordingly, the historical consolidated financial statements of JCI Inc. for periods prior to this transaction are considered to be the historic
financial statements of the Company.
On November 13, 2018, the Company entered into a Stock and Asset Purchase Agreement (“Purchase Agreement”) with BCP Acquisitions LLC (“Purchaser”).
The Purchaser is a newly-formed entity controlled by investment funds managed by Brookfield Capital Partners LLC. Pursuant to the Purchase Agreement, on the
terms and subject to the conditions therein, the Company agreed to sell, and Purchaser agreed to acquire, the Company’s Power Solutions business for a purchase
price of $13.2 billion. The transaction closed on April 30, 2019 with net cash proceeds of $11.6 billion after tax and transaction-related expenses.
During the first quarter of fiscal 2019, the Company determined that its Power Solutions business met the criteria to be classified as a discontinued operation and,
as a result, Power Solutions' historical financial results are reflected in the Company's consolidated financial statements as a discontinued operation, and assets and
liabilities were retrospectively reclassified as assets and liabilities held for sale. Refer to Note 3, "Discontinued Operations," of the notes to consolidated financial
statements for further information.
The Company is a global market leader in engineering, developing, manufacturing and installing building products and systems around the world, including
heating, ventilating, air-conditioning ("HVAC") equipment, HVAC controls, energy-management systems, security systems, fire detection systems and fire
suppression solutions. The Company further serves customers by providing technical services (in the HVAC, security and fire-protection space), energy-
management consulting and data-driven solutions via its data-enabled business. Finally, the Company has a strong presence in the North American residential air
conditioning and heating systems market and is a global market leader in industrial refrigeration products.
Principles of Consolidation
The consolidated financial statements include the consolidated accounts of Johnson Controls International plc and its subsidiaries that are consolidated in
conformity with 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.
The Company consolidates variable interest entities ("VIE") in which the Company has the power to direct the significant activities of the entity and the obligation
to absorb losses or receive benefits from the entity that may be significant. The Company did not have a significant variable interest in any consolidated or
nonconsolidated VIEs in its continuing operations for the presented reporting periods.
57
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.
In addition, the Company classifies disposal groups to be disposed of other than by sale (e.g. spin-off) as held for sale in the period the disposal occurs.
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.
Restricted Cash
At September 30, 2019, the Company held restricted cash of approximately $16 million, all of which was recorded within other current assets in the consolidated
statements of financial position. These amounts related to cash restricted for payment of asbestos liabilities. At September 30, 2018, the Company held restricted
cash of approximately $15 million, of which $6 million was recorded within other current assets in the consolidated statements of financial position and $9 million
was recorded within other noncurrent assets in the consolidated statements of financial position.
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
58
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 statements
of financial position 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.
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 generally range from 3 to 40 years for buildings and
improvements, subscriber systems up to 15 years, 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 published multiples of earnings of comparable entities with similar operations and economic
characteristics and applies to the Company's average of historical and future financial results. 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 7, "Goodwill
and Other Intangible Assets," of the notes to consolidated financial statements for information regarding the goodwill impairment testing performed in fiscal years
2019, 2018 and 2017.
Indefinite-lived intangible assets are also subject to at least annual impairment testing. Indefinite-lived intangible assets primarily 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 tangible assets and other intangible assets with definitive 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 350-30, "General Intangibles Other than Goodwill" and ASC 985-20, "Costs of
Software to be Sold, Leased, or Marketed." ASC 360-10-15 requires the Company to group assets and liabilities at the lowest level for which identifiable cash
flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows. If
the undiscounted cash flows do not indicate the carrying amount of the asset group is recoverable, an impairment charge is measured as the amount by which the
carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals. ASC 350-30 requires intangible assets acquired in a
business combination that are used in research and development activities to be considered indefinite lived until the completion or abandonment of the associated
research and development efforts. During the period that those assets are considered indefinite lived, they shall not be amortized but shall be tested for
impairment annually and more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired. If the carrying
amount of an intangible asset exceeds its fair value, an entity shall recognize an impairment loss in an amount equal to that excess. ASC 985-20 requires the
unamortized capitalized costs of a computer software product be compared to the net realizable value of that product. The amount by which the unamortized
capitalized costs of a computer software product exceed the net realizable value of that asset shall be written off. Refer to Note 17, "Impairment of
59
Long-Lived Assets," of the notes to consolidated financial statements for information regarding the impairment testing performed in fiscal years 2019, 2018 and
2017.
Revenue Recognition
The Company recognizes revenue from certain long-term contracts to design, manufacture and install building products and systems as well as unscheduled repair
or replacement services on an over time basis, with progress towards completion measured using a cost-to-cost input method based on the relationship between
actual costs incurred and total estimated costs at completion. The cost-to-cost input method is used as it best depicts the transfer of control to the customer that
occurs as the Company incurs costs. Changes to the original estimates may be required during the life of the contract and such estimates are reviewed monthly. If
contract modifications result in additional goods or services that are distinct from those transferred before the modification, they are accounted for prospectively as
if the Company entered into a new contract. If the goods or services in the modification are not distinct from those in the original contract, 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.
The Company does not adjust the promised amount of consideration for the effects of a significant financing component as at contract inception the Company
expects to receive the payment within twelve months of transfer of goods or services.
The Company enters into extended warranties and long-term service and maintenance agreements with certain customers. For these arrangements, revenue is
recognized over time on a straight-line basis over the respective contract term.
The Company also sells certain HVAC and refrigeration products and services in bundled arrangements with multiple performance obligations, such as equipment,
commissioning, service labor and extended warranties. 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 addition, the Company sells security monitoring systems that may have multiple performance obligations, including equipment, installation, monitoring
services and maintenance agreements. Revenues associated with sale of equipment and related installations are recognized over time on a cost-to-cost input
method, while the revenue for monitoring and maintenance services are recognized over time as services are rendered. The transaction price is allocated to each
performance obligation based on the relative selling price method. In order to estimate relative selling price, market data and transfer price studies are utilized. If
the standalone selling price is not directly observable, the Company estimates the standalone selling price using an adjusted market assessment approach or
expected cost plus margin approach. For transactions in which the Company retains ownership of the subscriber system asset, fees for monitoring and maintenance
services are recognized over time on a straight-line basis over the contract term. Non-refundable fees received in connection with the initiation of a monitoring
contract, along with associated direct and incremental selling costs, are deferred and amortized over the estimated life of the contract.
In all other cases, the Company recognizes revenue at the point in time when control over the goods or services transfers to the customer.
The Company considers the contractual consideration payable by the customer and assesses variable consideration that may affect the total transaction price,
including discounts, rebates, refunds, credits or other similar sources of variable consideration, when determining the transaction price of each contract. The
Company includes variable consideration in the estimated transaction price when it is probable that significant reversal of revenue recognized would not occur
when the uncertainty associated with variable consideration is subsequently resolved. These estimates are based on the amount of consideration that the Company
expects to be entitled to.
Shipping and handling costs billed to customers are included in sales and the related costs are included in cost of sales when control transfers to the customer. The
Company presents amounts collected from customers for sales and other taxes net of the related amounts remitted.
Subscriber System Assets, Dealer Intangibles and Related Deferred Revenue Accounts
The Company considers assets related to the acquisition of new customers in its electronic security business in three asset categories: internally generated
residential subscriber systems outside of North America, internally generated commercial subscriber systems (collectively referred to as subscriber system assets)
and customer accounts acquired through the ADT dealer program, primarily outside of North America (referred to as dealer intangibles). Subscriber system assets
include installed property, plant and equipment for which the Company retains ownership and deferred costs directly related to the customer acquisition and system
installation. Subscriber system assets represent capitalized equipment (e.g. security control panels, touchpad, motion detectors, window sensors, and other
equipment) and installation costs associated with electronic security monitoring arrangements under which the Company retains ownership of the security system
assets in a customer's place of business, or outside of North America, residence. Installation
60
costs represent costs incurred to prepare the asset for its intended use. The Company pays property taxes on the subscriber system assets and upon customer
termination, may retrieve such assets. These assets embody a probable future economic benefit as they generate future monitoring revenue for the Company.
Costs related to the subscriber system equipment and installation are categorized as property, plant and equipment rather than deferred costs. Deferred costs
associated with subscriber system assets represent direct and incremental selling expenses (such as commissions) related to acquiring the customer. Commissions
related to up-front consideration paid by customers in connection with the establishment of the monitoring arrangement are determined based on a percentage of
the up-front fees and do not exceed deferred revenue. Such deferred costs are recorded as other current and noncurrent assets within the consolidated statements of
financial position.
Subscriber system assets and any deferred revenue resulting from the customer acquisition are accounted for over the expected life of the subscriber. In certain
geographical areas where the Company has a large number of customers that behave in a similar manner over time, the Company accounts for subscriber system
assets and related deferred revenue using pools, with separate pools for the components of subscriber system assets and any related deferred revenue based on the
same month and year of acquisition. The Company depreciates its pooled subscriber system assets and related deferred revenue using a straight-line method with
lives up to 12 years and considering customer attrition. The Company uses a straight-line method with a 15-year life for non-pooled subscriber system assets
(primarily in Europe, Latin America and Asia) and related deferred revenue, with remaining balances written off upon customer termination.
Certain contracts and related customer relationships result from purchasing residential security monitoring contracts from an external network of independent
dealers who operate under the ADT dealer program, primarily outside of North America. Acquired contracts and related customer relationships are recorded at
their contractually determined purchase price.
During the first 6 months (12 months in certain circumstances) after the purchase of the customer contract, any cancellation of monitoring service, including those
that result from customer payment delinquencies, results in a chargeback by the Company to the dealer for the full amount of the contract purchase price. The
Company records the amount charged back to the dealer as a reduction of the previously recorded intangible asset.
Intangible assets arising from the ADT dealer program described above are amortized in pools determined by the same month and year of contract acquisition on a
straight-line basis over the period of the customer relationship. The estimated useful life of dealer intangibles ranges from 12 to 15 years.
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 for continuing operations in the consolidated statements of income. Such expenditures for the years ended September 30, 2019, 2018
and 2017 were $319 million, $310 million and $307 million, respectively.
Earnings Per Share
The Company presents both basic and diluted earnings per share ("EPS") amounts. Basic EPS is calculated by dividing net income attributable to Johnson Controls
by the weighted average number of common shares outstanding during the reporting period. Diluted EPS is calculated by dividing net income attributable to
Johnson Controls by the weighted average number of common shares and common equivalent shares outstanding during the reporting period that are calculated
using the treasury stock method for stock options, unvested restricted stock and unvested performance share awards. See Note 13, "Earnings per Share," of the
notes to consolidated financial statements for the calculation of earnings per share.
Foreign Currency Translation
Substantially all of the Company’s international operations use the respective local currency as the functional currency. Assets and liabilities of international
entities have been translated at period-end exchange rates, and income and expenses have been translated using average exchange rates for the period. Monetary
assets and liabilities denominated in non-functional currencies are adjusted to reflect period-end exchange rates. The aggregate transaction gains (losses), net of the
impact of foreign currency hedges, included in income from continuing operations for the years ended September 30, 2019, 2018 and 2017 were $(10) million, $1
million and $60 million, respectively.
61
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.
Investments
The Company invests in debt and equity securities which are marked to market at the end of each accounting period. For fiscal 2019, unrealized gains and losses
on these securities are recognized in the Company's consolidated statements of income. For periods prior to fiscal 2019, the unrealized gains and losses on these
securities, other than the deferred compensation plan assets, were recognized in AOCI within the consolidated statement of shareholders' equity unless an
unrealized loss is deemed to be other than temporary, in which case such loss was charged to earnings. The deferred compensation plan assets are marked to
market at the end of each accounting period and all unrealized gains and losses are recorded in the consolidated statements of income.
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
15, "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 22, "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. The Company
maintains captive insurance companies to manage its insurable liabilities.
62
Asbestos-Related Contingencies and Insurance Receivables
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 and corresponding insurance recovery for pending and future claims and defense costs is
based on the Company's historical claim experience, and estimates of the number and resolution cost of potential future claims that may be filed and is discounted
to present value from 2068 (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 2068. Annually, the Company assesses the
sufficiency of its estimated liability for pending and future claims and defense costs by evaluating actual experience regarding claims filed, settled and dismissed,
and amounts paid in settlements. In addition to claims and settlement experience, the Company considers additional quantitative and qualitative factors such as
changes in legislation, the legal environment, and the Company's defense strategy. The Company also evaluates the recoverability of its insurance receivable on an
annual basis. The Company evaluates all of these factors and determines whether a change in the estimate of its liability for pending and future claims and defense
costs or insurance receivable is warranted.
In connection with the recognition of liabilities for asbestos-related matters, the Company records asbestos-related insurance recoveries that are probable. The
Company's estimate of asbestos-related insurance recoveries represents estimated amounts due to the Company for previously paid and settled claims and the
probable reimbursements relating to its estimated liability for pending and future claims discounted to present value. In determining the amount of insurance
recoverable, the Company considers available insurance, allocation methodologies, solvency and creditworthiness of the insurers. Refer to Note 22, "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 assets and 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 basis 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 reduce the
carrying or book value of 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 18, "Income Taxes," of the notes to consolidated financial statements.
Retrospective Changes
During the first quarter of fiscal 2019, the Company determined that its Power Solutions business met the criteria to be classified as a discontinued operation,
which required retrospective application to financial information for all periods presented. Refer to Note 3, "Discontinued Operations" of the notes to consolidated
financial statements for further information regarding the Company's discontinued operations.
In November 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-18, "Statement of Cash Flows
(Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)." The ASU requires amounts generally described as restricted cash and
restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the
statement of cash flows. ASU No. 2016-18 was effective retrospectively for the quarter ended December 31, 2018. As of September 30, 2016, the Company had
approximately $2.0 billion of restricted cash related to restricted proceeds deposited into escrow from the issuance of $2.0 billion aggregate principal of unsecured,
unsubordinated notes by Adient Global Holdings Ltd., that were released upon the completion of the Adient spin-off in October 2016. Upon adoption of ASU
2016-18, the release of the restricted proceeds are presented in the fiscal 2017 consolidated statements of cash flow as a financing activity outflow from
discontinued operations. The remaining impact of this guidance did not have a significant impact on the Company's consolidated financial statements for the
periods presented, as the restricted cash balance for the fiscal years ended September 30, 2019 and 2018 was $16 million and $15 million, respectively.
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 was
effective retrospectively for the Company for the quarter ending December
63
31, 2018. The adoption of this guidance had an impact on the presentation of equity swap funding and settlement activities since the activity changed from an
operating activity to an investing activity.
New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In March 2018, the FASB issued ASU No. 2018-05, "Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No.
118," to add various SEC paragraphs pursuant to the issuance of SEC Staff Accounting Bulletin No. 118 ("SAB 118") to ASC 740 "Income Taxes." SAB 118 was
issued by the SEC in December 2017 to provide immediate guidance for accounting implications of U.S. Tax Reform under the "Tax Cuts and Jobs Act" in the
period of enactment. SAB 118 provides for a provisional one year measurement period for entities to finalize their accounting for certain income tax effects related
to the "Tax Cuts and Jobs Act." The Company applied this guidance to its consolidated financial statements and related disclosures beginning in the first quarter of
fiscal 2018. In the first quarter of fiscal 2019, the Company completed its analysis of all enactment-date income tax effects of the U.S. tax law change. Refer to
Note 18, "Income Taxes," of the notes to consolidated financial statements for further information.
In March 2017, the FASB issued ASU No. 2017-07, "Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost
and Net Periodic Postretirement Benefit Cost." The ASU requires the service cost component of net periodic benefit cost to be presented with other compensation
costs. The other components of net periodic benefit cost are required to be presented in the income statement separately from the service cost component and
outside a subtotal of income from operations, if one is presented. The ASU also allows only the service cost component of net periodic benefit cost to be eligible
for capitalization. ASU No. 2017-07 was effective for the quarter ended December 31, 2018. The guidance was effective retrospectively except for the
capitalization of the service cost component which was applied prospectively. The adoption of this guidance did not have a significant impact on the Company's
consolidated financial statements as the Company does not present a subtotal of income from operations within its consolidated statements of income.
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 was
effective for the Company for the quarter ended December 31, 2018. The changes were applied by means of a cumulative-effect adjustment which resulted in a
reduction to retained earnings and other noncurrent assets of $546 million.
In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and
Financial Liabilities." ASU No. 2016-01 amends certain aspects of recognition, measurement, presentation and disclosure of financial instruments, including
marketable securities. Additionally in February 2018, the FASB issued ASU No. 2018-03, "Technical Corrections and Improvements to Financial Instruments -
Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities," which provides additional clarification on certain topics
addressed in ASU No. 2016-01. ASU No. 2016-01 and ASU No. 2018-03 were effective for the Company for the quarter ending December 31, 2018. The changes
were applied by means of a cumulative-effect adjustment which resulted in an increase to retained earnings of $8 million. The new standard requires the mark-to-
market of marketable securities investments previously recorded within accumulated other comprehensive income on the statement of financial position be
recorded in the statement of income on a prospective basis beginning as of the adoption date. As these restricted investments do not relate to the underlying
operating performance of its business, the Company’s definition of segment earnings excludes the mark-to-market adjustments beginning in the first quarter of
fiscal 2019. Refer to Note 19, "Segment Information," of the notes to consolidated financial statements for further information.
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." ASU No. 2014-09 and its related amendments
(collectively, the “New Revenue Standard”) clarify 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 Company adopted the New Revenue Standard on October 1, 2018 using a
modified retrospective approach. Under the New Revenue Standard, revenue recognition is mostly consistent with the previous guidance, with the exception of the
Power Solutions business, which is now reported as a discontinued operation beginning in the first quarter of fiscal 2019. Within the Power Solutions business,
certain customers return battery cores which are now included in the transaction price as noncash consideration. The New Revenue Standard did not have a
material impact on the Company’s consolidated statements of financial position, consolidated statements of income or its consolidated statements of cash flows. As
of October 1, 2018, the Company applied the New Revenue Standard to contracts that were not completed as of this date and recognized a cumulative-effect
adjustment of a reduction to retained earnings of $45 million, which relates primarily to deferred revenue recorded for certain battery core
64
returns that represent a material right provided to customers. The prior period comparative information has not been revised and continues to be reported under the
previous guidance.
The impact of adoption of the New Revenue Standard to the Company's consolidated statement of income for the fiscal year ended September 30, 2019 for
continuing operations was an increase to net sales of approximately $3 million, with the impact to income before taxes of less than $1 million. The impact of
adoption of the New Revenue Standard to the Company's consolidated statement of income for the fiscal year ended September 30, 2019 for discontinued
operations was an increase to net sales of $667 million, with the impact to income from discontinued operations, net of tax, of approximately $26 million.
The impact of adoption of the New Revenue Standard to the Company's consolidated statement of financial position as of September 30, 2019 is as follows (in
millions):
September 30, 2019
As reported
accounting guidance
Under previous
Impact from adopting
the New Revenue
Standard
Consolidated Statement of Financial Position
Assets
Accounts receivable - net
$
5,770 $
5,802 $
Inventories
Other current assets
Property, plant and equipment - net
Other noncurrent assets
Liabilities and Equity
Deferred revenue
Retained earnings
1,814
1,906
3,348
1,823
1,407
4,827
1,828
1,931
3,308
1,794
1,398
4,838
(32)
(14)
(25)
40
29
9
(11)
Recently Issued Accounting Pronouncements
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. The original standard was effective retrospectively for the Company
for the quarter ending December 31, 2019 with early adoption permitted; however, in July 2018 the FASB issued ASU No. 2018-11, "Leases (Topic 842): Targeted
Improvements," which provides an additional transition method that permits changes 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 has elected this transition method at the adoption date of October 1, 2019. The FASB
further amended Topic 842 by issuing ASU No. 2018-01, "Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842," which provides
an optional transition practical expedient for existing or expired land easements that were not previously recorded as leases, ASU No. 2018-10, "Codification
Improvements to Topic 842, Leases," ASU No. 2018-20, "Leases (Topic 842): Narrow-Scope Improvements for Lessors," and ASU No. 2019-01, "Leases (Topic
842): Codification Improvements." The Company has populated its leases into new lease accounting software and is designing and implementing new processes
and controls for the accounting for leases under the new guidance. The Company is the lessee under various agreements for facilities and equipment that are
currently accounted for as operating leases. The new guidance will require the Company to record operating leases on the balance sheet with a right-of-use
("ROU") asset and corresponding lease liability for future payment obligations. The Company has elected to apply the package of transitional practical expedients,
under which the Company will not reassess prior conclusions about lease identification, lease classification, and initial direct costs of existing leases as of the date
of adoption. The Company expects the ROU asset and operating lease liability to be less than 3% of its total assets. However, the Company does not expect the
new guidance to have a material impact on its consolidated statements of income and its consolidated statements of cash flows.
Other recently issued accounting pronouncements are not expected to have a material impact on the Company's consolidated financial statements.
65
2.
ACQUISITIONS AND DIVESTITURES
Fiscal Year 2019
On April 30, 2019, the Company completed the sale of its Power Solutions business to BCP Acquisitions LLC for a purchase price of $13.2 billion. The net cash
proceeds after tax and transaction-related expenses were $11.6 billion. In connection with the sale, the Company recorded a gain, net of transaction and other costs,
of $5.2 billion ($4.0 billion after tax), subject to post-closing working capital and net debt adjustments, within income from discontinued operations, net of tax, in
the consolidated statements of income. During the first quarter of fiscal 2019, the Company determined that its Power Solutions business met the criteria to be
classified as a discontinued operation and, as a result, Power Solutions' historical financial results are reflected in the Company's consolidated financial statements
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.
During fiscal 2019, the Company completed certain divestitures within the Global Products and Building Solutions EMEA/LA businesses. The combined selling
price was $18 million, $16 million of which was received as of September 30, 2019. In connection with the sale, the Company reduced goodwill by $1 million
within the Building Solutions EMEA/LA segment. The divestitures were not material to the Company's consolidated financial statements.
During fiscal 2019, the Company completed certain acquisitions for a combined purchase price of $32 million, $25 million of which was paid as of September 30,
2019. The acquisitions were not material to the Company's consolidated financial statements. In connection with the acquisitions, the Company recorded goodwill
of $11 million within the Global Products segment, $8 million within the Building Solutions Asia Pacific segment, and $6 million within the Building Solutions
EMEA/LA segment.
Fiscal Year 2018
During fiscal 2018, the Company completed certain acquisitions for a combined purchase price, net of cash acquired, of $21 million, all of which was paid as of
September 30, 2018. 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 $14 million within the Global Products segment and $1 million within the Building Solutions EMEA/LA segment.
In the first quarter of fiscal 2018, the Company completed the sale of its Scott Safety business to 3M Company. The selling price, net of cash divested, was $2.0
billion, all of which was received as of September 30, 2018. In connection with the sale, the Company recorded a pre-tax gain of $114 million within selling,
general and administrative expenses in the consolidated statements of income and reduced goodwill in assets held for sale by $1.2 billion. The gain, net of tax,
recorded was $84 million. Net cash proceeds from the transaction of approximately $1.9 billion were used to repay a significant portion of the Tyco International
Holding S.a.r.L.'s ("TSarl") $4.0 billion of merger-related debt.
Also during fiscal 2018, the Company completed certain divestitures primarily within the Global Products business. The combined selling price was $204 million,
all of which was received as of September 30, 2018. In connection with the divestitures, the Company reduced goodwill by $35 million. The divestitures were not
material to the Company's consolidated financial statements.
Fiscal Year 2017
During fiscal 2017, the Company completed three acquisitions for a combined purchase price, net of cash acquired, of $9 million, $6 million of which was paid as
of September 30, 2017. The acquisitions in the aggregate were not material to the Company’s consolidated financial statements. In connection with the
acquisitions, the Company recorded goodwill of $2 million.
In the second quarter of fiscal 2017, the Company completed the sale of its ADT security business in South Africa within the Building Solutions EMEA/LA
segment. The selling price, net of cash divested, was $129 million, all of which was received as of September 30, 2017. In connection with the sale, the Company
reduced goodwill in assets held for sale by $92 million. The divestiture was not material to the Company's consolidated financial statements.
During fiscal 2017, the Company completed two divestitures for a combined selling price, net of cash divested, of $44 million, of which $40 million was received
as of September 30, 2017. The divestitures were not material to the Company's consolidated financial statements. In connection with the divestitures, the Company
reduced goodwill by $19 million and $2 million in the Global Products segment and in the Building Solutions Asia Pacific segment, respectively.
During fiscal 2017, the Company completed one additional divestiture for a sales price of $4 million, all of which was received as of September 30, 2017. The
divestiture decreased the Company's ownership from a controlling to noncontrolling interest, and
66
as a result, the Company deconsolidated cash of $5 million. The divestiture was not material to the Company's consolidated financial statements.
During fiscal 2017, the Company received $52 million in net cash proceeds related to prior year business divestitures and paid $75 million related to prior year
business acquisitions.
3. DISCONTINUED OPERATIONS
Power Solutions
On November 13, 2018, the Company entered into a Stock and Asset Purchase Agreement (“Purchase Agreement”) with BCP Acquisitions LLC (“Purchaser”).
The Purchaser is a newly-formed entity controlled by investment funds managed by Brookfield Capital Partners LLC. Pursuant to the Purchase Agreement, on the
terms and subject to the conditions therein, the Company agreed to sell, and Purchaser agreed to acquire, the Company’s Power Solutions business for a purchase
price of $13.2 billion. The transaction closed on April 30, 2019 with net cash proceeds of $11.6 billion after tax and transaction-related expenses.
During the first quarter of fiscal 2019, the Company determined that its Power Solutions business met the criteria to be classified as a discontinued operation and,
as a result, Power Solutions' historical financial results are reflected in the Company's consolidated financial statements as a discontinued operation, and assets and
liabilities were retrospectively reclassified as assets and liabilities held for sale. The Company did not allocate any general corporate overhead to discontinued
operations.
The following table summarizes the results of Power Solutions reclassified as discontinued operations for the fiscal years ended September 30, 2019, 2018 and
2017 (in millions). As the Power Solutions sale occurred on April 30, 2019, there are only seven months of results included in the fiscal year ended September 30,
2019.
Year Ended September 30,
2019
2018
2017
Net sales
$
5,001 $
8,000 $
7,337
Income from discontinued operations before income taxes
Provision for income taxes on discontinued operations
Income from discontinued operations attributable to noncontrolling interests, net of tax
6,039
(1,441)
(24)
1,355
(321)
(47)
Income from discontinued operations
$
4,574 $
987 $
1,407
(383)
(42)
982
For the fiscal year ended September 30, 2019, income from discontinued operations before income taxes included a gain on sale of the Power Solutions business,
net of transaction and other costs, of $5.2 billion and a favorable impact of $117 million for ceasing depreciation and amortization expense as the business was held
for sale.
For the fiscal year ended September 30, 2019, the effective tax rate was more than the Irish statutory rate of 12.5% primarily due to the tax impacts of the
divestiture of the Power Solutions business and tax rate differentials. For the fiscal year ended September 30, 2018, the effective tax rate was more than the Irish
statutory rate of 12.5% primarily due to legal entity restructuring associated with the Power Solutions business and tax rate differentials. For the fiscal year ended
September 30, 2017, the effective tax rate was more than the Irish statutory rate of 12.5% primarily due to a tax expense due to changes in entity tax status, the
establishment of a deferred tax liability on the outside basis difference of certain nonconsolidated subsidiaries and tax rate differentials.
Adient plc
On October 31, 2016, the Company completed the spin-off of its Automotive Experience business by way of the transfer of the Automotive Experience business
from Johnson Controls to Adient plc. The Company did not retain any equity interest in Adient plc. During the first quarter of fiscal 2017, the Company
determined that Adient met the criteria to be classified as a discontinued operation and, as a result, Adient’s historical financial results are reflected in the
Company’s consolidated financial statements as a discontinued operation. The Company did not allocate any general corporate overhead to discontinued
operations.
67
The following table summarizes the results of Adient, reclassified as discontinued operations for the fiscal year ended September 30, 2017 (in millions). As the
Adient spin-off occurred on October 31, 2016, there is only one month of Adient results included in the year ended September 30, 2017.
Net sales
Income from discontinued operations before income taxes
Provision for income taxes on discontinued operations
Income from discontinued operations attributable to noncontrolling interests, net of tax
Loss from discontinued operations
Year Ended
September 30, 2017
$
$
1,434
1
(35)
(9)
(43)
For the fiscal year ended September 30, 2017, the income from discontinued operations before income taxes included separation costs of $79 million.
For the fiscal year ended September 30, 2017, the effective tax rate was more than the Irish statutory rate of 12.5% primarily due to the tax impacts of separation
costs and Adient spin-off related tax expense, partially offset by non-U.S. tax rate differentials.
Assets and Liabilities Held for Sale
The following table summarizes the carrying value of the Power Solutions assets and liabilities held for sale at September 30, 2018 (in millions):
Cash
Accounts receivable - net
Inventories
Other current assets
Assets held for sale
Property, plant and equipment - net
Goodwill
Other intangible assets - net
Investments in partially-owned affiliates
Other noncurrent assets
Noncurrent assets held for sale
Short-term debt
Current portion of long-term debt
Accounts payable
Accrued compensation and benefits
Other current liabilities
Liabilities held for sale
Long-term debt
Pension and postretirement benefits
Other noncurrent liabilities
Noncurrent liabilities held for sale
$
$
$
$
$
$
$
September 30, 2018
15
1,443
1,405
152
3,015
2,871
1,092
161
453
611
5,188
9
25
1,237
125
395
1,791
31
101
75
207
68
During the third quarter of fiscal 2019, the Company determined that a business within its Global Products segment met the criteria to be classified as held for sale.
The assets and liabilities of this business are presented as held for sale in the consolidated statements of financial position as of September 30, 2019. Assets and
liabilities held for sale are required to be recorded at the lower of carrying value or fair value less any costs to sell. Accordingly, the Company recorded an
impairment charge of $235 million within restructuring and impairment costs in the consolidated statements of income in the third quarter of fiscal 2019 to write
down the carrying value of the assets held for sale to fair value less any costs to sell. Refer to Note 17, "Impairment of Long-Lived Assets" of the notes to
consolidated financial statements for further information regarding the impairment charge. The divestiture of the business held for sale could result in a gain or loss
on sale to the extent the ultimate selling price differs from the current carrying value of the net assets recorded. The business did not meet the criteria to be
classified as a discontinued operation as the divestiture of the business will not have a major effect on the Company's operations and financial results.
4.
REVENUE RECOGNITION
Disaggregated Revenue
The following table presents the Company's revenues disaggregated by segment and by products and systems versus services revenue for the year ended
September 30, 2019 (in millions):
Year Ended
September 30, 2019
Products &
Systems
Services
Total
Building Solutions North America
$
5,745 $
3,286 $
Building Solutions EMEA/LA
Building Solutions Asia Pacific
Global Products
1,767
1,575
8,624
1,888
1,083
—
9,031
3,655
2,658
8,624
Total
$
17,711 $
6,257 $
23,968
The following table presents further disaggregation of Global Products segment revenues by product type for the year ended September 30, 2019 (in millions):
Year Ended
September 30, 2019
$
$
1,292
6,181
1,151
8,624
Building management systems
HVAC & refrigeration equipment
Specialty products
Total
Contract Balances
Contract assets relate to the Company’s right to consideration for performance obligations satisfied but not billed and consist of unbilled receivables and costs in
excess of billings. Contract liabilities relate to customer payments received in advance of satisfaction of performance obligations under the contract. Contract
liabilities consist of deferred revenue. Contract balances are classified as assets or liabilities on a contract-by-contract basis at the end of each reporting period.
69
The following table presents the location and amount of contract balances in the Company's consolidated statements of financial position (in millions):
Location of contract balances
September 30, 2019
October 1, 2018
Contract assets - current
Accounts receivable - net
$
Contract assets - noncurrent
Other noncurrent assets
Contract liabilities - current
Deferred revenue
Contract liabilities - noncurrent
Other noncurrent liabilities
Total
$
1,389 $
90
(1,407)
(117)
(45) $
1,261
85
(1,335)
(113)
(102)
For the year ended September 30, 2019, the Company recognized revenue of approximately $1.2 billion that was included in the beginning of period contract
liability balance.
Performance Obligations
A performance obligation is a distinct good, service, or bundle of goods and services promised in a contract. A contract’s transaction price is allocated to each
distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. When contracts with customers require significant
and complex integration, contain goods or services which are highly interdependent or interrelated, or are goods or services which significantly modify or
customize other promises in the contracts and, therefore, are not distinct, then the entire contract is accounted for as a single performance obligation. For any
contracts with multiple performance obligations, the contract’s transaction price is allocated to each performance obligation based on the estimated relative
standalone selling price of each distinct good or service in the contract. For product sales, each product sold to a customer typically represents a distinct
performance obligation.
Performance obligations are satisfied as of a point in time or over time. The timing of satisfying the performance obligation is typically indicated by the terms of
the contract. As of September 30, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $14.4
billion, of which approximately 60% is expected to be recognized as revenue over the next two years. The remaining performance obligations expected to be
recognized in revenue beyond two years primarily relate to large, multi-purpose contracts to construct hospitals, schools and other governmental buildings, which
include services to be performed over the building's lifetime, with initial contract terms of 25 to 35 years. Future contract modifications could affect both the timing
and the amount of the remaining performance obligations. The Company excludes the value of remaining performance obligations for contracts with an original
expected duration of one year or less.
Costs to Obtain or Fulfill a Contract
The Company recognizes the incremental costs incurred to obtain or fulfill a contract with a customer as an asset when these costs are recoverable. These costs
consist primarily of sales commissions and bid/proposal costs. Costs to obtain or fulfill a contract are capitalized and amortized to revenue over the period of
contract performance.
As of September 30, 2019, the Company recorded the costs to obtain or fulfill a contract of $212 million, of which $110 million is recorded within other current
assets and $102 million is recorded within other noncurrent assets in the consolidated statements of financial position.
During the year ended September 30, 2019, the Company recognized amortization expense of $157 million related to costs to obtain or fulfill a contract. There
were no impairment losses recognized in the year ended September 30, 2019.
70
5. INVENTORIES
Inventories consisted of the following (in millions):
Raw materials and supplies
Work-in-process
Finished goods
Inventories
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in millions):
Buildings and improvements
Subscriber systems
Machinery and equipment
Construction in progress
Land
Total property, plant and equipment
Less: accumulated depreciation
Property, plant and equipment - net
September 30,
2019
2018
588 $
176
1,050
1,814 $
September 30,
2019
2018
1,499 $
661
2,969
465
250
5,844
(2,496)
3,348 $
606
155
1,058
1,819
1,213
573
2,715
704
258
5,463
(2,163)
3,300
$
$
$
$
Interest costs capitalized during the fiscal years ended September 30, 2019, 2018 and 2017 were $6 million, $17 million and $14 million, respectively.
7. 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, 2019 and 2018 were as
follows (in millions):
Building Solutions North America
Building Solutions EMEA/LA
Building Solutions Asia Pacific
Global Products
Total
Building Solutions North America
Building Solutions EMEA/LA
Building Solutions Asia Pacific
Global Products
Total
$
$
$
$
September 30,
2017
Business
Acquisitions
Business
Divestitures
Currency
Translation and
Other
September 30,
2018
9,637 $
2,012
1,255
5,687
18,591 $
— $
1
—
14
15 $
— $
—
—
(35)
(35)
$
$
(34)
(63)
(20)
(73)
(190)
$
9,603
1,950
1,235
5,593
18,381
September 30,
2018
Business
Acquisitions
Business
Divestitures
Currency
Translation and
Other
September 30,
2019
— $
6
8
11
25 $
— $
(1)
—
(22)
(23)
$
(15)
$
(106)
(49)
(35)
(205)
$
9,588
1,849
1,194
5,547
18,178
9,603 $
1,950
1,235
5,593
18,381 $
71
The fiscal 2019 Global Products business divestiture amount includes $22 million of goodwill transferred to noncurrent assets held for sale on the consolidated
statements of financial position related to plans to dispose of a business within the Global Products segment.
At September 30, 2017, accumulated goodwill impairment charges included $47 million related to the Building Solutions EMEA/LA - Latin America reporting
unit.
There were no goodwill impairments resulting from fiscal 2019 and 2018 annual impairment tests. No reporting unit was determined to be at risk of failing step
one of the goodwill impairment test. The Company continuously monitors for events and circumstances that could negatively impact the key assumptions in
determining fair value, including long-term revenue growth projections, profitability, discount rates, recent market valuations from transactions by comparable
companies, volatility in the Company's market capitalization, and general industry, market and macro-economic conditions. It is possible that future changes in
such circumstances, or in the variables associated with the judgments, assumptions and estimates used in assessing the fair value of the reporting unit, would
require the Company to record a non-cash impairment charge.
The assumptions included in the impairment tests require judgment, and changes to these inputs could impact the results of the calculations. The primary
assumptions used in the impairment tests were management's projections of future cash flows. 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 Company’s other intangible assets, primarily from business acquisitions valued based on independent appraisals, consisted of (in millions):
September 30, 2019
September 30, 2018
Gross
Carrying
Amount
Accumulated
Amortization
Net
Gross
Carrying
Amount
Accumulated
Amortization
Net
Amortized intangible assets
Technology
Customer relationships
Miscellaneous
Total amortized intangible assets
Unamortized intangible assets
Trademarks/tradenames
Miscellaneous
$
1,307 $
(370)
$
937 $
1,317 $
(251)
$
2,722
584
4,613
2,282
90
2,372
(759)
(224)
(1,353)
—
—
—
1,963
360
3,260
2,282
90
2,372
2,941
458
4,716
2,386
120
2,506
(599)
(185)
(1,035)
—
—
—
Total intangible assets
$
6,985 $
(1,353)
$
5,632 $
7,222 $
(1,035)
$
1,066
2,342
273
3,681
2,386
120
2,506
6,187
Amortization of other intangible assets included within continuing operations for the fiscal years ended September 30, 2019, 2018 and 2017 was $377 million,
$376 million and $481 million, respectively. Excluding the impact of any future acquisitions, the Company anticipates amortization for fiscal 2020, 2021, 2022,
2023 and 2024 will be approximately $390 million, $389 million, $387 million, $374 million and $361 million, respectively. There were no indefinite-lived
intangible asset impairments resulting from fiscal 2019, 2018 and 2017 annual impairment tests.
8. LEASES
Certain administrative, production and other facilities and equipment are leased under arrangements that are accounted for as operating leases. Most leases contain
renewal options for varying periods, and leases generally require the Company to pay for insurance, taxes and maintenance of the property.
Total rental expense for continuing operations for the fiscal years ended September 30, 2019, 2018 and 2017 was $452 million, $408 million and $432 million,
respectively.
72
Future minimum operating lease payments at September 30, 2019 were as follows (in millions):
2020
2021
2022
2023
2024
After 2024
Total minimum lease payments
$
September 30, 2019
352
287
200
111
71
172
$
1,193
9. DEBT AND FINANCING ARRANGEMENTS
Short-term debt consisted of the following (in millions):
Bank borrowings and commercial paper
Weighted average interest rate on short-term debt outstanding
$
10
$
2.0%
1,306
2.8%
September 30,
2019
2018
The Company had no commercial paper outstanding as of September 30, 2019 and $879 million as of September 30, 2018.
In June 2019, TSarl, a subsidiary of the Company, terminated its $1.25 billion committed revolving credit facility scheduled to expire in August 2020. In
connection with the termination, the Company repaid all of the outstanding obligations in respect of principal, interest and fees under the credit facility. In relation
to the termination of the credit facility, TSarl completed all of its obligations under the Term Loan Credit Agreement, dated as of March 10, 2016 (the "Term
Facility") by repaying all of the outstanding obligations under the Term Facility, which included $364 million term loan scheduled to mature in March 2020. Other
debt held at TSarl was also repaid, including a 364-day $250 million floating rate term loan scheduled to mature in March 2020 and an 18-month 215 million euro
floating rate euro term loan scheduled to mature in July 2019. No amounts remain outstanding on the $4.0 billion TSarl merger-related debt as of September 30,
2019.
In March 2019, a 364-day $250 million committed revolving credit facility expired. The Company entered into a new $250 million committed revolving credit
facility scheduled to expire in March 2020. As of September 30, 2019 there were no draws on the facility.
In February 2019, a 364-day $150 million committed revolving credit facility expired. The Company entered into a new $150 million committed revolving credit
facility scheduled to expire in February 2020. As of September 30, 2019 there were no draws on the facility.
In February 2019, a 364-day $150 million committed revolving credit facility expired. The Company entered into a new $150 million committed revolving credit
facility scheduled to expire in February 2020. As of September 30, 2019 there were no draws on the facility.
In January 2019, the Company entered into a $750 million term loan due the earlier of January 2020 or five business days from the closing on the sale of the Power
Solutions business. Proceeds from the term loan were used for general corporate purposes. Following the sale of the Power Solutions business, the loan was repaid
in May 2019.
In January 2019, a 364-day $200 million committed revolving credit facility expired. The Company entered into a new $350 million committed revolving credit
facility scheduled to expire in January 2020. Following the sale of the Power Solutions business, the facility was reduced to $200 million. As of September 30,
2019 there were no draws on the facility.
73
Long-term debt consisted of the following (in millions; due dates by fiscal year):
Unsecured notes
JCI plc - 5.00% due in 2020 ($453 million par value)
JCI Inc. - 5.00% due in 2020 ($47 million par value)
JCI plc - 0.00% due in 2021 (€750 million par value)
JCI plc - 4.25% due in 2021 ($204 million par value)
JCI Inc. - 4.25% due in 2021 ($53 million par value)
JCI plc - 3.75% due in 2022 ($171 million par value)
JCI Inc. - 3.75% due in 2022 ($22 million par value)
JCI plc - 4.625% due in 2023 ($25 million par value)
Tyco International Finance S.A. ("TIFSA") - 4.625% due in 2023 ($7 million par value)
JCI plc - 1.00% due in 2023 (€888 million par value)
JCI plc - 3.625% due in 2024 ($453 million par value)
JCI Inc. - 3.625% due in 2024 ($31 million par value)
JCI plc - 1.375% due in 2025 (€423 million par value)
TIFSA - 1.375% due in 2025 (€54 million par value)
JCI plc - 3.90% due in 2026 ($487 million par value)
TIFSA - 3.90% due in 2026 ($51 million par value)
JCI plc - 6.00% due in 2036 ($342 million par value)
JCI Inc. - 6.00% due in 2036 ($8 million par value)
JCI plc - 5.70% due in 2041 ($190 million par value)
JCI Inc. - 5.70% due in 2041 ($30 million par value)
JCI plc - 5.25% due in 2042 ($155 million par value)
JCI Inc. - 5.25% due in 2042 ($6 million par value)
JCI plc - 4.625% due in 2044 ($444 million par value)
JCI Inc. - 4.625% due in 2044 ($6 million par value)
JCI plc - 5.125% due in 2045 ($477 million par value)
TIFSA - 5.125% due in 2045 ($23 million par value)
JCI plc - 6.95% due in 2046 ($32 million par value)
JCI Inc. - 6.95% due in 2046 ($4 million par value)
JCI plc - 4.50% due in 2047 ($500 million par value)
JCI plc - 4.95% due in 2064 ($341 million par value)
JCI Inc. - 4.95% due in 2064 ($15 million par value)
TSarl - Term Loan A - LIBOR plus 1.25% due in 2020
TSarl - Term Loan B - €215 million; EURIBOR plus 0.62% due in 2020
JCI plc - Term Loan - 25 billion yen; LIBOR JPY plus 0.40% due in 2022
Other
Gross long-term debt
Less: current portion
Less: debt issuance costs
Net long-term debt
September 30,
2019
2018
453
47
818
204
53
171
22
26
7
967
453
31
471
60
521
51
339
8
189
30
155
6
441
6
567
22
32
4
496
340
15
—
—
232
3
7,240
501
31
6,708 $
$
452
47
868
446
53
427
22
37
8
1,154
468
31
501
69
755
52
388
8
269
30
242
8
441
6
867
23
121
4
496
434
15
364
250
309
3
9,668
1
44
9,623
The installments of long-term debt maturing in subsequent fiscal years are: 2020 - $501 million; 2021 - $1,075 million; 2022 - $425 million; 2023 - $1,001 million;
2024 - $485 million; 2025 and thereafter - $3,753 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 continuing operations for the fiscal years ended September 30, 2019, 2018 and 2017 was $369 million,
$401 million and $432 million, respectively.
74
Financing Arrangements
In June 2019, the Company repurchased at par, $2.5 million of its 5.25% fixed rate notes, plus accrued interest, scheduled to mature in 2041.
In May 2019, the Company completed the debt tender offer to purchase up to $1.5 billion in aggregate principal amount of certain of its outstanding notes for $1.6
billion total consideration. The Company recognized a loss on the extinguishment of debt of $60 million, which was recorded within net financing charges in the
consolidated statements of income.
In May 2019, the Company repaid 10 billion yen of the 35 billion yen five-year syndicated floating rate term loan, plus accrued interest, scheduled to mature in
September 2022.
In April 2019, the Company repurchased at a discount, 4.7 million euro of its 1.375% fixed rate euro notes, plus accrued interest, scheduled to mature in 2025.
In February 2019, the Company repurchased at a discount, $12 million of its 3.9% fixed rate notes, plus accrued interest, scheduled to mature in 2026.
Net Financing Charges
The Company's net financing charges line item in the consolidated statements of income for the years ended September 30, 2019, 2018 and 2017 contained the
following components (in millions):
Interest expense, net of capitalized interest costs
Banking fees and bond cost amortization
Loss on debt extinguishment
Interest income
Net foreign exchange results for financing activities
Net financing charges
Year Ended September 30,
2019
2018
2017
$
$
335 $
409 $
28
60
(61)
(12)
30
—
(13)
(25)
350 $
401 $
446
49
—
(11)
(18)
466
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 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. These contracts were highly effective in hedging the variability in future cash
flows attributable to changes in currency exchange rates at September 30, 2019 and 2018.
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 copper and aluminum in cases where commodity price risk cannot be naturally offset or hedged through
supply base fixed price contracts. Prior to the divestiture of Power Solutions, the Company also used commodity hedge contracts to minimize risk associated with
purchases of lead, polypropylene and tin. Commodity risks are systematically managed pursuant to policy guidelines. As cash flow hedges, hedge
75
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. 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, 2019 and 2018.
The Company had the following outstanding contracts to hedge forecasted commodity purchases for continuing and discontinued operations (in metric tons):
Commodity
September 30, 2019
September 30, 2018
Volume Outstanding as of
Copper
Aluminum
Lead
Polypropylene
Tin
3,561
2,967
—
—
—
3,175
3,381
49,066
15,868
3,076
Net Investment Hedges
The Company enters into foreign currency denominated debt obligations to selectively hedge portions of its net investment in non-U.S. subsidiaries. The currency
effects of the debt obligations are reflected in the AOCI account within shareholders’ equity attributable to Johnson Controls ordinary shareholders where they
offset currency gains and losses recorded on the Company’s net investments globally. At September 30, 2019, the Company had 888 million euro, 750 million
euro, 423 million euro and 54 million euro in bonds designated as net investment hedges in the Company's net investment in Europe and 25 billion yen of foreign
denominated debt designated as net investment hedge in the Company's net investment in Japan. At September 30, 2018, the Company had one billion euro, 750
million euro, 423 million euro and 58 million euro in bonds and a 215 million euro term loan designated as net investment hedges in the Company's net investment
in Europe and 35 billion yen of foreign denominated debt designated as net investment hedge in the Company's net investment in Japan.
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, 2019, the Company hedged approximately 1.4 million of its ordinary shares, which have a cost basis of $60 million. As of September 30, 2018 the
Company hedged approximately 1.8 million of its ordinary shares, which have a cost basis of $73 million.
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.
76
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,
2019
September 30, 2018
September 30,
2019
September 30, 2018
$
$
$
$
16 $
—
—
16 $
23 $
1
—
6 $
1
—
7 $
10 $
2
12
2,544
2,568 $
3,149
3,173 $
19 $
—
62
81 $
— $
—
—
—
— $
10
—
63
73
2
—
—
—
2
Other current assets
Foreign currency exchange derivatives
Commodity derivatives
Other noncurrent assets
Equity swap
Total assets
Other current liabilities
Foreign currency exchange derivatives
Commodity derivatives
Liability held for sale
Commodity derivatives
Long-term debt
Foreign currency denominated debt
Total liabilities
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, 2019 and 2018, 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,
2019
September 30,
2018
September 30,
2019
September 30,
2018
Gross amount recognized
Gross amount eligible for offsetting
Net amount
$
$
97
(11)
86
$
$
77
80
(12)
68
$
$
2,568
$
(11)
2,557
$
3,175
(12)
3,163
Derivatives Impact on the Statements of Income and Statements of Comprehensive Income
The following table presents the pre-tax gains (losses) recorded in other comprehensive income (loss) related to cash flow hedges for the fiscal years ended
September 30, 2019, 2018 and 2017 (in millions):
Derivatives in ASC 815 Cash Flow Hedging Relationships
2019
2018
2017
Foreign currency exchange derivatives
Commodity derivatives
Total
$
$
2
$
(4)
(2)
$
2 $
(14)
(12) $
(1)
14
13
The following table presents the location and amount of the 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, 2019, 2018 and 2017 (in millions):
Year Ended September 30,
Derivatives in ASC 815 Cash Flow
Hedging Relationships
Location of Gain (Loss)
Recognized in Income on Derivative
Year Ended September 30,
2019
2018
2017
Foreign currency exchange derivatives
Foreign currency exchange derivatives
Commodity derivatives
Commodity derivatives
Total
Cost of sales
Income from discontinued operations
Cost of sales
Income from discontinued operations
$
$
4 $
—
(4)
(10)
(10) $
2 $
2
5
7
16 $
(1)
26
4
4
33
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, 2019, 2018 and 2017 (in millions):
Derivatives Not Designated as Hedging
Instruments under ASC 815
Location of Gain (Loss)
Recognized in Income on Derivative
Year Ended September 30,
2019
2018
2017
Foreign currency exchange derivatives
Foreign currency exchange derivatives
Foreign currency exchange derivatives
Foreign currency exchange derivatives
Equity swap
Total
Cost of sales
Net financing charges
Income tax provision
Income from discontinued operations
Selling, general and administrative
$
$
(8)
$
(60)
(1)
52
14
(3)
$
4 $
42
(4)
(7)
(8)
27 $
(1)
48
(1)
(1)
(3)
42
The pre-tax gains (losses) recorded in foreign currency translation adjustment ("CTA") within other comprehensive income (loss) related to net investment hedges
were $145 million, $45 million and $(138) million for the years ended September 30, 2019, 2018 and 2017, respectively. For the years ended September 30, 2019,
2018 and 2017, no gains or losses were reclassified from CTA into income for the Company’s outstanding net investment 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 for identical assets or liabilities;
Level 2: Quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active,
or 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.
78
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, 2019 and 2018 (in
millions):
Other current assets
Foreign currency exchange derivatives
Exchange traded funds (fixed income)1
Other noncurrent assets
Deferred compensation plan assets
Exchange traded funds (fixed income)1
Exchange traded funds (equity)1
Equity swap
Total assets
Other current liabilities
Foreign currency exchange derivatives
Commodity derivatives
Total liabilities
$
$
$
$
Fair Value Measurements Using:
Quoted Prices
in Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total as of
September 30, 2019
— $
19
71
138
116
—
344 $
— $
—
— $
35 $
—
—
—
—
62
97 $
23 $
1
24 $
—
—
—
—
—
—
—
—
—
—
35 $
19
71
138
116
62
441 $
23 $
1
24 $
79
Fair Value Measurements Using:
Quoted Prices
in Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total as of
September 30, 2018
16 $
1
14
100
148
119
63
3
464 $
12 $
2
12
26 $
— $
—
14
100
148
119
—
3
384 $
— $
—
—
— $
16 $
1
—
—
—
—
63
—
80 $
12 $
2
12
26 $
—
—
—
—
—
—
—
—
—
—
—
—
—
Other current assets
Foreign currency exchange derivatives
$
Commodity derivatives
Exchange traded funds (fixed income)1
Other noncurrent assets
Deferred compensation plan assets
Exchange traded funds (fixed income)1
Exchange traded funds (equity)1
Equity swap
Noncurrent assets held for sale
Investments in marketable common stock
Total assets
Other current liabilities
Foreign currency exchange derivatives
Commodity derivatives
Liabilities held for sale
Commodity derivatives
Total liabilities
$
$
$
1Classified as restricted investments for payment of asbestos liabilities. See Note 22, "Commitments and Contingencies" of the notes to consolidated financial statements for
further details.
Valuation Methods
Foreign currency exchange derivatives: The foreign currency exchange derivatives are valued under a market approach using publicized spot and forward prices.
Commodity derivatives: The commodity derivatives are valued under a market approach using publicized prices, where available, or dealer quotes.
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.
Deferred compensation plan assets: Assets held in the deferred compensation plans will be used to pay benefits under certain of the Company's non-qualified
deferred compensation plans. The investments primarily consist of mutual funds which are publicly traded on stock exchanges and are valued using a market
approach based on the quoted market prices.
Exchange traded funds: Exchange traded funds are valued using a market approach based on the quoted market prices, where available, or broker/dealer quotes of
identical or comparable instruments. During the fiscal year ended September 30, 2019, the Company recognized unrealized gains of $12 million in the consolidated
statements of income on these investments that were still held as of September 30, 2019, all of which related to restricted investments. Refer to Note 22,
"Commitments and Contingencies," of the notes to consolidated financial statements for further information.
The fair values of cash and cash equivalents, accounts receivable, short-term debt and accounts payable approximate their carrying values. The fair value of long-
term debt was $7.6 billion and $9.6 billion at September 30, 2019 and 2018, respectively. The fair value of public debt was $7.4 billion and $8.6 billion at
September 30, 2019 and 2018, respectively, which was determined primarily using market quotes classified as Level 1 inputs within the ASC 820 fair value
hierarchy. The fair value of other long-term debt
80
was $0.2 billion and $1.0 billion at September 30, 2019 and 2018 respectively, which was determined based on quoted market prices for similar instruments
classified as Level 2 inputs within the ASC 820 fair value hierarchy.
12. STOCK-BASED COMPENSATION
On September 2, 2016, the shareholders of the Company approved amendments to the Johnson Controls International plc 2012 Share and Incentive Plan (the
"Plan"). The types of awards authorized by the Plan comprise of stock options, stock appreciation rights, performance shares, performance units and other stock-
based awards. The Compensation Committee of the Company's Board of Directors determines the types of awards to be granted to individual participants and the
terms and conditions of the awards. The Plan provides that 76 million shares of the Company's common stock are reserved for issuance under the 2012 Plan, and
34 million shares remain available for issuance at September 30, 2019.
The Company has four share-based compensation plans, which are described below. For the fiscal years ended September 30, 2019, 2018 and 2017, compensation
cost charged against income for continuing operations, excluding the offsetting impact of outstanding equity swaps, for those plans was approximately $103
million, $89 million and $122 million, respectively, all of which was recorded in selling, general and administrative expenses.
The Company has elected to utilize the alternative transition method for calculating the tax effects of stock-based compensation. The total income tax benefit
recognized for continuing operations in the consolidated statements of income for share-based compensation arrangements was approximately $26 million, $22
million and $48 million for the fiscal years ended September 30, 2019, 2018 and 2017, respectively. The tax expense from the exercise and vesting of equity
settled awards was $6 million and $3 million for the fiscal years ended September 30, 2019 and 2018, respectively, and recorded as part of the income tax
provision upon adoption of ASU 2016-09 during the first quarter of fiscal 2018. The tax benefit from the exercise and vesting of equity settled awards was $4
million for the fiscal year ended September 30, 2017, and was recorded in capital in excess of par value. The Company does not settle stock options granted under
share-based payment arrangements to cash.
Stock Options
Stock options are granted with an exercise price equal to the market price of the Company’s stock at the date of grant. Stock option awards typically vest between
two and three years after the grant date and expire ten years from the grant date.
The fair value of each option is estimated on the date of grant using a Black-Scholes option valuation model that uses the assumptions noted in the following table.
The expected life of options represents the period of time that options granted are expected to be outstanding, assessed separately for executives and non-
executives. The risk-free interest rate for periods during the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. For
fiscal 2019 and 2018, the expected volatility is based on the historical volatility of the Company's stock since October 2016 blended with the historical volatility of
certain peer companies' stock prior to October 2016 over the most recent period corresponding to the expected life as of the grant date. For fiscal 2017, the
expected volatility is based on historical volatility of certain peer companies over the most recent period corresponding to the expected life as of the grant date. The
expected dividend yield is based on the expected annual dividend as a percentage of the market value of the Company’s ordinary shares as of the grant date. The
Company uses historical data to estimate option exercises and employee terminations within the valuation model.
Expected life of option (years)
Risk-free interest rate
Expected volatility of the Company’s stock
Expected dividend yield on the Company’s stock
2019
6.4
2.77%
21.80%
3.29%
Year Ended September 30,
2018
6.5
2.28%
23.70%
2.78%
2017
4.75 & 6.5
1.23% - 1.93%
24.60%
2.21%
81
A summary of stock option activity at September 30, 2019, and changes for the year then ended, is presented below:
Outstanding, September 30, 2018
Granted
Exercised
Forfeited or expired
Outstanding, September 30, 2019
Exercisable, September 30, 2019
Weighted
Average
Option Price
Shares
Subject to
Option
$
$
$
34.24
33.37
27.54
37.49
35.07
34.74
17,836,062
1,741,510
(6,234,755)
(973,068)
12,369,749
9,295,813
Weighted
Average
Remaining
Contractual
Life (years)
Aggregate
Intrinsic
Value
(in millions)
4.6
3.4
$
$
111
87
The weighted-average grant-date fair value of options granted during the fiscal years ended September 30, 2019, 2018 and 2017 was $5.56, $7.04 and $7.81,
respectively.
The total intrinsic value of options exercised during the fiscal years ended September 30, 2019, 2018 and 2017 was approximately $73 million, $38 million and
$81 million, respectively.
In conjunction with the exercise of stock options granted, the Company received cash payments for the fiscal years ended September 30, 2019, 2018 and 2017 of
approximately $171 million, $66 million and $157 million, respectively.
At September 30, 2019, the Company had approximately $8 million of total unrecognized compensation cost related to nonvested stock options granted for
continuing operations. That cost is expected to be recognized over a weighted-average period of 1.8 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, 2019 were as follows:
Expected life of SAR (years)
Risk-free interest rate
Expected volatility of the Company’s stock
Expected dividend yield on the Company’s stock
0.4 - 3.5
1.55% - 1.85%
21.80%
3.29%
A summary of SAR activity at September 30, 2019, and changes for the year then ended, is presented below:
Outstanding, September 30, 2018
Exercised
Forfeited or expired
Outstanding, September 30, 2019
Exercisable, September 30, 2019
Weighted
Average
SAR Price
Shares
Subject to
SAR
Weighted
Average
Remaining
Contractual
Life (years)
Aggregate
Intrinsic
Value
(in millions)
626,701
(245,513)
(13,179)
368,009
365,829
$
$
$
27.39
25.20
32.43
28.67
28.59
82
2.4
2.4
$
$
6
6
In conjunction with the exercise of SARs granted, the Company made payments of $3 million, $3 million and $4 million during the fiscal years ended
September 30, 2019, 2018 and 2017, respectively.
Restricted (Nonvested) Stock / Units
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 over a period of
three years from the grant date. The Plan allows for different vesting terms on specific grants with approval by the Board of Directors. The fair value of each share-
settled restricted award is based on the closing market value of the Company’s ordinary shares on the date of grant. The fair value of each cash-settled restricted
award is recalculated at the end of each reporting period based on the closing market value of the Company's ordinary shares at the end of the reporting period, and
the liability and expense are adjusted based on the new fair value.
A summary of the status of the Company’s nonvested restricted stock awards at September 30, 2019, and changes for the fiscal year then ended, is presented
below:
Nonvested, September 30, 2018
Granted
Vested
Forfeited
Nonvested, September 30, 2019
Weighted
Average
Price
Shares/Units
Subject to
Restriction
$
$
45.14
33.88
41.23
37.83
35.98
5,001,517
2,384,747
(3,139,142)
(914,046)
3,333,076
At September 30, 2019, the Company had approximately $72 million of total unrecognized compensation cost related to nonvested restricted stock arrangements
granted for continuing operations. That cost is expected to be recognized over a weighted-average period of 2.1 years.
Performance Share Awards
The Plan permits the grant of performance-based share unit ("PSU") awards. The PSUs are generally contingent on the achievement of pre-determined
performance goals over a performance period of three years as well as on the award holder's continuous employment until the vesting date. The PSUs are also
indexed to the achievement of specified levels of total shareholder return versus a peer group over the performance period. Each PSU that is earned will be settled
with shares of the Company's ordinary shares following the completion of the performance period, unless the award holder elected to defer a portion or all of the
award until retirement which would then be settled in cash.
The fair value of each PSU is estimated on the date of grant with the use of a Monte Carlo simulation that uses the assumptions noted in the following table. The
risk-free interest rate for periods during the contractual life of the PSU is based on the U.S. Treasury yield curve in effect at the time of grant. For fiscal 2019, 2018
and 2017, the expected volatility is based on the historical volatility of the Company's stock since October 2016 blended with the historical volatility of certain peer
companies' stock prior to October 2016 over the most recent three-year period as of the grant date.
Risk-free interest rate
Expected volatility of the Company’s stock
Year Ended September 30,
2019
2.76%
22.90%
2018
1.92%
21.70%
2017
1.40%
21.00%
83
A summary of the status of the Company’s nonvested PSUs at September 30, 2019, and changes for the fiscal year then ended, is presented below:
Nonvested, September 30, 2018
Granted
Forfeited
Nonvested, September 30, 2019
Weighted
Average
Price
Shares/Units
Subject to
PSU
$
$
41.07
36.28
37.89
39.82
1,412,290
595,594
(182,365)
1,825,519
At September 30, 2019, the Company had approximately $31 million of total unrecognized compensation cost related to nonvested performance-based share unit
awards granted for continuing operations. That cost is expected to be recognized over a weighted-average period of 1.8 years.
13. EARNINGS PER SHARE
The Company presents both basic and diluted EPS amounts. Basic EPS is calculated by dividing net income attributable to Johnson Controls by the weighted
average number of ordinary shares outstanding during the reporting period. Diluted EPS is calculated by dividing net income attributable to Johnson Controls by
the weighted average number of ordinary shares and ordinary equivalent shares outstanding during the reporting period that are calculated using the treasury stock
method for stock options, unvested restricted stock and unvested performance share awards. The treasury stock method assumes that the Company uses the
proceeds from the exercise of stock option awards to repurchase ordinary shares at the average market price during the period. The assumed proceeds under the
treasury stock method include the purchase price that the grantee will pay in the future and compensation cost for future service that the Company has not yet
recognized. For unvested restricted stock and unvested performance share awards, assumed proceeds under the treasury stock method would include unamortized
compensation cost.
The following table reconciles the numerators and denominators used to calculate basic and diluted earnings per share (in millions):
Income Available to Ordinary Shareholders
Income from continuing operations
Income from discontinued operations
Basic and diluted income available to shareholders
Weighted Average Shares Outstanding
Basic weighted average shares outstanding
Effect of dilutive securities:
Stock options, unvested restricted stock and unvested
performance share awards
Diluted weighted average shares outstanding
Antidilutive Securities
Options to purchase shares
Year Ended September 30,
2019
2018
2017
$
$
1,100 $
4,574
5,674 $
1,175 $
987
2,162 $
672
939
1,611
870.2
925.7
935.3
4.1
874.3
6.0
931.7
9.3
944.6
1.4
1.5
0.2
84
14. EQUITY AND NONCONTROLLING INTERESTS
Dividends
The authority to declare and pay dividends is vested in the Board of Directors. The timing, declaration and payment of future dividends to holders of the
Company's ordinary shares is determined by the Company's Board of Directors and depends upon many factors, including the Company's financial condition and
results of operations, the capital requirements of the Company's businesses, industry practice and any other relevant factors.
Under Irish law, dividends may only be paid (and share repurchases and redemptions must generally be funded) out of "distributable reserves." The creation of
distributable reserves was accomplished by way of a capital reduction, which the Irish High Court approved on December 18, 2014 and as acquired in conjunction
with the Merger.
Share Repurchase Program
In November 2018, the Company's Board of Directors approved a $1 billion increase to its existing share repurchase authorization. In March 2019, the Company's
Board of Directors approved an additional $8.5 billion increase to its existing share repurchase authorization, subject to the completion of the previously
announced sale of the Company's Power Solutions business, which closed on April 30, 2019. The share repurchase program does not have an expiration date and
may be amended or terminated by the Board of Directors at any time without prior notice.
On May 1, 2019, the Company announced a "modified Dutch auction" tender offer for up to $4.0 billion of its ordinary shares with a price range between $36.00
and $40.00 per share. The tender offer expired on May 31, 2019. Through the tender offer, the Company accepted for payment 102 million shares at a purchase
price of $39.25 per share, for a total of approximately $4,035 million, including fees and commissions. The shares purchased through the tender offer were
immediately retired. Ordinary shares were reduced by the number of shares retired at $0.01 par value per share. The excess purchase price over par value was
recorded in retained earnings in the consolidated statements of financial position.
In addition to the equity tender offer described above, during fiscal year 2019, the Company repurchased and retired approximately $1,948 million of its ordinary
shares. As of September 30, 2019, approximately $4.6 billion remains available under the share repurchase program. During fiscal years 2018 and 2017, the
Company repurchased approximately $300 million and $651 million of its ordinary shares, respectively.
85
Other comprehensive income includes activity relating to discontinued operations. The following schedules present changes in consolidated equity attributable to
Johnson Controls and noncontrolling interests (in millions, net of tax):
At September 30, 2016
Total comprehensive income (loss):
Net income
Foreign currency translation adjustments
Realized and unrealized gains (losses) on
derivatives
Realized and unrealized gains on marketable
securities
Other comprehensive income (loss)
Comprehensive income
Other changes in equity:
Cash dividends - ordinary shares ($1.00 per share)
Dividends attributable to noncontrolling interests
Repurchases of ordinary shares
Change in noncontrolling interest share
Spin-off of Adient
Other, including options exercised
At September 30, 2017
Total comprehensive income (loss):
Net income
Foreign currency translation adjustments
Realized and unrealized losses on derivatives
Realized and unrealized gains on marketable
securities
Other comprehensive loss
Comprehensive income
Other changes in equity:
Cash dividends - ordinary shares ($1.04 per share)
Dividends attributable to noncontrolling interests
Repurchases of ordinary shares
Change in noncontrolling interest share
Adoption of ASU 2016-09
Reclassification from redeemable noncontrolling
interest
Other, including options exercised
At September 30, 2018
Total comprehensive income (loss):
Net income
Foreign currency translation adjustments
Realized and unrealized gains (losses) on
derivatives
Pension and postretirement plans
Other comprehensive loss
Comprehensive income
Other changes in equity:
Cash dividends - ordinary shares ($1.04 per share)
Dividends attributable to noncontrolling interests
Repurchases and retirements of ordinary shares
Divestiture of Power Solutions
Adoption of ASC 606
Adoption of ASU 2016-16
Equity Attributable to Johnson
Controls
International plc
Equity Attributable to
Noncontrolling Interests
Total Equity
$
24,118
$
972
$
25,090
1,611
108
(14)
5
99
1,710
(938)
—
(651)
—
(4,038)
246
20,447
2,162
(458)
(19)
4
(473)
1,689
(968)
—
(300)
—
179
—
117
21,164
5,674
(325)
7
(6)
(324)
5,350
(887)
—
(5,983)
483
(45)
(546)
164
(18)
1
—
(17)
147
—
(56)
—
(5)
(138)
—
920
186
(22)
(1)
—
(23)
163
—
(43)
—
23
—
231
—
1,294
213
(17)
(1)
—
(18)
195
—
(132)
—
(295)
—
—
1,775
90
(13)
5
82
1,857
(938)
(56)
(651)
(5)
(4,176)
246
21,367
2,348
(480)
(20)
4
(496)
1,852
(968)
(43)
(300)
23
179
231
117
22,458
5,887
(342)
6
(6)
(342)
5,545
(887)
(132)
(5,983)
188
(45)
(546)
Other, including options exercised
At September 30, 2019
$
230
19,766
$
1
1,063
$
231
20,829
As previously disclosed, during the quarter ended December 31, 2018, the Company adopted ASC 606, "Revenue from Contracts with Customers." As a result, the
Company recorded $45 million to beginning retained earnings, which relates primarily to deferred
86
revenue recorded for the Power Solutions business for certain battery core returns that represent a material right provided to customers.
As previously disclosed, during the quarter ended December 31, 2018, the Company adopted ASU 2016-16, "Accounting for Income Taxes: Intra-Entity Asset
Transfers of Assets Other Than Inventory." As a result, the Company recognized deferred taxes of $546 million related to the tax effects of all intra-entity sales of
assets other than inventory on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of October 1, 2018.
As previously disclosed, during the quarter ended December 31, 2017, the Company adopted ASU No. 2016-09. As a result, the Company recognized deferred tax
assets of $179 million related to certain operating loss carryforwards resulting from the exercise of employee stock options and restricted stock vestings on a
modified retrospective basis through a cumulative-effect adjustment to retained earnings as of October 1, 2017.
On October 31, 2016, the Company completed the Adient spin-off. As a result of the spin-off, the Company divested net assets of approximately $4.0 billion.
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. As of September 30, 2019 and 2018, the Company does not have any subsidiaries
for which the noncontrolling interest party has within their control the right to require the Company to redeem any portion of its interests.
The following schedules present changes in the redeemable noncontrolling interests (in millions):
Year Ended September 30,
2018
Year Ended September 30,
2017
Beginning balance, September 30
Net income
Foreign currency translation adjustments
Realized and unrealized losses on derivatives
Dividends
Reclassification to noncontrolling interest
Spin-off of Adient
Ending balance, September 30
211
$
35
(3)
(9)
(3)
(231)
—
— $
234
44
13
(1)
(43)
—
(36)
211
$
$
87
The following schedules present changes in AOCI attributable to Johnson Controls (in millions, net of tax):
Foreign currency translation adjustments
Balance at beginning of period
Divestiture of Power Solutions
Aggregate adjustment for the period (net of tax effect of $0, $(3) and $1) *
Adient spin-off impact (net of tax effect of $0)
Balance at end of period
Realized and unrealized gains (losses) on derivatives
Balance at beginning of period
Divestiture of Power Solutions (net of tax effect of $1, $0 and $0)
Current period changes in fair value (net of tax effect of $(1), $(4) and $4)
Reclassification to income (net of tax effect of $2, $(5) and $(10)) **
Adient spin-off impact (net of tax effect of $0, $0 and $6)
Balance at end of period
Realize and unrealized gains (losses) on marketable securities
Balance at beginning of period
Adoption of ASU 2016-01 ***
Current period changes in fair value (net of tax effect of $0, $1 and $1)
Reclassification to income (net of tax effect of $0, $(1) and $0) ****
Balance at end of period
Pension and postretirement plans
Balance at beginning of period
Other changes (net of tax effect of $0)
Adient spin-off impact (net of tax effect of $0)
Balance at end of period
Year Ended
September 30, 2019
Year Ended
September 30, 2018
Year Ended
September 30, 2017
$
(939)
$
(481)
$
(1,152)
479
(325)
—
(785)
(13)
4
(1)
8
—
(2)
8
(8)
—
—
—
(2)
(6)
—
(8)
—
(458)
—
(939)
6
—
(8)
(11)
—
(13)
4
—
5
(1)
8
(2)
—
—
(2)
—
108
563
(481)
4
—
9
(23)
16
6
(1)
—
5
—
4
(4)
—
2
(2)
Accumulated other comprehensive loss, end of period
$
(795)
$
(946)
$
(473)
* During fiscal 2018, $12 million of cumulative CTA was recognized as part of the divestiture-related gain recognized as part of the divestiture of Scott Safety.
** 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.
*** As previously disclosed, during the quarter ended December 31, 2018, the Company adopted ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-
10): Recognition and Measurement of Financial Assets and Financial Liabilities." As a result the Company reclassified $8 million of unrealized gains on
marketable securities to retained earnings as of October 1, 2018.
**** During fiscal 2018, the Company sold certain marketable common stock for approximately $3 million. As a result, the Company recorded $2 million of
realized gains within selling, general and administrative expenses.
88
15. 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. Certain of the Company’s U.S. pension plans have been amended to prohibit
new participants from entering the plans and no longer accrue benefits. 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 for continuing and discontinued operations, the projected benefit
obligation ("PBO"), ABO and fair value of plan assets of those plans were $5,450 million, $5,388 million and $4,484 million, respectively, as of September 30,
2019 and $5,166 million, $5,072 million and $4,525 million, respectively, as of September 30, 2018.
In fiscal 2019, total employer contributions for continuing operations to the defined benefit pension plans were $50 million, none of which were voluntary
contributions made by the Company. The Company expects to contribute approximately $50 million in cash to its defined benefit pension plans in fiscal 2020.
Projected benefit payments from the plans as of September 30, 2019 are estimated as follows (in millions):
2020
2021
2022
2023
2024
2025-2029
$
311
289
294
297
303
1,487
Postretirement Benefits
The Company provides certain health care and life insurance benefits for eligible retirees and their dependents primarily in the U.S. and Canada. 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 U.S.
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 2019, total employer contributions for continuing operations to the postretirement plans were $3 million. The Company expects to contribute
approximately $4 million in cash to its postretirement plans in fiscal 2020 for continuing operations. Projected benefit payments from the plans as of September 30,
2019 are estimated as follows (in millions):
2020
2021
2022
2023
2024
2025-2029
$
17
16
16
16
15
58
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
89
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 less than $1 million per year over the next ten years.
Defined Contribution 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 predetermined percentages of
compensation earned by the employee and/or will match a percentage of the employee contributions up to certain limits. Defined contribution plan contributions
charged to expense for continuing and discontinued operations amounted to $198 million, $205 million and $190 million for the fiscal years ended 2019, 2018 and
2017, 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 285 multiemployer benefit plans, 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 2019, 2018 and 2017 contributions. The Company recognizes expense for the contractually-required contribution for each
period. The Company contributed $69 million, $68 million and $67 million to multiemployer benefit plans in fiscal 2019, 2018 and 2017, 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
multiemployer benefit plans for which it is probable or reasonably possible that the Company will have a significant withdrawal liability. 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
90
relative to the equity and fixed income investments. As a result of the Company's 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.
91
The Company’s plan assets at September 30, 2019 and 2018, by asset category, are as follows (in millions):
Asset Category
U.S. Pension
Fair Value Measurements Using:
Quoted Prices
in Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total as of
September 30, 2019
Cash and Cash Equivalents
$
55 $
24 $
31 $
Equity Securities
Large-Cap
Small-Cap
International - Developed
International - Emerging
Fixed Income Securities
Government
Corporate/Other
Real Estate
Total Investments in the Fair Value Hierarchy
Investments Measured at Net Asset Value, as Practical Expedient:
Real Estate Investments Measured at Net Asset Value*
Total Plan Assets
Non-U.S. Pension
Cash and Cash Equivalents
Equity Securities
Large-Cap
International - Developed
International - Emerging
Fixed Income Securities
Government
Corporate/Other
Hedge Fund
Real Estate
Total Investments in the Fair Value Hierarchy
Investments Measured at Net Asset Value, as Practical Expedient:
Real Estate Investments Measured at Net Asset Value*
Total Plan Assets
Postretirement
Cash and Cash Equivalents
Equity Securities
Large-Cap
Small-Cap
International - Developed
International - Emerging
Fixed Income Securities
Government
$
$
$
$
276
232
233
42
47
1,266
55
—
—
33
10
285
—
—
2,175 $
359 $
276
232
266
52
332
1,266
55
2,534 $
202
2,736
174 $
174 $
— $
214
289
12
778
517
69
31
23
54
1
69
289
—
31
191
235
11
709
228
69
—
2,084 $
641 $
1,443 $
14
2,098
6 $
6 $
— $
22
8
19
9
20
—
—
—
—
—
22
8
19
9
20
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Corporate/Other
Commodities
Real Estate
Total Plan Assets
55
13
11
—
—
—
55
13
11
$
163 $
6 $
157 $
92
—
—
—
—
$
$
$
$
$
Asset Category
U.S. Pension
Cash and Cash Equivalents
Equity Securities
Large-Cap
Small-Cap
International - Developed
International - Emerging
Fixed Income Securities
Government
Corporate/Other
Total Investments in the Fair Value Hierarchy
Investments Measured at Net Asset Value, as Practical Expedient:
Real Estate Investments Measured at Net Asset Value*
Total Plan Assets
Non-U.S. Pension
Cash and Cash Equivalents
Equity Securities
Large-Cap
International - Developed
International - Emerging
Fixed Income Securities
Government
Corporate/Other
Hedge Fund
Real Estate
Total Investments in the Fair Value Hierarchy
Investments Measured at Net Asset Value, as Practical Expedient:
Real Estate Investments Measured at Net Asset Value*
Total Plan Assets
Postretirement
Cash and Cash Equivalents
Equity Securities
Large-Cap
Small-Cap
International - Developed
International - Emerging
Fixed Income Securities
Government
Corporate/Other
Fair Value Measurements Using:
Quoted Prices
in Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total as of
September 30, 2018
23 $
2 $
21 $
309
282
365
80
307
1,119
121
—
46
14
26
64
2,464 $
292 $
430
282
411
94
333
1,183
2,756 $
290
3,046
44 $
43 $
1 $
235
319
15
830
545
82
26
24
59
1
80
301
—
26
211
260
14
750
244
82
—
2,096 $
534 $
1,562 $
21
2,117
13 $
13 $
— $
26
8
20
9
20
55
—
—
—
—
—
—
26
8
20
9
20
55
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Commodities
Real Estate
Total Plan Assets
14
9
174 $
—
—
13 $
14
9
161 $
—
—
—
$
93
* The fair value of certain investments in real estate do not have a readily determinable fair value and requires the fund managers to independently 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 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. In accordance with ASU No. 2015-07, "Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its
Equivalent)," investments for which fair value is measured using the net asset value per share practical expedient should be disclosed separate from the fair value
hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of total plan assets to the amounts presented in the notes to
consolidated financial statements.
The following is a description of the valuation methodologies used for assets measured at fair value. Certain assets are held within commingled funds which are
valued at the unitized NAV or percentage of the net asset value as determined by the manager of the fund. These values are based on the fair value of the
underlying net assets owned by the fund.
Cash and Cash Equivalents: 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 is determined by quoted market prices of the underlying Real Estate Investment Trusts
("REITs"), which are securities traded on an open exchange.
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.
There were no Level 3 assets as of September 30, 2019 or 2018 or any Level 3 asset activity during fiscal 2019 or 2018.
94
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):
September 30,
2019
2018
2019
2018
2019
2018
Accumulated Benefit Obligation
$
3,115
$
3,154
$
2,549
$
2,444
$
— $
—
Pension Benefits
U.S. Plans
Non-U.S. Plans
Postretirement
Benefits
Change in Projected Benefit Obligation
Projected benefit obligation at beginning of year
Service cost
Interest cost
Plan participant contributions
Power Solutions divestiture
Other divestitures
Actuarial (gain) loss
Amendments made during the year
Benefits and settlements paid
Estimated subsidy received
Curtailment
Other
Currency translation adjustment
Projected benefit obligation at end of year
Change in Plan Assets
Fair value of plan assets at beginning of year
Actual return on plan assets
Power Solutions divestiture
Other divestitures
Employer and employee contributions
Benefits paid
Settlement payments
Other
Currency translation adjustment
Fair value of plan assets at end of year
Funded status
Amounts recognized in the statement of financial position consist of:
Prepaid benefit cost
Accrued benefit liability
Accrued benefit liability - discontinued operations
Net amount recognized
Weighted Average Assumptions (1)
Discount rate (2)
Rate of compensation increase
3,191
8
108
—
(390)
—
441
—
(243)
—
—
—
—
3,419
15
105
—
—
—
(70)
—
(278)
—
—
—
—
2,542
2,721
22
54
2
(86)
(8)
337
26
(126)
—
—
(2)
(109)
23
57
2
—
—
(67)
—
(130)
—
(2)
(4)
(58)
196
1
6
6
(9)
—
15
(19)
(23)
1
—
—
—
214
2
7
6
—
—
1
(8)
(24)
1
—
(1)
(2)
3,115
$
3,191
$
2,652
$
2,542
$
174
$
196
3,046
$
3,165
$
2,117
$
2,181
$
174
$
177
266
(371)
—
38
(136)
(107)
—
—
152
—
—
7
(153)
(125)
—
—
203
(45)
(4)
50
(76)
(50)
(2)
(95)
69
—
—
48
(88)
(42)
(2)
(49)
7
(4)
—
9
(23)
—
—
—
6
—
—
15
(24)
—
—
—
2,736
$
3,046
$
2,098
$
2,117
$
163
$
174
(379)
$
(145)
$
(554)
$
(425)
$
(11)
$
(22)
30
$
63
$
25
$
26
$
66
$
(409)
—
(156)
(52)
(579)
—
(409)
(42)
(77)
—
(379)
$
(145)
$
(554)
$
(425)
$
(11)
$
61
(83)
—
(22)
$
$
$
$
$
$
2.95%
NA
4.10%
3.50%
1.50%
2.80%
2.45%
2.95%
2.90%
NA
3.80%
NA
(1)
(2)
Plan assets and obligations are determined based on a September 30 measurement date at September 30, 2019 and 2018.
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
95
participants and the expected timing of benefit payments. For the U.S. pension and postretirement plans, the Company uses a discount rate provided by an
independent third party calculated based on an appropriate mix of high quality bonds. For the non-U.S. pension and postretirement plans, the Company
consistently uses the relevant country specific benchmark indices for determining the various discount rates. The Company has elected to utilize a full
yield curve approach in the estimation of service and interest components of net periodic benefit cost (credit) for pension and other postretirement for
plans that utilize a yield curve approach. The full yield curve approach applies the specific spot rates along the yield curve used in the determination of the
benefit obligation to the relevant projected cash flows.
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, 2019 and 2018 related to pension and postretirement benefits are $6 million and less than $1 million, respectively.
The amounts in AOCI expected to be recognized as components of net periodic benefit cost (credit) over the next fiscal year related to pension and postretirement
benefits are not significant.
Net Periodic Benefit Cost
The table that follows contains the components of net periodic benefit costs, which are primarily recorded in selling, general and administrative expenses in the
consolidated statements of income (in millions):
Year ended September 30,
2019
2018
2017
2019
2018
2017
2019
2018
2017
U.S. Plans
Non-U.S. Plans
Postretirement Benefits
Pension Benefits
Components of Net
Periodic Benefit Cost
(Credit):
Service cost
Interest cost
Expected return on plan
assets
Net actuarial (gain) loss
Curtailment gain
Settlement (gain) loss
Net periodic benefit cost
(credit)
Net periodic benefit (cost)
credit related to
discontinued operations
Net periodic benefit cost
(credit) included in
continuing operations
Expense Assumptions:
$
8
$
15
$
18
$
108
105
113
$
22
54
$
23
57
$
32
48
$
1
6
$
2
7
(199)
361
—
13
(229)
7
—
—
(229)
(220)
—
(16)
(105)
236
—
4
(114)
(22)
(2)
—
(92)
(195)
(19)
(1)
(9)
17
—
—
(10)
5
—
—
291
(102)
(334)
211
(58)
(227)
15
4
(2)
(5)
26
—
(7)
7
—
(2)
2
6
(10)
(5)
—
—
(7)
2
$
289
$
(107)
$
(308)
$
211
$
(65)
$
(220)
$
15
$
2
$
(5)
Discount rate
4.10%
3.80%
3.70%
2.45%
2.40%
1.90%
3.80%
3.70%
3.30%
Expected return on plan
assets
Rate of compensation
increase
7.10%
7.50%
7.50%
5.20%
5.35%
4.60%
5.65%
5.65%
5.60%
3.50%
3.20%
3.20%
2.95%
2.90%
2.65%
NA
NA
NA
96
16. SIGNIFICANT RESTRUCTURING AND IMPAIRMENT COSTS
To better align its resources with its growth strategies and reduce the cost structure of its global operations in certain underlying markets, the Company commits to
restructuring plans as necessary.
In fiscal 2018, the Company committed to a significant restructuring plan (2018 Plan) and recorded $255 million of restructuring and impairment costs for
continuing operations in the consolidated statements of income. This was the total amount incurred to date and the total amount expected to be incurred for this
restructuring plan. The restructuring actions related to cost reduction initiatives in the Company’s Building Technologies & Solutions businesses and at Corporate.
The costs consist primarily of workforce reductions, plant closures and asset impairments. Of the restructuring and impairment costs recorded, $113 million related
to the Global Products segment, $56 million related to the Building Solutions EMEA/LA segment, $50 million related to Corporate, $20 million related to the
Building Solutions North America segment and $16 million related to the Building Solutions Asia Pacific segment. The restructuring actions are expected to be
substantially complete in 2020.
Additionally, the Company recorded $8 million of restructuring and impairment costs related to Power Solutions in fiscal 2018. This is reported within
discontinued operations.
The following table summarizes the changes in the Company’s 2018 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
Utilized—cash
Utilized—noncash
Balance at September 30, 2018
Utilized—cash
Utilized—noncash
Transfer to liabilities held for sale
Balance at September 30, 2019
$
$
$
209
$
(45)
—
164
(61)
—
(4)
99
$
$
42
$
—
(42)
—
$
—
—
—
— $
12 $
(2)
—
10 $
(6)
—
—
4 $
— $
—
—
—
$
—
(1)
—
(1)
$
263
(47)
(42)
174
(67)
(1)
(4)
102
In fiscal 2017, the Company committed to a significant restructuring plan (2017 Plan) and recorded $347 million of restructuring and impairment costs for
continuing operations in the consolidated statements of income. This was the total amount incurred to date and the total amount expected to be incurred for this
restructuring plan. The restructuring actions related to cost reduction initiatives in the Company’s Building Technologies & Solutions businesses and at Corporate.
The costs consist primarily of workforce reductions, plant closures and asset impairments. Of the restructuring and impairment costs recorded, $166 million related
to Corporate, $74 million related to the Building Solutions EMEA/LA segment, $59 million related to the Building Solutions North America segment, $32 million
related to the Global Products segment and $16 million related to the Building Solutions Asia Pacific segment. The restructuring actions are expected to be
substantially complete in fiscal 2020.
Additionally, the Company recorded $20 million of restructuring and impairment costs related to Power Solutions in fiscal 2017. This is reported within
discontinued operations.
97
The following table summarizes the changes in the Company’s 2017 Plan reserve, included within other current liabilities in the consolidated statements of
financial position (in millions):
Employee
Severance and
Termination Benefits
Long-Lived Asset
Impairments
Other
Currency
Translation
Total
Original Reserve
Utilized—cash
Utilized—noncash
Adjustment to restructuring reserves
Balance at September 30, 2017
Utilized—cash
Utilized—noncash
Balance at September 30, 2018
Utilized—cash
Utilized—noncash
Transfer to liabilities held for sale
Balance at September 30, 2019
$
$
$
$
276
$
(75)
—
25
226
$
(152)
—
$
74
(11)
—
(3)
60
$
77
$
—
(77)
—
— $
—
—
—
$
—
—
—
— $
14 $
—
(1)
—
13
$
(6)
—
7
$
(2)
—
—
5 $
— $
—
—
—
— $
—
(1)
(1)
$
—
(3)
—
(4)
$
367
(75)
(78)
25
239
(158)
(1)
80
(13)
(3)
(3)
61
In fiscal 2016, the Company committed to a significant restructuring plan (2016 Plan) and recorded $222 million of restructuring and impairment costs for
continuing operations in the consolidated statements of income. The restructuring actions related to cost reduction initiatives in the Company’s Building
Technologies & Solutions businesses and at Corporate. The costs consist primarily of workforce reductions, plant closures, asset impairments and change-in-
control payments. Of the restructuring and impairment costs recorded, $161 million related to Corporate, $44 million related to the Global Products segment and
$17 million related to the Building Solutions EMEA/LA segment. The restructuring actions are substantially complete, and final payments are expected to be made
in fiscal 2020. Included in the reserve is $56 million of committed restructuring actions taken by Tyco for liabilities assumed as part of the Tyco acquisition.
Additionally, the Company recorded $398 million of restructuring and impairment costs within discontinued operations related to Adient and Power Solutions in
fiscal 2016. This is reported within discontinued operations.
98
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
Acquired Tyco restructuring
reserves
Utilized—cash
Utilized—noncash
Balance at September 30, 2016
Adient spin-off impact
Utilized—cash
Utilized—noncash
Adjustment to restructuring
reserves
Transfer to liabilities held for sale
Adjustment to acquired Tyco
restructuring reserves
Balance at September 30, 2017
Utilized—cash
Balance at September 30, 2018
Utilized—cash
Balance at September 30, 2019
$
$
$
$
$
368
$
190
$
62 $
78
(32)
—
414
$
(194)
(86)
—
(25)
(3)
(22)
84
$
(17)
67
(37)
$
30
$
—
—
(190)
—
—
(32)
— $
30
$
—
—
—
—
—
—
— $
—
— $
—
— $
(22)
(2)
—
—
—
—
6 $
(2)
4
$
(4)
— $
— $
—
—
1
1 $
—
—
1
—
—
—
2 $
—
2
$
—
2 $
620
78
(32)
(221)
445
(216)
(88)
1
(25)
(3)
(22)
92
(19)
73
(41)
32
The Company's fiscal 2018, 2017 and 2016 restructuring plans included workforce reductions of approximately 11,300 employees ( 9,100 for the Building
Technologies & Solutions business and 2,200 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, 2019, approximately
6,200 of the employees have been separated from the Company pursuant to the restructuring plans. In addition, the restructuring plans included twelve plant
closures in the Building Technologies & Solutions business. As of September 30, 2019, eleven of the twelve plants have been closed.
Company management closely monitors its overall cost structure and continually analyzes each of its businesses for opportunities to consolidate current operations,
improve operating efficiencies and locate facilities in close proximity to customers. This ongoing analysis includes a review of its manufacturing, engineering and
purchasing operations, as well as the overall global footprint for all its businesses.
17. IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets, including tangible assets and other intangible assets with definitive 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 350-30, "General Intangibles Other than Goodwill" and ASC 985-20, "Costs of
Software to be Sold, Leased, or Marketed." ASC 360-10-15 requires the Company to group assets and liabilities at the lowest level for which identifiable cash
flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows. If
the undiscounted cash flows do not indicate the carrying amount of the asset group is recoverable, an impairment charge is measured as the amount by which the
carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals. ASC 350-30 requires intangible assets acquired in a
business combination that are used in research and development activities be considered indefinite lived until the completion or abandonment of the associated
research and development efforts. During the period that those assets are considered indefinite lived, they shall not be amortized but shall be tested for impairment
annually and more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired. If the carrying amount of an
intangible asset exceeds its fair value, an entity shall recognize an impairment loss in an amount equal to that excess. ASC 985-20 requires the unamortized
capitalized costs of a computer software
99
product be compared to the net realizable value of that product. The amount by which the unamortized capitalized costs of a computer software product exceed the
net realizable value of that asset shall be written off.
In fiscal 2019, the Company concluded it had a triggering event requiring assessment of impairment for certain of its long-lived assets in conjunction with the plans
to dispose of a business within its Global Products segment that met the criteria to be classified as held for sale. Assets and liabilities held for sale are required to
be recorded at the lower of carrying value or fair value less any costs to sell. Accordingly, the Company recorded an impairment charge of $235 million within
restructuring and impairment costs in the consolidated statements of income in fiscal 2019 to write down the carrying value of the assets held for sale to fair value
less any costs to sell. 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 fiscal 2018, the Company concluded it had a triggering event requiring assessment of impairment for certain of its long-lived assets in conjunction with its
restructuring actions announced in fiscal 2018. As a result, the Company reviewed the long-lived assets for impairment and recorded $36 million of asset
impairment charges within restructuring and impairment costs in the consolidated statements of income. Of the total impairment charges, $31 million related to the
Global Products segment and $5 million related to Corporate assets. In addition, the Company recorded $6 million of asset impairments within discontinued
operations related to the Power Solutions segment in fiscal 2018. Refer to Note 16, "Significant Restructuring and Impairment Costs," of the notes to consolidated
financial statements for additional information. The impairments were measured under a market approach utilizing an appraisal to determine fair values of the
impaired assets. This method is 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 fiscal 2017, the Company concluded it had triggering events requiring assessment of impairment for certain of its long-lived assets in conjunction with its
restructuring actions announced in fiscal 2017. As a result, the Company reviewed the long-lived assets for impairment and recorded $70 million of asset
impairment charges within restructuring and impairment costs on the consolidated statements of income. Of the total impairment charges, $30 million related to the
Building Solutions North America segment, $20 million related to the Global Products segment, $19 million related to Corporate assets and $1 million related to
the Building Solutions Asia Pacific segment. In addition, the Company recorded $7 million of asset impairments within discontinued operations related to the
Power Solutions segment in fiscal 2017. Refer to Note 16, "Significant Restructuring and Impairment Costs," of the notes to consolidated financial statements for
additional information. The impairments were measured, depending on the asset, under either an income approach utilizing forecasted discounted cash flows or a
market approach utilizing an appraisal to determine fair values of the impaired assets. These methods are consistent with the methods the Company employed in
prior periods to value other long-lived assets. The inputs utilized in the analyses are classified as Level 3 inputs within the fair value hierarchy as defined in ASC
820, "Fair Value Measurement."
At September 30, 2019, 2018 and 2017, 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," and Note 7, "Goodwill and Other Intangible Assets," of the notes to consolidated financial
statements for discussion of the Company’s goodwill impairment testing.
18. INCOME TAXES
The more significant components of the Company’s income tax provision from continuing operations are as follows (in millions):
Tax expense at Ireland statutory rate
U.S. state income tax, net of federal benefit
Income subject to the U.S. federal tax rate
Income subject to rates different than the statutory rate
Reserve and valuation allowance adjustments
Impact of acquisitions and divestitures
U.S. Tax Reform discrete items
Restructuring and impairment costs
Income tax provision (benefit)
$
$
Year Ended September 30,
2019
2018
2017
132 $
193 $
15
(110)
38
(284)
—
—
(24)
15
39
(201)
31
16
108
(4)
(233) $
197 $
100
144
8
(311)
185
(164)
475
—
(15)
322
The statutory tax rate in Ireland is being used as a comparison since the Company is domiciled in Ireland. The effective rate for continuing operations is below the
statutory rate of 12.5% for fiscal 2019 primarily due to tax audit reserve adjustments, the income tax effects of mark-to-market adjustments, a tax indemnification
reserve release, the tax benefits of an asset held for sale impairment charge and continuing global tax planning initiatives, partially offset by valuation allowance
adjustments as a result of tax law changes, a discrete tax charge related to newly enacted regulations related to U.S. Tax Reform and tax rate differentials. The
effective rate for continuing operations is above the statutory rate of 12.5% for fiscal 2018 primarily due to the discrete net impacts of U.S. Tax Reform, the final
income tax effects of the completed divestiture of the Scott Safety business, and valuation allowance adjustments, partially offset by tax audit closures, tax benefits
due to changes in entity tax status, the benefits of continuing global tax planning initiatives and tax rate differentials. The effective rate is above the statutory rate
of 12.5% for fiscal 2017 primarily due to the establishment of a deferred tax liability on the outside basis difference of the Company's investment in certain
subsidiaries related to the divestiture of the Scott Safety business, the income tax effects of mark-to-market adjustments and tax rate differentials, partially offset by
the jurisdictional mix of significant restructuring and impairment costs, Tyco Merger transaction and integration costs, purchase accounting adjustments, tax audit
closures, a tax benefit due to changes in entity tax status and the benefits of continuing global tax planning initiatives.
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 2019, the Company performed an analysis related to the realizablility of its worldwide deferred tax assets. As a result, and after
considering feasible 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 the U.S., Belgium, Japan and the United Kingdom would not be realized, and it is more likely than not that certain deferred tax
assets of the U.S. and France will be realized. The valuation allowance adjustments resulted in an immaterial net impact to income tax expense for the three-month
period ended September 30, 2019.
In the first quarter of fiscal 2019, as a result of changes to U.S. tax law, the Company recorded a discrete tax charge of $76 million related to valuation allowances
on certain U.S. deferred tax assets.
In the fourth quarter of fiscal 2018, the Company performed an analysis related to the realizability of its worldwide deferred tax assets. As a result, and after
considering feasible 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 Germany would not be realized. Therefore, the Company recorded $56 million of valuation allowances as income tax expense
in the three-month period ended September 30, 2018.
In the fourth quarter of fiscal 2017, 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 in Canada, China and Mexico would not be able to be realized, and it was more likely than not that certain deferred tax assets in Germany would
be realized. Therefore, the Company recorded $27 million of net valuation allowances as income tax expense in the three-month period ended September 30, 2017.
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, 2019, the Company had gross tax effected unrecognized tax benefits for continuing operations of $2,451 million of which $2,121 million, if
recognized, would impact the effective tax rate. Total net accrued interest at September 30, 2019 was approximately $181 million (net of tax benefit).
101
At September 30, 2018, the Company had gross tax effected unrecognized tax benefits for continuing operations of $2,358 million of which $2,225 million, if
recognized, would impact the effective tax rate. Total net accrued interest at September 30, 2018 was approximately $119 million (net of tax benefit).
At September 30, 2017, the Company had gross tax effected unrecognized tax benefits for continuing operations of $2,161 million of which $2,034 million, if
recognized, would impact the effective tax rate. Total net accrued interest at September 30, 2017 was approximately $99 million (net of tax benefit).
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in millions):
Beginning balance, October 1
Additions for tax positions related to the current year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Settlements with taxing authorities
Statute closings and audit resolutions
Acquisition of business
Ending balance, September 30
Year Ended September 30,
2019
2018
2017
2,358 $
2,161 $
433
347
(88)
—
(599)
—
435
7
(201)
(19)
(25)
—
2,451 $
2,358 $
1,694
613
116
(44)
(95)
(264)
141
2,161
$
$
During fiscal 2019, the Company settled tax examinations impacting fiscal years 2015 to 2016 and adjusted various tax audit reserves which resulted in a $586
million net benefit to income tax expense in the fourth quarter. In the third quarter of fiscal 2019, the Company recorded a discrete charge related to newly enacted
regulations related to U.S. Tax Reform and a discrete charge related to non-U.S. tax examinations which impacted the Company’s reserves for uncertain tax
positions resulting in a $226 million net charge to income tax expense.
During fiscal 2018, the Company settled tax examinations impacting fiscal years 2010 to fiscal 2012 which resulted in a $25 million net benefit to income tax
expense.
During fiscal 2017, the Company settled a significant number of tax examinations impacting fiscal years 2006 to fiscal 2014. In the fourth quarter of fiscal 2017,
income tax audit resolutions resulted in a net $191 million benefit to income tax expense.
The Company is currently under exam in the following major non-U.S. jurisdictions for continuing operations:
Tax Jurisdiction
Tax Years Covered
Belgium
China
Germany
Japan
Spain
United Kingdom
2015 - 2017
2008 - 2018
2007 - 2016
2015 - 2018
2015
2012 - 2015
It is reasonably possible that certain tax examinations and/or tax litigation will conclude within the next twelve months, which could have a material impact to tax
expense.
Other Tax Matters
In the third quarter of fiscal 2019, the Company recorded a $235 million impairment charge related to assets held for sale. Refer to Note 17, "Impairment of Long-
Lived Assets," of the notes to consolidated financial statements for further information regarding the impairment charge. The impairment charge generated a $53
million tax benefit.
In the third quarter of fiscal 2019, the Company released a $226 million tax indemnification reserve, which was recorded within selling, general and administrative
expenses in the consolidated statements of income. Refer to Note 21, "Guarantees," of the notes
102
to consolidated financial statements for further information regarding the reserve release. The reserve release generated no income tax expense.
During fiscal 2019, 2018, and 2017, the Company recorded transaction and integration costs for continuing operations of $317 million, $226 million and $427
million, respectively. These costs generated tax benefits of $35 million, $27 million and $69 million, respectively, which reflects the Company’s current tax
position in these jurisdictions.
During fiscal 2019, 2018 and 2017, the Company recorded mark-to-market gains (losses) of $(618) million, $24 million and $384 million, respectively. These
gains (losses) generated tax expense (benefit) of $(130) million, $1 million and $113 million, respectively, which reflects the Company’s current tax position in
these jurisdictions.
In the fourth quarter of fiscal 2018, the Company recorded a tax benefit of $139 million due to changes in entity tax status.
In the first quarter of fiscal 2018, the Company completed the sale of its Scott Safety business to 3M Company. In connection with the sale, the Company recorded
a pre-tax gain of $114 million and income tax expense of $30 million. In addition, during fiscal 2017, the Company recorded a discrete non-cash tax charge
of $490 million related to establishment of a deferred tax liability on the outside basis difference of the Company's investment in certain subsidiaries of the Scott
Safety business. Refer to Note 2, "Acquisitions and Divestitures," of the notes to consolidated financial statements for additional information.
During fiscal 2018 and 2017, the Company incurred significant charges for restructuring and impairment costs for continuing operations of $255 million and $347
million, respectively. Refer to Note 16, "Significant Restructuring and Impairment Costs," of the notes to consolidated financial statements for additional
information. These costs generated tax benefits of $36 million and $58 million, respectively, which reflects the Company’s current tax position in these
jurisdictions.
In the third quarter of fiscal 2017, the Company recorded a discrete tax benefit of $75 million due to changes in entity tax status.
In the first quarter of fiscal 2017, the Company recorded a discrete tax benefit of $101 million due to changes in entity tax status.
Impacts of Tax Legislation and Change in Statutory Tax Rates
On September 28, 2018 the Swiss Parliament approved the Federal Act on Tax Reform and AHV Financing (“TRAF”), which was subsequently approved by the
Swiss electorate on May 19, 2019. During the fourth quarter of fiscal 2019, the Swiss Federal Council enacted TRAF which becomes effective for the Company on
January 1, 2020. The impacts of the federal enactment did not have a material impact to the Company’s financial statements. TRAF also provides for parameters
which enable the Swiss cantons to adjust tax rates and establish new regulations for companies. As of September 30, 2019, the canton of Schaffhausen had not
concluded its public referendum; however, the enactment did take place in October 2019. The Company is still evaluating the impact on the deferred tax assets in
the canton of Schaffhausen and the revaluation of these assets could have a noncash impact of less than $100 million to the Company’s financial statements.
On December 22, 2017, the “Tax Cuts and Jobs Act” (H.R. 1) was enacted and significantly revised U.S. corporate income tax by, among other things, lowering
corporate income tax rates, imposing a one-time transition tax on deemed repatriated earnings of non-U.S. subsidiaries, and implementing a territorial tax system
and various base erosion minimum tax provisions.
In connection with the Company’s analysis of the impact of the U.S. tax law changes, the Company recorded a provisional net tax charge of $108 million during
fiscal 2018 consistent with guidance prescribed by Staff Accounting Bulletin 118. This provisional net tax charge arises from a benefit of $108 million due to the
remeasurement of U.S. deferred tax assets and liabilities, offset by the Company’s tax charge relating to the one-time transition tax on deemed repatriated earnings,
inclusive of all relevant taxes, of $216 million. The Company’s estimated benefit of the remeasurement of U.S. deferred tax assets and liabilities increased from
$101 million as of December 31, 2017 to $108 million as of September 30, 2018 due to calculation refinement of the Company’s estimated impact. The Company
remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21% or the blended
fiscal 2018 rate of 24.5%. The Company’s tax charge for transition tax decreased from $305 million as of December 31, 2017 to $216 million as of September 30,
2018 due to further analysis of the Company’s post-1986 non-U.S. earnings and profits (“E&P”) previously deferred from U.S. federal taxation and refinement of
the estimated impact of tax law changes. During fiscal 2019, the Company completed its analysis of all enactment-date income tax effects of the U.S. tax law
change with no further adjustment to the provisional amounts recorded as of September 30, 2018.
During the fiscal years ended 2019, 2018 and 2017, other tax legislation was adopted in various jurisdictions. These law changes did not have a material impact on
the Company's consolidated financial statements.
103
Continuing Operations
Components of the provision (benefit) for income taxes on continuing operations were as follows (in millions):
Current
U.S. federal
U.S. state
Non-U.S.
Deferred
U.S. federal
U.S. state
Non-U.S.
Income tax provision (benefit)
Year Ended September 30,
2019
2018
2017
$
$
(1,025) $
(33)
213
(845)
412
84
116
612
476 $
26
434
936
(372)
(10)
(357)
(739)
(233) $
197 $
(286)
(18)
53
(251)
523
33
17
573
322
Consolidated U.S. income (loss) from continuing operations before income taxes and noncontrolling interests for the fiscal years ended September 30, 2019, 2018
and 2017 was income (loss) of $(259) million, $261 million and $335 million, respectively. Consolidated non-U.S. income from continuing operations before
income taxes and noncontrolling interests for the fiscal years ended September 30, 2019, 2018 and 2017 was income of $1,315 million, $1,285 million and $816
million, respectively.
Continuing operations income taxes paid for the fiscal years ended September 30, 2019, 2018 and 2017 were $377 million, $81 million and $497 million,
respectively. At September 30, 2019 and 2018, the Company recorded within the continuing operations consolidated statements of financial position in other
current assets approximately $1,069 million and $257 million, respectively, of income tax assets. At September 30, 2019 and 2018, the Company recorded within
the continuing operations consolidated statements of financial position in other current liabilities approximately $159 million and $336 million, respectively, of
accrued income tax liabilities.
The Company has not provided U.S. or non-U.S. income taxes on approximately $20.1 billion of outside basis differences of consolidated subsidiaries of Johnson
Controls International plc. The Company is indefinitely reinvested in these basis differences. The reduction of the outside basis differences via the sale or
liquidation of these subsidiaries and/or distributions could create taxable income. The Company's intent is to reduce the outside basis differences only when it
would be tax efficient. Given the numerous ways in which the basis differences may be reduced, it is not practicable to estimate the amount of unrecognized
withholding taxes and deferred tax liability on the outside basis differences.
Deferred taxes were classified in the consolidated statements of financial position as follows (in millions):
Other noncurrent assets
Other noncurrent liabilities
Net deferred tax asset (liability)
September 30,
2019
2018
552
(588)
(36) $
1,265
(727)
538
$
104
Temporary differences and carryforwards which gave rise to deferred tax assets and liabilities included (in millions):
Deferred tax assets
Accrued expenses and reserves
Employee and retiree benefits
Net operating loss and other credit carryforwards
Research and development
Valuation allowances
Deferred tax liabilities
Property, plant and equipment
Subsidiaries, joint ventures and partnerships
Intangible assets
Other, net
September 30,
2019
2018
$
437 $
265
5,664
106
6,472
(5,068)
1,404
139
499
759
43
1,440
Net deferred tax asset (liability)
$
(36) $
458
178
6,350
93
7,079
(5,088)
1,991
179
283
915
76
1,453
538
At September 30, 2019, the Company had available net operating loss carryforwards of approximately $23.3 billion, of which $13.8 billion will expire at various
dates between 2020 and 2039, and the remainder has an indefinite carryforward period. The Company had available U.S. foreign tax credit carryforwards at
September 30, 2019 of $35 million which will expire in 2029. The valuation allowance, generally, is for loss and credit carryforwards for which realization is
uncertain because it is unlikely that the losses and/or credits will be realized given the lack of sustained profitability and/or limited carryforward periods in certain
countries.
During the first quarter of 2018, the Company adopted ASU 2016-09. As a result, the Company recognized deferred tax assets of $179 million in the consolidated
statements of financial position related to certain operating loss carryforwards resulting from the exercise of employee stock options and restricted stock vestings
on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of October 1, 2017.
19. 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 four reportable segments for financial reporting purposes.
•
•
•
•
Building Solutions North America designs, sells, installs, and services HVAC and controls systems, integrated electronic security systems (including
monitoring), and integrated fire detection and suppression systems for commercial, industrial, retail, small business, institutional and governmental
customers in North America. Building Solutions North America also provides energy efficiency solutions and technical services, including
inspection, scheduled maintenance, and repair and replacement of mechanical and control systems, to non-residential building and industrial
applications in the North American marketplace.
Building Solutions EMEA/LA designs, sells, installs, and services HVAC, controls, refrigeration, integrated electronic security, integrated fire detection
and suppression systems, and provides technical services to markets in Europe, the Middle East, Africa and Latin America.
Building Solutions Asia Pacific designs, sells, installs, and services HVAC, controls, refrigeration, integrated electronic security, integrated fire detection
and suppression systems, and provides technical services to the Asia Pacific marketplace.
Global Products designs and produces heating and air conditioning for residential and commercial applications, and markets products and refrigeration
systems to replacement and new construction market customers globally. The Global Products business also designs, manufactures and sells fire
protection and security products, including intrusion security,
105
anti-theft devices, and access control and video management systems, for commercial, industrial, retail, residential, small business, institutional and
governmental customers worldwide. Global Products also includes the Johnson Controls-Hitachi joint venture.
During the first quarter of fiscal 2019, the Company determined that the Power Solutions business met the criteria to be classified as a discontinued operation,
which required retrospective application to financial information for all periods presented. Refer to Note 3, "Discontinued Operations," of the notes to consolidated
financial statements for further information regarding the Company's discontinued operations.
On October 1, 2018, the Company adopted ASU No. 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial
Assets and Financial Liabilities." The new standard requires the mark-to-market of marketable securities investments previously recorded within accumulated other
comprehensive income on the statement of financial position be recorded in the statement of income on a prospective basis beginning as of the adoption date. As
these restricted investments do not relate to the underlying operating performance of its business, the Company’s definition of segment earnings excludes the mark-
to-market adjustments beginning in the first quarter of fiscal 2019.
Management evaluates the performance of its business segments primarily on segment earnings before interest, taxes and amortization ("EBITA"), which
represents income from continuing operations before income taxes and noncontrolling interests, excluding general corporate expenses, intangible asset
amortization, net financing charges, restructuring and impairment costs, and net mark-to-market adjustments related to pension and postretirement plans and
restricted asbestos investments.
Financial information relating to the Company’s reportable segments is as follows (in millions):
Net Sales
Building Solutions North America
Building Solutions EMEA/LA
Building Solutions Asia Pacific
Global Products
Total net sales
Segment EBITA
Building Solutions North America (1)
Building Solutions EMEA/LA (2)
Building Solutions Asia Pacific (3)
Global Products (4)
Total segment EBITA
Amortization of intangible assets
Corporate expenses (5)
Net financing charges
Restructuring and impairment costs
Net mark-to-market adjustments
Income from continuing operations before income taxes
$
$
$
$
$
Year Ended September 30,
2019
2018
2017
9,031 $
3,655
2,658
8,624
23,968 $
8,679 $
3,696
2,553
8,472
23,400 $
Year Ended September 30,
2019
2018
2017
1,153 $
368
341
1,179
3,041 $
(377)
(405)
(350)
(235)
(618)
1,109 $
344
347
1,338
3,138 $
(376)
(584)
(401)
(255)
24
1,056 $
1,546 $
106
8,341
3,595
2,444
8,455
22,835
1,039
290
323
1,179
2,831
(481)
(770)
(466)
(347)
384
1,151
Assets
Building Technologies & Solutions (6)
Building Solutions North America (7)
Building Solutions EMEA/LA (8)
Building Solutions Asia Pacific (9)
Global Products (10)
Assets held for sale
Unallocated
Total
Depreciation/Amortization
Building Technologies & Solutions
Building Solutions North America
Building Solutions EMEA/LA
Building Solutions Asia Pacific
Global Products
Corporate
Continuing Operations
Discontinued Operations
Total
Capital Expenditures
Building Technologies & Solutions
Building Solutions North America
Building Solutions EMEA/LA
Building Solutions Asia Pacific
Global Products
Corporate
Continuing Operations
Discontinued Operations
Total
(1)
(2)
2019
September 30,
2018
2017
15,562 $
15,384 $
4,786
2,657
13,945
36,950
158
5,179
4,997
2,743
14,261
37,385
8,203
3,209
42,287 $
48,797 $
Year Ended September 30,
2019
2018
2017
233 $
236 $
112
23
396
764
61
825
32
110
28
390
764
60
824
261
15,228
4,885
2,575
14,018
36,706
10,725
4,453
51,884
272
140
37
410
859
60
919
269
857 $
1,085 $
1,188
Year Ended September 30,
2019
2018
2017
119 $
114 $
93
26
310
548
38
586
197
73
26
307
520
125
645
385
107
98
27
421
653
107
760
583
783 $
1,030 $
1,343
$
$
$
$
$
$
Building Solutions North America segment EBITA for the year ended September 30, 2018 and 2017 excludes $20 million and $59 million, respectively,
of restructuring and impairment costs.
Building Solutions EMEA/LA segment EBITA for the years ended September 30, 2018 and 2017 excludes $56 million and $74 million, respectively, of
restructuring and impairment costs. For the years ended September 30, 2019, 2018 and 2017, EMEA/LA segment EBITA includes $12 million, $1 million
and $5 million, respectively, of equity income.
107
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Building Solutions Asia Pacific segment EBITA for the year ended September 30, 2018 and 2017 excludes $16 million and $16 million, respectively, of
restructuring and impairment costs. For the years ended September 30, 2019, 2018 and 2017, Asia Pacific segment EBITA includes $1 million, $1 million
and $1 million, respectively, of equity income.
Global Products segment EBITA for the years ended September 30, 2019, 2018 and 2017 excludes $235 million, $113 million and $32 million,
respectively, of restructuring and impairment costs. For the years ended September 30, 2019, 2018 and 2017, Global Products segment EBITA includes
$179 million, $175 million and $151 million, respectively, of equity income.
Corporate expenses for the years ended September 30, 2018 and 2017 excludes $50 million and $166 million, respectively, of restructuring and
impairment costs.
Current year and 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.
Buildings Solutions North America assets as of September 30, 2019, 2018 and 2017 include $8 million, $8 million and $8 million, respectively, of
investments in partially-owned affiliates.
Building Solutions EMEA/LA assets as of September 30, 2019, 2018 and 2017 include $109 million, $99 million and $107 million, respectively, of
investments in partially-owned affiliates.
Building Solutions Asia Pacific assets as of September 30, 2019 and 2018 include $6 million and $1 million, respectively, of investments in partially-
owned affiliates.
(10)
Global Products assets as of September 30, 2019, 2018 and 2017 include $730 million, $740 million and $629 million, respectively, of investments in
partially-owned affiliates.
In fiscal years 2019, 2018 and 2017 no customer exceeded 10% of consolidated net sales.
108
Geographic Segments
Financial information relating to the Company’s operations by geographic area is as follows (in millions):
Net Sales
United States
China
Japan
Germany
United Kingdom
Taiwan
Other foreign
Other European countries
Total
Long-Lived Assets (Year-end)
United States
China
Japan
Germany
United Kingdom
Taiwan
Other foreign
Other European countries
Total
Year Ended September 30,
2019
2018
2017
11,773 $
11,306 $
1,424
1,943
629
1,042
612
4,625
1,920
1,480
1,903
616
1,075
661
4,423
1,936
23,968 $
23,400 $
11,353
1,448
1,816
576
872
625
4,222
1,923
22,835
1,824 $
1,879 $
1,824
326
228
20
77
141
568
164
332
209
19
73
154
464
170
171
180
19
109
169
595
274
3,348 $
3,300 $
3,341
$
$
$
$
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.
20. 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, 2019 and 2018. 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, 2019, 2018 and 2017.
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 continuing operations of such nonconsolidated partially-owned affiliates accounted for under the equity method.
109
Summarized balance sheet data as of September 30, 2019 and 2018 is as follows (in millions):
Current assets
Noncurrent assets
Total assets
Current liabilities
Noncurrent liabilities
Noncontrolling interests
Shareholders’ equity
Total liabilities and shareholders’ equity
September 30,
2019
2018
$
$
$
$
2,941 $
1,020
3,961 $
2,135 $
157
67
1,602
3,961 $
3,134
804
3,938
2,111
150
39
1,638
3,938
Summarized income statement data for the years ended September 30, 2019, 2018 and 2017 is as follows (in millions):
Net sales
Gross profit
Net income
Income attributable to noncontrolling interests
Net income attributable to the entity
21. GUARANTEES
$
Year Ended September 30,
2019
2018
2017
3,882 $
1,070
411
13
398
3,974 $
1,049
390
10
380
3,113
855
347
11
336
Certain of the Company's subsidiaries at the business segment level have guaranteed the performance of third-parties and provided financial guarantees for
uncompleted work and financial commitments. The terms of these guarantees vary with end dates ranging from the current fiscal year through the completion of
such transactions and would typically be triggered in the event of nonperformance. Performance under the guarantees, if required, would not have a material effect
on the Company's financial position, results of operations or cash flows.
The Company offers warranties to its customers depending upon the specific product and terms of the customer purchase agreement. A typical warranty program
requires that the Company replace defective products within a specified time period from the date of sale. The Company records an estimate for future warranty-
related costs based on actual historical return rates and other known factors. Based on analysis of return rates and other factors, the Company’s warranty provisions
are adjusted as necessary. The Company monitors its warranty activity and adjusts its reserve estimates when it is probable that future warranty costs will be
different than those estimates.
The Company’s product warranty liability for continuing operations is recorded in the consolidated statements of financial position in deferred revenue or other
current liabilities if the warranty is less than one year and in other noncurrent liabilities if the warranty extends longer than one year.
110
The changes in the carrying amount of the Company’s total product warranty liability for continuing operations, including extended warranties for which deferred
revenue is recorded, for the fiscal years ended September 30, 2019 and 2018 were as follows (in millions):
Balance at beginning of period
Accruals for warranties issued during the period
Accruals from acquisitions and divestitures
Accruals related to pre-existing warranties (including changes in estimates)
Settlements made (in cash or in kind) during the period
Currency translation
Balance at end of period
Year Ended
September 30,
2019
2018
315 $
110
1
(39)
(101)
(1)
285 $
323
128
—
(14)
(120)
(2)
315
$
$
As a result of the Tyco merger in the fourth quarter of fiscal 2016, the Company recorded, as part of the acquired liabilities of Tyco, $290 million of post sale
contingent tax indemnification liabilities. The liabilities are recorded at fair value and relate to certain tax related matters borne by the buyer of previously divested
subsidiaries of Tyco which Tyco has indemnified certain parties and the amounts are probable of being paid. At September 30, 2018, the Company recorded
liabilities of $255 million, of which $235 million was related to prior divested businesses and the remainder relates to Tyco’s tax sharing agreements from its 2007
and 2012 spin-off transactions. These are certain guarantees or indemnifications extended among Tyco, Medtronic, TE Connectivity, ADT and Pentair in
accordance with the terms of the 2007 and 2012 separation and tax sharing agreements. In fiscal 2019, the majority of tax indemnification liabilities were resolved
including a $226 million release as a result of changes to the likelihood of payments due to the expiration of certain statute of limitations.
22. COMMITMENTS AND CONTINGENCIES
Environmental Matters
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, 2019, reserves for environmental liabilities for continuing operations totaled $159 million, of which $52 million was recorded within other
current liabilities and $107 million was recorded within other noncurrent liabilities in the consolidated statements of financial position. Reserves for environmental
liabilities for continuing operations totaled $37 million at September 30, 2018, of which $10 million was recorded within other current liabilities and $27 million
was recorded within other noncurrent liabilities in the consolidated statements of financial position.
Tyco Fire Products L.P. (“Tyco Fire Products”), in coordination with the Wisconsin Department of Natural Resources ("WDNR"), has been conducting an
environmental assessment of its Fire Technology Center ("FTC") located in Marinette, Wisconsin and surrounding areas in the City of Marinette and Town of
Peshtigo, Wisconsin. In connection with the assessment, perfluorooctane sulfonate ("PFOS") and perfluorooctanoic acid ("PFOA") and/or other per- and poly
fluorinated substances ("PFAS") have been detected at the FTC and in groundwater and surface water outside of the boundaries of the FTC. Tyco Fire Products
continues to investigate the extent of potential migration of these compounds and is working closely with WDNR to address these issues insofar as they related to
this migration.
During the third quarter of 2019, the Company increased its environmental reserves which included $140 million related to remediation efforts to be undertaken to
address contamination relating to fire-fighting foams containing PFAS compounds at or near the FTC, as well as the continued remediation of arsenic and other
contaminants at the Tyco Fire Products Stanton Street manufacturing facility also located in Marinette, Wisconsin (the “Stanton Street Facility”). The Company is
not able to estimate a possible loss or range of loss in excess of the established accruals at this time.
A substantial portion of the increased reserves relates to remediation resulting from the use of fire-fighting foams containing PFAS at the FTC. The use of fire-
fighting foams at the FTC was primarily for training and testing purposes in order to ensure that such products sold by the Company’s affiliates, Chemguard, Inc.
("Chemguard") and Tyco Fire Products, were effective at suppressing high intensity fires that may occur at military installations, airports or elsewhere. The reserve
was recorded in the quarter ended June 30, 2019 following a comprehensive review by independent environmental consultants related to the presence of PFAS at
or near the FTC, as well as remediation discussions with the WDNR.
111
On June 21, 2019, the WDNR announced that it had received from the Wisconsin Department of Health Services (“WDHS”) a recommendation for groundwater
quality standards as to, among other compounds, PFOA and PFOS. The WDHS recommended a groundwater enforcement standard for PFOA and PFOS of 20
parts per trillion. On August 22, 2019, the Governor of Wisconsin issued an executive order that, among other things, directed the WDNR to create a PFAS
Coordinating Council and to work with other Wisconsin agencies (including WDHS) to establish final groundwater quality standards based on the WDHS’s prior
recommendation.
In July 2019, the Company received a letter from the WDNR directing the expansion of the evaluation of PFAS in the Marinette region to include (1) biosolids
sludge produced by the City of Marinette Waste Water Treatment Plant and spread on certain fields in the area and (2) the Menominee and Peshtigo Rivers. Tyco
Fire Products voluntarily responded to the WDNR’s letter to request additional necessary information. On October 16, 2019, the WDNR issued a “Notice of
Noncompliance” to Tyco Fire Products and Johnson Controls, Inc. regarding the WDNR’s July 3, 2019 letter. The letter stated that “if you fail to take the actions
required by Wis. Stat. § 292.11 to address this contamination, the DNR will move forward under Wis. Stat. § 292.31 to implement the SI workplan and evaluate
further environmental enforcement actions and cost recovery under Wis. Stat. § 292.31(8).” The WDNR issued a further letter regarding the issue on November 4,
2019. Tyco Fire Products and Johnson Controls, Inc. believe that they have complied with all applicable environmental laws and regulations. The Company cannot
predict what regulatory or enforcement actions, if any, might result from the WDNR’s actions, or the consequences of any such actions.
Tyco Fire Products has been engaged in remediation activities at the Stanton Street Facility since 1990. Its corporate predecessor, Ansul Incorporated (“Ansul”)
manufactured arsenic-based agricultural herbicides at the Stanton Street Facility, which resulted in significant arsenic contamination of soil and groundwater on the
site and in parts of the adjoining Menominee River. In 2009, Ansul entered into an Administrative Consent Order (the "Consent Order") with the U.S.
Environmental Protection Agency to address the presence of arsenic at the site. Under this agreement, Tyco Fire Products’ principal obligations are to contain the
arsenic contamination on the site, pump and treat on-site groundwater, dredge, treat and properly dispose of contaminated sediments in the adjoining river areas,
and monitor contamination levels on an ongoing basis. Activities completed under the Consent Order since 2009 include the installation of a subsurface barrier
wall around the facility to contain contaminated groundwater, the installation of a groundwater extraction and treatment system and the dredging and offsite
disposal of treated river sediment. The increase in the reserve related to the Stanton Street Facility was recorded following a further review of the Consent Order,
which resulted in the identification of several structural upgrades needed to preserve the effectiveness of prior remediation efforts.
Potential environmental 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. It is possible that technological, regulatory or enforcement developments, the results of additional environmental studies or other factors could change the
Company's expectations with respect to future charges and cash outlays, and such changes could be material to the Company's future results of operations, financial
condition or cash flows. Nevertheless, the Company does not currently believe that any claims, penalties or costs in addition to the amounts accrued will have a
material adverse effect on the Company’s financial position, results of operations or cash flows. In addition, the Company has identified asset retirement
obligations for environmental matters that are expected to be addressed at the retirement, disposal, removal or abandonment of existing owned facilities. At
September 30, 2019 and 2018, the Company recorded conditional asset retirement obligations for continuing operations of $30 million and $29 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, 2019, the Company's estimated asbestos related net liability recorded on a discounted basis within the Company's consolidated statements of
financial position was $141 million. The net liability within the consolidated statements of financial position was comprised of a liability for pending and future
claims and related defense costs of $507 million, of which $50 million was recorded in other current liabilities and $457 million was recorded in other noncurrent
liabilities. The Company also maintained separate cash, investments and receivables related to insurance recoveries within the consolidated statements of financial
position of $366 million, of which $46 million was recorded in other current assets and $320 million was recorded in other noncurrent assets. Assets included $16
million of cash and $273 million of investments, which have all been designated as
112
restricted. In connection with the recognition of liabilities for asbestos-related matters, the Company records asbestos-related insurance recoveries that are
probable; the amount of such recoveries recorded at September 30, 2019 was $77 million. As of September 30, 2018, the Company's estimated asbestos related net
liability recorded on a discounted basis within the Company's consolidated statements of financial position was $173 million. The net liability within the
consolidated statements of financial position was comprised of a liability for pending and future claims and related defense costs of $550 million, of which $55
million was recorded in other current liabilities and $495 million was recorded in other noncurrent liabilities. The Company also maintained separate cash,
investments and receivables related to insurance recoveries within the consolidated statements of financial position of $377 million, of which $33 million was
recorded in other current assets and $344 million was recorded in other noncurrent assets. Assets included $6 million of cash and $281 million of investments,
which have all been designated as restricted. In connection with the recognition of liabilities for asbestos-related matters, the Company records asbestos-related
insurance recoveries that are probable; the amount of such recoveries recorded at September 30, 2018 was $90 million.
The Company's estimate of the liability and corresponding insurance recovery for pending and future claims and defense costs is based on the Company's historical
claim experience, and estimates of the number and resolution cost of potential future claims that may be filed and is discounted to present value from 2068 (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 2068. At least annually, the Company assesses the sufficiency of its estimated
liability for pending and future claims and defense costs by evaluating actual experience regarding claims filed, settled and dismissed, and amounts paid in
settlements. In addition to claims and settlement experience, the Company considers additional quantitative and qualitative factors such as changes in legislation,
the legal environment, and the Company's defense strategy. The Company also evaluates the recoverability of its insurance receivable on an annual basis. The
Company evaluates all of these factors and determines whether a change in the estimate of its liability for pending and future claims and defense costs or insurance
receivable is warranted.
The amounts recorded by the Company for asbestos-related liabilities and insurance-related assets are based on the Company's strategies for resolving its asbestos
claims, currently available information, and a number of estimates and assumptions. Key variables and assumptions include the number and type of new claims
that are filed each year, the average cost of resolution of claims, the identity of defendants, the resolution of coverage issues with insurance carriers, amount of
insurance, and the solvency risk with respect to the Company's insurance carriers. Many of these factors are closely linked, such that a change in one variable or
assumption will impact one or more of the others, and no single variable or assumption predominately influences the determination of the Company's asbestos-
related liabilities and insurance-related assets. Furthermore, predictions with respect to these variables are subject to greater uncertainty in the later portion of the
projection period. Other factors that may affect the Company's liability and cash payments for asbestos-related matters include uncertainties surrounding the
litigation process from jurisdiction to jurisdiction and from case to case, reforms of state or federal tort legislation and the applicability of insurance policies among
subsidiaries. As a result, actual liabilities or insurance recoveries could be significantly higher or lower than those recorded if assumptions used in the Company's
calculations vary significantly from actual results.
Insurable Liabilities
The Company records liabilities for its workers' compensation, product, general 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, 2019 and 2018, the insurable liabilities totaled $379 million and $417 million, respectively, of which $99 million
and $95 million was recorded within other current liabilities, $22 million and $22 million was recorded within accrued compensation and benefits, and $258
million and $300 million was recorded within other noncurrent liabilities in the consolidated statements of financial position, respectively. The Company records
receivables from third party insurers when recovery has been determined to be probable. The amount of such receivables recorded at September 30, 2019 was $23
million, of which $5 million was recorded within other current assets and $18 million was recorded within other noncurrent assets. The amount of such receivables
recorded at September 30, 2018 was $26 million, of which $6 million was recorded within other current assets and $20 million was recorded within other
noncurrent assets, respectively. The Company maintains captive insurance companies to manage its insurable liabilities.
Aqueous Film-Forming Foam ("AFFF") Litigation
Two of our subsidiaries, Chemguard and Tyco Fire Products, have been named, along with other defendant manufacturers, in a number of class action and other
lawsuits relating to the use of fire-fighting foam products by the U.S. Department of Defense (the "DOD") and others for fire suppression purposes and related
training exercises. Plaintiffs generally allege that the firefighting foam products manufactured by defendants contain or break down into the chemicals PFOS and
PFOA and/or other PFAS
113
compounds and that the use of these products by others at various airbases, airports and other sites resulted in the release of these chemicals into the environment
and ultimately into communities’ drinking water supplies neighboring those airports, airbases and other sites. PFOA, PFOS, and other PFAS compounds are being
studied by the United States Environmental Protection Agency ("EPA") and other environmental and health agencies and researchers. The EPA has not issued
binding regulatory limits, but has stated that it will propose regulatory standards for PFOS and PFOA in drinking water by the end of 2019, in accordance with its
PFAS Action Plan released in February 2019. While those studies continue, the EPA has issued a health advisory level for PFOA and PFOS in drinking water.
Both PFOA and PFOS are types of synthetic chemical compounds that have been present in firefighting foam. However, both are also present in many existing
consumer products. According to EPA, PFOA and PFOS have been used to make carpets, clothing, fabrics for furniture, paper packaging for food and other
materials (e.g., cookware) that are resistant to water, grease or stains.
Plaintiffs generally seek compensatory damages, including damages for alleged personal injuries, medical monitoring, diminution in property values, investigation
and remediation costs, and natural resources damages, and also seek punitive damages and injunctive relief to address remediation of the alleged contamination.
In September 2018, the Company filed a Petition for Multidistrict Litigation with the United States Judicial Panel on Multidistrict Litigation (“JPML”) seeking to
consolidate all existing and future federal cases into one jurisdiction. On December 7, 2018, the JPML issued an order transferring various AFFF cases to a multi-
district litigation (“MDL”) before the United States District Court for the District of South Carolina. Additional cases have been identified for transfer to the MDL.
AFFF Putative Class Actions
Chemguard and Tyco Fire Products are named in 24 putative class actions in federal and state courts in Colorado, Delaware, Florida, Massachusetts, New York,
Pennsylvania, Washington New Hampshire, Guam, and Michigan. Each of these cases has been transferred to the MDL. The following putative class actions were
filed since the beginning of fiscal year 2019:
•
•
•
•
•
•
•
Grubb v. The 3M Company et al., filed October 30, 2018 in the United States District Court, District of Delaware.
County of Dutchess v. The 3M Company et al., filed October 12, 2018 in the United States District Court, Southern District of New York.
Battisti et al. v. The 3M Company et al., filed December 20, 2018 in the United States District Court, Middle District of Florida.
Jackson et al. v. The 3M Company et al., filed February 5, 2019 in the United States District Court, Western District of Washington.
Smith et al. v. The 3M Company et al., filed May 24, 2019 in the United States District Court, District of New Hampshire.
Cadrette et al. v. The 3M Company et al., filed May 24, 2019 in the United States District Court, Eastern District of Michigan.
Aguon et al. v. The 3M Company et al., filed October 3, 2019, in the United States District Court, District of Guam.
AFFF Individual or Mass Actions
There are approximately 61 individual or “mass” actions pending in federal court in Colorado (41 cases), New York (4 cases), Pennsylvania (11 cases), New
Mexico (2 cases) and South Carolina (3 cases) against Chemguard and Tyco Fire Products and other defendants in which the plaintiffs generally seek
compensatory damages, including damages for alleged personal injuries, medical monitoring, and alleged diminution in property values. The cases involve
approximately 7,000 plaintiffs in Colorado, approximately 126 plaintiffs in New York, 15 plaintiffs in Pennsylvania, two plaintiffs in New Mexico, one plaintiff in
New Hampshire, and two plaintiffs in Louisiana. These matters have been transferred to or directly-filed in the MDL. The Company is also on notice of
approximately 660 other possible individual product liability claims by filings made in Pennsylvania state court, but complaints have not been filed in those
matters, but the Company anticipates that they soon will be.
AFFF Municipal Cases
Chemguard and Tyco Fire Products are also defendants in 31 cases in federal and state courts involving municipal or water provider plaintiffs in Alaska, Arizona,
California, Colorado, Florida, Massachusetts, New Jersey, New York, Maryland, Ohio, Pennsylvania, and South Carolina. These municipal plaintiffs generally
allege that the use of the defendants’ fire-fighting foam products at fire training academies, municipal airports, Air National Guard bases, or Navy bases released
PFOS and PFOA into public water supply wells, allegedly requiring remediation of public property. All of these cases have been transferred to the MDL. The
following municipal actions were filed since the beginning of fiscal year 2019:
114
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Dutchess County v. The 3M Company et al. filed October 12, 2018 (removed to the United States District Court, Southern District of New York) and
styled as a class action.
City of Dayton v. The 3M Company et al., filed October 3, 2018 in the United States District Court, Southern District of Ohio.
City of Stuart v. The 3M Company et al., filed October 18, 2018 in the United States District Court, Southern District of Florida.
City of Tucson and Town of Marana v. The 3M Company et al., filed November 8, 2018 in the Superior Court of the State of Arizona, County of Pima
(removed to the United States District Court for the District of Arizona).
New Jersey-American Water Company, Inc. v. The 3M Company et al., filed November 8, 2018 in the United States District Court for the District of New
Jersey.
Village of Farmingdale v. The 3M Company et al., filed December 19, 2018 in the Supreme Court of the State of New York, County of Nassau (removed
to the United States District Court for the Eastern District of New York).
Town of East Hampton v. The 3M Company et al., filed December 28, 2018 in the Supreme Court of the State of New York, County of Suffolk.
Ridgewood Water v. The 3M Company et al., filed February 25, 2019, in the Superior Court of the State of New Jersey, Bergen County (removed to the
United States District Court for the District of New Jersey).
Atlantic City Municipal Utilities Authority v. The 3M Company et al., filed April 10, 2019 in the United States District Court, District of New Jersey.
Town of Vienna v. The 3M Company et al., filed March 30, 2019 in the United States District Court, District of Maryland.
New York American Water Company, Inc. v. The 3M Company et al., filed April 11, 2019 in the United States District Court, Eastern District of New
York.
City of Fairbanks v. The 3M Company et al., filed April 26, 2019 in the United States District Court, District of Alaska.
County of Westchester v. The 3M Company et al., filed May 24, 2019 in the United States District Court, Southern District of New York.
Diane Hebrank et al. v. City of Newburgh v. The 3M Company et al., third-party complaint filed June 10, 2019, in the Supreme Court of New York,
Orange County.
California-American Water v. The 3M Company et al., direct-filed on June 21, 2019 in the MDL pending in the United States District Court, District of
South Carolina.
City of Sioux Falls v. The 3M Company et al., direct-filed on June 26, 2019 in the MDL pending in the United States District Court, District of South
Carolina.
Sioux Falls Regional Airport Authority v. The 3M Company et al., direct-filed on June 28, 2019 in the MDL pending in the United States District Court,
District of South Carolina.
• Warminster Township Municipal Authority v. The 3M Company et al., direct-filed on August 30, 2019 in the MDL pending in the United States District
Court, District of South Carolina.
• Warrington Township v. The 3M Company et al., direct-filed on August 30, 2019 in the MDL pending in the United States District Court, District of
•
•
•
•
•
South Carolina.
Horsham Water and Sewer Authority v. The 3M Company et al., direct-filed on August 30, 2019 in the MDL pending in the United States District Court,
District of South Carolina.
Security Water District and Pike Peak Community Foundation v. United States et al., filed on March 5, 2019, in the United States District Court, District
of Colorado.
Bakman Water Co. v. The 3M Company et al., direct-filed on September 30, 2019 in the MDL pending in the United States District Court, District of
South Carolina.
California Water Service Co. v. The 3M Company et al., direct-filed on October 14, 2019 in the MDL pending in the United States District Court, District
of South Carolina.
Town of Ayer v. The 3M Company et al., direct-filed on November 4, 2019 in the MDL pending in the United States District Court, District of South
Carolina.
In May 2018, the Company was also notified by the Widefield Water and Sanitation District in Colorado Springs, Colorado that it may assert claims regarding its
remediation costs in connection with PFOS and PFOA contamination allegedly resulting from the use of those products at the Peterson Air Force Base.
115
State Attorneys General Litigation related to AFFF
In June 2018, the State of New York filed a lawsuit in New York state court (State of New York v. The 3M Company et al., No. 904029-18 (N.Y. Sup. Ct., Albany
County)) against a number of manufacturers, including affiliates of the Company, with respect to alleged PFOS and PFOA contamination purportedly resulting
from firefighting foams used at locations across New York, including Stewart Air National Guard Base in Newburgh and Gabreski Air National Guard Base in
Southampton, Plattsburgh Air Force Base in Plattsburgh, Griffiss Air Force Base in Rome, and unspecified “other” sites throughout the State. The lawsuit seeks to
recover costs and natural resource damages associated with contamination at these sites. This suit has been removed to the United States District Court for the
Northern District of New York and transferred to the MDL.
In February 2019, the State of New York filed a second lawsuit in New York state court (State of New York v. The 3M Company et al., (N.Y. Sup. Ct., Albany
County)), against a number of manufacturers, including affiliates of the Company, with respect to alleged PFOS and PFOA contamination purportedly resulting
from firefighting foams used at additional locations across New York. This suit has been removed to the United States District Court for the Northern District of
New York and transferred to the MDL. In July 2019, the State of New York filed a third lawsuit in New York state court (State of New York v. The 3M Company et
al., (N.Y. Sup. Ct., Albany County)), against a number of manufacturers, including affiliates of the Company, with respect to alleged PFOS and PFOA
contamination purportedly resulting from firefighting foams used at further additional locations across New York. This suit has been removed to the United States
District Court for the Northern District of New York and transferred to the MDL. In November 2019, the State of New York filed a fourth lawsuit in New York
state court (State of New York v. The 3M Company et al., (N.Y. Sup. Ct., Albany County)), against a number of manufacturers, including affiliates of the Company,
with respect to alleged PFOS and PFOA contamination purportedly resulting from firefighting foams used at further additional locations across New York. This
suit has not been served yet.
In January 2019, the State of Ohio filed a lawsuit in Ohio state court (State of Ohio v. The 3M Company et al., No. G-4801-CI-021804752-000 (Court of Common
Pleas of Lucas County, Ohio)) against a number of manufacturers, including affiliates of the Company, with respect to PFOS and PFOA contamination allegedly
resulting from the use of firefighting foams at various specified and unspecified locations across Ohio. The lawsuit seeks to recover costs and natural resource
damages associated with the contamination. This lawsuit has been removed to the United States District Court for the Northern District of Ohio and transferred to
the MDL.
In addition, in May and June 2019, three other states filed lawsuits in their respective state courts against a number of manufacturers, including affiliates of the
Company, with respect to PFOS and PFOA contamination allegedly resulting from the use of firefighting foams at various specified and unspecified locations
across their jurisdictions (State of New Hampshire v. The 3M Company et al.; State of Vermont v. The 3M Company et al.; State of New Jersey v. The 3M Company
et al.). All three of these suits have been removed to federal court and transferred to the MDL.
In September 2019, the government of Guam filed a lawsuit in the superior court of Guam against a number of manufacturers, including affiliates of the Company,
with respect to PFOS and POA contamination allegedly resulting from the use of firefighting foams at various locations within its jurisdiction. This complaint has
been removed to federal court and transferred to the MDL.
AFFF Matters Related to the Tyco Fire Products Fire Technology Center in Marinette, Wisconsin
Tyco Fire Products and Chemguard are defendants in one lawsuit in Marinette County, Wisconsin alleging damages due to the historical use of AFFF products at
Tyco’s Fire Technology Center in Marinette, Wisconsin. The putative class action, Joan & Richard Campbell for themselves and on behalf of other similarly
situated v. Tyco Fire Products LP and Chemguard Inc., et al. (Marinette County Circuit Court, filed Dec. 17, 2018) alleges PFAS (including PFOA/PFOS)
contaminated groundwater migrated off Tyco’s property and into residential drinking water wells causing both personal injuries and property damage to the
plaintiffs; Tyco and Chemguard removed this case to the United States District Court for the Eastern District of Wisconsin and it has been transferred to the MDL.
A second lawsuit, Duane and Janell Goldsmith individually and on behalf of H.G. and K.G v. Tyco Fire Products LP and Chemguard Inc., et al. (Marinette
County Circuit Court, filed Dec. 17, 2018) was also filed by a family alleging personal injuries due to contaminated groundwater; this case has been dismissed
without prejudice.
The Company is vigorously defending the above AFFF matters and believes that it has meritorious defenses to class certification and the claims asserted. However,
there are numerous factual and legal issues to be resolved in connection with these claims, and it is extremely difficult to predict the outcome or ultimate financial
exposure, if any, represented by these matters, but there can be no assurance that any such exposure will not be material. The Company is also pursuing insurance
coverage for these matters.
116
Bosch Litigation
On March 15, 2019, a German subsidiary of the Company received a complaint from Robert Bosch GmbH (“Bosch”), filed in a German court. The complaint
relates to an automotive starter batteries joint venture in which the Company and Bosch were 80/20 parties to this joint venture. At the time the complaint was
filed, JCI’s ownership interest in the joint venture was to be transferred to entities controlled by the Purchaser upon consummation of the previously announced
sale of the Company’s Power Solutions business.
The complaint alleges that certain internal Company reorganization transactions were not in compliance with the arrangements relating to such joint venture. The
complaint seeks a declaration that such internal reorganization transactions are void. In the alternative, the complaint seeks a declaration of damages that represent
an alleged difference between (i) the value ascribed to the joint venture interests in connection with the Power Solutions sale and (ii) the value that was assigned to
those interests in connection with such internal reorganization transactions. The Company believes that it has several strong defenses to the substance of the
complaint and that the complaint substantially overstates any reasonable valuation of the joint venture interests. The Company does not believe the complaint has
merit, and intends to defend it vigorously. While litigation is inherently uncertain, the Company believes that any ultimate liability that may arise from this
proceeding would be immaterial to its business, financial condition and results of operations.
Under the previously announced Stock and Asset Purchase Agreement dated November 13, 2018 between the Company and the Purchaser, the Company has
agreed to indemnify the Purchaser for any damages that could arise from this litigation. The German court litigation is currently stayed as the parties continue to
work towards a resolution of the matter.
Other Matters
The Company is involved in various lawsuits, claims and proceedings incident to the operation of its businesses, including those pertaining to product liability,
environmental, safety and health, intellectual property, employment, commercial and contractual matters, and various other casualty matters. Although the
outcome of litigation cannot be predicted with certainty and some lawsuits, claims or proceedings may be disposed of unfavorably to us, it is management’s
opinion that none of these will have a material adverse effect on the Company’s financial position, results of operations or cash flows. Costs related to such matters
were not material to the periods presented.
23. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company enters into transactions with related parties, such as equity affiliates. Such transactions consist of facility
management services, the sale or purchase of goods and other arrangements.
The net sales to and purchases from related parties included in the consolidated statements of income were $217 million and $66 million, respectively, for fiscal
2019; $220 million and $63 million, respectively, for fiscal 2018; and $226 million and $61 million, respectively, for fiscal 2017.
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):
Receivable from related parties
Payable to related parties
September 30,
2019
2018
$
34
$
6
36
18
117
JOHNSON CONTROLS INTERNATIONAL PLC AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In millions)
Year Ended September 30,
2019
2018
2017
Accounts Receivable - Allowance for Doubtful Accounts
Balance at beginning of period
Provision charged to costs and expenses
Accounts charged off, net of recoveries
Acquisition (divestiture) of businesses
Currency translation
Balance at end of period
Deferred Tax Assets - Valuation Allowance
Balance at beginning of period
Allowance provision for new operating and other loss carryforwards
Allowance provision benefits
Acquisition of businesses
Balance at end of period
$
$
$
$
169 $
37
(21)
(10)
(2)
173 $
5,088 $
195
(215)
—
5,068 $
172 $
14
(17)
—
—
169 $
3,735 $
1,639
(286)
—
5,088 $
168
25
(41)
18
2
172
3,290
550
(158)
53
3,735
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the
Company’s disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) as of the end of the period covered by this report. Based on such evaluations, the Company’s Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing, and reporting,
on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act, and that information is
accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange
Act Rule 13a-15(f). The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of the Company’s internal control over financial reporting based on the framework in Internal Control-Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, the Company’s management has concluded that, as of
September 30, 2019, the Company’s internal control over financial reporting was effective.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited the Company’s consolidated financial statements and the
effectiveness of internal control over financial reporting as of September 30, 2019 as stated in its report which is included in Item 8 of this Form 10-K and is
incorporated by reference herein.
118
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2019, that have materially affected,
or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B
OTHER INFORMATION
None.
PART III
In response to Part III, Items 10, 11, 12, 13 and 14, parts of the Company’s definitive proxy statement (to be filed pursuant to Regulation 14A within 120 days after
Registrant’s fiscal year-end of September 30, 2019) for its annual meeting to be held on March 4, 2020, are incorporated by reference in this Form 10-K.
ITEM 10
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information relating to directors and nominees of Johnson Controls is set forth under the caption “Proposal Number One” in Johnson Controls’ proxy
statement for its annual meeting of stockholders to be held on March 4, 2020 (the “Johnson Controls Proxy Statement”) and is incorporated by reference herein.
Information about executive officers is included in Part I, Item 4 of this Annual Report on Form 10-K. The information required by Items 405, 407(c)(3), (d)
(4) and (d)(5) of Regulation S-K is contained under the captions “Section 16(a) Beneficial Ownership Reporting Compliance,” “Governance of the Company -
Nomination of Directors and Board Diversity,” “Governance of the Company - Board Committees”, and “Committees of the Board - Audit Committee” of the
Johnson Controls Proxy Statement and such information is incorporated by reference herein.
Code of Ethics
Johnson Controls has adopted a code of ethics for directors, officers (including the Company’s principal executive officer, principal financial officer and principal
accounting officer) and employees, known as the Code of Ethics. The Code of Ethics is available in the “Investors - Corporate Governance” section of its website
at www.johnsoncontrols.com. The Company posts any amendments to or waivers of its Code of Ethics (to the extent applicable to the Company’s directors or
executive officers) at the same location on the Company’s website. In addition, copies of the Code of Ethics may be obtained in print without charge upon written
request by any stockholder to the office of the Company at One Albert Quay, Cork, Ireland.
ITEM 11
EXECUTIVE COMPENSATION
The information required by Item 402 of Regulation S-K is contained under the captions “Compensation Discussion & Analysis” (excluding the information under
the caption “Compensation Committee Report on Executive Compensation”), “Executive Compensation Tables” and “Compensation of Non-Employee Directors”
of the Johnson Controls Proxy Statement. Such information is incorporated by reference.
The information required by Items 407(e)(4) and (e)(5) of Regulation S-K is contained under the captions “Committees of the Board - Compensation Committee
Interlocks and Insider Participation” and “Compensation Discussion & Analysis - Compensation Committee Report on Executive Compensation” of the Johnson
Controls Proxy Statement. Such information (other than the Compensation Committee Report on Executive Compensation, which shall not be deemed to be
“filed”) is incorporated by reference.
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The information in the Johnson Controls Proxy Statement set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" is
incorporated herein by reference.
119
The following table provides information about the Company's equity compensation plans as of September 30, 2019:
(a)
(b)
(c)
Number of Securities to be Issued
upon Exercise of Outstanding
Options, Warrants and Rights
Weighted-Average Exercise Price of
Outstanding Options, Warrants and
Rights
Number of Securities Remaining
Available for Future Issuance Under
Equity Compensation Plans
(Excluding Securities Reflected in
Column (a))
Plan Category
Equity compensation plans approved by
shareholders
Equity compensation plans not approved by
shareholders
Total
12,369,749 $
—
12,369,749 $
35.07
—
35.07
34,144,013
—
34,144,013
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information in the Johnson Controls Proxy Statement set forth under the captions “Committees of the Board,” “Governance of the Company - Director
Independence,” and “Governance of the Company - Other Directorships, Conflicts and Related Party Transactions,” is incorporated herein by reference.
ITEM 14
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information in the Johnson Controls Proxy Statement set forth under “Proposal Number Two” related to the appointment of auditors is incorporated herein by
reference.
120
PART IV
ITEM 15
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Form 10-K:
(1) Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Income for the years ended September 30, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Income (Loss) for the years ended September 30, 2019,
2018 and 2017
Consolidated Statements of Financial Position at September 30, 2019 and 2018
Consolidated Statements of Cash Flows for the years ended September 30, 2019, 2018 and 2017
Consolidated Statements of Shareholders’ Equity for the years ended September 30, 2019, 2018 and
2017
Notes to Consolidated Financial Statements
(2) Financial Statement Schedule
For the years ended September 30, 2019, 2018 and 2017:
Schedule II - Valuation and Qualifying Accounts
(3) Exhibits
Page in
Form 10-K
49
52
53
54
55
56
57
118
Reference is made to the separate exhibit index contained on page 123 filed herewith.
All other schedules are omitted because they are not applicable, or the required information is shown in the financial statements or notes thereto.
Financial statements of 50% or less-owned companies have been omitted because the proportionate share of their profit before income taxes and total assets are
individually less than 20% of the respective consolidated amounts, and investments in such companies are less than 20% of consolidated total assets. Refer to Note
20, "Non-Consolidated Partially-Owned Affiliates" of the notes to consolidated financial statements for the summarized financial data for the Company’s
nonconsolidated partially-owned affiliates.
121
ITEM 16
FORM 10-K SUMMARY
Not applicable.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
SIGNATURES
JOHNSON CONTROLS INTERNATIONAL PLC
By
/s/ Brian J. Stief
Brian J. Stief
Vice Chairman and
Chief Financial Officer
Date: November 21, 2019
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below as of November 21, 2019, by the following persons on
behalf of the registrant and in the capacities indicated:
/s/ George R. Oliver
George R. Oliver
Chairman and Chief Executive Officer
(Principal Executive Officer)
/s/ Robert M. VanHimbergen
Robert M. VanHimbergen
Vice President and Corporate Controller
(Principal Accounting Officer)
/s/ Pierre Cohade
Pierre Cohade
Director
/s/ Juan Pablo del Valle Perochena
Juan Pablo del Valle Perochena
Director
/s/ Gretchen R. Haggerty
Gretchen R. Haggerty
Director
/s/ Jürgen Tinggren
Jürgen Tinggren
Director
/s/ David Yost
David Yost
Director
/s/ Brian J. Stief
Brian J. Stief
Vice Chairman and
Chief Financial Officer (Principal Financial Officer)
/s/ Jean Blackwell
Jean Blackwell
Director
/s/ Mike Daniels
Mike Daniels
Director
/s/ Roy Dunbar
Roy Dunbar
Director
/s/ Simone Menne
Simone Menne
Director
/s/ Mark P. Vergnano
Mark P. Vergnano
Director
/s/ John D. Young
John D. Young
Director
122
Johnson Controls International plc
Index to Exhibits
(a) (1) and (2) Financial Statements and Supplementary Data - See Item 8
(b) Exhibit Index:
Exhibit
Title
2.1
2.2
2.3
3.1
4.1
4.2
4.3
4.4
4.5
4.6
Separation and Distribution Agreement, dated as of September 8, 2016, by and between Johnson Controls International plc and Adient
Limited (incorporated by reference to Exhibit 2.1 to the registrant’s Current Report on Form 8-K filed September 9, 2016)
Agreement and Plan of Merger by and among Johnson Controls, Inc., Johnson Controls International plc (formerly Tyco International
plc) and Jagara Merger Sub LLC, dated as of January 24, 2016 (incorporated by reference to Exhibit 2.1 to the registrant’s Current Report
on Form 8-K filed January 27, 2016)
Merger Agreement, dated as of May 30, 2014, between Tyco International Ltd., and Johnson Controls International plc (formerly Tyco
International plc) (incorporated by reference to Exhibit 2.1 to the registrant’s Current Report on Form 8-K filed on June 4, 2014)
Memorandum and Articles of Association of Johnson Controls International plc, as amended by special resolutions dated September 8,
2014, August 17, 2016 and March 7, 2018 (incorporated by reference to Exhibit 3.1 to the registrant’s Quarterly Report on Form 10-Q
filed on May 3, 2018)
Assumption and Accession Agreement, dated as of November 17, 2014, by Johnson Controls International plc (formerly Tyco
International plc) (incorporated by reference to Exhibit 4.1 to the registrant’s current report on Form 8-K filed on November 17, 2014)
Indenture, dated December 28, 2016, between Johnson Controls International plc and U.S. Bank National Association, as trustee
(incorporated by reference to Exhibit 4.1 to the registrant’s current report on Form 8-K filed on December 28, 2016)
First Supplemental Indenture, dated December 28, 2016, between Johnson Controls International plc, and U.S. Bank National
Association, as trustee, and Elavon Financial Services DAC, UK Branch, as paying agent for the New Euro Notes attaching forms of
2.355% Senior Notes due 2017 (retired; no longer outstanding), 7.125% Senior Notes due 2017 (retired; no longer outstanding), 1.400%
Senior Notes due 2017 (retired, no longer outstanding as of November 2, 2017), 3.750% Notes due 2018 (retired; no longer outstanding),
5.000% Senior Notes due 2020, 4.25% Senior Notes due 2021, 3.750% Senior Notes due 2021, 3.625% Senior Notes due 2024, 6.000%
Notes due 2036, 5.70% Senior Notes due 2041, 5.250% Senior Notes due 2041, 4.625% Senior Notes due 2044, 6.950% Debentures due
December 1, 2045, 4.950% Senior Notes due 2064, 4.625% Notes due 2023, 1.375% Notes due 2025, 3.900% Notes due 2026, and
5.125% Notes due 2045 (incorporated by reference to Exhibit 4.2 to the registrant’s current report on Form 8-K filed on December 28,
2016)
Second Supplemental Indenture, dated February 7, 2017, between Johnson Controls International plc and U.S. Bank National
Association, as trustee, attaching form of 4.500% Senior Notes due 2047 (incorporated by reference to Exhibit 4.2 to the registrant’s
Current Report on Form 8-K filed on February 7, 2017)
Third Supplemental Indenture, dated March 15, 2017, among Johnson Controls International plc, U.S. Bank National Association, as
trustee and Elavon Financial Services DAC, UK Branch, as paying agent, attaching form of 1.000% Senior Notes due 2023 (incorporated
by reference to Exhibit 4.2 to the registrant’s Current Report on Form 8-K filed on March 15, 2017)
Fourth Supplemental Indenture, dated December 4, 2017, among Johnson Controls International plc, U.S. Bank National Association, as
trustee and Elavon Financial Services DAC, UK Branch, as paying agent (attaching form of 0.000% Senior Notes due 2020)
(incorporated by reference to Exhibit 4.2 to the registrant’s Current Report on Form 8-K filed on December 4, 2017).
4.7
Miscellaneous long-term debt agreements and financing leases with banks and other creditors and debenture indentures.*
123
Johnson Controls International plc
Index to Exhibits
Exhibit
Title
4.8
Miscellaneous industrial development bond long-term debt issues and related loan agreements and leases.*
10.1
10.2
10.3
10.4
10.5
10.6
10.7
Credit Agreement, dated as of March 10, 2016, among Johnson Controls, Inc., the financial institutions parties thereto and JPMorgan
Chase Bank, N.A., as administrative agent (incorporated by reference to Exhibit 4.2 to Johnson Controls, Inc.’s Current Report on Form
8-K filed March 16, 2016) (Commission File No. 1-5097)
Amendment No. 1 dated as of November 1, 2016 to the Credit Agreement, dated as of March 10, 2016, among Johnson Controls, Inc.,
Johnson Controls International plc, Tyco Fire & Security Finance S.C.A. and Tyco International Finance S.A., the financial parties thereto
and JPMorgan Chase Bank, N.A., as administrative agent (incorporated by reference to Exhibit 10.8 to the registrant’s Annual Report on
Form 10-K for the fiscal year ended September 30, 2017 filed on November 21, 2017)
Stock and Asset Purchase Agreement, dated as of November 13, 2018, by and between Johnson Controls International plc and BCP
Acquisitions LLC (incorporated by reference to Exhibit 2.1 to the Company’s Current Report filed November 13, 2018).
Tax Matters Agreement, dated as of September 8, 2016, by and between Johnson Controls International plc and Adient Limited
(incorporated by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed on September 9, 2016)
Employee Matters Agreement, dated as of September 8, 2016, by and between Johnson Controls International plc and Adient Limited
(incorporated by reference to Exhibit 10.3 to the registrant’s Current Report on Form 8-K filed on September 9, 2016)
Tax Sharing Agreement, dated September 28, 2012 by and among Pentair Ltd., Johnson Controls International plc (formerly Tyco
International Ltd.), Tyco International Finance S.A. and The ADT Corporation (incorporated by reference to Exhibit 10.1 to the
registrant’s Current Report on Form 8-K filed on October 1, 2012) (Commission File No. 1-13836)
Non-Income Tax Sharing Agreement dated September 28, 2012 by and among Johnson Controls International plc (formerly Tyco
International Ltd.), Tyco International Finance S.A. and The ADT Corporation (incorporated by reference to Exhibit 10.2 to the
registrant’s Current Report on Form 8-K filed on October 1, 2012) (Commission File No. 1-13836)
124
Exhibit
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
Johnson Controls International plc
Index to Exhibits
Title
Trademark Agreement, dated as of September 25, 2012, by and among ADT Services GmbH, ADT US Holdings, Inc., Johnson Controls
International plc (formerly Tyco International Ltd.) and The ADT Corporation (incorporated by reference to Exhibit 10.3 to the
registrant’s Current Report on Form 8-K filed on October 1, 2012) (Commission File No. 1-13836)
Form of Deed of Indemnification between Johnson Controls International plc (formerly Tyco International plc) and certain of its directors
and officers (incorporated by reference to Exhibit 10.4 to the registrant’s Current Report on Form 8-K filed on September 6, 2016)
Form of Indemnification Agreement between Tyco Fire & Security (US) Management, Inc. and certain directors and officers of Johnson
Controls International plc (incorporated by reference to Exhibit 10.5 to the registrant’s Current Report on Form 8-K filed on September 6,
2016)
Tyco International plc 2004 Share and Incentive Plan (incorporated by reference to Exhibit 10.3 to the registrant’s Current Report on
Form 8-K filed on November 17, 2014) (Commission File No. 1-13836)**
Johnson Controls International plc 2012 Share and Incentive Plan, amended and restated as of March 8, 2017 (incorporated by reference
to Exhibit 10.2 to the registrant’s Quarterly Report on Form 10-Q filed on May 4, 2017)**
Johnson Controls International plc 2007 Stock Option Plan (incorporated by reference to Exhibit 10.7 to the registrant’s Current Report
on Form 8-K filed on September 6, 2016)**
Johnson Controls International plc 2012 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.6 to the registrant’s Current
Report on Form 8-K filed on September 6, 2016)**
Johnson Controls International plc Severance and Change in Control Policy for Officers, Amended and Restated December 7, 2017
(Incorporated by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed on December 11, 2017)**
Johnson Controls International plc Executive Deferred Compensation Plan, as amended and restated effective January 1, 2018
(incorporated by reference to Exhibit 10.3 to the registrant’s Quarterly Report on Form 10-Q filed on May 3, 2018)**
Johnson Controls International plc Senior Executive Deferred Compensation Plan effective as of January 1, 2018 (incorporated by
reference to Exhibit 10.4 to the registrant’s Current Report on Form 8-K filed on September 19, 2017)**
Johnson Controls International plc Retirement Restoration Plan, as amended and restated effective January 1, 2018 (incorporated by
reference to Exhibit 10.4 to the registrant’s Quarterly Report on Form 10-Q filed on May 3, 2018)**
Tyco Supplemental Savings and Retirement Plan as amended and restated effective January 1, 2018 (incorporated by reference to Exhibit
10.4 to the registrant’s Current Report on Form 8-K filed on September 19, 2017) **
Johnson Controls International plc Executive Compensation Incentive Recoupment Policy effective September 2, 2016 (incorporated by
reference to Exhibit 10.24 to the registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2016 filed on
November 23, 2016)**
Letter Agreement between Johnson Controls International plc and George R. Oliver dated December 8, 2017 (Incorporated by reference
to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed on December 11, 2017).**
125
Exhibit
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
Johnson Controls International plc
Index to Exhibits
Title
Form of terms and conditions for Option / SAR Awards, Restricted Stock / Unit Awards, Performance Share Awards under the Johnson
Controls International plc 2012 Share and Incentive Plan for periods commencing December 6, 2018 (incorporated by reference to
Exhibit 10.2 to the registrant’s Quarterly Report on Form 10-Q filed February 1, 2019)**
Form of terms and conditions for Option / SAR Awards, and Restricted Stock / Unit Awards, under the Johnson Controls International plc
2012 Share and Incentive Plan commencing December 6, 2018 applicable to Mr. Stief (incorporated by reference to Exhibit 10.3 to the
registrant’s Quarterly Report on Form 10-Q filed February 1, 2019)**
Form of Option/SAR Award for Executive Officers (filed herewith)**
Form of terms and conditions for Option / SAR Awards, Restricted Stock / Unit Awards, Performance Share Awards under the Johnson
Controls International plc 2012 Share and Incentive Plan for fiscal 2018 (incorporated by reference to Exhibit 10.3 to the registrant’s
Quarterly Report on Form 10-Q filed on February 2, 2018)**
Form of terms and conditions for Option / SAR Awards, and Restricted Stock / Unit Awards, under the Johnson Controls International plc
2012 Share and Incentive Plan for fiscal 2018 applicable to Messrs. Oliver and Stief (incorporated by reference to Exhibit 10.4 to the
registrant’s Quarterly Report on Form 10-Q filed on February 2, 2018)**
Form of terms and conditions for Option / SAR Awards, Restricted Stock / Unit Awards, Performance Share Awards under the Johnson
Controls International plc 2012 Share and Incentive Plan for periods commencing on September 2, 2016 (incorporated by reference to
Exhibit 10.33 to the registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2016 filed on November 23,
2016)**
Form of terms and conditions for Option / SAR Awards, and Restricted Stock / Unit Awards, under the Johnson Controls International plc
2012 Share and Incentive Plan for periods commencing on September 2, 2016 applicable to Messrs. Molinaroli, Oliver and Stief
(incorporated by reference to Exhibit 10.1 to registrant’s Quarterly Report on Form 10-Q filed on February 8, 2017)**
Terms of Unit Award under the Johnson Controls International plc 2012 Share and Incentive Plan for Brian J. Stief dated September 14,
2017 (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed on September 15, 2017)**
Terms of PSU Award under the Johnson Controls International plc 2012 Share and Incentive Plan for Brian J. Stief dated September 14,
2017 (incorporated by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed on September 15, 2017)**
Terms of RSU Award under the Johnson Controls International plc 2012 Share and Incentive Plan for Brian J. Stief dated September 14,
2017 (incorporated by reference to Exhibit 10.3 to the registrant’s Current Report on Form 8-K filed on September 15, 2017)**
Letter Agreement dated as of September 14, 2017 between Johnson Controls International plc and Brian J. Stief (incorporated by
reference to Exhibit 10.4 to the registrant’s Current Report on Form 8-K filed on September 15, 2017)**
Form of terms and conditions for Option Awards, Restricted Unit Awards, Performance Share Awards under the 2012 Share and
Incentive Plan for fiscal 2016 (incorporated by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed on October
13, 2015)**
Form of terms and conditions for Option Awards, Restricted Unit Awards, Performance Share Awards under the 2012 Stock and
Incentive Plan for fiscal 2015 (incorporated by reference to Exhibit 10.9 to the registrant’s Annual Report on Form 10-K for the fiscal
year ended September 26, 2014 filed on November 14, 2014) (Commission File No. 1-13836)**
126
Johnson Controls International plc
Index to Exhibits
Title
Form of terms and conditions for Option Awards, Restricted Unit Awards, Performance Share Awards under the 2012 Stock and
Incentive Plan for fiscal 2014 (incorporated by reference to Exhibit 10.9 to the registrant’s Annual Report on Form 10-K filed on for the
year ended September 27, 2013 filed on November 14, 2013) (Commission File No. 1-13836)**
Form of terms and conditions for Restricted Stock Units for Directors under the Johnson Controls International plc 2012 Share and
Incentive Plan for use beginning in 2018 (incorporated by reference to Exhibit 10.2 to the registrant’s Quarterly Report on Form 10-Q
filed on May 3, 2018)**
Form of terms and conditions for Restricted Stock Units for Directors under the Johnson Controls International plc 2012 Share and
Incentive Plan for use in 2019 (incorporated by reference to Exhibit 10.2 to the registrant’s Quarterly Report on Form 10-Q filed on May
3, 2019)**
Form of stock option or stock appreciation right award agreement for Johnson Controls, Inc. 2007 Stock Option Plan effective
September 20, 2011 (incorporated by reference to Exhibit 10.V to Johnson Controls, Inc.’s Annual Report on Form 10-K for the year
ended September 30, 2011 filed on November 22, 2011) (Commission File No. 1-5097)**
Johnson Controls, Inc. 2012 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.1(a) to Johnson Controls, Inc.'s Current
Report on Form 8-K filed January 28, 2013) (Commission File No. 1-5097)**
Form of option/stock appreciation right agreement for Johnson Controls, Inc. 2012 Omnibus Incentive Plan (incorporated by reference to
Exhibit 10.1(c) to Johnson Controls, Inc.'s Current Report on Form 8-K filed November 21, 2013) (Commission File No. 1-5097)**
Subsidiaries of Johnson Controls International plc (filed herewith)
Consent of Independent Public Accounting Firm (filed herewith)
Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002 (filed herewith)
Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002 (filed herewith)
Certification by the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
Financial statements from the Annual Report on Form 10-K of Johnson Controls International plc for the fiscal year ended
September 30, 2019 formatted in iXBRL (Inline Extensible Business Reporting Language): (i) the Consolidated Statements of Financial
Position, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the
Consolidated Statements of Cash Flow, (v) the Consolidated Statements of Shareholders’ Equity Attributable to Johnson Controls
Ordinary Shareholders and (vi) Notes to Consolidated Financial Statements (filed herewith)
These instruments are not being filed as exhibits herewith because none of the long-term debt instruments authorizes the issuance of debt
in excess of 10% of the total assets of Johnson Controls International plc and its subsidiaries on a consolidated basis. Johnson Controls
International plc agrees to furnish a copy of each agreement to the Securities and Exchange Commission upon request.
Management contract or compensatory plan.
Exhibit
10.35
10.36
10.37
10.38
10.39
10.40
21.1
23.1
31.1
31.2
32.1
101
*
**
127
Exhibit 10.24
JOHNSON CONTROLS INTERNATIONAL PLC
2012 SHARE AND INCENTIVE PLAN (AMENDED AND RESTATED AS OF SEPTEMBER 2, 2016)
(THE “PLAN”)
OPTION OR SHARE APPRECIATION RIGHT AWARD AGREEMENT
Terms for Nonqualified Share Options and Share Appreciation Rights
The Plan has been adopted to permit awards of share options or share appreciation rights to be made to certain key employees of the Company or
any Affiliate. The Company desires to provide incentives and potential rewards for future performance by the Participant by providing the Participant
with a means to acquire or to increase his/her proprietary interest in the Company's success.
Definitions. Capitalized terms used in this Award Agreement have the following meanings:
(a) “Award” means this grant of Options and/or an SAR.
(b) “Award Notice” means the Award notification delivered or made available to the Participant (in either paper or electronic form).
(c)
“Cause” means (i) if the Participant is subject to an employment agreement with the Company or a Subsidiary that contains a definition of
“cause”, such definition, or (ii) otherwise, any of the following as determined by the Committee: (A) violation of the provisions of any employment
agreement, noncompetition agreement, confidentiality agreement, or similar agreement with the Company or a Subsidiary, or the Company’s or
a Subsidiary’s code of ethics, as then in effect, (B) conduct rising to the level of gross negligence or willful misconduct in the course of
employment with the Company or a Subsidiary, (C) commission of an act of dishonesty or disloyalty involving the Company or a Subsidiary, (D)
violation of any federal, state or local law in connection with the Participant’s employment or service, or (E) breach of any fiduciary duty to the
Company or a Subsidiary.
(d) “Company” means Johnson Controls International plc, an Irish public limited company, or any successor thereto.
(e) “Fair Market Value” means, per Share on a particular date, the closing sales price on such date on the New York Stock Exchange, or if no sales
of Shares occur on the date in question, on the next preceding date on which there was a sale on such market.
“Grant Date” is the date the Award was made to the Participant, as specified in the Award Notice.
(f)
(g) “Inimical Conduct” means any act or omission that is inimical to the best interests of the Company or any Affiliate as determined by the
Committee in its sole discretion, including but not limited to: (i) violation of any employment, noncompete, confidentiality or other agreement in
effect with the Company or any Affiliate, (ii) taking any steps or doing anything which would damage or negatively reflect on the reputation of the
Company or an Affiliate, or (iii) failure to comply with applicable laws relating to trade secrets, confidential information or unfair competition.
(h) “Option” means this nonqualified share option representing the right to purchase Shares at a stated price for a specified period of time.
(i)
“Plan” means the Johnson Controls International plc 2012 Share and Incentive Plan (as amended and restated as of September 2, 2016) and as
may be further amended from time to time.
“Retirement” means termination of employment from the Company and its Subsidiaries (for other than Cause) on or after attainment of age fifty-
five (55) and completion of five (5) years of continuous service with the Company and its Subsidiaries (including, for Participants who are
Legacy Johnson Controls Employees, service with Johnson Controls, Inc. and its affiliates prior to the Merger).
(j)
(k)
“SAR” is an Award of Share Appreciation Rights which will be settled in cash. The Participant will receive the economic equivalent of the excess
of the Fair Market Value on the exercise date over the Exercise Price.
“Share” means an ordinary share in the capital of the Company.
(l)
(m) “Termination of Employment” means, subject to the terms of any Attachment hereto, the date of cessation of the Participant’s employment
relationship with the Company or a Subsidiary for any reason, with or without Cause, as determined by the Company.
Other capitalized terms used in this Award Agreement have the meanings given in the Plan. The parties agree as follows:
1.
2.
3.
Grant of Award. Subject to the terms and conditions of the Plan, a copy of which has been made available to the Participant and made a
part of this Award, and to the terms and conditions of this Award Agreement, the Company grants to the Participant an Award of Options or
an SAR, as specified in the Award Notice.
Exercise Price. The purchase price payable upon exercise of the Options or used to determine the value of the SARs shall be the Exercise
Price per Share stated in the Award Notice.
Exercise of Vested Portion of Award. The Award may be exercised by the Participant, in whole or in part, from time to time, to the extent
the Award is vested and prior to the Expiration Date stated in the Award Notice. The vesting schedule of the Award is as follows:
(a) Fifty Percent (50%) of the Award shall vest on the second anniversary of the Grant Date. (b) Fifty Percent (50%) of the Award shall vest
on the third anniversary of the Grant Date.
The Award shall expire ten years from the Grant Date.
4.
5.
Exercise Procedure. The Award may only be exercised through the Company’s Option/SAR execution service provider following the
procedures established by the Committee.
Conditions to Issuance or Payment. Before the Company will become obligated to issue or transfer Shares or pay cash upon exercise of
the Option or SAR, the Company may require the Participant to pay to the Company or its Affiliates such amount as may be requested by
the Company or its Affiliates for the purpose of satisfying its liability to withhold federal, state or local income or other taxes incurred by
reason of the exercise of the Award. If the amount requested is not paid, the Company may refuse to issue or transfer Shares or pay cash,
as applicable, upon exercise of the Award.
6.
Withholding.
(a) Share Withholding or Delivery. The Participant shall be permitted to satisfy the Company's withholding tax requirements with respect to the
Option by electing to have the Company withhold sufficient Shares otherwise issuable to the Participant to meet the withholding tax
requirements; provided that, to the extent Shares are withheld to satisfy taxes, the amount to be withheld may not exceed the total minimum
statutory tax withholding obligations associated with the transaction to the extent needed for the Company and its Subsidiaries to avoid an
accounting charge until Accounting Standards Update 2016-09 applies to the Company, after which time the amount to be withheld may not
exceed the total maximum statutory tax rates associated with the transaction. Such election shall be irrevocable, and shall be subject to
disapproval, in whole or in part, by the Company. Such election shall be made according to such rules and regulations and in such form as the
Company shall determine.
(b) Other Withholding. Notwithstanding anything to the contrary in this Award, if the Company or any Affiliate is required to withhold any
foreign, Federal, state or local taxes or other amounts in connection
Terms for SAR-Stock Options – 2012 Plan Page 2 of 6
with the Award, then the Company may deduct (or require an Affiliate to deduct) such taxes or other amounts from any payments of any kind
otherwise due the Participant to satisfy such tax obligations.
7.
Termination of Employment.
(a) General. In the event a Participant’s employment with the Company or any of its Affiliates is terminated for any reason, except Retirement,
death, Disability, Disposition of Assets (as defined below), Disposition of a Subsidiary (as defined below), Outsourcing Agreement (as defined
below), involuntary termination by the Company or an Affiliate without Cause prior to September 2, 2018 or Cause, a Participant may exercise
this Award (to the extent vested and exercisable as of the date of the Participant’s termination of employment) for a period of ninety (90) days
after the date of the Participant’s termination of employment, but not later than the Award’s expiration date. Thereafter, all rights to exercise the
Award shall terminate. Any portion of this Award that is not, or does not become, vested and exercisable as of the date of the Participant’s
termination of employment shall automatically be forfeited as of the date of such termination of employment.
(b) Retirement. If the Participant ceases to be an employee of the Company or any Affiliate by reason of Retirement at a time when the
Participant’s employment could not have been terminated for Cause, then the Award shall become exercisable with respect to a pro rata portion
of the Award and will remain exercisable (to the extent vested upon Retirement) for the life of the grant. The pro rata portion of the Award that
shall vest upon the Participant’s Retirement shall be calculated as follows: (i) the total number of Options or SARs subject to this Award
multiplied by (ii) a fraction, the numerator of which equals the total number of full months that the Participant was employed during the Award’s
original vesting period and the denominator of which equals the total number of months in the Award’s original vesting period, less (iii) the
number of Options or SARs that previously vested in the normal course as of the Participant’s last day of employment. For the avoidance of
doubt, any portion of this Award that is not, or does not become, vested and exercisable as of the date of the Participant’s Retirement shall
automatically be forfeited as of the date of such Retirement.
(c) Death or Disability. If the Participant ceases to be an employee of the Company or any Affiliate by reason of death or Disability at a time
when the Participant could not be terminated for Cause, then the Award shall become exercisable in full without regard to any vesting
requirements, and may be exercised by the Participant at any time within three (3) years after the date of such termination, but not later than the
Award’s expiration date. In the case of the Participant’s death, the Award may be exercised by the person to whom the Award is transferred by
will or by applicable laws of descent and distribution. In the event of the death of a Participant who has had a Retirement or ceased to be an
employee by reason of Disability, the Award may be exercised by the person to whom the Option is transferred, by will or by applicable laws of
descent and distribution, as if the Participant had remained living under Section 6(b) or this Section 6(c), as applicable.
(d) Divestiture or Outsourcing. If the Participant’s employment with the Company and its Affiliates terminates as a result of a Disposition of
Assets, Disposition of a Subsidiary or Outsourcing Agreement (each as defined below) at a time when the Participant could not have been
terminated for Cause, then the Award shall become exercisable with respect to a pro rata portion of the Award and will remain exercisable (to
the extent vested upon the Disposition of Assets, Disposition of a Subsidiary or Outsourcing Agreement) until the earlier of three (3) years after
the date of such Disposition of Assets, Disposition of a Subsidiary or Outsourcing Agreement and the Award’s expiration date. The pro rata
portion of the Award that shall vest upon termination shall be calculated as follows: (i) the total number of Options or SARs subject to this Award
multiplied by (ii) a fraction, the numerator of which equals the total number of full months that the Participant was employed during the Award’s
original vesting period and the denominator of which equals the total number of months in the Award’s original vesting period, less (iii) the
number of Options or SARs that previously vested in the normal course as of the Participant’s last day of employment. Notwithstanding the
foregoing, the Participant shall not be eligible for such pro rata vesting if (i) the Participant’s termination of employment occurs on or prior to the
closing date of
Terms for SAR-Stock Options – 2012 Plan Page 3 of 6
such Disposition of Assets or Disposition of a Subsidiary, as applicable, or on such later date as is specifically provided in the applicable
transaction agreement or related agreements, or on the effective date of such Outsourcing Agreement applicable to the Participant (the
“Applicable Employment Date”), and (ii) the Participant is offered Comparable Employment (as defined below) with the buyer, successor
company or outsourcing agent, as applicable, but does not commence such employment on the Applicable Employment Date. For the
avoidance of doubt, any portion of this Award that is not, or does not become, vested and exercisable as of the date of the Disposition of Assets,
Disposition of a Subsidiary or Outsourcing Agreement shall automatically be forfeited as of the date of such Disposition of Assets, Disposition of
a Subsidiary or Outsourcing Agreement, as applicable.
For purposes of this Section 7(d), “Comparable Employment” shall mean employment (i) with base compensation and benefits (not including
perquisites, allowances or long term incentive compensation) that, taken as whole, is not materially reduced from that which is in effect
immediately prior to the Participant’s termination of employment and (ii) that is at a geographic location no more than 50 miles from the
Participant’s principal place of employment in effect immediately prior to the Participant’s termination of employment; “Disposition of Assets”
shall mean the disposition by the Company or an Affiliate by which the Participant is employed of all or a portion of the assets used by the
Company or Affiliate in a trade or business to an unrelated corporation or entity; “Disposition of a Subsidiary” shall mean the disposition by the
Company or an Affiliate of its interest in a subsidiary or controlled entity to an unrelated individual or entity (which, for the avoidance of doubt,
excludes a spin-off or split-off or similar transaction), provided that such subsidiary or entity ceases to be controlled by the Company as a result
of such disposition; and “Outsourcing Agreement” shall mean a written agreement between the Company or an Affiliate and an unrelated third
party (“Outsourcing Agent”) pursuant to which (i) the Company transfers the performance of services previously performed by employees of the
Company or Affiliate to the Outsourcing Agent, and (ii) the Outsourcing Agent is obligated to offer employment to any employee whose
employment is being terminated as a result of or in connection with said Outsourcing Agreement.
(e) Termination for Cause. If the Participant’s employment with the Company or any of its Affiliates is terminated for Cause, then such
termination shall cause the immediate cancellation and forfeiture of any Award, regardless of vesting; and any pending exercises shall be
cancelled on the date of termination.
8.
9.
10.
11.
12.
Inimical Conduct. If the Committee determines at any time that a Participant has engaged in Inimical Conduct, whether before or after
termination of employment, the Award shall be cancelled, regardless of vesting; and any pending exercises shall be cancelled on that date.
In addition, the Committee or the Company may suspend any exercise of the Option or SAR pending the determination of whether the
Participant has engaged in Inimical Conduct.
Rights as Shareholder. The Participant shall not be deemed for any purposes to be a shareholder of the Company with respect to any
shares which may be acquired hereunder except to the extent that the Option shall have been exercised with respect thereto and Shares
issued therefor.
No Reinstatement of Award. After this Award or any portion thereof expires, is cancelled or otherwise terminates for any reason, the
Award or such portion shall not be reinstated, extended or otherwise continued.
Transferability. This Award shall not be transferable (without the Committee’s consent) other than by will or the laws of descent and
distribution. Following any permitted transfer, the Award shall continue to be subject to the same terms and conditions as were applicable
immediately prior to the transfer, provided that the Award may be exercised during the life of the Participant only by the Participant or, if
applicable, by the Participant’s permitted transferees.
Securities Compliance. The Participant agrees for himself/herself and the Participant's heirs, legatees, and legal representatives, with
respect to all Shares acquired pursuant to this Award (or
Terms for SAR-Stock Options – 2012 Plan Page 4 of 6
13.
14.
15.
16.
17.
any Shares issued pursuant to a share dividend or share split thereon or any securities issued in lieu of or in substitution or exchange for
such Shares) that the Participant and the Participant's heirs, legatees, and legal representatives will not sell or otherwise dispose of such
shares except pursuant to an effective registration statement under the Securities Act of 1933, as amended, or except in a transaction
which, in the opinion of counsel for the Company, is exempt from registration under such act.
No Restrictions on Certain Actions. The existence of the Award shall not affect in any way the right or power of the Company or its
shareholders to make or authorize any or all adjustments, recapitalizations, reorganizations, or other changes in the Company's capital
structure or its business, or any merger or consolidation of the Company, or any issuance of bonds, debentures, preferred, or prior
preference shares ahead of or affecting the Shares or the rights thereof, or dissolution or liquidation of the Company, or any sale or transfer
of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise.
Award Not Part of Normal Compensation. Neither the Award nor any benefit accruing to the Participant from the Award will be
considered to be part of the Participant’s normal or expected compensation or salary for any purposes, including, but not limited to,
calculating any severance, resignation, termination, redundancy, dismissal, end-of-service payments, bonuses, long-service awards,
pension or retirement or welfare benefits or similar payments. In no event may the Award or any benefit accruing to the Participant from the
Award be considered as compensation for, or relating in any way to, past services for the Company or any Affiliate. In consideration of the
Award, no claim or entitlement to compensation or damages shall arise from forfeiture of the Award resulting from termination of the
Participant’s employment by the Company or any Affiliate (for any reason whatsoever and whether or not in breach of local labor laws) and
the Participant irrevocably releases the Company and its Affiliates from any such claim that may arise. If, notwithstanding the foregoing, any
such claim is found by a court of competent jurisdiction to have arisen, then, by acknowledging the grant, the Participant shall have been
deemed irrevocably to have waived any entitlement to pursue such claim.
Electronic Communications. The Company or its Affiliates may, in its or their sole discretion, decide to deliver any documents related to
current or future participation in the Plan or related to this Award by electronic means. The Participant hereby consents to receive such
documents by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established and maintained
by the Company or a third party designated by the Company. The Participant hereby agrees that all on-line acknowledgements shall have
the same force and effect as a written signature.
Governing Law; Arbitration. This Award, and the interpretation of this Award Agreement, shall be governed by (a) the internal laws of
Ireland (without reference to conflict of law principles thereof that would direct the application of the laws of another jurisdiction) with respect
to the validity and authorization of any Shares issued under this Award, and (b) the internal laws of the State of Wisconsin (without
reference to conflict of law principles thereof that would direct the application of the laws of another jurisdiction) with respect to all other
matters. Arbitration will be conducted per the provisions in the Plan.
Data Privacy and Sharing. As a condition of the granting of the Award, the Participant acknowledges and agrees that it is necessary for
some of the Participant’s personal identifiable information to be provided to certain employees of the Company and the Company’s
Option/SAR execution service provider and the Company’s designated third party broker in the United States. These transfers will be made
pursuant to a contract that requires the service provider to provide adequate levels of protection for data privacy and security interests in
accordance with the EU Data Privacy Directive 95/46 EC and the implementing legislation of the Participant’s home country (or any
successor or superseding regulation). By acknowledging the Award, the Participant acknowledges having been informed of the processing
of the Participant’s personal identifiable information described in the
Terms for SAR-Stock Options – 2012 Plan Page 5 of 6
preceding paragraph and consents to the Company collecting and transferring to the Company's Human Resources Department, and its
independent service provider and third party broker, the Participant’s personal data that are necessary to administer the Award and the
Plan. The Participant understands that his or her personal information may be transferred, processed and stored outside of the Participant’s
home country in a country that may not have the same data protection laws as his or her home country, for the purposes mentioned in this
Award.
18.
Restrictive Covenants. In consideration for the Participant’s opportunity to earn the benefits provided in this Award Agreement, Participant
agrees to be bound by the restrictive covenants in Attachment A. For the sake of clarity, by accepting this Award, Participant agrees to be
bound by such restrictive covenants even if Participant ultimately forfeits this Award or otherwise fails to receive any benefits under this
Award Agreement.
This Award, the Award Notice, and any other documents expressly referenced in this Award contain all of the provisions applicable to the Award and
no other statements, documents or practices may modify, waive or alter such provisions unless expressly set forth in writing, signed by an
authorized officer of the Company and delivered to the Participant.
Failure of the Participant to affirmatively ACKNOWLEDGE or reject this Award within the sixty (60) day period following the Grant Date
will result in the Participant’s IMMEDIATE AND AUTOMATIC acceptance of this Award and the terms and conditions of this Award
Agreement and the Plan.
The Company has caused this Award to be executed by one of its authorized officers as of the Grant Date.
JOHNSON CONTROLS INTERNATIONAL PLC
/s/ John Donofrio
John Donofrio
Executive Vice President and General Counsel
Terms for SAR-Stock Options – 2012 Plan Page 6 of 6
Attachment A
Johnson Controls International plc
Restrictive Covenants for Award Agreements
In consideration for the Participant’s opportunity to earn the benefits provided in this Award Agreement (regardless of whether benefits
under this Award Agreement are actually realized by the Participant), and except as prohibited by law, the Participant agrees as follows:
1. Non-Competition. Participant agrees that during his or her employment with the Company or its Subsidiaries, and for the
period of one (1) year following the Participant’s termination of employment for any reason, or such longer period of non-competition as is
included in any offer letter or any other agreement between Participant and the Company or its Subsidiaries or Affiliates, the Participant will
not directly or indirectly, own, manage, operate, control (including indirectly through a debt, equity investment, or otherwise), provide
services to, or be employed by, any person or entity engaged in any business that (i) conducts or is planning to conduct a business in
competition with any business conducted or planned by the Company or any of its Subsidiaries (1) that is located in a region in which
Participant had substantial responsibilities during the twenty-four (24) month period preceding Participant’s termination, and (2) for which
Participant (A) was materially involved in during the twenty-four (24) month period preceding Participant’s termination, or (B) had knowledge
of operations or substantial exposure to during the twenty-four (24) month period preceding Participant’s termination; or (ii) designs,
develops, produces, offers for sale or sells a product or service that can be used as a substitute for, or is generally intended to satisfy the
same customer needs for, any one or more products or services designed, developed, manufactured, produced or offered for sale or sold
by any of the Company’s business (1) that is located in a region in which Participant had substantial responsibilities during the twenty-four
(24) month period preceding Participant’s termination, and (2) for which Participant (A) was materially involved in during the twenty-four (24)
month period preceding Participant’s termination, or (B) had knowledge of operations or substantial exposure to during the twenty-four (24)
month period preceding Participant’s termination.
2. Non-Solicitation of Customers. Participant agrees that during his or her employment with the Company or its Subsidiaries,
and for the period of one (1) year following the Participant’s termination of employment for any reason, or such longer period of non-
solicitation as is included in any offer letter or any other agreement between Participant and the Company or its Subsidiaries or Affiliates,
the Participant will not, directly or indirectly, on his or her own behalf or on behalf of another (i) solicit, aid or induce any customer of the
Company or any of its Subsidiaries that Participant was responsible for, including supervised, managed or directed by Participant, to
purchase goods or services then sold by the Company or its Subsidiaries from another person or entity, or assist or aid any other person or
entity in identifying or soliciting any such customer, or (ii) solicit, aid or induce any customer that was pursued by the Company and with
which Participant had contact, participated in the contact, or about which Participant had knowledge of Confidential Information by reason of
Participant’s relationship with the Company within the twenty-four (24) month period preceding Participant’s termination if that sale or
service would be located in a region with respect to which the Participant had substantial responsibilities while employed by the Company or
its Subsidiaries.
3. Non-Solicitation of Employees. Participant agrees that during his or her employment with the Company or its Subsidiaries,
and for the period of one (1) year following the Participant’s termination of employment for any reason, or such longer period of non-
solicitation as is included in any offer letter or any other agreement between Participant and the Company or its Subsidiaries or Affiliates,
the Participant will not, directly or indirectly, on his or her own behalf or on behalf of another solicit, recruit, aid or induce employees of the
Company or any of its Subsidiaries (a) with whom Participant has had material contact with during the twelve (12) months period preceding
Participant’s termination and who had access to Confidential Information, trade secrets or customer relationships; or (b) who were directly
managed by or
reported to Participant as of the date of Participant’s termination to leave their employment with the Company or its Subsidiaries in order to
accept employment with or render services to another person or entity unaffiliated with the Company or its Subsidiaries, or hire or knowingly
take any action to assist or aid any other person or entity in identifying or hiring any such employee.
4. Confidentiality. In consideration for the Participant’s opportunity to earn the benefits provided in this Award Agreement
(regardless of whether benefits under this Award Agreement are actually realized by the Participant) and for the Company’s and its
Subsidiaries’ promise to provide Participant with confidential and competitively sensitive information from time to time concerning, among
other things, the Company and its Subsidiaries strategies, objectives, performance and business prospects, the Participant agrees that
during his or her employment with the Company or its Subsidiaries, and until such time thereafter as the Confidential Information is no
longer confidential through no fault of the Participant, the Participant shall not use or disclose any Confidential Information except for the
benefit of the Company or its Subsidiaries in the course of the Participant’s employment, and shall not use or disclose any Confidential
Information in competition with or to the detriment of the Company or its Subsidiaries, or for the benefit of the Participant or anyone else
other than the Company or its Subsidiaries. Notwithstanding the foregoing, nothing herein shall prohibit the Participant from reporting or
otherwise disclosing possible violations of state, local or federal law or regulation to any governmental agency or entity, or making other
disclosures that, in each case, are protected under whistleblower provisions of local, state or federal law or regulation. Nothing in this
Agreement is intended to discourage or restrict Employee from reporting any theft of trade secrets pursuant to the Defend Trade Secrets
Act of 2016 (“DTSA”) or other applicable state or federal law. The DTSA provides: An individual shall not be held criminally or civilly liable
under any federal or state trade secret law for the disclosure of a trade secret that: (a) is made (i) in confidence to a federal, state or local
government official, either directly or indirectly, or to any attorney; and (ii) solely for the purpose of reporting or investigating a suspected
violation or law; or (b) is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal. An
individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the trade secret to an
attorney for the individual and use the trade secret information in the court proceeding, if the individual (a) files any document containing the
trade secret under seal; and (b) does not disclose the trade secret, except pursuant to court order.
“Confidential Information” means any information that is not generally known outside the Company and its Subsidiaries, relating to
any phase of business of the Company or any Subsidiary, whether existing or foreseeable, including information conceived,
discovered or developed by the Participant. Confidential Information includes, but is not limited to: project files, product designs,
drawings, sketches and processes; production characteristics; testing procedures and results thereof; manufacturing methods,
processes, techniques and test results; plant layouts, tooling, engineering evaluations and reports; business plans, financial
statements and projections; operating forms (including contracts) and procedures; payroll and personnel records; non-public
marketing materials, plans and proposals; customer lists and information, and target lists for new clients and information relating to
potential clients; software codes and computer programs; training manuals; policy and procedure manuals; raw materials sources,
price and cost information; administrative techniques and documents; and any information received by the Company under an
obligation of confidentiality to a third party.
5. Non-Disparagement. Each of the Participant and the Company and its Subsidiaries (for purposes hereof, the Company and its
Subsidiaries shall mean only the officers and directors thereof and not any other employees) agrees not to make any statements that
disparage the other party, or in the case of the Company or its Subsidiaries, their respective Subsidiaries, employees, officers, directors,
products or services. Notwithstanding the foregoing, statements made in the course of sworn testimony in administrative, judicial or arbitral
proceedings (including, without limitation, depositions in connection with such proceedings) shall not be subject to the limitations in this
paragraph.
JOHNSON CONTROLS INTERNATIONAL PLC
EXHIBIT 21.1
The following is a list of significant subsidiaries of Johnson Controls International plc, as defined by Section 1.02(w) of Regulation S-X, as of September 30, 2019.
Name of Company
Hitachi Johnson Controls Air Conditioning KK
JIFG GmbH
Johnson Controls BE Operations Mexico S. de R.L. de C.V.
Johnson Controls Fire Protection LP
Johnson Controls HQ Holding BVBA
Johnson Controls, Inc.
Johnson Controls International, Inc.
Johnson Controls KK
Johnson Controls Security Solutions LLC
Tyco Fire & Security Finance S.C.A.
Tyco Fire & Security GmbH
Tyco Holdings (U.K.) Limited
Tyco International Finance Group GmbH
Tyco International Holding S.a.r.l.
York Guangzhou A/C & Refrigeration Co. Ltd.
York International Corporation
Jurisdiction Where Subsidiary is
Incorporated
Japan
Switzerland
Mexico
Delaware, United States
Belgium
Wisconsin, United States
Delaware, United States
Japan
Delaware, United States
Luxembourg
Switzerland
United Kingdom
Switzerland
Luxembourg
China
Delaware, United States
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
EXHIBIT 23.1
We hereby consent to the incorporation by reference in the Registration Statements on Form S‑3 (No. 333-215863), S-4 (No. 333-210588) and S‑8 (Nos. 333-
226258, 333-213508, 333-200320, 333-185004 and 333-113943) of Johnson Controls International plc of our report dated November 21, 2019 relating to the
financial statements and financial statement schedule and the effectiveness of internal control over financial reporting, which appears in this Form 10‑K.
/s/ PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
November 21, 2019
EXHIBIT 31.1
I, George R. Oliver, of Johnson Controls International plc, certify that:
1.
I have reviewed this annual report on Form 10-K of Johnson Controls International plc;
CERTIFICATIONS
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: November 21, 2019
/s/ George R. Oliver
George R. Oliver
Chairman and Chief Executive Officer
EXHIBIT 31.2
I, Brian J. Stief, of Johnson Controls International plc, certify that:
1.
I have reviewed this annual report on Form 10-K of Johnson Controls International plc;
CERTIFICATIONS
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: November 21, 2019
/s/ Brian J. Stief
Brian J. Stief
Vice Chairman and
Chief Financial Officer
CERTIFICATION OF PERIODIC FINANCIAL REPORTS
EXHIBIT 32.1
We, George R. Oliver and Brian J. Stief, of Johnson Controls International plc, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1.
2.
the Annual Report on Form 10-K for the year ended September 30, 2019 (Periodic Report) to which this statement is an exhibit fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) and
information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of Johnson Controls
International plc.
Date: November 21, 2019
/s/ George R. Oliver
George R. Oliver
Chairman and Chief Executive
Officer
/s/ Brian J. Stief
Brian J. Stief
Vice Chairman and Chief
Financial Officer