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JOHNSON CONTROLS INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) Cautionary Statements for Forward-Looking Information Unless otherwise indicated, references to "Johnson Controls," the "Company," "we," "our" and "us" in this Quarterly Report on Form 10-Q refer to Johnson Controls, Inc. 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 statements that are, or could be, deemed "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. In this document, statements regarding future financial position, sales, costs, earnings, cash flows, other measures of results of operations, capital expenditures or debt levels and plans, objectives, outlook, targets, guidance or goals are forward-looking statements. Words such as "may," "will," "expect," "intend," "estimate," "anticipate," "believe," "should," "forecast," "project" or "plan" or terms of similar meaning are also generally intended to identify forward-looking statements. 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. These factors include required regulatory approvals that are material conditions for proposed transactions to close, the strength of the U.S. or other economies, automotive vehicle production levels, mix and schedules, energy and commodity prices, availability of raw materials and component products, currency exchange rates, and cancellation of or changes to commercial contracts, as well as other factors discussed in Item 1A of Part I of Johnson Controls' most recent Annual Report on Form 10-K for the year ended September 30, 2013. Shareholders, potential investors and others should consider these factors in evaluating the forward-looking statements and should not place undue reliance on such statements. The forward-looking statements included in this document are only made as of the date of this document, and Johnson Controls assumes no obligation, and disclaims any obligation, to update forward-looking statements to reflect events or circumstances occurring after the date of this document. Overview Johnson Controls is a global diversified technology and industrial leader serving customers in more than 150 countries. The Company creates quality products, services and solutions to optimize energy and operational efficiencies of buildings; lead-acid automotive batteries and advanced batteries for hybrid and electric vehicles; and interior systems for automobiles. Johnson Controls was originally incorporated in the state of Wisconsin in 1885 as Johnson Electric Service Company to manufacture, install and service automatic temperature regulation systems for buildings. The Company was renamed to Johnson Controls, Inc. in 1974. In 1978, the Company acquired Globe-Union, Inc., a Wisconsin-based manufacturer of automotive batteries for both the replacement and original equipment markets. The Company entered the automotive seating industry in 1985 with the acquisition of Michigan-based Hoover Universal, Inc. In 2005, the Company acquired York International, a global supplier of heating, ventilating, air-conditioning and refrigeration equipment and services. The Building Efficiency business is a global market leader in designing, producing, marketing and installing integrated heating, ventilating and air conditioning (HVAC) systems, building management systems, controls, security and mechanical equipment. In addition, the Building Efficiency business provides technical services, energy management consulting and operations of entire real estate portfolios for the non-residential buildings market. The Company also provides residential air conditioning and heating systems and industrial refrigeration products. The Automotive Experience business is one of the world's largest automotive suppliers, providing innovative interior systems through our design and engineering expertise. The Company's technologies extend into virtually every area of the interior including seating, door systems, floor consoles, instrument panels, cockpits and integrated electronics. Customers include most of the world's major automakers. The Power Solutions business is a leading global supplier of lead-acid automotive batteries for virtually every type of passenger car, light truck and utility vehicle. The Company serves both automotive original equipment manufacturers (OEMs) and the general vehicle battery aftermarket. The Company also supplies advanced battery technologies to power Start-Stop, hybrid and electric vehicles. The following information should be read in conjunction with the September 30, 2013 consolidated financial statements and notes thereto, along with management's discussion and analysis of financial condition and results of operations included in our Annual 39 -------------------------------------------------------------------------------- Report on Form 10-K for the year ended September 30, 2013. References in the following discussion and analysis to "Three Months" refer to the three months ended June 30, 2014 compared to the three months ended June 30, 2013, while references to "Year-to-Date" refer to the nine months ended June 30, 2014 compared to the nine months ended June 30, 2013. Certain amounts as of September 30, 2013 and June 30, 2013 have been revised to conform to the current year's presentation. Effective October 1, 2013, the Company reorganized the reportable segments within its Building Efficiency business to align with its new management reporting structure and business activities. Prior to this reorganization, Building Efficiency was comprised of five reportable segments for financial reporting purposes: North America Systems, North America Service, Global Workplace Solutions, Asia and Other. As a result of this change, Building Efficiency is now comprised of four reportable segments for financial reporting purposes, with the only change being the the combination of North America Systems and North America Service into one reportable segment called North America Systems and Service. Historical information has been revised to reflect the new Building Efficiency reportable segment structure. In the fourth quarter of fiscal 2013, the Company changed its method of inventory costing for certain inventory in its Power Solutions business to the first-in first-out (FIFO) method from the last-in first-out (LIFO) method. The Company's other businesses also determine costs using the FIFO method. Prior to the change, Power Solutions utilized two methods of inventory costing: LIFO for inventories in the U.S. and FIFO for inventories in other countries. The Company believes that the FIFO method is preferable as it better reflects the current value of inventory on the Company's consolidated statement of financial position, provides better matching of revenues and expenses, results in uniformity across the Company's global operations with respect to the method of inventory accounting and improves comparability with the Company's peers. The change has been reported through retrospective application of the new policy to all periods presented. At March 31, 2014, the Company determined that its Automotive Experience Electronics segment met the criteria to be classified as a discontinued operation, which required retrospective application to financial information for all periods presented. Refer to Note 4, "Discontinued Operations," of the notes to consolidated financial statements for further information regarding the Company's discontinued operations. Outlook On July 18, 2014, the Company announced that it expects fiscal 2014 fourth quarter earnings from continuing operations, excluding any transaction related costs, to be $1.00 - $1.02 per diluted share. The Company also reaffirmed that it expects segment margin improvements in all three of its businesses. The guidance assumes that underlying earnings from the recently announced Air Distribution Technologies, Inc. (ADT) acquisition are not material in the fourth quarter. On July 1, 2014, the Company completed the divestiture of its Automotive Experience Electronics business. Refer to Note 3, "Acquisitions and Divestitures," of the notes to consolidated financial statements for additional information. Liquidity and Capital Resources The Company believes its capital resources and liquidity position at June 30, 2014 are adequate to meet projected needs. The Company believes requirements for working capital, capital expenditures, dividends, share repurchases, minimum pension contributions, debt maturities and any potential acquisitions during the remainder of fiscal 2014 will 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. The Company continues to adjust its commercial paper maturities and issuance levels given market reactions to industry events and changes in the Company's credit rating. In the event the Company is unable to issue commercial paper, it would have the ability to draw on its $2.5 billion revolving credit facility, which matures in August 2018. There were no draws on the revolving credit facility as of June 30, 2014. As such, the Company believes it has sufficient financial resources to fund operations and meet its obligations for the foreseeable future. The Company's debt financial covenants require a minimum consolidated shareholders' equity attributable to Johnson Controls, Inc. of at least $3.5 billion at all times and allow a maximum aggregated amount of 10% of consolidated shareholders' equity attributable to Johnson Controls, Inc. for liens and pledges. For purposes of calculating the Company's covenants, consolidated shareholders' equity attributable to Johnson Controls, Inc. 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 June 30, 2014, consolidated shareholders' equity attributable to Johnson Controls, Inc. as defined in the Company's debt financial covenants was $11.5 billion and there was a maximum of $301 million of liens outstanding. The 40 -------------------------------------------------------------------------------- Company expects to remain in compliance with all covenants and other requirements set forth in its credit agreements and indentures 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 key financial assumptions used in calculating the Company's pension liability are determined annually, or whenever plan assets and liabilities are re-measured as required under accounting principles generally accepted in the U.S., including the expected rate of return on its plan assets. In fiscal 2014, the Company believes the long-term rate of return will approximate 8.00%, 4.65% and 5.80% for U.S. pension, non-U.S. pension and postretirement plans, respectively. During the first nine months of fiscal 2014, the Company made approximately $59 million in total pension contributions. In total, the Company expects to contribute approximately $150 million in cash to its defined benefit pension plans in fiscal 2014. The Company does not expect to make any significant contributions to its postretirement plans in fiscal 2014. Net Sales Three Months Ended Nine Months Ended June 30, June 30, (in millions) 2014 2013 Change 2014 2013 Change Net sales $ 10,812 $ 10,499 3 % $ 31,849 $ 30,710 4 % • The increase in consolidated net sales for the three months ended June 30, 2014 was due to higher sales in the Automotive Experience business ($300 million), the favorable impact of foreign currency translation ($91 million) and higher sales in the Power Solutions business ($67 million), partially offset by lower sales in the Building Efficiency business ($145 million). Excluding the favorable impact of foreign currency translation, consolidated net sales increased 2% as compared to the prior year. The favorable impacts of higher Automotive Experience volumes globally and higher global battery shipments were partially offset by lower market demand for Building Efficiency in North America, Latin America and the Middle East; and the impact of lower lead costs on pricing for Power Solutions. Refer to the segment analysis below within Item 2 for a discussion of net sales by segment. • The increase in consolidated net sales for the nine months ended June 30, 2014 was due to higher sales in the Automotive Experience business ($1.3 billion) and Power Solutions business ($148 million), and the favorable impact of foreign currency translation ($80 million), partially offset by lower sales in the Building Efficiency business ($419 million). Excluding the favorable impact of foreign currency translation, consolidated net sales increased 3% as compared to the prior year. The favorable impacts of higher Automotive Experience volumes globally, and higher global battery shipments and improved pricing in the Power Solutions business were partially offset by lower market demand for Building Efficiency in North America, the Middle East, Europe and Latin America; and the impact of lower lead costs on pricing for Power Solutions. Refer to the segment analysis below within Item 2 for a discussion of net sales by segment. Cost of Sales / Gross Profit Three Months Ended Nine Months Ended June 30, June 30, (in millions) 2014 2013 Change 2014 2013 Change Cost of sales $ 9,149 $ 8,935 2 % $ 27,064 $ 26,270 3 % Gross profit 1,663 1,564 6 % 4,785 4,440 8 % % of sales 15.4 % 14.9 % 15.0 % 14.5 % • The increase in cost of sales for the three months ended June 30, 2014 corresponds to the sales growth noted above, with gross profit percentage increasing by 50 basis points. Gross profit in the Automotive Experience business was favorably impacted by higher volumes globally, and lower purchasing and operating costs due to improved operational performance. The Power Solutions business was impacted by favorable product mix and operational efficiencies. Gross profit in the Building Efficiency business was unfavorably impacted by lower market demand in North America, Latin America and the Middle East, and contract related charges in the Middle East. Foreign currency translation had an unfavorable impact on cost of sales of approximately $97 million. Refer to the segment analysis below within Item 2 for a discussion of segment income by segment. 41-------------------------------------------------------------------------------- • The increase in cost of sales for the nine months ended June 30, 2014 corresponds to the sales growth noted above, with gross profit percentage increasing by 50 basis points. Gross profit in the Automotive Experience business was favorably impacted by higher volumes globally, and lower purchasing and operating costs due to improved operational performance, partially offset by net unfavorable pricing and commercial settlements. The Power Solutions business was impacted by favorable pricing and product mix including lead acquisition costs and battery cores, and increased benefits of vertical integration. Gross profit in the Building Efficiency business was unfavorably impacted by lower market demand in North America, the Middle East, Europe and Latin America, and contract related charges in the Middle East, partially offset by strong operating performance in Asia due to cost and pricing initiatives. Foreign currency translation had an unfavorable impact on cost of sales of approximately $98 million. Refer to the segment analysis below within Item 2 for a discussion of segment income by segment. Selling, General and Administrative Expenses Three Months Ended Nine Months Ended June 30, June 30, (in millions) 2014 2013 Change 2014 2013 Change Selling, general and administrative expenses $ 977 $ 977 0% $ 3,014 $ 3,024 0% % of sales 9.0 % 9.3 % 9.5 % 9.8 % • Selling, general and administrative expenses (SG&A) were consistent with the three month period ended June 30, 2013, and SG&A as a percentage of sales decreased 30 basis points over the same period. The Building Efficiency SG&A decreased primarily due to lower employee related expenses and other cost reduction initiatives, partially offset by transaction-related costs. The Automotive Experience business SG&A increased primarily due to higher employee related expenses, partially offset by the benefits of cost reduction initiatives and lower engineering expenses. The Power Solutions business SG&A increased primarily due to higher employee related expenses. Foreign currency translation had a favorable impact on SG&A of $1 million. Refer to the segment analysis below within Item 2 for a discussion of segment income by segment. • SG&A decreased slightly as compared to the nine month period ended June 30, 2013, and SG&A as a percentage of sales decreased 30 basis points over the same period. The Building Efficiency SG&A decreased primarily due to lower employee related expenses and other cost reduction initiatives, partially offset by a prior year pension curtailment gain resulting from a lost Global Workplace Solutions contract and transaction-related costs. The Automotive Experience business SG&A increased primarily due to higher employee related expenses, partially offset by lower engineering expenses, prior year distressed supplier costs and the benefits of cost reduction initiatives. The Power Solutions business SG&A increased primarily due to a prior year net favorable legal settlement and higher employee related expenses. Foreign currency translation had a favorable impact on SG&A of $10 million. Refer to the segment analysis below within Item 2 for a discussion of segment income by segment. Gain (Loss) on Business Divestitures - Net Three Months Ended Nine Months Ended June 30, June 30, (in millions) 2014 2013 Change 2014 2013 Change Gain (loss) on business divestitures - net $ (120 ) $ 29 * $ (111 ) $ 29 * * Measure not meaningful Refer to Note 3, "Acquisitions and Divestitures," of the notes to consolidated financial statements for additional information on the gain (loss) on business divestitures - net for the three and nine months ended June 30, 2014. 42 --------------------------------------------------------------------------------Restructuring and Impairment Costs Three Months Ended Nine Months Ended June 30, June 30, (in millions) 2014 2013 Change 2014 2013 Change Restructuring and impairment costs $ 162 $ 143 13 % $ 162 $ 227 -29 % 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 recorded $227 million of restructuring and impairment costs in the nine months ended June 30, 2013, of which $84 million was recorded in the second quarter and $143 million in the third quarter of fiscal 2013. The Company recorded $162 million of restructuring and impairment costs in the third quarter of fiscal 2014 for business portfolio changes related primarily to the Automotive Experience Interiors business. The restructuring actions included planned workforce reductions, plant closures, and asset impairments which are expected to be substantially complete by the end of fiscal 2015. Refer to Note 9, "Significant Restructuring Costs," of the notes to consolidated financial statements for further disclosure related to the Company's restructuring plans. Net Financing Charges Three Months Ended Nine Months Ended June 30, June 30, (in millions) 2014 2013 Change 2014 2013 Change Net financing charges $ 67 $ 67 0% $ 178 $ 193 -8 % Net financing charges were consistent for the three month period ended June 30, 2014 primarily due to lower interest rates, offset by higher average borrowing levels. The decrease in net financing charges for the nine month period ended June 30, 2014 was primarily due to lower interest expense as a result of lower average borrowing levels and interest rates. Equity Income Three Months Ended Nine Months Ended June 30, June 30, (in millions) 2014 2013 Change 2014 2013 Change Equity income $ 88 $ 74 19 % $ 273 $ 305 -10 % • The increase in equity income for the three months ended June 30, 2014 was primarily due to higher income at certain Automotive Experience partially-owned affiliates, partially offset by lower income at certain Power Solutions and Building Efficiency partially-owned affiliates. Refer to the segment analysis below within Item 2 for a discussion of segment income by segment. • The decrease in equity income for the nine months ended June 30, 2014 was primarily due to a prior year gain on acquisition of a partially-owned affiliate in India in the Automotive Experience business ($82 million) and lower income in the current year at certain Power Solutions and Building Efficiency partially-owned affiliates, partially offset by current year higher income at certain Automotive Experience partially-owned affiliates and a gain on acquisition of a partially-owned affiliate in the Power Solutions business ($19 million). Refer to the segment analysis below within Item 2 for a discussion of segment income by segment. 43--------------------------------------------------------------------------------Income Tax Provision (Benefit) Three Months Ended Nine Months Ended June 30, June 30, (in millions) 2014 2013 Change 2014 2013 Change Income tax provision (benefit) $ 167 $ (72 ) * $ 388 $ 227 71 % Effective tax rate 39 % -15 % 24 % 17 % * Measure not meaningful • In calculating the provision for income taxes, the Company uses an estimate of the annual effective tax rate based upon the facts and circumstances known at each interim period. On a quarterly basis, the annual effective tax rate is adjusted, as appropriate, based upon changed facts and circumstances, if any, as compared to those forecasted at the beginning of the fiscal year and each interim period thereafter. • For the three and nine months ended June 30, 2014, the Company's effective tax rate for continuing operations was 39% and 24%, respectively. This was different than the U.S. federal statutory rate of 35% primarily due to the jurisdictional mix of significant restructuring and impairment costs and losses on divestitures, partially offset by global tax planning and foreign tax rate differentials. For the three and nine months endedJune 30, 2013, the Company's effective tax rate for continuing operations was (15)% and 17%, respectively. The effective rate was different than the U.S. federal statutory rate of 35% primarily due to tax audit resolutions and other matters, significant restructuring and impairment costs, valuation allowance adjustments, an uncertain tax position charge and foreign tax rate differentials. • In the third quarter of fiscal 2014, the Company disposed of its Automotive Experience Interiors headliner and sun visor product lines. As a result, the Company recorded a pre-tax loss on divestiture of $95 million and income tax expense of $38 million. The income tax expense is due to the jurisdictional mix of gains and losses on the sale, which resulted in non-benefited losses in certain countries and taxable gains in other countries. • In the third quarter of fiscal 2014, the Company recorded $80 million of divestiture related losses related to its Automotive Experience Electronics business. The loss generated an $8 million tax benefit, which was negatively impacted by the jurisdictional mix of gains and losses on the sale. • In the third quarter of fiscal 2014, the Company recorded $162 million of significant restructuring and impairment costs. The restructuring costs generated an $11 million tax benefit, which was negatively impact by the Company's current tax position in these jurisdictions and the underlying tax basis in the impaired assets. • In the first quarter of fiscal 2014, the Company determined that it was more likely than not that a deferred tax asset associated with a capital loss in Mexico would not be utilized. Therefore, the Company recorded a $21 million valuation allowance as income tax expense. • As a result of changes to Mexican tax law in the first quarter of fiscal 2014, the Company recorded a benefit to income tax expense of $25 million. • In the third quarter of fiscal 2013, tax audit resolutions resulted in a net $79 million benefit to income tax expense. • In the third quarter of fiscal 2013, the Company resolved certain Mexican tax issues which resulted in a $61 million benefit to income tax expense. • In the second quarter of fiscal 2013, the Company performed an analysis 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 a portion of the deferred tax assets would not be utilized in Brazil and Germany. Therefore, the Company recorded $94 million of valuation allowances as income tax expense. • As a result of foreign law changes during the second quarter of fiscal 2013, the Company increased its total reserve for uncertain tax positions, resulting in income tax expense of $17 million. 44--------------------------------------------------------------------------------Income (Loss) From Discontinued Operations, Net of Tax Three Months Ended Nine Months Ended June 30, June 30, (in millions) 2014 2013 Change 2014 2013 Change Income (loss) from discontinued operations, net of tax $ (62 ) $ 20 * $ (216 ) $ 50 * * Measure not meaningful • The decrease in income (loss) from discontinued operations, net of tax, for the three months ended June 30, 2014 was primarily due to $80 million of divestiture related losses recorded in the third quarter of fiscal year 2014. • The decrease in income (loss) from discontinued operations, net of tax, for the nine months ended June 30, 2014 was primarily due to a discrete non-cash tax charge of $180 million related to the repatriation of foreign cash associated with the divestiture of the Electronics business and $80 million of divestiture related losses recorded in the third quarter of fiscal year 2014. • Refer to Note 4, "Discontinued Operations," of the notes to consolidated financial statements for further information regarding the Company's discontinued operations. Income from Continuing Operations Attributable to Noncontrolling Interests Three Months Ended Nine Months Ended June 30, June 30, (in millions) 2014 2013 Change 2014 2013 Change Income from continuing operations attributable to noncontrolling interests $ 20 $ 22 -9 % $ 83 $ 80 4 % • The decrease in income from continuing operations attributable to noncontrolling interests for the three months ended June 30, 2014 was primarily due to losses at certain Automotive Experience partially-owned affiliates, partially offset by higher income at certain Power Solutions partially-owned affiliates. • The increase in income from continuing operations attributable to noncontrolling interests for the nine months ended June 30, 2014 was primarily due to higher income at certain Automotive Experience partially-owned affiliates, partially offset by lower income at certain Power Solutions partially-owned affiliates. Net Income Attributable to Johnson Controls, Inc. Three Months Ended Nine Months Ended June 30, June 30, (in millions) 2014 2013 Change 2014 2013 Change Net income attributable to Johnson Controls, Inc. $ 176 $ 550 -68 % $ 906 $ 1,073 -16 % • The decrease in net income attributable to Johnson Controls, Inc. for the three months ended June 30, 2014 was primarily due to an increase in the provision for income taxes, loss on business divestitures, loss from discontinued operations and unfavorable impact of foreign currency translation, partially offset by higher gross profit. Diluted earnings per share from continuing operations for the three months ended June 30, 2014 was $0.35 compared to diluted earnings per share from continuing operations of $0.77 for the three months ended June 30, 2013. Diluted loss per share from discontinued operations for the three months ended June 30, 2014 was $(0.09) compared to diluted earnings per share from discontinued operations of $0.03 for the three months ended June 30, 2013. • The decrease in net income attributable to Johnson Controls, Inc. for the nine months ended June 30, 2014 was primarily due to a loss from discontinued operations, an increase in the provision for income taxes, loss on business divestitures, lower equity income and unfavorable impact of foreign currency translation, partially offset by higher gross profit, and 45-------------------------------------------------------------------------------- lower restructuring and impairment costs. Diluted earnings per share from continuing operations for the nine months ended June 30, 2014 was $1.66 compared to diluted earnings per share from continuing operations of $1.49 for the nine months ended June 30, 2013. Diluted loss per share from discontinued operations for the nine months ended June 30, 2014 was $(0.32) compared to diluted earnings per share from discontinued operations of $0.07 for the nine months ended June 30, 2013. Segment Analysis Management evaluates the performance of its business units based primarily on segment income, which is defined as income from continuing operations before income taxes and noncontrolling interests excluding net financing charges, significant restructuring and impairment costs, and net mark-to-market adjustments on pension and postretirement plans. Building Efficiency - Net Sales Three Months Ended Nine Months Ended June 30, June 30, (in millions) 2014 2013 Change 2014 2013 Change North America Systems and Service $ 1,126 $ 1,175 -4 % $ 3,141 $ 3,232 -3 % Global Workplace Solutions 979 1,021 -4 % 3,052 3,233 -6 % Asia 521 520 0 % 1,480 1,452 2 % Other 950 996 -5 % 2,560 2,783 -8 % $ 3,576 $ 3,712 -4 % $ 10,233 $ 10,700 -4 % Three Months: • The decrease in North America Systems and Service was due to lower volumes of equipment and controls systems ($43 million), and the unfavorable impact of foreign currency translation ($6 million). • The decrease in Global Workplace Solutions was due to lost customer accounts and lower project work ($57 million), partially offset by the favorable impact of foreign currency translation ($15 million). • The increase in Asia was due to higher volumes of equipment and controls systems ($19 million), partially offset by the unfavorable impact of foreign currency translation ($10 million) and lower service volumes ($8 million). • The decrease in Other was due to lower volumes related to a prior period business divestiture ($57 million), and lower volumes in Latin America ($30 million) and the Middle East ($16 million), partially offset by incremental sales related to a business acquisition ($36 million), favorable impact of foreign currency translation ($10 million), and higher volumes in other businesses ($6 million), Europe ($3 million) and unitary products ($2 million). Year-to-Date: • The decrease in North America Systems and Service was due to lower volumes of equipment and controls systems ($72 million), and the unfavorable impact of foreign currency translation ($19 million). • The decrease in Global Workplace Solutions was due to lost customer accounts and lower project work ($254 million), partially offset by incremental sales from a prior year business acquisition ($66 million) and the favorable impact of foreign currency translation ($7 million). • The increase in Asia was due to higher volumes of equipment and controls systems ($50 million), and higher service volumes ($24 million), partially offset by the unfavorable impact of foreign currency translation ($46 million). • The decrease in Other was due to lower volumes related to a prior year business divestiture ($163 million), and lower volumes in the Middle East ($96 million), Europe ($44 million) and Latin America ($20 million), partially offset by higher volumes in unitary products ($42 million), incremental sales related to a business acquisition ($36 million), higher volumes in other businesses ($12 million) and the favorable impact of foreign currency translation ($10 million). 46--------------------------------------------------------------------------------Building Efficiency - Segment Income Three Months Ended Nine Months Ended June 30, June 30, (in millions) 2014 2013 Change 2014 2013 Change North America Systems and Service $ 137 $ 155 -12 % $ 305 $ 305 0 % Global Workplace Solutions 13 26 -50 % 52 77 -32 % Asia 84 83 1 % 215 189 14 % Other 27 50 -46 % (13 ) 52 * $ 261 $ 314 -17 % $ 559 $ 623 -10 % * Measure not meaningful Three Months: • The decrease in North America Systems and Service was due to unfavorable margin rates ($31 million), lower volumes ($11 million) and the unfavorable impact of foreign currency translation ($1 million), partially offset by lower selling, general and administrative expenses ($25 million). • The decrease in Global Workplace Solutions was due to the indemnification of certain costs associated with a previously divested business ($25 million) and lower volumes ($5 million), partially offset by lower selling, general and administrative expenses ($8 million), favorable margin rates ($8 million) and the favorable impact of foreign currency translation ($1 million). • The increase in Asia was due to higher volumes ($7 million), and lower selling, general and administrative expenses ($3 million), partially offset by unfavorable margin rates ($7 million) and the unfavorable impact of foreign currency translation ($2 million). • The decrease in Other was due to net unfavorable current period contract related charges in the Middle East ($21 million), acquisition related charges ($20 million), lower volumes ($12 million) and lower equity income ($3 million), partially offset by favorable margin rates ($20 million), lower selling, general and administrative expenses ($12 million), and the favorable impact of foreign currency translation ($1 million). Year-to-Date: • North America Systems and Service was flat due to lower selling, general and administrative expenses ($81 million), partially offset by unfavorable margin rates ($51 million), lower volumes ($18 million), net unfavorable current year contract related charges ($9 million) and the unfavorable impact of foreign currency translation ($3 million). • The decrease in Global Workplace Solutions was due to the indemnification of certain costs associated with a previously divested business ($25 million), a prior year pension curtailment gain resulting from a lost contract net of other contract losses ($24 million) and lower volumes ($13 million), partially offset by lower selling, general and administrative expenses ($27 million), favorable margin rates ($9 million) and the favorable impact of foreign currency translation ($1 million). • The increase in Asia was due to higher volumes ($22 million) and favorable margin rates ($14 million), partially offset by higher selling, general and administrative expenses ($5 million), and the unfavorable impact of foreign currency translation ($5 million). • The decrease in Other was due to net unfavorable current year contract related charges in the Middle East ($50 million), lower volumes ($41 million), acquisition related charges ($20 million) and lower equity income ($7 million), partially offset by favorable margin rates ($27 million), lower selling, general and administrative expenses ($17 million), net unfavorable prior year contract related charges ($7 million) and higher operating income related to a prior year business divestiture ($2 million). 47 --------------------------------------------------------------------------------Automotive Experience - Net Sales Three Months Ended Nine Months Ended June 30, June 30, (in millions) 2014 2013 Change 2014 2013 Change Seating $ 4,571 $ 4,268 7 % $ 13,364 $ 12,234 9 % Interiors 1,159 1,094 6 % 3,410 3,115 9 % $ 5,730 $ 5,362 7 % $ 16,774 $ 15,349 9 % Three Months: • The increase in Seating was due to higher volumes ($247 million), the favorable impact of foreign currency translation ($51 million), incremental sales related to business acquisitions ($20 million) and favorable pricing and commercial settlements ($7 million), partially offset by lower volumes due to a prior year business divestiture ($22 million). • The increase in Interiors was due to higher volumes ($66 million) and the favorable impact of foreign currency translation ($17 million), partially offset by lower volumes related to business divestitures ($13 million) and net unfavorable pricing and commercial settlements ($5 million). Year-to-Date: • The increase in Seating was due to higher volumes ($1.0 billion), incremental sales related to business acquisitions ($116 million) and the favorable impact of foreign currency translation ($52 million), partially offset by lower volumes due to a prior year business divestiture ($53 million), net unfavorable pricing and commercial settlements ($25 million), and unfavorable sales mix ($6 million). • The increase in Interiors was due to higher volumes ($284 million) and the favorable impact of foreign currency translation ($43 million), partially offset by lower volumes related to business divestitures ($32 million). Automotive Experience - Segment Income Three Months Ended Nine Months Ended June 30, June 30, (in millions) 2014 2013 Change 2014 2013 Change Seating $ 255 $ 229 11 % $ 666 $ 487 37 % Interiors (55 ) 12 * (28 ) (19 ) -47 % $ 200 $ 241 -17 % $ 638 $ 468 36 % * Measure not meaningful Three Months: • The increase in Seating was due to higher volumes ($42 million), lower purchasing costs ($25 million), higher equity income ($18 million), lower operating costs ($16 million), lower engineering expenses ($13 million), net favorable pricing and commercial settlements ($8 million), and incremental operating income related to business acquisitions ($1 million), partially offset by higher selling, general and administrative expenses ($47 million), a prior year gain on business divestiture ($29 million), unfavorable mix ($12 million), lower operating income due to a prior year business divestiture ($5 million) and the unfavorable impact of foreign currency translation ($4 million). • The decrease in Interiors was due to a loss on business divestiture ($95 million), net unfavorable pricing and commercial settlements ($9 million), higher selling, general and administrative expenses ($3 million), and lower operating income related to a business divestiture ($2 million), partially offset by lower operating costs ($21 million), higher volumes ($11 million), higher equity income ($7 million) and lower purchasing costs ($3 million). 48--------------------------------------------------------------------------------Year-to-Date: • The increase in Seating was due to higher volumes ($168 million), lower operating costs ($90 million), lower purchasing costs ($67 million), higher equity income ($47 million), lower engineering expenses ($23 million), prior year distressed supplier costs ($20 million), incremental operating income due to business acquisitions ($6 million) and the favorable impact of foreign currency translation ($2 million), partially offset by a prior year gain on acquisition of a partially-owned affiliate in India ($82 million), higher selling, general and administrative expenses ($57 million), net unfavorable pricing and commercial settlements ($40 million), a prior year gain on business divestiture ($29 million), unfavorable mix ($27 million) and lower operating income due to a prior year business divestiture ($9 million). • The decrease in Interiors was due to a net loss on business divestitures ($86 million), unfavorable mix ($11 million), lower operating income due to a business divestiture ($7 million), net unfavorable pricing and commercial items ($7 million), higher selling, general and administrative expenses ($5 million), and the unfavorable impact of foreign currency translation ($1 million), partially offset by higher volumes ($58 million), lower operating costs ($28 million), higher equity income ($12 million), lower purchasing costs ($8 million) and prior year distressed supplier costs ($2 million). Power Solutions Three Months Ended Nine Months Ended June 30, June 30, (in millions) 2014 2013 Change 2014 2013 Change Net sales $ 1,506 $ 1,425 6 % $ 4,842 $ 4,661 4 % Segment income 193 135 43 % 736 659 12 % Three Months: • Net sales increased due to incremental sales related to a business acquisition ($41 million), favorable pricing and product mix ($31 million), higher sales volumes ($26 million) and the favorable impact of foreign currency translation ($14 million), partially offset by the impact of lower lead costs on pricing ($31 million). • Segment income increased due to favorable product mix including lead acquisition costs ($47 million), higher volumes ($10 million), lower operating costs ($6 million) and incremental operating income related to a business acquisition ($4 million), partially offset by lower equity income ($4 million), higher selling, general and administrative expenses ($3 million), and higher transportation costs ($2 million). Year-to-Date: • Net sales increased due to incremental sales related to a business acquisition ($104 million), favorable pricing and product mix ($56 million), higher sales volumes ($45 million) and the favorable impact of foreign currency translation ($33 million), partially offset by the impact of lower lead costs on pricing ($57 million). • Segment income increased due to favorable product mix including lead acquisition costs and battery cores ($94 million), lower operating costs ($23 million), a gain on acquisition of a partially-owned affiliate ($19 million), higher volumes ($14 million), incremental operating income related to a business acquisition ($9 million) and the favorable impact of foreign currency translation ($3 million), partially offset by higher selling, general and administrative expenses ($47 million), a prior year net favorable legal settlement ($24 million), higher transportation costs ($7 million) and lower equity income ($7 million). 49-------------------------------------------------------------------------------- Johnson Controls, Inc. Notes to Consolidated Financial Statements June 30, 2014 (unaudited) Backlog Building Efficiency's backlog relates to its control systems and service activity. At June 30, 2014, the unearned backlog was $4.7 billion, or a 5% decrease compared to June 30, 2013. The North America Systems and Service and Other segment backlogs decreased compared to prior year levels. Financial Condition Working Capital June 30, September 30, June 30, (in millions) 2014 2013 Change 2013 Change Current assets $ 13,447 $ 13,698 $ 12,739 Current liabilities (12,143 ) (12,117 ) (11,784 ) 1,304 1,581 -18 % 955 37 % Less: Cash (160 ) (1,055 ) (391 ) Add: Short-term debt 930 119 312 Add: Current portion of long-term debt 141 819 1,119 Less: Assets held for sale (1,575 ) (804 ) - Add: Liabilities held for sale 994 402 - Working capital (as defined) $ 1,634 $ 1,062 54 % $ 1,995 -18 % Accounts receivable $ 6,710 $ 7,206 -7 % $ 7,259 -8 % Inventories 2,591 2,325 11 % 2,470 5 % Accounts payable 5,567 6,318 -12 % 6,217 -10 % • The Company defines working capital as current assets less current liabilities, excluding cash, short-term debt, the current portion of long-term debt, and the current portion of assets and liabilities held for sale. Management believes that this measure of working capital, which excludes financing-related items, provides a more useful measurement of the Company's operating performance. • The increase in working capital at June 30, 2014 as compared to September 30, 2013 was primarily due to a decrease in accounts payable due to timing of supplier payments, lower accrued compensation and benefits primarily due to timing of incentive compensation payments, and higher inventory levels, partially offset by lower accounts receivable due to timing of customer receipts. Compared to June 30, 2013, the decrease was primarily due to higher accrued income taxes due to timing of tax payments, lower accounts receivable due to improved collections and timing of customer receipts, and an increase in reserves due to restructuring actions, partially offset by a decrease in accounts payable primarily due to timing of supplier payments and higher inventory levels. • The Company's days sales in accounts receivable at June 30, 2014 were 55, higher than 51 at the comparable period ended September 30, 2013, and consistent at the comparable period ended June 30, 2013. There have been no significant adverse changes in the level of overdue receivables or changes in revenue recognition methods. • The Company's inventory turns for the three months ended June 30, 2014 were lower than the comparable periods ended September 30, 2013 and June 30, 2013 primarily due to higher inventory production. • Days in accounts payable at June 30, 2014 were 69 days, lower than 72 and 73 at the comparable periods ended September 30, 2013 and June 30, 2013, respectively. 50-------------------------------------------------------------------------------- Cash Flows Three Months Ended Nine Months Ended June 30, June 30, (in millions) 2014 2013 2014 2013 Cash provided by operating activities $ 714 $ 1,034 $ 1,163 $ 1,549 Cash used by investing (268 ) (963 ) activities (1,904 ) (2,557 ) Cash provided (used) by financing activities 1,144 (856 ) 540 (432 ) Capital expenditures (274 ) (265 ) (876 ) (929 ) • The decrease in cash provided by operating activities for the three months ended June 30, 2014 was primarily due to unfavorable changes in inventories, other assets, accounts receivable and accrued income taxes. For the nine months ended June 30, 2014, the decrease in cash provided by operating activities was primarily due to unfavorable changes in inventories and accounts payable and accrued liabilities, partially offset by favorable changes in accounts receivable and other assets. • The increase in cash used by investing activities for the three and nine months ended June 30, 2014 was primarily due to cash paid for the ADT acquisition in the current quarter. • The increase in cash provided by financing activities for the three months ended June 30, 2014 was primarily due to an increase in long-term debt incurred to finance the acquisition of ADT. The increase in cash provided by financing activities for the nine months ended June 30, 2014 was primarily due to an increase of long-term debt to finance the acquisition of ADT, partially offset by current year stock repurchases. • The increase in capital expenditures for the three months ended June 30, 2014 primarily relates to increased investments to support customer growth. The decrease in capital expenditures for the nine months ended June 30, 2014 primarily relates to prior year capacity expansion and vertical integration efforts in the Power Solutions business. Deferred Taxes The Company reviews the realizability of its deferred tax assets on a quarterly basis, or whenever events or changes in circumstances indicate that a review is required. In determining the requirement for a valuation allowance, the historical and projected financial results of the legal entity or consolidated group recording the net deferred tax asset are considered, along with any other positive or negative evidence. Since future financial results may differ from previous estimates, periodic adjustments to the Company's valuation allowances may be necessary. The Company has certain subsidiaries, mainly located in Brazil, France, Germany and Spain, which have generated operating and/or capital losses and, in certain circumstances, have limited loss carryforward periods. In accordance with ASC 740, "Income Taxes," the Company is required to record a valuation allowance when it is more likely than not the Company will not utilize deductible amounts or net operating losses for each legal entity or consolidated group based on the tax rules in the applicable jurisdiction, evaluating both positive and negative historical evidences as well as expected future events and tax planning strategies. In the first quarter of fiscal 2014, the Company determined that it was more likely than not that the deferred tax asset associated with a capital loss in Mexico would not be utilized. Therefore, the Company recorded a $21 million valuation allowance as income tax expense. In the second quarter of fiscal 2013, the Company performed an analysis 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 a portion of the deferred tax assets would not be utilized in Brazil and Germany. Therefore, the Company recorded $94 million of valuation allowances as income tax expense. To the extent the Company improves its underlying operating results in these jurisdictions, these valuation allowances, or a portion thereof, could be reversed in future periods. 51 --------------------------------------------------------------------------------Long-Lived Assets The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the asset's carrying amount may not be recoverable. The Company conducts its long-lived asset impairment analyses in accordance with ASC 360-10-15, "Impairment or Disposal of Long-Lived Assets." ASC 360-10-15 requires the Company to group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows. If the undiscounted cash flows do not indicate the carrying amount of the asset group is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals. In the third quarter of fiscal 2014, 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 for its Automotive Experience Interiors business. As a result, the Company reviewed the long-lived assets for impairment and recorded a $45 million impairment charge within restructuring and impairment costs on the consolidated statement of income in the third quarter of fiscal 2014 for the Automotive Experience Interiors segment. Refer to Note 9, "Significant Restructuring Costs," of the notes to consolidated financial statements for additional information. In addition, the Company recorded $43 million of asset and investment impairments within discontinued operations in the third quarter of fiscal 2014 related to the divestiture of the Automotive Experience Electronics business. Refer to Note 4, "Discontinued Operations," and Note 9, "Significant Restructuring Costs," of the notes to the 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." The Company concluded it did not have any other significant triggering events requiring assessment of impairment of its long-lived assets at June 30, 2014. In the first nine months of fiscal 2013, the Company recorded $49 million of asset impairment charges, of which $13 million was recorded in the second quarter and $36 million was recorded in the third quarter, in conjunction with its fiscal 2013 restructuring actions. The impairment charges related to long-lived assets within all business units, none of which were individually material to the consolidated financial statements. The impairments were recorded within significant restructuring and impairment costs on the consolidated statements of income. Refer to Note 9, "Significant Restructuring 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." The Company concluded it did not have any other significant triggering events requiring assessment of impairment of its long-lived assets at June 30, 2013. At October 1, 2013, the Company assessed goodwill for impairment in the Building Efficiency business due to the change in reportable segments. As a result, the Company performed impairment testing for goodwill under the new segment structure and determined that the estimated fair value of each reporting unit substantially exceeded its corresponding carrying amount including recorded goodwill, and as such, no impairment existed at October 1, 2013. No reporting unit was determined to be at risk of failing step one of the goodwill impairment test. 52-------------------------------------------------------------------------------- Capitalization June 30, September 30, June 30, (in millions) 2014 2013 Change 2013 Change Short-term debt $ 930 $ 119 $ 312 Current portion of long-term debt 141 819 1,119 Long-term debt 6,416 4,560 4,593 Total debt 7,487 5,498 36 % 6,024 24 % Shareholders' equity attributable to Johnson Controls, Inc. 11,815 12,314 -4 % 12,188 -3 % Total capitalization $ 19,302 $ 17,812 8 % $ 18,212 6 % Total debt as a % of total capitalization 39 % 31 % 33 % • The Company believes the percentage of total debt to total capitalization is useful to understanding the Company's financial condition as it provides a review of the extent to which the Company relies on external debt financing for its funding and is a measure of risk to its shareholders. • At June 30, 2014, September 30, 2013, and June 30, 2013, the Company had committed bilateral euro denominated revolving credit facilities totaling 237 million euro. Additionally, at June 30, 2014, September 30, 2013 and June 30, 2013, the Company had committed bilateral U.S. dollar denominated revolving credit facilities totaling $185 million. As of June 30, 2014, facilities in the amounts of 237 million euro and $50 million are scheduled to expire in fiscal 2014, and a facility in the amount of $135 million is scheduled to expire in fiscal 2015. There were no draws on any of the revolving facilities for the respective periods. • In June 2014, the Company issued $300 million aggregate principal amount of 1.4% senior unsecured fixed rate notes due in fiscal 2018, $500 million aggregate principal amount of 3.625% senior unsecured fixed rate notes due in fiscal 2024, $450 million aggregate principal amount of 4.625% senior unsecured fixed rate notes due in fiscal 2044 and $450 million aggregate principal amount of 4.95% senior unsecured fixed rate notes due in fiscal 2064. Aggregate net proceeds of $1.7 billion from the issuances were used to finance the acquisition of ADT and for other general corporate purposes. • In March 2014, the Company entered into a nine-month, $150 million, floating rate term loan scheduled to mature in December 2014. Proceeds from the term loan were used for general corporate purposes. The loan was repaid during the quarter ended June 30, 2014. • In March 2014, the Company retired $450 million in principal amount, plus accrued interest, of its 1.75% fixed rate notes that matured in March 2014. • In February 2014, the Company retired $350 million in principal amount, plus accrued interest, of its floating rate notes that matured in February 2014. • In January 2014, the Company entered into a one-year, $150 million, floating rate term loan scheduled to mature in January 2015. Proceeds from the term loan were used for general corporate purposes. • In December 2013, the Company entered into a five-year, 220 million euro, floating rate credit facility scheduled to mature in fiscal 2019. The Company drew on the full credit facility during the quarter ended December 31, 2013. Proceeds from the facility were used for general corporate purposes. • In December 2013, the Company entered into a nine-month, $500 million, floating rate term loan scheduled to mature in September 2014. Proceeds from the term loan were used for general corporate purposes. • In September 2013, the Company retired $300 million in principal amount, plus accrued interest, of its 4.875% fixed rate notes that matured in September 2013. 53--------------------------------------------------------------------------------• In August 2013, the Company made a partial repayment of 43 million euro, plus accrued interest, of its 100 million euro floating rate credit facility scheduled to mature in February 2017. • In August 2013, the Company replaced its $2.5 billion committed four-year credit facility, scheduled to mature in February 2015, with a $2.5 billion committed five-year credit facility scheduled to mature in August 2018. The facility is used to support the Company's outstanding commercial paper. There were no draws on the facility as of June 30, 2014. • In November 2012, the Company entered into a five-year, 70 million euro, floating rate credit facility scheduled to mature in November 2017. The Company drew on the credit facility during the first quarter of fiscal 2013. Proceeds from the facility were used for general corporate purposes. • In November 2012, the Company retired $100 million in principal amount, plus accrued interest, of its 5.8% fixed rate notes that matured. • The Company also selectively makes use of short-term credit lines. The Company estimates that, as of June 30, 2014, it could borrow up to $1.7 billion on committed credit lines. • The Company believes its capital resources and liquidity position at June 30, 2014 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 the remainder of fiscal 2014 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 $2.5 billion revolving credit facility, which matures in August 2018. There were no draws on the revolving credit facility as of June 30, 2014. As such, the Company believes it has sufficient financial resources to fund operations and meet its obligations for the foreseeable future. • The Company earns a significant amount of its operating income outside the U.S., which is deemed to be permanently reinvested in foreign jurisdictions. The Company currently does not intend nor foresee a need to repatriate these funds. The Company's intent is for such earnings to be reinvested by the subsidiaries or to be repatriated only when it would be tax effective through the utilization of foreign tax credits. The Company expects existing domestic cash and liquidity to continue to be sufficient to fund the Company's domestic operating activities and cash commitments for investing and financing activities for at least the next twelve months and thereafter for the foreseeable future. In addition, the Company expects existing foreign cash, cash equivalents, short-term investments and cash flows from operations to continue to be sufficient to fund the Company's foreign operating activities and cash commitments for investing activities, such as material capital expenditures, for at least the next twelve months and thereafter for the foreseeable future. Should the Company require more capital in the U.S. than is generated by operations domestically, the Company could elect to raise capital in the U.S. through debt or equity issuances. This alternative could result in increased interest expense or other dilution of the Company's earnings. The Company has borrowed funds domestically and continues to have the ability to borrow funds domestically at reasonable interest rates. • The Company's debt financial covenants require a minimum consolidated shareholders' equity attributable to Johnson Controls, Inc. of at least $3.5 billion at all times and allow a maximum aggregated amount of 10% of consolidated shareholders' equity attributable to Johnson Controls, Inc. for liens and pledges. For purposes of calculating the Company's covenants, consolidated shareholders' equity attributable to Johnson Controls, Inc. is calculated without giving effect to (i) the application of ASC 715-60, "Defined Benefit Plans - Other Postretirement," or (ii) the cumulative foreign currency translation adjustment. As of June 30, 2014, consolidated shareholders' equity attributable to Johnson Controls, Inc. as defined per the Company's debt financial covenants was $11.5 billion and there was a maximum of $301 million of liens outstanding. The Company expects to remain in compliance with all covenants and other requirements set forth in its credit agreements and indentures 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. New Accounting Standards In May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." ASU No. 2014-09 clarifies the principles for recognizing revenue when an entity either enters into a contract with customers to transfer goods or services or enters into a contract for the transfer of non-financial assets. ASU No. 2014-09 will be effective for the Company for the quarter ending December 31, 2017, with early adoption not permitted. The Company is currently assessing the impact adoption of this guidance may have on its consolidated financial statements. 54 -------------------------------------------------------------------------------- In April 2014, the FASB issued ASU No. 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity." ASU No. 2014-08 limits discontinued operations reporting to situations where the disposal represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results, and requires expanded disclosures for discontinued operations. ASU No. 2014-08 will be effective prospectively for the Company for disposals that occur during or after the quarter ending December 31, 2015, with early adoption permitted in certain instances. The significance of this guidance for the Company is dependent on any future dispositions or disposals. In July 2013, the FASB issued ASU No. 2013-11, "Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists." ASU No. 2013-11 clarifies that companies should present an unrecognized tax benefit as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward. ASU No. 2013-11 will be effective prospectively for the Company for the quarter ending December 31, 2014, with early adoption permitted. The Company is currently assessing the impact adoption of this guidance may have on its consolidated statement of financial position. The adoption of this guidance will have no impact on the Company's consolidated results of operations. In March 2013, the FASB issued ASU No. 2013-05, "Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity." ASU No. 2013-05 clarifies when companies should release the cumulative translation adjustment (CTA) into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets within a foreign entity. Additionally, ASU No. 2013-05 states that CTA should be released into net income upon an acquirer obtaining control of an acquiree in which it held an equity interest immediately before the acquisition date (step acquisition). ASU No. 2013-05 will be effective prospectively for the Company for the quarter ending December 31, 2014, with early adoption permitted. The significance of this guidance for the Company is dependent on any future derecognition events involving the Company's foreign entities. In February 2013, the FASB issued ASU No. 2013-02, "Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income." ASU No. 2013-02 requires companies to provide information about the amounts reclassified out of accumulated other comprehensive income by component. Additionally, companies are required to disclose these reclassifications by each respective line item on the statements of income. ASU No. 2013-02 was effective for the Company for the quarter ended December 31, 2013. The adoption of this guidance had no impact on the Company's consolidated financial condition or results of operations. Refer to Note 14, "Equity and Noncontrolling Interests," of the notes to consolidated financial statements for disclosures regarding other comprehensive income. In December 2011, the FASB issued ASU No. 2011-11, "Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities." ASU No. 2011-11 requires additional quantitative and qualitative disclosures of gross and net information regarding derivative instruments that are offset or eligible for offset in the consolidated statement of financial position. ASU No. 2011-11 was effective for the Company for the quarter ending December 31, 2013. The adoption of this guidance had no impact on the Company's consolidated financial condition or results of operations. Refer to Note 15, "Derivative Instruments and Hedging Activities," of the notes to consolidated financial statements for disclosure of gross and net information regarding the Company's derivative instruments. Other Financial Information The interim financial information included in this Quarterly Report on Form 10-Q has not been audited by PricewaterhouseCoopers LLP (PwC). PwC has, however, applied limited review procedures in accordance with professional standards for reviews of interim financial information. Accordingly, you should restrict your reliance on their reports on such information. PwC is not subject to the liability provisions of Section 11 of the Securities Act of 1933 for its reports on the interim financial information because such reports do not constitute "reports" or "parts" of the registration statements prepared or certified by PwC within the meaning of Sections 7 and 11 of the Securities Act of 1933. |