UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

Commission File Number: 001-13836 

 

(Exact name of registrant as specified in its charter) 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer"filer," "smaller reporting company," and "smaller reporting"emerging growth company" in Rule 12b-2 of the Exchange Act.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

The accompanying notes are an integral part of the consolidated financial statements.

The accompanying notes are an integral part of the consolidated financial statements.

Johnson Controls International plc

Consolidated Statements of Cash Flows

The consolidated financial statements include the consolidated accounts of Johnson Controls International plc, a corporation organized under the laws of Ireland, and its subsidiaries (Johnson Controls International plc and all its subsidiaries, hereinafter collectively referred to as the "Company" or "Johnson Controls"). In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (which include normal recurring adjustments) necessary to state fairly the financial position, results of operations and cash flows for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP)("U.S. GAAP") have been omitted pursuant to the rules and regulations of the United States Securities and Exchange Commission (SEC)("SEC"). These consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended September 30, 20162017 filed with the SEC on November 23, 2016.21, 2017. The results of operations for the three month period ended December 31, 20162017 are not necessarily indicative of results for the Company’s 20172018 fiscal year because of seasonal and other factors.

Nature of Operations

In the fourth quarter of fiscal 2016, Johnson Controls, Inc. ("JCI Inc.") and Tyco International plc (“Tyco”("Tyco") completed their combination pursuant to the Agreement and Plan of Merger (the “Merger Agreement”), dated as of January 24, 2016, as amended by Amendment No. 1, dated as of July 1, 2016, by and among JCI Inc., Tyco and certain other parties named therein, including Jagara Merger Sub LLC, an indirect wholly owned subsidiary of Tyco (“Merger Sub”). Pursuant to the terms of the Merger Agreement, on September 2, 2016, Merger Sub merged with and into JCI Inc., with JCI Inc. being the surviving corporation in the merger andmerging with a wholly owned,wholly-owned, indirect subsidiary of Tyco (the “Merger”"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 changed the jurisdiction of organization from the United States to Ireland. The domicile to Ireland became effective on September 2, 2016.

On October 31, 2016,The Building Technologies & Solutions ("Buildings") business 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 Buildings business further serves customers by providing technical services (in the HVAC, security and fire-protection space), energy-management consulting and data-driven solutions via its recently launch data-enabled business. Finally, the Company completed the spin-offis a North American market leader in residential air conditioning and heating systems and a global market leader in industrial refrigeration products.

The Power Solutions business is a leading global supplier of its Automotive Experience business by waylead-acid automotive batteries for virtually every type of the transfer of the Automotive Experience Business from Johnson Controls to Adient plcpassenger car, light truck and utility vehicle. The Company serves both automotive original equipment manufacturers and the issuance of ordinary shares of Adient directly to holders of Johnson Controls ordinary shares on a pro rata basis. Prior to the open of business on October 31, 2016, each of the Company's shareholders received one ordinary share of Adient plc for every 10 ordinary shares of Johnson Controls held as of the close of business on October 19, 2016, the record date for the distribution. Company shareholders received cash in lieu of fractional shares of Adient, if any. Following the separation and distribution, Adient plc is now an independent public company trading on the New York Stock Exchange (NYSE) under the symbol "ADNT."general vehicle battery aftermarket. The Company did not retain any equity interest in Adient plc. Adient’s historical financial results are reflected in the Company’s consolidated financial statements as a discontinued operation at December 31, 2016. Referalso supplies advanced battery technologies to Note 5, "Discontinued Operations," of the notes to consolidated financial statements for further information.power start-stop, hybrid and electric vehicles.

Principles of Consolidation

The consolidated financial statements include the consolidated accounts of Johnson Controls International plc and its subsidiaries that are consolidated in conformity with U.S. GAAP. All significant intercompany transactions have been eliminated. The results of companies acquired or disposed of during the year are included in the consolidated financial statements from the effective date of acquisition or up to the date of disposal. Investments in partially-owned affiliates are accounted for by the equity method when the Company’s interest exceeds 20% and the Company does not have a controlling interest.

Under certain criteria as provided for in Financial Accounting Standards Board (FASB)("FASB") ASC 810, "Consolidation," the Company may consolidate a partially-owned affiliate. To determine whether to consolidate a partially-owned affiliate, the

Consolidated VIEs    

Based upon the criteria set forth in ASC 810, the Company has determined that it was not the primary beneficiary in any VIEs for the reporting period ended December 31, 2017 and that it was the primary beneficiary in one VIE for the reporting period ended December 31, 2016 and three VIEs for the reporting period ended  September 30, 2016,2017, as the Company absorbsabsorbed significant economics of the entitiesentity and hashad the power to direct the activities that are considered most significant to the entities.

In fiscal 2012, a pre-existing VIE accounted for under the equity method was reorganized into three separate investments as a result of the counterparty exercising its option to put its interest to the Company. The Company acquired additional interests in two of the reorganized group entities. The reorganized group entities are considered to be VIEs as the other owner party has been provided decision making rights but does not have equity at risk. The Company iswas considered the primary beneficiary of one of the entities due to the Company’s power pertaining to decisions over significant activities of the entity. As such, this VIE has beenwas consolidated within the Company’s consolidated statements of financial position.position as of September 30, 2017. The impact of consolidation of the entity on the Company’s consolidated statements of income for the three month periods ended December 31, 2017 and 2016 and 2015 waswere not material. During the quarter ended December 31, 2017, certain joint venture agreements were amended, and as a result, the Company can no longer make key operating decisions considered to be most significant to the VIE. As such, the Company is no longer considered the primary beneficiary of this entity, and the Company deconsolidated the entity during the quarter ended December 31, 2017.

The carrying amounts and classification of assets (none of which are restricted) and liabilities included in the Company’s consolidated statements of financial position for the consolidated VIE is as follows (in millions):

As mentioned previously within the "Consolidated VIEs" section above, in fisca1 2012, a pre-existing VIE was reorganized into three separate investments as a result of the counterparty exercising its option to put its interest to the Company. The reorganized group entities are considered to be VIEs as the other owner party has been provided decision making rights but does not have equity at risk. The VIEs are named as a co-obligorco-obligors under a third party debt agreement in the amount of $170$162 million, maturing in fiscal 2020, under which ita VIE could become subject to paying more than its allocated share of the third

party debt in the event of bankruptcy of one or more of the other co-obligors. The other co-obligors, all related parties in which the Company is an equity investor, consist of the remaining group entities involved in the reorganization. As part of the overall reorganization transaction, the Company has also provided financial support to the group entities in the form of loans totaling $37 million, which are subordinate to the third party debt agreement. The Company is a significant customer of certain co-obligors, resulting in a remote possibility of loss. Additionally, the Company is subject to a floor guaranty expiring in fiscal 2022; in the event that the other owner party no longer owns any part of the group entities due to sale or transfer, the Company has guaranteed that the proceeds received from the sale or transfer will not be less than $25 million. The Company has partnered with the group entities to design and manufacture battery components for the Power Solutions business.

The Company did not have a significant variable interest in any other unconsolidated VIEs for the presented reporting periods.

At December 31, 2016,2017, the Company held restricted cash of approximately $42$19 million, of which $33$10 million was recorded within other current assets in the consolidated statements of financial position and $9 million was recorded within other noncurrent assets in the consolidated statements of financial position. These amounts were related to cash restricted for payment of asbestos liabilities. At September 30, 2016,2017, the Company held restricted cash of approximately $88$31 million, of which $79$22 million was recorded within other current assets in the consolidated statements of financial position and $9 million was recorded within other noncurrent assets in the consolidated statements of financial position. These amounts were primarily related to cash held in escrow from business divestitures and cash restricted for payment of asbestos liabilities.

Retrospective Changes

In March 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting." During the quarter ended December 31, 2017, the Company adopted ASU No. 2016-09. As a result, employee withholding taxes paid to taxing authorities for equity-based compensation transactions, previously classified as cash flows from operating activities, were reclassified to financing activities in the consolidated statements of cash flows for the three months ended December 31, 2016. Refer to Note 2, "New Accounting Standards," of the notes to consolidated financial statements for further information regarding the Company's discontinued operations.

For the three months ended December 31, 2016, the income from discontinued operations before income taxes included separation costs of $79 million. For the three months ended December 31, 2015, the income from discontinued operations before income taxes included separation costs of $70 million.

For the three months ended December 31, 2016, the effective tax rate was more than the U.S. federal statutory rate of 35% primarily due to the tax impacts of separation costs and Adient spin-off related tax expense, partially offset by non-U.S. tax rate differentials. For the three months ended December 31, 2015, the effective tax rate was less than the U.S. federal statutory rate of 35% primarily due to non-U.S. tax rate differentials, partially offset by the tax impacts of separation costs.

The following table summarizes depreciation and amortization, capital expenditures, and significant operating and investing noncash items related to Adient for the three month periodsperiod ended December 31, 2016 and 2015 (in millions):

At December 31, 2016Assets and September 30, 2016,Liabilities Held for Sale

During the second quarter of fiscal 2017, the Company signed a definitive agreement to sell its Scott Safety business of the Global Products segment to 3M Company. The transaction closed on October 4, 2017. The assets and liabilities of the securitythis business in South Africa of the Tyco segment were classifiedare presented as held for sale.sale in the consolidated statements of financial position as of September 30, 2017. The business did not meet the criteria to be classified as a discontinued operation as the divestiture of the Scott Safety business did not have a major effect on the Company’s operations and financial results.

The following table summarizes the carrying value of the Tyco segmentScott Safety assets and liabilities held for sale at December 31, 2016 and September 30, 20162017 (in millions):

At December 31, 2016 and September 30, 2016, $122017, $22 million and $17 million, respectively, of certain Corporate assets

The Building Technologies & Solutions business records certain long-term contracts under the percentage-of-completion method of accounting. Under this method, sales and gross profit are recognized as work is performed based on the relationship between actual costs incurred and total estimated costs at completion. The Company records costs and earnings in excess of billings on uncompleted contracts primarily within accounts receivable - net and billings in excess of costs and earnings on uncompleted contracts primarily within other current liabilitiesdeferred revenue in the consolidated statements of financial position. Costs and earnings in excess of billings related to these contracts were $812$975 million and $841$908 million at December 31, 20162017 and September 30, 2016,2017, respectively. Billings in excess of costs and earnings related to these contracts were $462$567 million and $431$451 million at December 31, 20162017 and September 30, 2016,2017, respectively.

At September 30, 2016,2017, accumulated goodwill impairment charges included $47 million related to the Building Efficiency Rest of WorldSolutions EMEA/LA - Latin America reporting unit. The three months ended December 31, 2017 Global Products business divestiture amount includes $18 million of goodwill transferred to assets held for sale in the consolidated statements of financial position. Refer to Note 4, "Discontinued Operations," of the notes to consolidated financial statements for further information regarding the Company's assets and liabilities held for sale.

The Company’s other intangible assets, primarily from business acquisitions valued based on independent appraisals, consisted of (in millions):

Amortization of other intangible assets included within continuing operations for the three month periods ended December 31, 2017 and 2016 and 2015 was $149$94 million and $20$149 million, respectively. Excluding the impact of any future acquisitions, the Company anticipates amortization for fiscal 2018, 2019, 2020, 2021, 2022 and 20222023 will be approximately $416$376 million, $403$371 million, $392$365 million, $385$355 million and $379$346 million per year, respectively.

The Company's fiscal 2018, 2017 and 2016 restructuring plans included workforce reductions of approximately 3,2009,200 employees (2,400(7,300 for the Building Technologies & Solutions business, 1,700 for Corporate and 800200 for Corporate)Power Solutions). 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 December 31, 2016,2017, approximately 3001,800 of the employees have been separated from the Company pursuant to the restructuring plans. In addition, the restructuring plans included teneleven plant closures in the Building Technologies & Solutions business. As of December 31, 2016, one2017, four of the teneleven 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.

In calculating the provision for income taxes, the Company uses an estimate of the annual effective tax rate based upon the facts and circumstances known at each interim period. On a quarterly basis, the actual effective tax rate is adjusted, as appropriate, based upon changed facts and circumstances, if any, as compared to those forecasted at the beginning of the fiscal year and each interim period thereafter. The U.S. federal statutory tax rate is being used as a comparison since the Company was a U.S. domiciled company for 11 months of 2016 and due to the Company's current legal entity structure. As a result of recently enacted U.S. Tax Reform, the Company will be subject to a U.S. federal statutory tax rate of 24.5% for its fiscal year ended September 30, 2018, which reflects a blended federal statutory rate of 35% for its first fiscal quarter and 21% for the remaining three fiscal quarters. For the three months ended December 31, 2017, the Company's effective tax rate was 50% and was higher than the blended U.S. federal statutory rate of 24.5% primarily due to the discrete net impacts of U.S. Tax Reform, Tyco Merger transaction and integration costs, and the jurisdictional mix of significant restructuring and impairment costs, partially offset by the benefits of continuing global tax planning initiatives, non-U.S. tax rate differentials and tax audit closures. For the three months ended December 31, 2016, the Company's effective

tax rate for continuing operations was (7)%-7% and was lower than the U.S. federal statutory rate of 35% primarily due to the benefits of continuing global tax planning initiatives, non-U.S. tax rate differentials and a tax benefit due to changes in entity tax status, partially offset by the jurisdictional mix of significant restructuring and impairment costs, as well as the Tyco Merger transaction and integration costs, and purchase accounting impacts. For the three months ended December 31, 2015, the Company's effective tax rate for continuing operations was 22%. The effective rate was lower than the U.S. federal statutory rate of 35% primarily due to global tax planning and non-U.S. tax rate differentials.

Valuation Allowance

The Company reviews the realizability of its deferred tax assets on a quarterly basis, or whenever events or changes in circumstances indicate that a review is required. In determining the requirement for a valuation allowance, the historical and

Uncertain Tax Positions

At September 30, 2016, exclusive of items included in noncurrent liabilities held for sale,2017, the Company had gross tax effected unrecognized tax benefits of $1,706$2,173 million, of which $1,604$2,047 million, if recognized, would impact the effective tax rate. Total net accrued interest at September 30, 20162017 was approximately $55$99 million (net of tax benefit). The interest and penalties accrued during the three months ended December 31, 2017 and 2016 and 2015 waswere not material. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense.

In the U.S.,first quarter of fiscal years 2010 through 2014 are currently under exam by the Internal Revenue Service ("IRS") and 2008 through 2009 are currently under IRS appeals. Additionally, the2018, tax audit resolutions resulted in a net $25 million benefit to income tax expense.

The Company is currently under exam in the following major non-U.S. jurisdictions:

On October 13, 2016, the U.S. Treasury and the IRSInternal Revenue Service (“IRS”) released final and temporary Section 385 regulations. These regulations address whether certain instruments between related parties are treated as debt or equity. The Company does not expect that the regulations will have a material impact on its consolidated financial statements.

During the three months ended December 31, 20162017 and 2015,2016, other tax legislation was adopted in various jurisdictions. These law changes did not have a material impact on the Company's consolidated financial statements.

Other Tax Matters

In the first quarter of fiscal 2017, the Company recorded a discrete tax benefit of $101 million due to changes in entity tax status.

In the first quarter of fiscal 2017, the Company recorded $130 million of transaction and integration costs which generated an $11 million tax benefit.

In the first quarter of fiscal 2017, the Company recorded $78 million of significant restructuring and impairment costs. Refer to Note 9,8, "Significant Restructuring and Impairment Costs," of the notes to consolidated financial statements for additional information. The restructuring costs generated a $14 million tax benefit.benefit, which was impacted by the Company’s current tax position in these jurisdictions.

The components of the Company’s net periodic benefit costs from continuing operations associated with its defined benefit pension and postretirement plans are shown in the tables below in accordance with ASC 715, "Compensation – Retirement Benefits" (in millions):

During the three months ended December 31, 2016, the amount of lump sum payouts triggered a remeasurement event for certain U.S. pension plans resulting in the recognition of net actuarial gains of $117 million.

In connection with the Tyco Merger, on December 28, 2016,November 2017, the Company completed its offersissued 750 million euro in principal amount of 0.0% senior unsecured fixed rate notes due in December 2020. Proceeds from the issuance were used to exchange all validly tenderedrepay existing debt and accepted notes of certain series (the "existing notes") issued by JCI Inc. or Tyco International Finance S.A. ("TIFSA"), as applicable, each of which is a wholly owned subsidiary of the Company, for the new notes to be issued by the Company and the related solicitation of consents to amend the indentures governing the existing notes (the offers to exchange and theother general corporate purposes.

related consent solicitation together the "exchange offers"). Pursuant to the exchange offers, the Company exchanged approximately $5.6 billion of $6.0 billion in aggregate principal amount of dollar denominated notes and approximately 423 million euro of 500 million euro in aggregate principal amount of euro denominated notes. All were validly tendered and accepted and notes have been canceled. Following such cancellation, $380,948,000 aggregate principal amount of existing notes (not including the TIFSA Euro Notes) will remain outstanding across seventeen series of dollar-denominated existing notes and 77,394,000 euro aggregate principal amount of TIFSA Euro Notes remain outstanding across one series. In connection with the settlement of the exchange offers, the new notes ("the New Notes") issued by the Company have been registered under the Securities Act of 1933. The terms of the New Notes are described in the Company’s Prospectus dated December 19, 2016, as filed with the SEC under Rule 424(b)(3) of the Act on that date. The issuance of the New Notes occurred on December 28, 2016. The New Notes are unsecured and unsubordinated obligations of the Company and will rank equally with all other unsecured and unsubordinated indebtedness of the Company issued from time to time.

In October 2016,2017, the Company repaid two ten-month floating rate term loans totaling $325 million, plus accrued interest, scheduledcompleted the previously announced sale of its Scott Safety business to mature in October 2016.

The Company's net financing charges line item in the consolidated statements of income for the three month periodsmonths ended December 31, 20162017 and 20152016 contained the following components (in millions):

Net financing charges for the three month periodmonths ended December 31, 2016, included $17 million of transaction costs related primarily to the prior year debt exchange offers.offer fees.