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, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

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

The consolidated financial statements include the consolidated accounts of Johnson Controls International plc, a corporation organized under the laws of Ireland, and its subsidiaries (Johnson Controls International plc and all its subsidiaries, hereinafter collectively referred to as the "Company" 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, portions of which (including Part I, Item 1. Business and Item 3. Legal Proceedings, and the following items from Part II of the Annual Report: Item 6. Selected Financial Data, Item 7. Management’s Discussion and Analysis, and Item 8. Financial Statements and Supplementary Data) were recast in the Company's Current Report on Form 8-K filed with the SEC on February 23,21, 2017. The results of operations for the three and nine month periods ended June 30, 20172018 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.” The Merger changed the jurisdictionplc” and JCI Inc. is a wholly-owned subsidiary 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. 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 Company first determines if the entity is a variable interest entity (VIE)("VIE"). An entity is considered to be a VIE if it has one of the following characteristics: 1) the entity is thinly capitalized; 2) residual equity holders do not control the entity; 3) equity holders are shielded from economic losses or do not participate fully in the entity’s residual economics; or 4) the entity was established with non-substantive voting rights. If the entity meets one of these characteristics, the Company then determines if it is the primary beneficiary of the VIE. The party with the power to direct activities of the VIE that most significantly impact the VIE’s economic performance and the potential to absorb benefits or losses that could be significant to the VIE is considered the primary beneficiary and consolidates the VIE. If the entity is not considered a VIE, then the Company applies the voting interest model to determine whether or not the Company shall consolidate the partially-owned affiliate.

Consolidated VIEs    

Based upon the criteria set forth in ASC 810, the Company has determined that it was not the primary beneficiary in any VIEs for the reporting period ended June 30, 2018 and that it was the primary beneficiary in one VIE for the reporting period ended JuneSeptember 30, 2017, and three VIEs for the reporting period ended  September 30, 2016, 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. 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 impact of consolidation of the entity on the Company’s consolidated statements of income for the three and nine month periods ended June 30, 20172018 and 20162017 was not material.

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 $166$157 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$38 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 June 30, 2018, the Company held restricted cash of approximately $19 million, of which $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. At September 30, 2017, the Company held restricted cash of approximately $37$31 million, of which $28$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 restricted for payment of asbestos liabilities. At September 30, 2016, the Company held restricted cash of approximately $88 million, of which $79 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 nine months ended June 30, 2017. Refer to Note 2, "New Accounting Standards," of the notes to consolidated financial statements for further information regarding the Company's discontinued operations.

In the first quarter of fiscal 2018, the Company completed the sale of its Scott Safety business to 3M Company. The selling price, net of cash divested, was $2.0 billion, all of which was received as of December 31, 2017. In connection with the sale, the Company recorded a pre-tax gain of $114 million within selling, general and administrative expenses in the consolidated statements of income and reduced goodwill in assets held for sale by $1.2 billion. The gain, net of tax, recorded was $84 million. Net cash proceeds from the transaction of approximately $1.9 billion were used to repay a significant portion of the Tyco International Holding S.a.r.L.'s ("TSarl") $4.0 billion of merger-related debt. The Scott Safety business is included in the Global Products segment and was reported within assets and liabilities held for sale in the consolidated statements of financial position as of September 30, 2017. Refer to Note 4, "Discontinued Operations," of the notes to consolidated financial statements for further disclosure related to purchase price allocations.

In the first nine months of fiscal 2017, the Company completed three acquisitions for a combined purchase price, net of cash acquired, of $9 million, $6 million of which was paid in the nine months ended June 30, 2017. The acquisitions in the aggregate were not material to the Company’s consolidated financial statements. In connection with the acquisitions, the Company recorded goodwill of $2 million.

In the second quarter of fiscal 2017, the Company completed the sale of its ADT security business in South Africa within the TycoBuilding Solutions EMEA/LA segment. The selling price, net of cash divested, was $129 million, all of which was received in the nine months ended June 30, 2017. In connection with the sale, the Company reduced goodwill in assets held for sale by $92 million. The divestiture was not material to the Company's consolidated financial statements.

In the first nine months of fiscal 2017, the Company completed one additional divestiture for a sales price of $4 million, all of which was received in the nine months ended June 30, 2017. The divestiture decreased the Company's ownership from a controlling to noncontrolling interest, and as a result, the Company deconsolidated cash of $5 million. The divestiture was not material to the Company's consolidated financial statements.

In the first nine months of fiscal 2017, the Company received $52 million in net cash proceeds related to prior year business divestitures.

As discussed in Note 1, "Financial Statements," of the notes to consolidated financial statements, onOn October 31, 2016, the Company completed the spin-off of its Automotive Experience business by way of the transfer of the Automotive Experience Businessbusiness from Johnson Controls to Adient plc.plc 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." The Company did not retain any equity interest in Adient plc. During the first quarter of fiscal 2017, the Company determined that Adient met the criteria to be classified as a discontinued operation and, as a result, Adient’s historical financial results are reflected in the Company’s consolidated financial statements as a discontinued operation, and assets and liabilities were retrospectively reclassified as assets and liabilities held for sale.operation. The Company did not allocate any general corporate overhead to discontinued operations.

The following table summarizes the results of Adient, reclassified as discontinued operations for the nine month period ended June 30, 2017 and the three and nine month periods ended June 30, 2016 (in millions). As the Adient spin-off occurred on October 31, 2016, there is only one month of Adient results included in the nine month period ended June 30, 2017.

For the nine months ended June 30, 2017, the income from discontinued operations before income taxes included separation costs of $79 million. For the three and nine months ended June 30, 2016, the income from discontinued operations before income taxes included separation costs of $127 million and $287 million, respectively.

For the nine months ended June 30, 2017, 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 June 30, 2016, the effective tax rate was more than the U.S. federal statutory rate of 35% primarily due to $85 million of income tax expense for changes in entity status, the jurisdictional mix of restructuring and impairment costs, and the tax impacts of separation costs, partially offset by non-U.S. tax rate differentials. For the nine months ended June 30, 2016, the effective tax rate was more than the U.S. federal statutory rate of 35% primarily due to $780 million of income tax expense recorded on foreign undistributed earnings of certain non-U.S. subsidiaries, $85 million of income tax expense for changes in entity status, the jurisdictional mix of restructuring and impairment costs, and the tax impacts of separation costs, partially offset by non-U.S. tax rate differentials.

The following table summarizes depreciation and amortization, capital expenditures, and significant operating and investing noncash items related to Adient for the nine month period ended June 30, 2017 and the three and nine month periods ended June 30, 2016 (in millions):

During the second quarter of fiscal 2017, the Company signed a definitive agreement to sell its Scott Safety business of the TycoGlobal Products segment to 3M Company. The transaction is expected to close in the first quarter of fiscal 2018, subject to customary closing conditions including required regulatory approval.closed on October 4, 2017. The assets and liabilities of this business wereare presented as held for sale in the consolidated statements of financial position as of JuneSeptember 30, 2017. The business did not meet the criteria to be classified as a discontinued operation as the divestiture of the Scott Safety business willdid 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 JuneSeptember 30, 2017 and September 30, 2016 (in millions):

At SeptemberJune 30, 2016, $172018, $12 million of certain Corporate assets were classified as held for sale. The assets were sold during the second quarter of fiscal 2017.

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 $951$1,025 million and $841$908 million at June 30, 20172018 and September 30, 2016,2017, respectively. Billings in excess of costs and earnings related to these contracts were $448$545 million and $431$451 million at June 30, 20172018 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 nine months ended June 30, 2017 Tyco business divestiture amount includes $1,270 million of goodwill transferred to assets held for sale on the consolidated statements of financial position. Refer to Note 5, "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 June 30, 2018 and 2017 and 2016 was $108$100 million and $22$108 million, respectively. Amortization of other intangible assets included within continuing operations for the nine month periods ended June 30, 2018 and 2017 and 2016 was $383$288 million and $62$383 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 $389$388 million, $379$380 million, $366$371 million, $367$365 million and $360$344 million per year, respectively.