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EX-32.1 - EXHIBIT 32.1 - Johnson Controls International plcq1ex32fy1810-q.htm
EX-31.2 - EXHIBIT 31.2 - Johnson Controls International plcq1ex312fy1810-q.htm
EX-31.1 - EXHIBIT 31.1 - Johnson Controls International plcq1ex311fy1810-q.htm
EX-10.4 - EXHIBIT 10.4 - Johnson Controls International plcq1ex104fy1810-q.htm
EX-10.3 - EXHIBIT 10.3 - Johnson Controls International plcq1ex103fy1810-q.htm


 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
 
 
Form 10-Q
 
 
 
 
 
  
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 001-13836 
 
 
 
 
 
 
JOHNSON CONTROLS INTERNATIONAL PLC
(Exact name of registrant as specified in its charter) 
 
 
 
 
 
 
Ireland
 
98-0390500
(Jurisdiction of Incorporation)
 
(I.R.S. Employer Identification No.)
 
 
One Albert Quay
Cork, Ireland
(Address of principal executive offices)
353-21-423-5000

(Registrant’s telephone number)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report) 
 
 
 
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
þ
 
 
Accelerated filer
¨

Non-accelerated filer
¨

(Do not check if a smaller
 
Smaller reporting company
¨

 
 
 reporting company)

 
Emerging growth company
¨

 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Ordinary Shares Outstanding at December 31, 2017
Ordinary Shares, $0.01 par value per share
 
926,105,380
 
 
 
 
 

1


JOHNSON CONTROLS INTERNATIONAL PLC
FORM 10-Q
Report Index

  
Page
Part I. Financial Information
 
 
 
Item 1. Financial Statements (unaudited)
 
 
 
Consolidated Statements of Financial Position at December 31, 2017 and September 30, 2017
 
 
Consolidated Statements of Income for the Three Month Periods Ended December 31, 2017 and 2016
 
 
Consolidated Statements of Comprehensive Income (Loss) for the Three Month Periods Ended December 31, 2017 and 2016
 
 
Consolidated Statements of Cash Flows for the Three Month Periods Ended December 31, 2017 and 2016
 
 
Notes to Consolidated Financial Statements
 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
 
Item 4. Controls and Procedures
 
 
Part II. Other Information
 
 
 
Item 1. Legal Proceedings
 
 
Item 1A. Risk Factors
 
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
 
Item 6. Exhibits
 
 
Signatures

2



PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
Johnson Controls International plc
Consolidated Statements of Financial Position
(in millions, except par value; unaudited)
 
 
 
 
 
December 31, 2017
 
September 30, 2017
Assets
 
 
 
 
 
 
 
Cash and cash equivalents
$
552

 
$
321

Accounts receivable - net
6,731

 
6,666

Inventories
3,459

 
3,209

Assets held for sale
40

 
189

Other current assets
1,647

 
1,907

Current assets
12,429

 
12,292

 
 
 
 
Property, plant and equipment - net
6,105

 
6,121

Goodwill
19,717

 
19,688

Other intangible assets - net
6,657

 
6,741

Investments in partially-owned affiliates
1,219

 
1,191

Noncurrent assets held for sale

 
1,920

Other noncurrent assets
3,640

 
3,931

Total assets
$
49,767

 
$
51,884

 
 
 
 
Liabilities and Equity
 
 
 
 
 
 
 
Short-term debt
$
1,514

 
$
1,214

Current portion of long-term debt
91

 
394

Accounts payable
4,020

 
4,271

Accrued compensation and benefits
883

 
1,071

Deferred revenue
1,368

 
1,279

Liabilities held for sale

 
72

Other current liabilities
3,370

 
3,553

Current liabilities
11,246

 
11,854

 
 
 
 
Long-term debt
10,895

 
11,964

Pension and postretirement benefits
896

 
947

Noncurrent liabilities held for sale

 
173

Other noncurrent liabilities
5,004

 
5,368

Long-term liabilities
16,795

 
18,452

 
 
 
 
Commitments and contingencies (Note 21)


 


 
 
 
 
Redeemable noncontrolling interests
226

 
211

 
 
 
 
Ordinary shares, $0.01 par value
9

 
9

Ordinary A shares, €1.00 par value

 

Preferred shares, $0.01 par value

 

Ordinary shares held in treasury, at cost
(885
)
 
(710
)
Capital in excess of par value
16,427

 
16,390

Retained earnings
5,398

 
5,231

Accumulated other comprehensive loss
(414
)
 
(473
)
Shareholders’ equity attributable to Johnson Controls
20,535

 
20,447

Noncontrolling interests
965

 
920

Total equity
21,500

 
21,367

Total liabilities and equity
$
49,767

 
$
51,884

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

3



Johnson Controls International plc
Consolidated Statements of Income
(in millions, except per share data; unaudited)
 
 
 
 
 
Three Months Ended
December 31,
 
2017
 
2016
Net sales
 
 
 
Products and systems*
$
5,946

 
$
5,585

Services*
1,489

 
1,501

 
7,435

 
7,086

Cost of sales
 
 
 
Products and systems*
4,449

 
4,063

Services*
817

 
909

 
5,266

 
4,972

 
 
 
 
Gross profit
2,169

 
2,114

 
 
 
 
Selling, general and administrative expenses
(1,417
)
 
(1,570
)
Restructuring and impairment costs
(158
)
 
(78
)
Net financing charges
(116
)
 
(136
)
Equity income
60

 
55

 
 
 
 
Income from continuing operations before income taxes
538

 
385

 
 
 
 
Income tax provision (benefit)
267

 
(27
)
 
 
 
 
Income from continuing operations
271

 
412

 
 
 
 
Loss from discontinued operations, net of tax (Note 4)

 
(34
)
 
 
 
 
Net income
271

 
378

 
 
 
 
Income from continuing operations attributable to noncontrolling interests
41

 
40

 
 
 
 
Income from discontinued operations attributable to noncontrolling interests

 
9

 
 
 
 
Net income attributable to Johnson Controls
$
230

 
$
329

 
 
 
 
Amounts attributable to Johnson Controls ordinary shareholders:
 
 
 
Income from continuing operations
$
230

 
$
372

        Loss from discontinued operations

 
(43
)
Net income
$
230

 
$
329

 
 
 
 
Basic earnings (loss) per share attributable to Johnson Controls
 
 
 
Continuing operations
$
0.25

 
$
0.40

Discontinued operations
0.00

 
(0.05
)
Net income
$
0.25

 
$
0.35

 
 
 
 
Diluted earnings (loss) per share attributable to Johnson Controls
 
 
 
Continuing operations
$
0.25

 
$
0.39

Discontinued operations
0.00

 
(0.05
)
Net income **
$
0.25

 
$
0.35


*
Products and systems consist of Building Technologies & Solutions and Power Solutions products and systems. Services are Building Technologies & Solutions technical services.
**
Certain items do not sum due to rounding.

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

4



Johnson Controls International plc
Consolidated Statements of Comprehensive Income (Loss)
(in millions; unaudited)
 
 
 
 
 
Three Months Ended
December 31,
 
2017
 
2016
 
 
 
 
Net income
$
271

 
$
378

 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
Foreign currency translation adjustments
79

 
(703
)
Realized and unrealized gains (losses) on derivatives
(1
)
 
4

Realized and unrealized losses on marketable securities

 
(2
)
 
 
 
 
Other comprehensive income (loss)
78

 
(701
)
 
 
 
 
Total comprehensive income (loss)
349

 
(323
)
 
 
 
 
Comprehensive income attributable to noncontrolling interests
60

 
9

 
 
 
 
Comprehensive income (loss) attributable to Johnson Controls
$
289

 
$
(332
)

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

5



Johnson Controls International plc
Consolidated Statements of Cash Flows
(in millions; unaudited)
 
Three Months Ended
December 31,
 
2017
 
2016
Operating Activities
 
 
 
Net income attributable to Johnson Controls
$
230

 
$
329

Income from continuing operations attributable to noncontrolling interests
41

 
40

Income from discontinued operations attributable to noncontrolling interests

 
9

Net income
271

 
378

Adjustments to reconcile net income to cash used by operating activities:
 
 
 
Depreciation and amortization
272

 
346

Pension and postretirement benefit income
(36
)
 
(155
)
Pension and postretirement contributions
(24
)
 
(247
)
Equity in earnings of partially-owned affiliates, net of dividends received
(36
)
 
(64
)
Deferred income taxes
(79
)
 
580

Non-cash restructuring and impairment charges
30

 
16

Gain on divestitures
(114
)
 

Equity-based compensation
30

 
37

Other
(13
)
 

Changes in assets and liabilities, excluding acquisitions and divestitures:
 
 
 
Accounts receivable
(30
)
 
37

Inventories
(233
)
 
(142
)
Other assets
64

 
(87
)
Restructuring reserves
93

 
20

Accounts payable and accrued liabilities
(623
)
 
(796
)
Accrued income taxes
299

 
(1,808
)
Cash used by operating activities
(129
)
 
(1,885
)
 
 
 
 
Investing Activities
 
 
 
Capital expenditures
(230
)
 
(371
)
Sale of property, plant and equipment
5

 
2

Acquisition of businesses, net of cash acquired

 
(3
)
Business divestitures
2,011

 
47

Changes in long-term investments
(12
)
 
(6
)
Cash provided (used) by investing activities
1,774

 
(331
)
 
 
 
 
Financing Activities
 
 
 
Increase in short-term debt - net
304

 
1,312

Increase in long-term debt
885

 
7

Repayment of long-term debt
(2,234
)
 
(763
)
Debt financing costs
(4
)
 
(6
)
Stock repurchases
(150
)
 

Payment of cash dividends
(232
)
 

Proceeds from the exercise of stock options
16

 
29

Employee equity-based compensation withholding taxes
(25
)
 
(25
)
Dividends paid to noncontrolling interests

 
(31
)
Dividend from Adient spin-off

 
2,050

Cash transferred to Adient related to spin-off

 
(564
)
Cash paid related to prior acquisitions

 
(45
)
Cash provided (used) by financing activities
(1,440
)
 
1,964

Effect of exchange rate changes on cash and cash equivalents
17

 
(55
)
Change in cash held for sale
9

 
105

Increase (decrease) in cash and cash equivalents
231

 
(202
)
Cash and cash equivalents at beginning of period
321

 
579

Cash and cash equivalents at end of period
$
552

 
$
377


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

6


Johnson Controls International plc
Notes to Consolidated Financial Statements
December 31, 2017
(unaudited)



1.
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") have been omitted pursuant to the rules and regulations of the United States Securities and Exchange Commission ("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, 2017 filed with the SEC on November 21, 2017. The results of operations for the three month period ended December 31, 2017 are not necessarily indicative of results for the Company’s 2018 fiscal year because of seasonal and other factors.

Nature of Operations

Johnson Controls International plc, headquartered in Cork, Ireland, is a global diversified technology and multi industrial leader serving a wide range of customers in more than 150 countries. The Company creates intelligent buildings, efficient energy solutions, integrated infrastructure and next generation transportation systems that work seamlessly together to deliver on the promise of smart cities and communities. The Company is committed to helping our customers win and creating greater value for all of its stakeholders through strategic focus on our buildings and energy growth platforms.

In the fourth quarter of fiscal 2016, Johnson Controls, Inc. ("JCI Inc.") and Tyco International plc ("Tyco") completed their combination with JCI Inc. merging with a wholly-owned, indirect subsidiary of Tyco (the "Merger"). Following the Merger, Tyco changed its name to “Johnson Controls International plc” and JCI Inc. is a wholly-owned subsidiary of Johnson Controls International plc. The Merger was accounted for as a reverse acquisition using the acquisition method of accounting in accordance with Accounting Standards Codification ("ASC") 805, "Business Combinations." JCI Inc. was the accounting acquirer for financial reporting purposes. Accordingly, the historical consolidated financial statements of JCI Inc. for periods prior to this transaction are considered to be the historic financial statements of the Company. 

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 is 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 lead-acid automotive batteries for virtually every type of passenger car, light truck and utility vehicle. The Company serves both automotive original equipment manufacturers and the general vehicle battery aftermarket. The Company also supplies advanced battery technologies to 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.


7


Johnson Controls International plc
Notes to Consolidated Financial Statements
December 31, 2017
(unaudited)


Under certain criteria as provided for in Financial Accounting Standards Board ("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"). 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 December 31, 2017 and that it was the primary beneficiary in one VIE for the reporting period ended September 30, 2017, as the Company absorbed significant economics of the entity and had the power to direct the activities that are considered most significant to the entity.

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 was 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 was consolidated within the Company’s consolidated statements of financial position as of September 30, 2017. The impact of the entity on the Company’s consolidated statements of income for the three month periods ended December 31, 2017 and 2016 were 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):
 
 
September 30,
2017
 
 
 
Current assets
 
$
2

Noncurrent assets
 
53

Total assets
 
$
55

 
 
 
Current liabilities
 
$
6

Noncurrent liabilities
 
42

Total liabilities
 
$
48


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

Nonconsolidated VIEs

As mentioned previously within the "Consolidated VIEs" section above, in 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 co-obligors under a third party debt agreement in the amount of $162 million, maturing in fiscal 2020, under which a VIE could become subject to paying more than its allocated share of the third

8


Johnson Controls International plc
Notes to Consolidated Financial Statements
December 31, 2017
(unaudited)


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 is not considered to be the primary beneficiary of three of the entities as of December 31, 2017 and two of the entities as of September 30, 2017, as the Company cannot make key operating decisions considered to be most significant to the VIEs. Therefore, the entities are accounted for under the equity method of accounting as the Company’s interest exceeds 20% and the Company does not have a controlling interest. The Company’s maximum exposure to loss includes the partially-owned affiliate investment balances of $38 million and $65 million at December 31, 2017 and September 30, 2017, respectively, as well as the subordinated loan from the Company, third party debt agreement and floor guaranty mentioned above. Current liabilities due to the VIEs are not material and represent normal course of business trade payables for all presented periods.

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

Restricted Cash

At December 31, 2017, 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 $31 million, of which $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.

Retrospective Changes

Effective July 1, 2017, the Company reorganized the reportable segments within its Building Technologies & Solutions business to align with its new management reporting structure and business activities. Prior to this reorganization, Building Technologies & Solutions was comprised of five reportable segments for financial reporting purposes: Systems and Service North America, Products North America, Asia, Rest of World and Tyco. As a result of this change, Building Technologies & Solutions is now comprised of four reportable segments for financial reporting purposes: Building Solutions North America, Building Solutions EMEA/LA, Building Solutions Asia Pacific and Global Products. Refer to Note 18, “Segment Information,” of the notes to consolidated financial statements for further information. The net sales and cost of sales split of products and systems versus services in the consolidated statements of income has also been revised for the Building Technologies & Solutions reorganization.

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.
    
2. 
New Accounting Standards

Recently Adopted Accounting Pronouncements

In August 2017, the FASB issued ASU No. 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." The ASU more closely aligns the results of hedge accounting with risk management activities through amendments to the designation and measurement guidance to better reflect a Company's hedging strategy

9


Johnson Controls International plc
Notes to Consolidated Financial Statements
December 31, 2017
(unaudited)


and effectiveness. During the quarter ended December 31, 2017, the Company early adopted ASU 2017-12. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting." ASU No. 2016-09 impacts certain aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statements of cash flows. During the quarter ended December 31, 2017, the Company adopted ASU No. 2016-09. As a result, the Company recognized deferred tax assets of $179 million in the consolidated statements of financial position related to certain operating loss carryforwards resulting from the exercise of employee stock options and vested restricted stock on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of October 1, 2017. Additionally, 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 for comparative purposes. The remaining provisions of ASU No. 2016-09 did not have a material impact on the Company's consolidated financial statements.
 
Recently Issued Accounting Pronouncements

In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)." The ASU requires amounts generally described as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The guidance will be effective for the Company for the quarter ending December 31, 2018, with early adoption permitted. The amendments in this update should be applied retrospectively to all periods presented. The impact of this guidance for the Company will depend on the levels of restricted cash balances in the periods presented.

In October 2016, the FASB issued ASU No. 2016-16, "Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory." The ASU requires the tax effects of all intra-entity sales of assets other than inventory to be recognized in the period in which the transaction occurs. The guidance will be effective for the Company for the quarter ending December 31, 2018, with early adoption permitted but only in the first interim period of a fiscal year. The changes are required to be applied by means of a cumulative-effect adjustment recorded in retained earnings as of the beginning of the fiscal year of adoption. The Company is currently assessing the impact adoption of this guidance will have on its consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments." ASU No. 2016-15 provides clarification guidance on eight specific cash flow presentation issues in order to reduce the diversity in practice. ASU No. 2016-15 will be effective for the Company for the quarter ending December 31, 2018, with early adoption permitted. The guidance should be applied retrospectively to all periods presented, unless deemed impracticable, in which case prospective application is permitted. The Company is currently assessing the impact adoption of this guidance will have on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)." ASU No. 2016-02 requires recognition of operating leases as lease assets and liabilities on the balance sheet, and disclosure of key information about leasing arrangements. ASU No. 2016-02 will be effective retrospectively for the Company for the quarter ending December 31, 2019, with early adoption permitted. The Company is currently assessing the impact adoption of this guidance will have on its consolidated financial statements. The Company has started the assessment process by evaluating the population of leases under the revised definition of what qualifies as a leased asset. The Company is the lessee under various agreements for facilities and equipment that are currently accounted for as operating leases. The new guidance will require the Company to record operating leases on the balance sheet with a right-of-use asset and corresponding liability for future payment obligations. The Company expects the new guidance will have a material impact on its consolidated statements of financial position for the addition of right-of-use assets and lease liabilities, but the Company does not expect it to have a material impact on its consolidated statements of income.
In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." ASU No. 2016-01 amends certain aspects of recognition,

10


Johnson Controls International plc
Notes to Consolidated Financial Statements
December 31, 2017
(unaudited)


measurement, presentation and disclosure of financial instruments, including marketable securities. ASU No. 2016-01 will be effective for the Company for the quarter ending December 31, 2018, and early adoption is not permitted, with certain exceptions. The changes are required to be applied by means of a cumulative-effect adjustment on the balance sheet as of the beginning of the fiscal year of adoption. The impact of this guidance for the Company will depend on the magnitude of the unrealized gains and losses on the Company's marketable securities investments.

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." ASU No. 2014-09 clarifies the principles for recognizing revenue when an entity either enters into a contract with customers to transfer goods or services or enters into a contract for the transfer of non-financial assets. The original standard was effective retrospectively for the Company for the quarter ending December 31, 2017; however in August 2015, the FASB issued ASU No. 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," which defers the effective date of ASU No. 2014-09 by one-year for all entities. The new standard will become effective retrospectively for the Company for the quarter ending December 31, 2018, with early adoption permitted, but not before the original effective date. Additionally, in March 2016, the FASB issued ASU No. 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)," in April 2016, the FASB issued ASU No. 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing," in May 2016, the FASB issued ASU No. 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients," and in December 2016, the FASB issued ASU No. 2016-20, "Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers," all of which provide additional clarification on certain topics addressed in ASU No. 2014-09. ASU No. 2016-08, ASU No. 2016-10, ASU No. 2016-12 and ASU No. 2016-20 follow the same implementation guidelines as ASU No. 2014-09 and ASU No. 2015-14. The Company has elected to adopt the new revenue guidance as of October 1, 2018 using the modified retrospective approach.  In preparation for adoption of the new guidance, the Company has reviewed representative samples of contracts and other forms of agreements with customers globally and is in the process of evaluating the impact of the new revenue standard. Based on its procedures to date, the Company is not in a position today to quantify the potential impact the new revenue standard will have to its consolidated financial statements.

Other recently issued accounting pronouncements are not expected to have a material impact on the Company's consolidated financial statements.

3.
Acquisitions and Divestitures

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 is 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 the Company's net assets held for sale.

In the first quarter of fiscal 2017, the Company completed two acquisitions for a combined purchase price, net of cash acquired, of $6 million$3 million of which was paid in the three months ended December 31, 2016. 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 $1 million.

In the first quarter of fiscal 2017, the Company completed one divestiture for a sales price of $4 million, none of which was received in the three months ended December 31, 2016. 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.

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


11


Johnson Controls International plc
Notes to Consolidated Financial Statements
December 31, 2017
(unaudited)


4.
Discontinued Operations

On October 31, 2016, the Company completed the spin-off of its Automotive Experience business by way of the transfer of the Automotive Experience business from Johnson Controls to Adient plc 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. Adient’s historical financial results are reflected in the Company’s consolidated financial statements as a discontinued operation. The Company did not allocate any general corporate overhead to discontinued operations.

The following table summarizes the results of Adient, reclassified as discontinued operations for the three month period ended December 31, 2016 (in millions). As the Adient spin-off occurred on October 31, 2016, there is only one month of Adient results included in the three month period ended December 31, 2016.
 
Three Months Ended December 31,
 
2016
 
 
Net sales
$
1,434

 
 
Income from discontinued operations before income taxes
1

Provision for income taxes on discontinued operations
35

Income from discontinued operations attributable to noncontrolling interests, net of tax
9

Loss from discontinued operations
$
(43
)

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, 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.

The following table summarizes depreciation and amortization, capital expenditures, and significant operating and investing noncash items related to Adient for the three month period ended December 31, 2016 (in millions):
 
Three Months Ended December 31,
 
2016
 
 
Depreciation and amortization
$
29

Equity in earnings of partially-owned affiliates
(31
)
Deferred income taxes
562

Equity-based compensation
1

Accrued income taxes
(808
)
Capital expenditures
(91
)



12


Johnson Controls International plc
Notes to Consolidated Financial Statements
December 31, 2017
(unaudited)


Assets and 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 this business are presented as held for 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 Scott Safety assets and liabilities held for sale at September 30, 2017 (in millions):
 
September 30, 2017
 
 
Cash
$
9

Accounts receivable - net
100

Inventories
75

Other current assets
5

Assets held for sale
$
189

 
 
Property, plant and equipment - net
$
79

Goodwill
1,248

Other intangible assets - net
592

Other noncurrent assets
1

Noncurrent assets held for sale
$
1,920

 
 
Accounts payable
$
37

Accrued compensation and benefits
10

Other current liabilities
25

Liabilities held for sale
$
72

 
 
Other noncurrent liabilities
$
173

Noncurrent liabilities held for sale
$
173


During the first quarter of fiscal 2018, the Company signed a definitive agreement to sell a certain Global Products business. As a result, $18 million of goodwill was transfered to assets held for sale in the consolidated statements of financial position as of December 31, 2017. The business did not meet the criteria to be classified as a discontinued operation as the divestiture of the business will not have a major effect on the Company’s operations and financial results.

At December 31, 2017, $22 million of certain Corporate assets were classified as held for sale.

5.
Percentage-of-Completion Contracts

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 deferred revenue in the consolidated statements of financial position. Costs and earnings in excess of billings related to these contracts were $975 million and $908 million at December 31, 2017 and September 30, 2017, respectively. Billings in excess of costs and earnings related to these contracts were $567 million and $451 million at December 31, 2017 and September 30, 2017, respectively.

13


Johnson Controls International plc
Notes to Consolidated Financial Statements
December 31, 2017
(unaudited)


6.
Inventories

Inventories consisted of the following (in millions):
 
December 31, 2017
 
September 30, 2017
 
 
 
 
Raw materials and supplies
$
1,006

 
$
919

Work-in-process
543

 
567

Finished goods
1,910

 
1,723

Inventories
$
3,459

 
$
3,209


7.
Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill in each of the Company’s reportable segments for the three month period ended December 31, 2017 were as follows (in millions):
 
 
 
Business Acquisitions
 
Business Divestitures
 
Currency Translation and Other
 
 
 
September 30,
 
 
 
 
December 31,
 
2017
 
 
 
 
2017
 
 
 
 
 
 
 
 
 
 
Building Technologies & Solutions
 
 
 
 
 
 
 
 
 
     Building Solutions North America
$
9,637

 
$

 
$

 
$
(4
)
 
$
9,633

     Building Solutions EMEA/LA
2,012

 

 

 
14

 
2,026

     Building Solutions Asia Pacific
1,255

 

 

 
28

 
1,283

     Global Products
5,687

 

 
(18
)
 
1

 
5,670

Power Solutions
1,097

 

 

 
8

 
1,105

Total
$
19,688

 
$

 
$
(18
)
 
$
47

 
$
19,717


At September 30, 2017, accumulated goodwill impairment charges included $47 million related to the Building Solutions 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):
 
December 31, 2017
 
September 30, 2017
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Amortized intangible assets
 
 
 
 
 
 
 
 
 
 
 
Technology
$
1,343

 
$
(174
)
 
$
1,169

 
$
1,328

 
$
(137
)
 
$
1,191

Customer relationships
3,136

 
(503
)
 
2,633

 
3,168

 
(486
)
 
2,682

Miscellaneous
413

 
(167
)
 
246

 
389

 
(147
)
 
242

Total amortized intangible assets
4,892

 
(844
)
 
4,048

 
4,885

 
(770
)
 
4,115

Unamortized intangible assets
 
 
 
 
 
 
 
 
 
 
 
Trademarks/trade names
2,486

 

 
2,486

 
2,483

 

 
2,483

Miscellaneous
123

 

 
123

 
143

 

 
143

 
2,609

 

 
2,609

 
2,626

 

 
2,626

Total intangible assets
$
7,501

 
$
(844
)
 
$
6,657


$
7,511


$
(770
)

$
6,741



14


Johnson Controls International plc
Notes to Consolidated Financial Statements
December 31, 2017
(unaudited)


Amortization of other intangible assets included within continuing operations for the three month periods ended December 31, 2017 and 2016 was $94 million and $149 million, respectively. Excluding the impact of any future acquisitions, the Company anticipates amortization for fiscal 2019, 2020, 2021, 2022 and 2023 will be approximately $376 million, $371 million, $365 million, $355 million and $346 million per year, respectively.

8.
Significant Restructuring and Impairment Costs

To better align its resources with its growth strategies and reduce the cost structure of its global operations in certain underlying markets, the Company commits to restructuring plans as necessary.

In fiscal 2018, the Company committed to a significant restructuring plan (2018 Plan) and recorded $158 million of restructuring and impairment costs in the consolidated statements of income. This was the total amount incurred to date and the total amount expected to be incurred for this restructuring plan. The restructuring actions related to cost reduction initiatives in the Company’s Building Technologies & Solutions and Power Solutions businesses and at Corporate. The costs consist primarily of workforce reductions, plant closures and asset impairments. Of the restructuring and impairment costs recorded, $76 million related to the Global Products segment, $32 million related to the Building Solutions EMEA/LA segment, $24 million related to Corporate, $14 million related to the Building Solutions Asia Pacific segment, $8 million related to the Building Solutions North America segment and $4 million related to the Power Solutions segment. The restructuring actions are expected to be substantially complete in 2020.

The following table summarizes the changes in the Company’s 2018 Plan reserve, included within other current liabilities in the consolidated statements of financial position (in millions):

 
Employee Severance and Termination Benefits
 
Long-Lived Asset Impairments
 
Other
 
Total
 
 
 
 
 
 
 
 
Original reserve
$
125

 
$
30

 
$
3

 
$
158

Utilized—noncash

 
(30
)
 

 
(30
)
Balance at December 31, 2017
$
125

 
$

 
$
3

 
$
128


In fiscal 2017, the Company committed to a significant restructuring plan (2017 Plan) and recorded $367 million of restructuring and impairment costs in the consolidated statements of income. This was the total amount incurred to date and the total amount expected to be incurred for this restructuring plan. The restructuring actions related to cost reduction initiatives in the Company’s Building Technologies & Solutions and Power Solutions businesses and at Corporate. The costs consist primarily of workforce reductions, plant closures and asset impairments. Of the restructuring and impairment costs recorded, $166 million related to Corporate, $74 million related to the Building Solutions EMEA/LA segment, $59 million related to the Building Solutions North America segment, $32 million related to the Global Products segment, $20 million related to the Power Solutions segment and $16 million related to the Building Solutions Asia Pacific segment. The restructuring actions are expected to be substantially complete in fiscal 2018.


15


Johnson Controls International plc
Notes to Consolidated Financial Statements
December 31, 2017
(unaudited)


The following table summarizes the changes in the Company’s 2017 Plan reserve, included within other current liabilities in the consolidated statements of financial position (in millions):

 
Employee Severance and Termination Benefits
 
Long-Lived Asset Impairments
 
Other
 
Total
 
 
 
 
 
 
 
 
Original reserve
$
276

 
$
77

 
$
14

 
$
367

Utilized—cash
(75
)
 

 

 
(75
)
Utilized—noncash

 
(77
)
 
(1
)
 
(78
)
   Adjustment to restructuring reserves
25

 

 

 
25

Balance at September 30, 2017
$
226


$


$
13


$
239

Utilized—cash
(26
)
 

 
(2
)
 
(28
)
Balance at December 31, 2017
$
200

 
$

 
$
11

 
$
211


In fiscal 2016, the Company committed to a significant restructuring plan (2016 Plan) and recorded $288 million of restructuring and impairment costs in the consolidated statements of income. This was the total amount incurred to date and the total amount expected to be incurred for this restructuring plan. The restructuring actions related to cost reduction initiatives in the Company’s Building Technologies & Solutions and Power Solutions businesses and at Corporate. The costs consist primarily of workforce reductions, plant closures, asset impairments and change-in-control payments. Of the restructuring and impairment costs recorded, $161 million related to Corporate, $66 million related to the Power Solutions segment, $44 million related to the Global Products segment and $17 million related to the Building Solutions EMEA/LA segment. The restructuring actions are expected to be substantially complete in fiscal 2018. Included in the reserve is $56 million of committed restructuring actions taken by Tyco for liabilities assumed as part of the Tyco acquisition.

Additionally, the Company recorded $332 million of restructuring and impairment costs within discontinued operations related to Adient in fiscal 2016.


16


Johnson Controls International plc
Notes to Consolidated Financial Statements
December 31, 2017
(unaudited)


The following table summarizes the changes in the Company’s 2016 Plan reserve, included within other current liabilities in the consolidated statements of financial position (in millions):

Employee Severance and Termination Benefits
 
Long-Lived Asset Impairments
 
Other
 
Currency
Translation
 
Total
 
 
 
 
 
 
 
 
 
 
Original reserve
$
368

 
$
190

 
$
62

 
$

 
$
620

Acquired Tyco restructuring
     reserves
78

 

 

 

 
78

Utilized—cash
(32
)
 

 

 

 
(32
)
Utilized—noncash

 
(190
)
 
(32
)
 
1

 
(221
)
Balance at September 30, 2016
$
414

 
$

 
$
30

 
$
1

 
$
445

Adient spin-off impact
(194
)
 

 
(22
)
 

 
(216
)
Utilized—cash
(86
)
 

 
(2
)
 

 
(88
)
Utilized—noncash

 

 

 
1

 
1

 Adjustment to restructuring
    reserves
(25
)
 

 

 

 
(25
)
Transfer to liabilities held for sale
(3
)
 

 

 

 
(3
)
Adjustment to acquired Tyco
     restructuring reserves
(22
)
 

 

 

 
(22
)
Balance at September 30, 2017
$
84

 
$

 
$
6

 
$
2

 
$
92

Utilized—cash
(5
)
 

 
(1
)
 

 
(6
)
Balance at December 31, 2017
$
79

 
$

 
$
5

 
$
2

 
$
86


The Company's fiscal 2018, 2017 and 2016 restructuring plans included workforce reductions of approximately 9,200 employees (7,300 for the Building Technologies & Solutions business, 1,700 for Corporate and 200 for 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, 2017, approximately 1,800 of the employees have been separated from the Company pursuant to the restructuring plans. In addition, the restructuring plans included eleven plant closures in the Building Technologies & Solutions business. As of December 31, 2017, four of the eleven 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.

9.
Income Taxes

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 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

17


Johnson Controls International plc
Notes to Consolidated Financial Statements
December 31, 2017
(unaudited)


tax rate was -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 Tyco Merger transaction and integration costs, and purchase accounting impacts.

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 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.

Uncertain Tax Positions

At September 30, 2017, the Company had gross tax effected unrecognized tax benefits of $2,173 million, of which $2,047 million, if recognized, would impact the effective tax rate. Total net accrued interest at September 30, 2017 was approximately $99 million (net of tax benefit). The interest and penalties accrued during the three months ended December 31, 2017 and 2016 were not material. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense.

In the first quarter of fiscal 2018, 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:
Tax Jurisdiction
 
Tax Years Covered
 
 
 
Belgium
 
2015 - 2016
Brazil
 
2011 - 2012
Canada
 
2013 - 2014
China
 
2008 - 2016
France
 
2010 - 2016
Germany
 
2007 - 2015
Japan
 
2016
Spain
 
2010 - 2014
Switzerland
 
2011 - 2014
United Kingdom
 
2011 - 2014

Impacts of Tax Legislation

On December 22, 2017, the “Tax Cuts and Jobs Act” (H.R. 1) was enacted and significantly revises U.S. corporate income tax by, among other things, lowering corporate income tax rates, imposing a one-time transition tax on deemed repatriated earnings of non-U.S. subsidiaries, and implementing a territorial tax system and various base erosion minimum tax provisions.

In the first quarter of fiscal 2018, as a result of the enacted legislation, the Company recorded a discrete non-cash tax benefit of $101 million due to the remeasurement of U.S. deferred tax assets and liabilities. The Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21% or the blended fiscal 2018 rate of 24.5%. This tax benefit is provisional as the Company is still analyzing certain aspects of the legislation and refining calculations, which could potentially materially affect the measurement of these amounts or give rise to new deferred tax amounts.


18


Johnson Controls International plc
Notes to Consolidated Financial Statements
December 31, 2017
(unaudited)


In the first quarter of fiscal 2018, the Company also recorded a discrete tax charge of $305 million due to the one-time transition tax on deemed repatriated earnings of certain non-U.S. subsidiaries. This charge is inclusive of relevant non-U.S. withholding taxes and U.S. state income tax on the portion of the earnings expected to be repatriated. This one-time transition tax is based on the Company’s post-1986 earnings and profits (“E&P”) not previously subjected to U.S. taxation. This tax charge is provisional as the Company has not yet finally determined its post-1986 non-U.S. E&P. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. Given the varying tax rates (15.5% on cash and 8% on other property), this amount may change when the Company completes the calculation of post-1986 non-U.S. E&P previously deferred from U.S. federal taxation and concludes on the amounts held in cash versus other specified assets.

Various impacts of the enacted legislation are still being evaluated by the Company and may materially differ from the estimated impacts recognized in the first quarter of fiscal 2018 due to future treasury regulations, tax law technical corrections, and other potential guidance, notices, rulings, refined computations, actions the Company may take as a result of the tax legislation, and other items. The SEC has issued rules that allow for a measurement period of up to one year after the enactment date of the legislation to finalize the recording of the related tax impacts. 

On October 13, 2016, the U.S. Treasury and the Internal 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, 2017 and 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 2018, the Company recorded $50 million of transaction and integration costs. These costs generated a $7 million tax benefit which was impacted by the Company’s current tax position in these jurisdictions.

In the first quarter of fiscal 2018, the Company recorded $158 million of significant restructuring and impairment costs. Refer to Note 8, "Significant Restructuring and Impairment Costs," of the notes to consolidated financial statements for additional information. The restructuring costs generated a $24 million tax benefit, which was impacted by the Company’s current tax position in these jurisdictions and the lower enacted U.S. tax rate.

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 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, which was impacted by the Company’s current tax position in these jurisdictions.


19


Johnson Controls International plc
Notes to Consolidated Financial Statements
December 31, 2017
(unaudited)


10.
Pension and Postretirement Plans

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):
 
U.S. Pension Plans
 
Three Months Ended
December 31,
 
2017
 
2016
 
 
 
 
Service cost
$
4

 
$
5

Interest cost
26

 
28

Expected return on plan assets
(57
)
 
(59
)
Net actuarial gain

 
(117
)
Settlement gain

 
(8
)
Net periodic benefit credit
$
(27
)
 
$
(151
)

 
Non-U.S. Pension Plans
 
Three Months Ended
December 31,
 
2017
 
2016
 
 
 
 
Service cost
$
6

 
$
8

Interest cost
14

 
12

Expected return on plan assets
(29
)
 
(23
)
Net periodic benefit credit
$
(9
)
 
$
(3
)

 
Postretirement Benefits
 
Three Months Ended
December 31,
 
2017
 
2016
 
 
 
 
Service cost
$

 
$
1

Interest cost
2

 
1

Expected return on plan assets
(2
)
 
(3
)
Net periodic benefit credit
$

 
$
(1
)

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.

11.
Debt and Financing Arrangements

In December 2017, the Company repaid a 364-day 150 million euro floating rate term loan, plus accrued interest, scheduled to mature in September 2018.

In November 2017, the Company issued 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 repay existing debt and for other general corporate purposes.


20


Johnson Controls International plc
Notes to Consolidated Financial Statements
December 31, 2017
(unaudited)


In November 2017, the Company retired $300 million in principal amount, plus accrued interest, of its 1.4% fixed rate notes that expired in November 2017.

In October 2017, the Company completed the previously announced sale of its Scott Safety business to 3M. Net cash proceeds from the transaction of approximately $1.9 billion were used to repay a significant portion of the TSarl $4.0 billion of merger-related debt. As of December 31, 2017, the outstanding balance of the TSarl term loan was approximately $1.8 billion.

Net Financing Charges

The Company's net financing charges line item in the consolidated statements of income for the three months ended December 31, 2017 and 2016 contained the following components (in millions):
 
Three Months Ended
December 31,
 
2017
 
2016
 
 
 
 
Interest expense, net of capitalized interest costs
$
114

 
$
110

Banking fees and bond cost amortization
13

 
30

Interest income
(9
)
 
(7
)
Net foreign exchange results for financing activities
(2
)
 
3

Net financing charges
$
116

 
$
136


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

12.
Stock-Based Compensation

During September 2016, the Board of Directors of the Company approved amendments to the Johnson Controls International plc 2012 Share and Incentive Plan (the "Plan"). The types of awards authorized by the Plan comprise of stock options, stock appreciation rights, performance shares, performance units and other stock-based compensation awards. The Compensation Committee of the Company's Board of Directors determines the types of awards to be granted to individual participants and the terms and conditions of the awards. Awards are typically granted annually in the Company’s fiscal first quarter. A summary of the stock-based awards granted during the three month periods ended December 31, 2017 and 2016 is presented below:
 
Three Months Ended December 31,
 
2017
 
2016
 
Number Granted
 
Weighted Average Grant Date Fair Value
 
Number Granted
 
Weighted Average Grant Date Fair Value
 
 
 
 
 
 
 
 
Stock options
1,355,595

 
$
7.05

 
2,830,826

 
$
7.81

Stock appreciation rights

 

 
15,693

 
8.28

Restricted stock/units
2,051,817

 
37.36

 
1,512,544

 
41.74

Performance shares
496,478

 
36.31

 
846,725

 
48.40


Stock Options

Stock options are granted with an exercise price equal to the market price of the Company’s stock at the date of grant. Stock option awards typically vest between two and three years after the grant date and expire ten years from the grant date.


21


Johnson Controls International plc
Notes to Consolidated Financial Statements
December 31, 2017
(unaudited)


The fair value of each option is estimated on the date of grant using a Black-Scholes option valuation model that uses the assumptions noted in the following table. The expected life of options represents the period of time that options granted are expected to be outstanding, assessed separately for executives and non-executives. The risk-free interest rate for periods during the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. For fiscal 2018, the expected volatility is based on the historical volatility of the Company’s stock after the Adient spin-off blended with the historical volatility of certain peer companies’ stock prior to the Adient spin-off over the most recent period corresponding to the expected life as of the grant date. For fiscal 2017, the expected volatility is based on the historical volatility of certain peer companies over the most recent period corresponding to the expected life as of the grant date. The expected dividend yield is based on the expected annual dividend as a percentage of the market value of the Company’s ordinary shares as of the grant date. The Company uses historical data to estimate option exercises and employee terminations within the valuation model.
 
Three Months Ended
December 31,
 
2017
 
2016
Expected life of option (years)
6.5
 
4.75 & 6.5
Risk-free interest rate
2.28%
 
1.23% - 1.48%
Expected volatility of the Company’s stock
23.7%
 
24.6%
Expected dividend yield on the Company’s stock
2.78%
 
2.21%

Stock Appreciation Rights ("SARs")

SARs vest under the same terms and conditions as stock option awards; however, they are settled in cash for the difference between the market price on the date of exercise and the exercise price. As a result, SARs are recorded in the Company’s consolidated statements of financial position as a liability until the date of exercise. The fair value of each SAR award is estimated using a similar method described for stock options. The fair value of each SAR award is recalculated at the end of each reporting period and the liability and expense are adjusted based on the new fair value.

Restricted (Nonvested) Stock / Units

The Plan provides for the award of restricted stock or restricted stock units to certain employees. These awards are typically share settled unless the employee is a non-U.S. employee or elects to defer settlement until retirement at which point the award would be settled in cash. Restricted awards typically vest over a period of three years from the grant date. The Plan allows for different vesting terms on specific grants with approval by the Board of Directors. The value of restricted awards is based on the closing market value of the Company’s ordinary shares on the date of grant.

Performance Share Awards

The Plan permits the grant of performance-based share unit ("PSU") awards. The PSUs are generally contingent on the achievement of pre-determined performance goals over a three-year performance period as well as on the award holder's continuous employment until the vesting date. The PSUs are also indexed to the achievement of specified levels of total shareholder return versus a peer group over the performance period. Each PSU that is earned will be settled with shares of the Company's ordinary shares following the completion of the performance period, unless the award holder elected to defer a portion or all of the award until retirement which would then be settled in cash.

The fair value of each PSU is estimated on the date of grant using a Monte Carlo simulation that uses the assumptions noted in the following table. The risk-free interest rate for periods during the contractual life of the PSU is based on the U.S. Treasury yield curve in effect at the time of grant. For fiscal 2018, the expected volatility is based on the historical volatility of the Company’s stock after the Adient spin-off blended with the historical volatility of certain peer companies’ stock prior to the Adient spin-off over the most recent three-year period as of the grant date. For fiscal 2017, the expected volatility is based on historical volatility of certain peer companies over the most recent three-year period as of the grant date.

22


Johnson Controls International plc
Notes to Consolidated Financial Statements
December 31, 2017
(unaudited)


 
Three Months Ended
December 31,
 
2017
 
2016
Risk-free interest rate
1.92%
 
1.40%
Expected volatility of the Company’s stock
21.7%
 
21.0%


13.
Earnings Per Share

The Company presents both basic and diluted earnings per share ("EPS") amounts. Basic EPS is calculated by dividing net income attributable to Johnson Controls by the weighted average number of ordinary shares outstanding during the reporting period. Diluted EPS is calculated by dividing net income attributable to Johnson Controls by the weighted average number of ordinary shares and ordinary equivalent shares outstanding during the reporting period that are calculated using the treasury stock method for stock options, unvested restricted stock and unvested performance share awards. The treasury stock method assumes that the Company uses the proceeds from the exercise of stock option awards to repurchase ordinary shares at the average market price during the period. The assumed proceeds under the treasury stock method include the purchase price that the grantee will pay in the future and compensation cost for future service that the Company has not yet recognized. For unvested restricted stock and unvested performance share awards, assumed proceeds under the treasury stock method would include unamortized compensation cost.

The following table reconciles the numerators and denominators used to calculate basic and diluted earnings per share (in millions):
 
Three Months Ended
December 31,
 
2017
 
2016
Income Available to Ordinary Shareholders
     
 
 
 
Income from continuing operations
$
230

 
$
372

Loss from discontinued operations

 
(43
)
Basic and diluted income available to shareholders
$
230

 
$
329

 
 
 
 
Weighted Average Shares Outstanding
 
 
 
Basic weighted average shares outstanding
926.1

 
937.2

Effect of dilutive securities:
 
 
 
Stock options, unvested restricted stock and
     unvested performance share awards
7.2

 
10.2

Diluted weighted average shares outstanding
933.3

 
947.4

 
 
 
 
Antidilutive Securities
 
 
 
Options to purchase shares
1.0

 
0.1


During the three months ended December 31, 2017 and 2016, the Company declared a dividend of $0.26 and $0.25, respectively, per share. The Company paid all dividends in the month subsequent to the end of each fiscal quarter.


23


Johnson Controls International plc
Notes to Consolidated Financial Statements
December 31, 2017
(unaudited)


14.
Equity and Noncontrolling Interests

Other comprehensive income includes activity relating to discontinued operations. The following schedules present changes in consolidated equity attributable to Johnson Controls and noncontrolling interests (in millions, net of tax):
 
Three Months Ended December 31, 2017
 
Three Months Ended December 31, 2016
 
Equity
Attributable to
Johnson Controls International plc
 
Equity
Attributable to
Noncontrolling
Interests
 
Total
Equity
 
Equity
Attributable to
Johnson Controls International plc
 
Equity
Attributable to
Noncontrolling
Interests
 
Total
Equity
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance, September 30,
$
20,447

 
$
920

 
$
21,367

 
$
24,118

 
$
972

 
$
25,090

Total comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Net income
230

 
28

 
258

 
329

 
36

 
365

Foreign currency translation adjustments
58

 
16

 
74

 
(659
)
 
(35
)
 
(694
)
Realized and unrealized gains on derivatives
1

 
1

 
2

 

 
4

 
4

Realized and unrealized losses on marketable securities

 

 

 
(2
)
 

 
(2
)
    Other comprehensive income (loss)
59

 
17

 
76

 
(661
)
 
(31
)
 
(692
)
Comprehensive income (loss)
289

 
45

 
334

 
(332
)
 
5

 
(327
)
 
 
 
 
 
 
 
 
 
 
 
 
Other changes in equity:
 
 
 
 
 
 
 
 
 
 
 
Cash dividends—ordinary shares
(242
)
 

 
(242
)
 
(236
)
 

 
(236
)
Repurchases of ordinary shares
(150
)
 

 
(150
)
 

 

 

Change in noncontrolling interest share

 

 

 

 
(20
)
 
(20
)
Adoption of ASU 2016-09
179

 

 
179

 

 

 

Spin-off of Adient

 

 

 
(4,020
)
 
(138
)
 
(4,158
)
Other, including options exercised
12

 

 
12

 
47

 

 
47

Ending balance, December 31
$
20,535

 
$
965

 
$
21,500

 
$
19,577

 
$
819

 
$
20,396

 
 
 
 
 
 
 
 
 
 
 
 
As previously disclosed, during the quarter ended December 31, 2017, the Company adopted ASU No. 2016-09. As a result, the Company recognized deferred tax assets of $179 million related to certain operating loss carryforwards resulting from the exercise of employee stock options and restricted stock vestings on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of October 1, 2017.

As previously disclosed, on October 31, 2016, the Company completed the Adient spin-off. As a result of the spin-off, the Company divested net assets of approximately $4.0 billion.

Following the Tyco Merger, the Company adopted, subject to the ongoing existence of sufficient distributable reserves, the existing Tyco International plc $1 billion share repurchase program in September 2016. In December 2017, the Company's Board of Directors approved an $1 billion increase to its share repurchase authorization. The share repurchase program does not have an expiration date and may be amended or terminated by the Board of Directors at any time without prior notice. For the three month period ended December 31, 2017, the Company repurchased $150 million of its ordinary shares. For the three month period ended December 31, 2016, the Company had no repurchases of its ordinary shares. As of December 31, 2017, approximately $1.2 billion remains available under the share repurchase program.

The Company consolidates certain subsidiaries in which the noncontrolling interest party has within its control the right to require the Company to redeem all or a portion of its interest in the subsidiary. The redeemable noncontrolling interests are reported at their estimated redemption value. Any adjustment to the redemption value impacts retained earnings but does not impact net income. Redeemable noncontrolling interests which are redeemable only upon future events, the occurrence of which is not currently probable, are recorded at carrying value.

24


Johnson Controls International plc
Notes to Consolidated Financial Statements
December 31, 2017
(unaudited)



The following schedules present changes in the redeemable noncontrolling interests (in millions):
 
Three Months Ended
December 31,
 
2017
 
2016
 
 
 
 
Beginning balance, September 30
$
211

 
$
234

Net income
13

 
13

Foreign currency translation adjustments
5

 
(9
)
Realized and unrealized losses on derivatives
(3
)
 

Dividends

 
(43
)
Spin-off of Adient

 
(36
)
Ending balance, December 31
$
226

 
$
159

 
 
 
The following schedules present changes in accumulated other comprehensive income ("AOCI") attributable to Johnson Controls (in millions, net of tax):
 
Three Months Ended
December 31,
 
2017
 
2016
 
 
 
 
Foreign currency translation adjustments ("CTA")
 
 
 
Balance at beginning of period
$
(481
)
 
$
(1,152
)
Aggregate adjustment for the period (net of tax effect of $1 and $5)*
58

 
(659
)
Adient spin-off impact (net of tax effect of $0)

 
563

Balance at end of period
(423
)
 
(1,248
)
 
 
 
 
Realized and unrealized gains (losses) on derivatives
 
 
 
Balance at beginning of period
6

 
4

Current period changes in fair value (net of tax effect of $3 and $4)
6

 
6

Reclassification to income (net of tax effect of $(2) and $(3)) **
(5
)
 
(6
)
Adient spin-off impact (net of tax effect of $0 and $6)

 
16

Balance at end of period
7

 
20

 
 
 
 
Realized and unrealized gains (losses) on marketable securities
 
 
 
Balance at beginning of period
4

 
(1
)
Current period changes in fair value (net of tax effect of $0)

 
(2
)
Balance at end of period
4

 
(3
)
 
 
 
 
Pension and postretirement plans
 
 
 
Balance at beginning of period
(2
)
 
(4
)
Adient spin-off impact (net of tax effect of $0)

 
2

Balance at end of period
(2
)
 
(2
)
 
 
 
 
Accumulated other comprehensive loss, end of period
$
(414
)
 
$
(1,233
)
 
 
 
 

25


Johnson Controls International plc
Notes to Consolidated Financial Statements
December 31, 2017
(unaudited)


* During the three months ended December 31, 2017, $12 million of cumulative CTA were recognized as part of the divestiture-related gain recognized as a result of the divestiture of Scott Safety.

** Refer to Note 15, "Derivative Instruments and Hedging Activities," of the notes to consolidated financial statements for disclosure of the line items in the consolidated statements of income affected by reclassifications from AOCI into income related to derivatives.

15.
Derivative Instruments and Hedging Activities

The Company selectively uses derivative instruments to reduce market risk associated with changes in foreign currency, commodities, stock-based compensation liabilities and interest rates. Under Company policy, the use of derivatives is restricted to those intended for hedging purposes; the use of any derivative instrument for speculative purposes is strictly prohibited. A description of each type of derivative utilized by the Company to manage risk is included in the following paragraphs. In addition, refer to Note 16, "Fair Value Measurements," of the notes to consolidated financial statements for information related to the fair value measurements and valuation methods utilized by the Company for each derivative type.

Cash Flow Hedges

The Company has global operations and participates in the foreign exchange markets to minimize its risk of loss from fluctuations in foreign currency exchange rates. The Company selectively hedges anticipated transactions that are subject to foreign exchange rate risk primarily using foreign currency exchange hedge contracts. The Company hedges 70% to 90% of the nominal amount of each of its known foreign exchange transactional exposures. As cash flow hedges under ASC 815, "Derivatives and Hedging," the hedge gains or losses due to changes in fair value are initially recorded as a component of AOCI and are subsequently reclassified into earnings when the hedged transactions occur and affect earnings. These contracts were highly effective in hedging the variability in future cash flows attributable to changes in currency exchange rates during the three months ended December 31, 2017 and 2016.

The Company selectively hedges anticipated transactions that are subject to commodity price risk, primarily using commodity hedge contracts, to minimize overall price risk associated with the Company’s purchases of lead, copper, tin, aluminum and polypropylene in cases where commodity price risk cannot be naturally offset or hedged through supply base fixed price contracts. Commodity risks are systematically managed pursuant to policy guidelines. As cash flow hedges, the effective portion of the hedge gains or losses due to changes in fair value are initially recorded as a component of AOCI and are subsequently reclassified into earnings when the hedged transactions, typically sales, occur and affect earnings. The maturities of the commodity hedge contracts coincide with the expected purchase of the commodities. These contracts were highly effective in hedging the variability in future cash flows attributable to changes in commodity prices during the three months ended December 31, 2017 and 2016.

The Company had the following outstanding contracts to hedge forecasted commodity purchases:
 
 
 
 
Volume Outstanding as of
Commodity
 
Units
 
December 31, 2017
 
September 30, 2017
 
 
 
 
 
 
 
Copper
 
Metric Tons
 
3,765

 
1,962

Polypropylene
 
Metric Tons
 
21,762

 
19,563

Lead
 
Metric Tons
 
13,791

 
24,705

Aluminum
 
Metric Tons
 
5,295

 
2,169

Tin
 
Metric Tons
 
1,655

 
1,715




26


Johnson Controls International plc
Notes to Consolidated Financial Statements
December 31, 2017
(unaudited)


Fair Value Hedges

The Company selectively uses interest rate swaps to reduce market risk associated with changes in interest rates for its fixed-rate bonds. As fair value hedges, the interest rate swaps and related debt balances are valued under a market approach using publicized swap curves. Changes in the fair value of the swap and hedged portion of the debt are recorded in the consolidated statements of income. As of September 30, 2016, the Company had four fixed to floating interest rate swaps totaling $400 million to hedge the coupon of its 2.6% notes that matured in December 2016, three fixed to floating interest rate swaps totaling $300 million to hedge the coupon of its 1.4% notes maturing November 2017 and one fixed to floating interest rate swap totaling $150 million to hedge the coupon of its 7.125% notes maturing July 2017. In December 2016, the four remaining outstanding interest rate swaps were terminated. The Company had no interest rate swaps outstanding at December 31, 2017 and September 30, 2017, respectively.

Net Investment Hedges

The Company enters into foreign currency denominated debt obligations to selectively hedge portions of its net investment in non-U.S. subsidiaries. The currency effects of the debt obligations are reflected in the AOCI account within shareholders’ equity attributable to Johnson Controls ordinary shareholders where they offset gains and losses recorded on the Company’s net investments globally. At December 31, 2017, the Company had one billion euro, 750 million euro, 423 million euro and 58 million euro bonds designated as net investment hedges in the Company's net investment in Europe and 35 billion yen of foreign denominated debt designated as net investment hedge in the Company's net investment in Japan. At September 30, 2017, the Company had one billion euro, 423 million euro and 58 million euro bonds designated as net investment hedges in the Company's net investment in Europe and 35 billion yen of foreign denominated debt designated as net investment hedge in the Company's net investment in Japan.

Derivatives Not Designated as Hedging Instruments

The Company selectively uses equity swaps to reduce market risk associated with certain of its stock-based compensation plans, such as its deferred compensation plans. These equity compensation liabilities increase as the Company’s stock price increases and decrease as the Company’s stock price decreases. In contrast, the value of the swap agreement moves in the opposite direction of these liabilities, allowing the Company to fix a portion of the liabilities at a stated amount. As of December 31, 2017, the Company hedged approximately 1.8 million shares of its ordinary shares, which have a cost basis of $73 million. As of September 30, 2017, the Company hedged approximately 1.4 million shares of its ordinary shares, which have a cost basis of $58 million.

The Company also holds certain foreign currency forward contracts which do not qualify for hedge accounting treatment. The change in fair value of foreign currency exchange derivatives not designated as hedging instruments under ASC 815 are recorded in the consolidated statements of income.


27


Johnson Controls International plc
Notes to Consolidated Financial Statements
December 31, 2017
(unaudited)


Fair Value of Derivative Instruments

The following table presents the location and fair values of derivative instruments and hedging activities included in the Company’s consolidated statements of financial position (in millions):
 
Derivatives and Hedging Activities Designated
as Hedging Instruments under ASC 815
 
Derivatives and Hedging Activities Not
Designated as Hedging Instruments under ASC 815
 
December 31,
 
September 30,
 
December 31,
 
September 30,
 
2017
 
2017
 
2017
 
2017
Other current assets
 
 
 
 
 
 
 
Foreign currency exchange derivatives
$
35

 
$
27

 
$
21

 
$

Commodity derivatives
6

 
9

 

 

Other noncurrent assets
 
 
 
 
 
 
 
Equity swap

 

 
68

 
55

Total assets
$
41

 
$
36

 
$
89

 
$
55

 
 
 
 
 
 
 
 
Other current liabilities
 
 
 
 
 
 
 
Foreign currency exchange derivatives
$
25

 
$
21

 
$
16

 
$
25

         Commodity derivatives
1

 
1

 

 

Long-term debt
 
 
 
 
 
 
 
Foreign currency denominated debt
2,981

 
2,058

 

 

Total liabilities
$
3,007

 
$
2,080

 
$
16

 
$
25


Counterparty Credit Risk

The use of derivative financial instruments exposes the Company to counterparty credit risk. The Company has established policies and procedures to limit the potential for counterparty credit risk, including establishing limits for credit exposure and continually assessing the creditworthiness of counterparties. As a matter of practice, the Company deals with major banks worldwide having strong investment grade long-term credit ratings. To further reduce the risk of loss, the Company generally enters into International Swaps and Derivatives Association ("ISDA") master netting agreements with substantially all of its counterparties. The Company's derivative contracts do not contain any credit risk related contingent features and do not require collateral or other security to be furnished by the Company or the counterparties. The Company's exposure to credit risk associated with its derivative instruments is measured on an individual counterparty basis, as well as by groups of counterparties that share similar attributes. The Company does not anticipate any non-performance by any of its counterparties, and the concentration of risk with financial institutions does not present significant credit risk to the Company.

The Company enters into ISDA master netting agreements with counterparties that permit the net settlement of amounts owed under the derivative contracts. The master netting agreements generally provide for net settlement of all outstanding contracts with a counterparty in the case of an event of default or a termination event. The Company has not elected to offset the fair value positions of the derivative contracts recorded in the consolidated statements of financial position. Collateral is generally not required of the Company or the counterparties under the master netting agreements. As of December 31, 2017 and September 30, 2017, no cash collateral was received or pledged under the master netting agreements.

The gross and net amounts of derivative assets and liabilities were as follows (in millions):
 
Fair Value of Assets
 
Fair Value of Liabilities
 
December 31,
 
September 30,
 
December 31,
 
September 30,
 
2017
 
2017
 
2017
 
2017
Gross amount recognized
$
130

 
$
91

 
$
3,023

 
$
2,105

Gross amount eligible for offsetting
(27
)
 
(16
)
 
(27
)
 
(16
)
Net amount
$
103

 
$
75

 
$
2,996

 
$
2,089

    

28


Johnson Controls International plc
Notes to Consolidated Financial Statements
December 31, 2017
(unaudited)


Derivatives Impact on the Statements of Income and Statements of Comprehensive Income

The following table presents the effective portion of pre-tax gains (losses) recorded in other comprehensive income (loss) related to cash flow hedges for the three months ended December 31, 2017 and 2016 (in millions):
Derivatives in ASC 815 Cash Flow Hedging Relationships
 
Three Months Ended December 31,
 
2017
 
2016
Foreign currency exchange derivatives
 
$
6

 
$
8

Commodity derivatives
 
3

 
2

Total
 
$
9

 
$
10


The following tables present the location and amount of the effective portion of pre-tax gains (losses) on cash flow hedges reclassified from AOCI into the Company’s consolidated statements of income for the three months ended December 31, 2017 and 2016 (in millions):
Derivatives in ASC 815 Cash Flow
Hedging Relationships
 
Location of Gain (Loss) Reclassified
from AOCI into Income
 
Three Months Ended December 31,
 
2017
 
2016
Foreign currency exchange derivatives
 
Cost of sales
 
$
2

 
$
8

Commodity derivatives
 
Cost of sales
 
5

 
1

Total
 
 
 
$
7

 
$
9


 The following table presents the location and amount of pre-tax gains (losses) on fair value hedges recognized in the Company’s consolidated statements of income for the three months ended December 31, 2017 and 2016 (in millions):
Derivatives in ASC 815 Fair Value
Hedging Relationships
 
Location of Gain (Loss)
Recognized in Income on Derivative
 
Three Months Ended December 31,
 
2017
 
2016
Interest rate swap
 
Net financing charges
 
$

 
$
(1
)
Fixed rate debt swapped to floating
 
Net financing charges
 

 
2

Total
 
 
 
$

 
$
1


The following table presents the location and amount of pre-tax gains (losses) on derivatives not designated as hedging instruments recognized in the Company’s consolidated statements of income for the three months ended December 31, 2017 and 2016 (in millions):
 
 
 
 
Amount of Gain (Loss) Recognized in
Income on Derivative
Derivatives Not Designated as Hedging Instruments under ASC 815
 
Location of Gain (Loss)
Recognized in Income on Derivative
 
Three Months Ended December 31,
 
2017
 
2016
Foreign currency exchange derivatives
 
Cost of sales
 
$
2

 
$
1

Foreign currency exchange derivatives
 
Net financing charges
 
4

 
4

Foreign currency exchange derivatives
 
Income tax provision
 
2

 
(3
)
Foreign currency exchange derivatives
 
Income (loss) from discontinued operations
 

 
5

Equity swap
 
Selling, general and administrative
 
(2
)
 

Total
 
 
 
$
6

 
$
7


The effective portion of pre-tax gains (losses) recorded in CTA within other comprehensive income (loss) related to net investment hedges were $(36) million and $47 million for the three months ended December 31, 2017 and 2016, respectively. For the three months ended December 31, 2017 and 2016, no gains or losses were reclassified from CTA into income for the Company’s outstanding net investment hedges.


29


Johnson Controls International plc
Notes to Consolidated Financial Statements
December 31, 2017
(unaudited)


16.
Fair Value Measurements

ASC 820, "Fair Value Measurement," defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a three-level fair value hierarchy that prioritizes information used in developing assumptions when pricing an asset or liability as follows:

Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities;

Level 2: Quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and

Level 3: Unobservable inputs where there is little or no market data, which requires the reporting entity to develop its own assumptions.

ASC 820 requires the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.

Recurring Fair Value Measurements

The following tables present the Company’s fair value hierarchy for those assets and liabilities measured at fair value as of December 31, 2017 and September 30, 2017 (in millions):
 
Fair Value Measurements Using:
 
Total as of
December 31, 2017
 
Quoted Prices
in Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Other current assets
 
 
 
 
 
 
 
Foreign currency exchange derivatives
$
56

 
$

 
$
56

 
$