INCOME TAXES
In the fourth quarter of fiscal 2013, the Company changed its method of inventory costing for certain inventory in its Power Solutions business to the first-in first-out (FIFO) method from the last-in first-out (LIFO) method. Certain amounts have been revised to reflect the retrospective application of this accounting policy change. The $112 million adjustment to the opening balance of retained earnings as of September 30, 2010 was net of a $73 million tax provision. Refer to Note 1, “Summary of Significant Accounting Policies,” of the notes to consolidated financial statements for further details surrounding this accounting policy change.
The more significant components of the Company’s income tax provision from continuing operations are as follows (in millions):
|
| | | | | | | | | | | |
| Year Ended September 30, |
| 2013 | | 2012 | | 2011 |
Tax expense at federal statutory rate | $ | 863 |
| | $ | 532 |
| | $ | 627 |
|
State income taxes, net of federal benefit | 46 |
| | 17 |
| | (10 | ) |
Foreign income tax expense at different rates and foreign losses without tax benefits | (317 | ) | | (381 | ) | | (351 | ) |
U.S. tax on foreign income | (69 | ) | | (20 | ) | | 28 |
|
Reserve and valuation allowance adjustments | 197 |
| | 13 |
| | (30 | ) |
U.S. credits and incentives | (28 | ) | | (13 | ) | | (7 | ) |
Gain on business divestiture | 59 |
| | — |
| | — |
|
Restructuring and impairment costs | 235 |
| | 81 |
| | — |
|
Change in assertion over permanently reinvested earnings | 210 |
| | — |
| | — |
|
Other | (28 | ) | | (20 | ) | | 1 |
|
Provision for income taxes | $ | 1,168 |
| | $ | 209 |
| | $ | 258 |
|
The effective rate is above the U.S. statutory rate for fiscal 2013 primarily due to the tax consequences of the sale of the HomeLink® product line, significant restructuring and impairment costs, the change in our assertion over reinvestment of foreign undistributed earnings primarily related to the Electronics business, and valuation allowance and uncertain tax position adjustments, partially offset by favorable tax audit resolutions, the benefits of continuing global tax planning initiatives and income in certain non-U.S. jurisdictions with a tax rate lower than the U.S. statutory tax rate. The effective rate is below the U.S. statutory rate for fiscal 2012 and 2011 primarily due to continuing global tax planning initiatives and income in certain non-U.S. jurisdictions with a rate of tax lower than the U.S. statutory tax rate.
Valuation Allowances
The Company reviews the realizability of its deferred tax asset valuation allowances on a quarterly basis, or whenever events or changes in circumstances indicate that a review is required. In determining the requirement for a valuation allowance, the historical and projected financial results of the legal entity or consolidated group recording the net deferred tax asset are considered, along with any other positive or negative evidence. Since future financial results may differ from previous estimates, periodic adjustments to the Company’s valuation allowances may be necessary.
In the fourth quarter of fiscal 2013, the Company performed an analysis related to the realizability of its worldwide deferred tax assets. As a result, and after considering tax planning initiatives and other positive and negative evidence, the Company determined that it was more likely than not that deferred tax assets within Germany and Poland would not be realized. The Company also determined that it was more likely than not that the deferred tax assets within two French Power Solutions entities would be realized. Therefore, the Company recorded $145 million of net valuation allowances as income tax expense in the three month period ended September 30, 2013.
In the second quarter of fiscal 2013, the Company determined that it was more likely than not that a portion of the deferred tax assets within Brazil and Germany would not be realized. Therefore, the Company recorded $94 million of valuation allowances as income tax expense.
In fiscal 2012, the Company recorded an overall increase to its valuation allowances of $47 million primarily due to a discrete period income tax adjustment in the fourth quarter. In the fourth quarter of fiscal 2012, the Company performed an analysis related to the realizability of its worldwide deferred tax assets. As a result, and after considering tax planning initiatives and other positive and negative evidence, the Company determined that it was more likely than not that deferred tax assets within Power Solutions in China would not be realized. Therefore, the Company recorded a $35 million valuation allowance as income tax expense in the three month period ended September 30, 2012.
In fiscal 2011, the Company recorded a decrease to its valuation allowances primarily due to a $30 million discrete period income tax adjustment in the fourth quarter. In the fourth quarter of fiscal 2011, the Company performed an analysis related to the realizability of its worldwide deferred tax assets. As a result, and after considering tax planning initiatives and other positive and negative evidence, the Company determined that it was more likely than not that the deferred tax assets primarily within Denmark, Italy, Automotive Experience in Korea and Automotive Experience in the United Kingdom would be realized. Therefore, the Company released a net $30 million of valuation allowances as a benefit to income tax expense in the three month period ended September 30, 2011.
Uncertain Tax Positions
The Company is subject to income taxes in the U.S. and numerous foreign jurisdictions. Judgment is required in determining its worldwide provision for income taxes and recording the related assets and liabilities. In the ordinary course of the Company’s business, there are many transactions and calculations where the ultimate tax determination is uncertain. The Company is regularly under audit by tax authorities.
At September 30, 2013, the Company had gross tax effected unrecognized tax benefits of $1,345 million of which $1,198 million, if recognized, would impact the effective tax rate. Total net accrued interest at September 30, 2013 was approximately $84 million (net of tax benefit).
At September 30, 2012, the Company had gross tax effected unrecognized tax benefits of $1,465 million of which $1,274 million, if recognized, would impact the effective tax rate. Total net accrued interest at September 30, 2012 was approximately $72 million (net of tax benefit).
At September 30, 2011, the Company had gross tax effected unrecognized tax benefits of $1,357 million of which $1,164 million, if recognized, would impact the effective tax rate. Total net accrued interest at September 30, 2011 was approximately $77 million (net of tax benefit).
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in millions):
|
| | | | | | | | | | | |
| Year Ended September 30, |
| 2013 | | 2012 | | 2011 |
Beginning balance, September 30 | $ | 1,465 |
| | $ | 1,357 |
| | $ | 1,262 |
|
Additions for tax positions related to the current year | 123 |
| | 143 |
| | 150 |
|
Additions for tax positions of prior years | 84 |
| | 36 |
| | 20 |
|
Reductions for tax positions of prior years | (43 | ) | | (58 | ) | | (62 | ) |
Settlements with taxing authorities | (160 | ) | | — |
| | (5 | ) |
Statute closings | (45 | ) | | (13 | ) | | (8 | ) |
Audit resolutions | (79 | ) | | — |
| | — |
|
Ending balance, September 30 | $ | 1,345 |
| | $ | 1,465 |
| | $ | 1,357 |
|
In the U.S., fiscal years 2010 through 2012 are currently under exam by the Internal Revenue Service (IRS) and 2004 through 2009 are currently under (IRS) appeals. Additionally, the Company is currently under exam in the following major foreign jurisdictions:
|
| | |
Tax Jurisdiction | | Tax Years Covered |
| | |
Belgium | | 2011 - 2012 |
Brazil | | 2004 - 2008 |
Canada | | 2007 - 2010 |
France | | 2002 - 2012 |
Germany | | 2001 - 2010 |
Italy | | 2005 - 2009 |
Japan | | 2010 - 2012 |
Korea | | 2008 - 2012 |
Mexico | | 2003 - 2004, 2008 - 2011 |
Poland | | 2008 - 2009 |
The Company expects that certain tax examinations, appellate proceedings and/or tax litigation will conclude within the next twelve months, the impact of which is not expected to be significant to the Company's consolidated financial statements.
In the third quarter of fiscal 2013, tax audit resolutions resulted in a net $79 million benefit to income tax expense.
As a result of foreign law changes during the second quarter of fiscal 2013, the Company increased its total reserve for uncertain tax positions, resulting in income tax expense of $17 million.
As a result of certain events related to prior tax planning initiatives, during the third quarter of fiscal 2012, the Company reduced the reserve for uncertain tax positions by $22 million, including $13 million of interest and penalties, resulting in a benefit to income tax expense.
Other Tax Matters
In the fourth quarter of fiscal 2013, the Company disposed of assets, the HomeLink® product line and certain businesses, which resulted in $59 million of incremental tax expense above the statutory rate on the net gain.
In the fourth quarter of fiscal 2013, the Company provided income tax expense on the foreign undistributed earnings of the non-U.S. subsidiaries primarily related to the Electronics business, which resulted in $210 million of incremental tax expense.
During fiscal 2013, the Company incurred significant charges for restructuring and impairment costs. A substantial portion of these charges cannot be benefited for tax purposes due to the Company's current tax position in these jurisdictions and the underlying tax basis in the impaired assets, thus causing a $235 million incremental tax expense.
In the third quarter of fiscal 2013, the Company resolved certain Mexican tax issues, which resulted in a $61 million benefit to income tax expense.
Impacts of Tax Legislation and Change in Statutory Tax Rates
As a result of foreign law changes during the second quarter of fiscal 2013, the Company increased its total reserve for uncertain tax positions, resulting in income tax expense of $17 million.
The "look-through rule," under subpart F of the U.S. Internal Revenue Code, expired for the Company on September 30, 2012. The "look-through rule" had provided an exception to the U.S. taxation of certain income generated by foreign subsidiaries. The rule was extended in January 2013 retroactive to the beginning of the Company's 2013 fiscal year.
During the fiscal year ended September 30, 2012, tax legislation was adopted in Japan which reduced its statutory income tax rate by 5%. Also, tax legislation was adopted in various jurisdictions to limit the annual utilization of tax losses that are carried forward. None of these changes had a material impact on the Company’s consolidated financial condition, results of operations or cash flows.
Continuing Operations
Components of the provision for income taxes on continuing operations were as follows (in millions):
|
| | | | | | | | | | | |
| Year Ended September 30, |
| 2013 | | 2012 | | 2011 |
Current | | | | | |
Federal | $ | 327 |
| | $ | 118 |
| | $ | 56 |
|
State | 41 |
| | 12 |
| | — |
|
Foreign | 527 |
| | 313 |
| | 458 |
|
| 895 |
| | 443 |
| | 514 |
|
Deferred | | | | | |
Federal | 462 |
| | 94 |
| | 95 |
|
State | 14 |
| | 18 |
| | (9 | ) |
Foreign | (203 | ) | | (346 | ) | | (342 | ) |
| 273 |
| | (234 | ) | | (256 | ) |
| | | | | |
Provision for income taxes | $ | 1,168 |
| | $ | 209 |
| | $ | 258 |
|
Consolidated domestic income from continuing operations before income taxes and noncontrolling interests for the fiscal years ended September 30, 2013, 2012 and 2011 was income of $2,335 million, $1,061 million and $1,013 million, respectively. Consolidated foreign income from continuing operations before income taxes and noncontrolling interests for the fiscal years ended September 30, 2013, 2012 and 2011 was income of $130 million, $459 million and $777 million, respectively.
Income taxes paid for the fiscal years ended September 30, 2013, 2012 and 2011were $531 million, $496 million and $384 million, respectively.
The Company has not provided additional U.S. income taxes on approximately $7.6 billion of undistributed earnings of consolidated foreign subsidiaries included in shareholders’ equity attributable to Johnson Controls, Inc. Such earnings could become taxable upon the sale or liquidation of these foreign subsidiaries or upon dividend repatriation. The Company’s intent is for such earnings to be reinvested by the subsidiaries or to be repatriated only when it would be tax effective through the utilization of foreign tax credits. It is not practicable to estimate the amount of unrecognized withholding taxes and deferred tax liability on such earnings. In the fourth quarter of fiscal 2013, the Company provided income tax expense on the foreign undistributed earnings of the non-U.S. subsidiaries primarily related to the Electronics business, which resulted in $210 million of incremental tax expense. Refer to “Capitalization” within the “Liquidity and Capital Resources” section of Item 7 for discussion of domestic and foreign cash projections.
Deferred taxes were classified in the consolidated statements of financial position as follows (in millions):
|
| | | | | | | |
| September 30, |
| 2013 | | 2012 |
Other current assets | $ | 567 |
| | $ | 518 |
|
Other noncurrent assets | 1,349 |
| | 1,783 |
|
Other current liabilities | (4 | ) | | (10 | ) |
Other noncurrent liabilities | (58 | ) | | (95 | ) |
| | | |
Net deferred tax asset | $ | 1,854 |
| | $ | 2,196 |
|
Temporary differences and carryforwards which gave rise to deferred tax assets and liabilities included (in millions):
|
| | | | | | | |
| September 30, |
| 2013 | | 2012 |
Deferred tax assets | | | |
Accrued expenses and reserves | $ | 439 |
| | $ | 488 |
|
Employee and retiree benefits | 173 |
| | 444 |
|
Net operating loss and other credit carryforwards | 2,752 |
| | 2,582 |
|
Research and development | 146 |
| | 79 |
|
| 3,510 |
| | 3,593 |
|
Valuation allowances | (1,172 | ) | | (766 | ) |
| 2,338 |
| | 2,827 |
|
Deferred tax liabilities | | | |
Property, plant and equipment | 128 |
| | 119 |
|
Intangible assets | 196 |
| | 349 |
|
Other | 160 |
| | 163 |
|
| 484 |
| | 631 |
|
| | | |
Net deferred tax asset | $ | 1,854 |
| | $ | 2,196 |
|
Note that the above tables exclude the amounts of deferred tax assets and liabilities for fiscal 2013 that have been transferred to assets held for sale and liabilities held for sale within the consolidated statement of financial position.
At September 30, 2013, the Company had available net operating loss carryforwards of approximately $5.0 billion, of which $2.1 billion will expire at various dates between 2014 and 2032, and the remainder has an indefinite carryforward period. The Company had available U.S. foreign tax credit carryforwards at September 30, 2013 of $900 million, which will expire at various dates between 2016 and 2022. The valuation allowance, generally, is for loss carryforwards for which realization is uncertain because it is unlikely that the losses will be realized given the lack of sustained profitability and/or limited carryforward periods in certain countries.
