Johnson Controls 2011 Annual Report Download - page 11

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11
unplanned turnover or inability to attract and retain key employees could have a negative effect on our results of
operations.
Building Efficiency Risks
Failure to comply with regulations due to our contracts with U.S. government entities could adversely affect
our business and results of operations.
Our building efficiency business contracts with government entities and is subject to specific rules, regulations and
approvals applicable to government contractors. We are subject to routine audits by the Defense Contract Audit
Agency to assure our compliance with these requirements. Our failure to comply with these or other laws and
regulations could result in contract terminations, suspension or debarment from contracting with the U.S. federal
government, civil fines and damages and criminal prosecution. In addition, changes in procurement policies, budget
considerations, unexpected U.S. developments, such as terrorist attacks, or similar political developments or events
abroad that may change the U.S. federal government’s national security defense posture may affect sales to
government entities.
Volatility in commodity prices may adversely affect our results of operations.
Commodity prices were volatile in the past year, primarily steel, aluminum, copper and fuel costs. Increases in
commodity costs negatively impact the profitability of orders in backlog as prices on those orders are fixed;
therefore, in the short term we cannot adjust for changes in commodity prices. If we are not able to recover
commodity cost increases through price increases to our customers on new orders, then such increases will have an
adverse effect on our results of operations. Additionally, unfavorability in our hedging programs during a period of
declining commodity prices could result in lower margins as we reduce prices to match the market on a fixed
commodity cost level.
Conditions in the residential and commercial new construction markets may adversely affect our results of
operations.
HVAC equipment sales in the residential and commercial new construction markets correlate to the number of new
homes and buildings that are built. The strength of the residential and commercial markets depends in part on the
availability of consumer and commercial financing for our customers, along with inventory and pricing of existing
homes and buildings. If economic and credit market conditions worsen, it may result in a decline in the residential
housing construction market and construction of new commercial buildings. Such conditions could have an adverse
effect on our results of operations and result in potential liabilities or additional costs, including impairment charges.
A variety of other factors could adversely affect the results of operations of our building efficiency business.
Any of the following could materially and adversely impact the results of operations of our building efficiency
business: loss of, changes in, or failure to perform under facility management supply contracts with our major
customers; cancellation of, or significant delays in, projects in our backlog; delays or difficulties in new product
development; the potential introduction of similar or superior technologies; financial instability or market declines
of our major component suppliers; the unavailability of raw materials (primarily steel, copper and electronic
components) necessary for production of HVAC equipment; price increases of limited-source components, products
and services that we are unable to pass on to the market; unseasonable weather conditions in various parts of the
world; changes in energy costs or governmental regulations that would decrease the incentive for customers to
update or improve their building control systems; revisions to energy efficiency legislation; a decline in the
outsourcing of facility management services; availability of labor to support growth of our service businesses; and
natural or man-made disasters or losses that impact our ability to deliver facility management and other products and
services to our customers.
Automotive Experience Risks
Conditions in the automotive industry may adversely affect our results of operations.
Our financial performance depends, in part, on conditions in the automotive industry. In fiscal 2011, our largest
customers globally were automobile manufacturers Ford Motor Company (Ford), General Motors Corporation
(GM) and Daimler AG. If automakers experience a decline in the number of new vehicle sales, we may experience
reductions in orders from these customers, incur write offs of accounts receivable, incur impairment charges or