Johnson Controls 2013 Annual Report Download - page 39

39
Power Solutions
Year Ended
September 30,
(in millions) 2012 2011 Change
Net sales $ 5,906 $ 5,875 1%
Segment income 784 822 -5%
• Net sales increased primarily due to favorable pricing and product mix ($156 million), higher volumes including the prior
year negative impact of the earthquake in Japan and related events ($144 million), and incremental sales due to business
acquisitions ($38 million), partially offset by the unfavorable impact of foreign currency translation ($193 million) and
impact of pass through pricing ($114 million).
• Segment income decreased primarily due to higher operating and transportation costs ($46 million); higher selling, general
and administrative expenses ($43 million); a gain on a fiscal 2011 acquisition of a partially-owned affiliate net of acquisition
costs and related purchase accounting adjustments and a partially-owned affiliate's restatement of prior period income
($37 million); the unfavorable impact of foreign currency translation ($21 million); an impairment of an equity investment
($14 million) and the unfavorable impact of business acquisitions ($11 million); partially offset by favorable pricing and
product mix net of lead acquisition costs including battery cores ($46 million); a gain on redemption of a warrant for an
existing partially-owned affiliate ($25 million); higher volumes including the fiscal 2011 negative impact of the earthquake
in Japan and related events ($24 million); change in asset retirement obligations ($14 million); an insurance settlement
($12 million); a gain on a fiscal 2012 acquisition of a partially-owned affiliate ($9 million) and higher equity income ($4
million).
GOODWILL, LONG-LIVED ASSETS AND OTHER INVESTMENTS
Goodwill at September 30, 2013 was $6.6 billion, $393 million lower than the prior year. The decrease was primarily due to the
impairment in the Automotive Experience Interiors segment, as discussed below, and business divestitures in the Automotive
Experience Electronics and Seating segments, partially offset by business acquisitions in the Automotive Experience Seating and
Building Efficiency Global Workplace Solutions segments.
Goodwill reflects the cost of an acquisition in excess of the fair values assigned to identifiable net assets acquired. The Company
reviews goodwill for impairment during the fourth fiscal quarter or more frequently if events or changes in circumstances indicate
the asset might be impaired. The Company performs impairment reviews for its reporting units, which have been determined to
be the Company’s reportable segments or one level below the reportable segments in certain instances, using a fair value method
based on management’s judgments and assumptions or third party valuations. The fair value of a reporting unit refers to the price
that would be received to sell the unit as a whole in an orderly transaction between market participants at the measurement date.
In estimating the fair value, the Company uses multiples of earnings based on the average of historical, published multiples of
earnings of comparable entities with similar operations and economic characteristics. In certain instances, the Company uses
discounted cash flow analyses or estimated sales price to further support the fair value estimates. The inputs utilized in the analyses
are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, “Fair Value Measurement.” The estimated
fair value is then compared with the carrying amount of the reporting unit, including recorded goodwill. The Company is subject
to financial statement risk to the extent that the carrying amount exceeds the estimated fair value. The impairment testing performed
by the Company in the fourth quarter of fiscal year 2013 indicated that the estimated fair value of the Automotive Experience
Interiors reporting unit did not exceed its corresponding carrying amount including recorded goodwill, and an impairment existed.
No other reporting unit was determined to be at risk of failing step one of the goodwill impairment test as the impairment testing
performed indicated that the estimated fair value of each reporting unit substantially exceeded its corresponding carrying amount
including recorded goodwill at September 30, 2013. No impairments existed at September 30, 2012 and 2011.
Based on a combination of factors, including the recent operating results of the Automotive Experience Interiors business,
restrictions on future capital and restructuring funding, and the Company's announced intention to explore strategic options related
to this business, the Company's forecasted cash flow estimates used in the goodwill assessment were negatively impacted as of
September 30, 2013. As a result, the Company concluded that the carrying value of the Interiors reporting unit exceeded its fair
value as of September 30, 2013. The Company recorded a goodwill impairment charge of $430 million in the fourth quarter of
fiscal 2013, which was determined by comparing the carrying value of the reporting unit's goodwill with the implied fair value of
goodwill for the reporting unit. The assumptions included in the impairment test require judgment, and changes to these inputs
could impact the results of the calculation. Other than management's internal projections of future cash flows, the primary
assumptions used in the impairment test were the weighted-average cost of capital and long-term growth rates. Although the