By Kristin Jones
Johnson Controls Inc. (JCI) outlined a series of charges related
to restructuring and accounting changes, as it became the latest
U.S. company to adopt a mark-to-market accounting method for
pension and retirement costs.
Johnson Controls, one of the world's largest producers of car
batteries, said Monday starting in the fiscal fourth quarter it
will change its accounting policy for recognizing costs related to
pension and post-retirement benefits to a mark-to-market method.
The prior accounting method deferred gains or losses in pension and
retirement plans, smoothing the impact over a number of years.
For the fiscal fourth quarter, the change will result in a
pretax adjustment estimated at $425 million to $475 million, due to
the decline in year-over-year discount rates.
The accounting switch, which the company initially disclosed in
July 2012, will also require retrospective revisions of current and
prior-year financial statements. Johnson Controls said it is
currently reviewing the full financial implications of the
move.
Honeywell International Inc. (HON) in late 2010 became the first
major U.S. business to announce a move to mark-to-market pension
accounting. Others have followed in making the switch, including
International Business Machines Corp. (IBM) and United Parcel
Service Inc. (UPS).
Mark-to-market pension accounting is favored by many accounting
experts because it provides more immediate snapshots of
pension-plan performance and is considered more transparent, and it
also mirrors international standards that go into effect in 2013.
But the mingling of big one-year pension gains or losses with
companies' business operations can make profits more volatile.
Johnson Controls also said it expects a fourth-quarter pre-tax
charge of $225 million to $275 million as the company outlined
plans to cut its workforce and shut down plants. The charge
includes employee-related costs of around $180 million to $210
million, and asset impairment costs of roughly $15 million to $20
million.
Future cash payouts related to the company's restructuring are
expected to reach around $190 million to $220 million. The
restructuring effort is expected to be completed by the end of
2014.
Also in connection with the restructuring, the company plans to
increase its tax valuation allowance by around $30 million to $35
million, due to deferred tax assets related to its discontinuing
lead-processing operations in Shanghai.
The company said last month that it planned to cut its workforce
and shut down lead-processing capabilities at its Kangqiao battery
plant in response to the Shanghai municipal government's initiative
to remove lead manufacturing from the community. The company hasn't
said how many employees it will lay off.
Johnson Controls has benefited recently from a pickup in its
core automotive business as car makers ramp up production
world-wide. The company has posted improving revenue in recent
quarters while holding margins mostly steady despite pressure from
higher input costs for some materials.
Johnson Controls recently offered to buy A123 Systems Inc.'s
(AONE) automotive business as the fellow battery maker filed for
bankruptcy protection. Chinese auto-parts maker Wanxiang Group
Corp. is also readying a bid.
Johnson Controls shares closed Monday at $26.42 and were
unchanged in after-hours trading. Through the close, the stock was
down 15% so far this year.
Write to Kristin Jones at kristin.jones@dowjones.com
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