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JCI > SEC Filings for JCI > Form 10-Q on 3-May-2013All Recent SEC Filings

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Form 10-Q for JOHNSON CONTROLS INC


3-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statements for Forward-Looking Information

Unless otherwise indicated, references to "Johnson Controls," the "Company," "we," "our" and "us" in this Quarterly Report on Form 10-Q refer to Johnson Controls, Inc. and its consolidated subsidiaries.

All statements in this report, other than purely historical information, including future financial position, sales, costs, earnings, cash flows, other measures of results of operations, capital expenditures or debt levels and plans, objectives, outlook, targets, guidance or goals and the assumptions upon which those statements are based, are statements that are, or could be, deemed "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words "may," "will," "expect," "intend," "estimate," "anticipate," "believe," "should," "forecast," "project" or "plan" or terms of similar meaning are also generally intended to identify forward-looking statements. Forward-looking statements are based on current expectations and assumptions that are subject to risks, uncertainties and other factors, some of which are beyond our control, which may cause actual results to differ materially from those expressed or implied by such forward-looking statements. A detailed discussion of risks, uncertainties and other factors that could cause actual results and events to differ materially from such forward-looking statements is included in the section entitled "Risk Factors" of our Annual Report on Form 10-K for the year ended September 30, 2012. Shareholders, potential investors and others should consider these factors in evaluating the forward-looking statements and should not place undue reliance on such statements. The forward-looking statements included in this report are only made as of the date of this report, and we assume no obligation, and we disclaim any obligation, to update forward-looking statements to reflect events or circumstances occurring after the date of this report.

Overview

Johnson Controls is a global diversified technology and industrial leader serving customers in more than 150 countries. The Company creates quality products, services and solutions to optimize energy and operational efficiencies of buildings; lead-acid automotive batteries and advanced batteries for hybrid and electric vehicles; and interior systems for automobiles.

Johnson Controls was originally incorporated in the state of Wisconsin in 1885 as Johnson Electric Service Company to manufacture, install and service automatic temperature regulation systems for buildings. The Company was renamed to Johnson Controls, Inc. in 1974. In 1978, the Company acquired Globe-Union, Inc., a Wisconsin-based manufacturer of automotive batteries for both the replacement and original equipment markets. The Company entered the automotive seating industry in 1985 with the acquisition of Michigan-based Hoover Universal, Inc. In 2005, the Company acquired York International, a global supplier of heating, ventilating, air-conditioning and refrigeration equipment and services.

The Building Efficiency business is a global market leader in designing, producing, marketing and installing integrated heating, ventilating and air conditioning (HVAC) systems, building management systems, controls, security and mechanical equipment. In addition, the Building Efficiency business provides technical services, energy management consulting and operations of entire real estate portfolios for the non-residential buildings market. The Company also provides residential air conditioning and heating systems and industrial refrigeration products.

The Automotive Experience business is one of the world's largest automotive suppliers, providing innovative interior systems through our design and engineering expertise. The Company's technologies extend into virtually every area of the interior including seating and overhead systems, door systems, floor consoles, instrument panels, cockpits and integrated electronics. Customers include most of the world's major automakers.

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 (OEMs) and the general vehicle battery aftermarket. The Company also supplies advanced battery technologies to power Start-Stop, hybrid and electric vehicles.

The following information should be read in conjunction with the September 30, 2012 consolidated financial statements and notes thereto, along with management's discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended September 30, 2012. References in the following discussion and analysis to "Three


Months" refer to the three months ended March 31, 2013 compared to the three months ended March 31, 2012, while references to "Year-to-Date" refer to the six months ended March 31, 2013 compared to the six months ended March 31, 2012.

Certain amounts as of March 31, 2012 have been revised to conform to the current year's presentation.

Effective October 1, 2012, the Company reorganized the reportable segments within its Automotive Experience business to align with its new management reporting structure and business activities. As a result of this change, Automotive Experience is comprised of three new reportable segments for financial reporting purposes: Seating, Interiors and Electronics. Historical information has been revised to reflect the new Automotive Experience reportable segment structure.

In the fourth quarter of fiscal 2012, the Company changed its accounting policy for recognizing pension and postretirement benefit expenses. The Company's historical accounting treatment smoothed asset returns and amortized deferred actuarial gains and losses over future years. The new mark-to-market approach includes measuring the market related value of plan assets at fair value instead of utilizing a three-year smoothing approach. In addition, the Company has elected to completely eliminate the corridor approach and recognize actuarial gains and losses in the fourth quarter of each fiscal year or at the date of a remeasurement event. The Company believes this new policy is preferable and provides greater transparency to on-going operational results. The change has no impact on future pension and postretirement funding or benefits paid to participants. The change has been reported through retrospective application of the new policy to all periods presented. This change resulted in a $15 million increase in net income attributable to Johnson Controls, Inc. ($0.02 per diluted share) for the three months ended March 31, 2012 and a $29 million increase in net income attributable to Johnson Controls, Inc. ($0.05 per diluted share) for the six months ended March 31, 2012.

Outlook

On April 23, 2013, the Company reaffirmed its fiscal 2013 full year guidance of $2.60 - $2.70 per diluted share, as previously announced on December 19, 2012. The Company noted the factors driving fiscal 2013 second half performance are expected to be the realization of benefits from restructuring actions, seasonality of the Building Efficiency business profitability with increasing benefits of improved cost and pricing initiatives, continued sequential improvements in the Automotive Experience European and South American markets, improved profitability related to vertical integration and favorable year over year net lead costs in the Power Solutions business, and improved North America and Europe production comparables.

In the second quarter of fiscal 2013, the Company announced it is exploring the potential sale of its Automotive Experience Electronics business. The process is in the early stages.

Liquidity and Capital Resources

The Company believes its capital resources and liquidity position at March 31, 2013 are adequate to meet projected needs. The Company believes requirements for working capital, capital expenditures, dividends, share repurchases, minimum pension contributions, debt maturities and any potential acquisitions in fiscal 2013 will continue to be funded from operations, supplemented by short- and long-term borrowings, if required. The Company currently manages its short-term debt position in the U.S. and euro commercial paper markets and bank loan markets. The Company continues to adjust its commercial paper maturities and issuance levels given market reactions to industry events and changes in the Company's credit rating. In the event the Company is unable to issue commercial paper, it would have the ability to draw on its $2.5 billion revolving credit facility, which matures in February 2015. There were no draws on the revolving credit facility as of March 31, 2013. As such, the Company believes it has sufficient financial resources to fund operations and meet its obligations for the foreseeable future.

The Company's debt financial covenants require a minimum consolidated shareholders' equity attributable to Johnson Controls, Inc. of at least $3.5 billion at all times and allow a maximum aggregated amount of 10% of consolidated shareholders' equity attributable to Johnson Controls, Inc. for liens and pledges. For purposes of calculating the Company's covenants, consolidated shareholders' equity attributable to Johnson Controls, Inc. is calculated without giving effect to (i) the application of Accounting Standards Codification (ASC) 715-60, "Defined Benefit Plans - Other Postretirement," or
(ii) the cumulative foreign currency translation adjustment. As of March 31, 2013, consolidated shareholders' equity attributable to Johnson Controls, Inc. as defined per the Company's debt financial covenants was $11.6 billion and there was a maximum of $314 million of liens outstanding. The Company expects to remain in compliance with all covenants and other requirements set forth in its credit agreements and indentures for the foreseeable future. None of the Company's debt agreements limit access to stated borrowing levels or require accelerated repayment in the event of a decrease in the Company's credit rating.


The key financial assumptions used in calculating the Company's pension liability are determined annually, or whenever plan assets and liabilities are re-measured as required under accounting principles generally accepted in the U.S., including the expected rate of return on our plan assets. In fiscal 2013, the Company believes the long-term rate of return will approximate 8.00%, 4.55% and 5.80% for U.S. pension, non-U.S. pension and postretirement plans, respectively. During the first six months of fiscal 2013, the Company made approximately $45 million in total pension contributions. In total, the Company expects to contribute approximately $100 million in cash to its defined benefit pension plans in fiscal 2013. The Company does not expect to make any significant contributions to its postretirement plans in fiscal 2013.

Net Sales

                        Three Months Ended March 31,                      Six Months Ended March 31,
(in millions)                2013             2012          Change            2013            2012          Change
Net sales              $        10,430     $  10,565           -1  %    $       20,852     $  20,982           -1  %

The decrease in consolidated net sales for the three months ended March 31, 2013 was due to lower sales in the Automotive Experience business ($142 million) and Building Efficiency business ($71 million), and the unfavorable impact of foreign currency translation ($73 million), partially offset by higher sales in the Power Solutions business ($151 million). Excluding the unfavorable impact of foreign currency translation, consolidated net sales decreased less than 1% as compared to the prior year. The unfavorable impacts of lower automotive industry production in Europe and softness in global building demand were partially offset by higher automotive battery shipments and increased automotive industry production in Asia and North America. Refer to the segment analysis below within Item 2 for a discussion of net sales by segment.

The decrease in consolidated net sales for the six months ended March 31, 2013 was due to the unfavorable impact of foreign currency translation ($213 million), and lower sales in the Automotive Experience business ($91 million) and Building Efficiency business ($67 million), partially offset by higher sales in the Power Solutions business ($241 million). Excluding the unfavorable impact of foreign currency translation, consolidated net sales increased less than 1% as compared to the prior year. The unfavorable impacts of lower automotive industry production in Europe and softness in global building demand were partially offset by higher automotive battery shipments and increased automotive industry production in Asia and North America. Refer to the segment analysis below within Item 2 for a discussion of net sales by segment.

Cost of Sales / Gross Profit

                          Three Months Ended March 31,                          Six Months Ended March 31,
(in millions)                2013               2012            Change            2013               2012            Change
Cost of sales          $       8,942       $       9,012           -1  %    $      17,856       $      17,893            0  %
Gross profit                   1,488               1,553           -4  %            2,996               3,089           -3  %
% of sales                      14.3 %              14.7 %                           14.4 %              14.7 %

The decrease in cost of sales for the three months ended March 31, 2013 corresponds to the sales noted above, with gross profit percentage decreasing slightly. Gross profit in the Automotive Experience business was unfavorably impacted by lower production volumes in Europe, higher operating and launch costs, and net unfavorable pricing and commercial settlements, partially offset by lower purchasing costs. The Building Efficiency business experienced favorable margin rates and benefits from pricing initiatives. Gross profit in the Power Solutions business was favorably impacted by improved pricing and product mix, increased vertical integration and lower operating costs, partially offset by higher costs for battery cores and lead. Foreign currency translation had a favorable impact on cost of sales of approximately $63 million. Refer to the segment analysis below within Item 2 for a discussion of segment income by segment.

The decrease in cost of sales for the six months ended March 31, 2013 corresponds to the sales noted above, with gross profit percentage decreasing slightly. Gross profit in the Automotive Experience business was unfavorably impacted by higher operating and launch costs related to operational inefficiencies, delay in flex labor costs related to lower production


volumes in Europe, and net unfavorable pricing and commercial settlements, partially offset by lower purchasing costs. The Building Efficiency business experienced favorable margin rates and benefits from pricing initiatives. Gross profit in the Power Solutions business was favorably impacted by improved pricing and product mix, increased vertical integration and lower operating costs, partially offset by higher costs for battery cores and lead. Foreign currency translation had a favorable impact on cost of sales of approximately $184 million. Refer to the segment analysis below within Item 2 for a discussion of segment income by segment.

Selling, General and Administrative Expenses

                          Three Months Ended March 31,                         Six Months Ended March 31,
(in millions)                2013               2012            Change           2013               2012           Change
Selling, general and
administrative
expenses               $       1,091       $       1,050            4 %     $      2,143       $      2,085            3 %
% of sales                      10.5 %               9.9 %                          10.3 %              9.9 %

Selling, general and administrative expenses (SG&A), as well as SG&A as a percentage of sales, increased slightly as compared to the three month period ended March 31, 2012. The Automotive Experience business SG&A increased primarily due to distressed supplier costs and higher engineering expenses, partially offset by prior year restructuring costs. The Building Efficiency business SG&A increased primarily due to a prior year gain on business divestitures, partially offset by prior year restructuring costs. The Power Solutions business SG&A decreased primarily due to a net legal settlement and a prior year impairment of an equity investment, partially offset by higher employee related expenses. Foreign currency translation had a favorable impact on SG&A of $5 million. Refer to the segment analysis below within Item 2 for a discussion of segment income by segment.

SG&A, as well as SG&A as a percentage of sales, increased slightly as compared to the six month period ended March 31, 2012. The Automotive Experience business SG&A increased primarily due to distressed supplier costs; and higher engineering, product development and employee related expenses; partially offset by prior year restructuring costs. The Building Efficiency business SG&A increased primarily due to a prior year gain on business divestitures, partially offset by a current year pension curtailment gain resulting from a lost Global Workplace Solutions contract and prior year restructuring costs. The Power Solutions business SG&A decreased primarily due to a net legal settlement and a prior year impairment of an equity investment, partially offset by higher employee related expenses. Foreign currency translation had a favorable impact on SG&A of $18 million. Refer to the segment analysis below within Item 2 for a discussion of segment income by segment.

Significant Restructuring Costs

Three Months Ended March 31, Six Months Ended March 31,
(in millions) 2013 2012 Change 2013 2012 Change Restructuring costs $ 84 $ - * $ 84 $ - *

* Measure not meaningful

As a continuation of its 2012 restructuring plans recorded in the third and fourth quarters of fiscal 2012, the Company recorded $84 million of significant restructuring costs in the second quarter of fiscal 2013. The restructuring actions related to cost reduction initiatives primarily for the Company's Automotive Experience Interiors segment and included planned workforce reductions and plant closures. The restructuring actions are expected to be substantially complete by the end of fiscal 2014. There were no significant restructuring costs recorded in the three or six month periods ended March 31, 2012.

Refer to Note 8, "Significant Restructuring Costs," of the notes to consolidated financial statements for further disclosure related to the Company's restructuring plans.


Net Financing Charges

                             Three Months Ended March 31,                            Six Months Ended March 31,
(in millions)                    2013                  2012          Change              2013               2012         Change
Net financing charges  $          66               $       63            5 %     $         127           $     112           13 %

The increase in net financing charges for the three and six month periods ended March 31, 2013 was primarily due to higher interest expense as a result of higher debt levels in the current period.

Equity Income

                              Three Months Ended March 31,                            Six Months Ended March 31,
(in millions)                     2013                   2012         Change              2013               2012         Change
Equity income          $            148              $       79           87 %    $         233           $     199           17 %

The increase in equity income for the three months ended March 31, 2013 was primarily due to a gain on acquisition of a partially-owned affiliate in India in the Automotive Experience business ($82 million), partially offset by a prior year gain on acquisition of a partially-owned affiliate in the Power Solutions business ($9 million). Refer to the segment analysis below within Item 2 for a discussion of segment income by segment.

The increase in equity income for the six months ended March 31, 2013 was primarily due to a gain on acquisition of a partially-owned affiliate in India in the Automotive Experience business ($82 million), partially offset by a prior year gain on redemption of a warrant for an existing partially-owned affiliate in the Power Solutions business ($25 million), a prior gain on acquisition of a partially-owned affiliate in the Power Solutions business ($9 million) and a prior year equity interest gain in the Automotive Experience business. Refer to the segment analysis below within Item 2 for a discussion of segment income by segment.

Provision for Income Taxes

                              Three Months Ended March 31,                      Six Months Ended March 31,
(in millions)                    2013                2012         Change          2013                2012          Change
Provision for income taxes $        217         $        102            *   $        313         $        215           46 %
Effective tax rate                   55 %                 20 %                        36 %                 20 %

* Measure not meaningful

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 annual 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.

For the three and six months ended March 31, 2013, the Company's effective tax rate was greater than the U.S. federal statutory rate of 35% due to valuation allowance adjustments, an uncertain tax position charge and significant restructuring costs, partially offset by foreign tax rate differentials. For the three and six months ended March 31, 2012, the Company's effective tax rate was lower than the U.S. federal statutory rate of 35% primarily due to foreign tax rate differentials.

In the second quarter of fiscal 2013, the Company performed an analysis 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 a portion of the deferred tax assets would not be utilized in Brazil and Germany. Therefore, the Company recorded $94 million of valuation allowances as 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.

Income Attributable to Noncontrolling Interests

                             Three Months Ended March 31,                             Six Months Ended March 31,
(in millions)                    2013                  2012         Change               2013                 2012         Change
Income attributable to
noncontrolling
interests              $          30               $       38          -21  %   $          60             $       73          -18  %

The decrease in income attributable to noncontrolling interests for the three and six months ended March 31, 2013 was primarily due to the effects of an increase in the Company's ownership percentage in an Automotive Experience partially-owned affiliate.

Net Income Attributable to Johnson Controls, Inc.

                            Three Months Ended March 31,                           Six Months Ended March 31,
(in millions)                    2013                 2012         Change              2013               2012         Change
Net income
attributable to
Johnson Controls, Inc. $           148             $     379          -61  %   $         502           $     803          -37  %

The decrease in net income attributable to Johnson Controls, Inc. for the three months ended March 31, 2013 was primarily due to restructuring costs, lower gross profit, higher selling, general and administrative expenses, the unfavorable impact of foreign currency translation, higher net financing charges and an increase in the provision for income taxes, partially offset by higher equity income and lower income attributable to noncontrolling interests. Diluted earnings per share for the three months ended March 31, 2013 was $0.21 compared to diluted earnings per share of $0.55 for the three months ended March 31, 2012.

The decrease in net income attributable to Johnson Controls, Inc. for the six months ended March 31, 2013 was primarily due to lower gross profit, restructuring costs, higher selling, general and administrative expenses, higher net financing charges, the unfavorable impact of foreign currency translation and an increase in the provision for income taxes, partially offset by higher equity income and lower income attributable to noncontrolling interests. Diluted earnings per share for the six months ended March 31, 2013 was $0.73 compared to diluted earnings per share of $1.17 for the six months ended March 31, 2012.

Segment Analysis

Management evaluates the performance of its business units based primarily on segment income, which is defined as income from continuing operations before income taxes and noncontrolling interests excluding net financing charges, significant restructuring costs and net mark-to-market adjustments on pension and postretirement plans.


Building Efficiency - Net Sales

                                      Net Sales                                   Net Sales
                                 Three Months Ended                           Six Months Ended
                                      March 31,                                   March 31,
(in millions)                      2013            2012        Change          2013          2012        Change
North America Systems        $      591         $    580           2  %    $    1,124     $  1,132          -1  %
. . .
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