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JCI > SEC Filings for JCI > Form 10-Q on 1-Aug-2013All Recent SEC Filings

Show all filings for JOHNSON CONTROLS INC

Form 10-Q for JOHNSON CONTROLS INC


1-Aug-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.

The Company has made statements in this document that are forward-looking and, therefore, are subject to risks and uncertainties. All statements in this document other than statements of historical fact are statements that are, or could be, deemed "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. In this document, statements regarding 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 are forward-looking statements. Words such as "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. Johnson Controls cautions that these statements are subject to numerous important risks, uncertainties, assumptions and other factors, some of which are beyond Johnson Controls' control, that could cause Johnson Controls' actual results to differ materially from those expressed or implied by such forward-looking statements. These factors include the strength of the U.S. or other economies, automotive vehicle production levels, mix and schedules, energy and commodity prices, availability of raw materials and component products, currency exchange rates, and cancellation of or changes to commercial contracts, as well as other factors discussed in Item 1A of Part I of Johnson Controls' most recent Annual Report on Form 10-K for the year ended September 30, 2012 and Johnson Controls' subsequent Quarterly Reports on Form 10-Q. 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 document are only made as of the date of this document, and Johnson Controls assumes no obligation, and disclaims any obligation, to update forward-looking statements to reflect events or circumstances occurring after the date of this document.

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 June 30, 2013 compared to the three months ended June 30, 2012, while references to "Year-to-Date" refer to the nine months ended June 30, 2013 compared to the nine months ended June 30, 2012.

Certain amounts as of June 30, 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 $14 million increase in net income attributable to Johnson Controls, Inc. ($0.02 per diluted share) for the three months ended June 30, 2012 and a $43 million increase in net income attributable to Johnson Controls, Inc. ($0.06 per diluted share) for the nine months ended June 30, 2012.

Outlook

On July 18, 2013, the Company announced that it expects fiscal 2013 fourth quarter earnings to be $0.93 - $0.95 per diluted share, resulting in full fiscal year 2013 earnings of $2.64 - $2.66 per diluted share. The Company noted that it expects that its restructuring initiative benefits, sequential improvements in the Automotive Experience European and South American businesses, year over year improvement in the Power Solutions business, and revenue growth and margin expansion in Building Efficiency will have positive impacts in the fiscal fourth quarter. This guidance excludes the potential impact of mark-to-market pension accounting, significant restructuring costs and income tax adjustments. Based on current interest rate levels and investment experience, the Company expects that the fiscal 2013 fourth quarter mark-to-market adjustment related to its pension and postretirement plans will likely be material. The Company also expects additional significant restructuring costs in the fourth quarter of fiscal 2013.

In the second quarter of fiscal 2013, the Company announced it is exploring the potential sale of its Automotive Experience Electronics business. In July 2013, the Company announced that it has signed a definitive agreement to sell its Automotive Experience Electronics' HomeLinkฎ product line to Gentex Corporation of Zeeland, Michigan for approximately $700 million. The transaction is expected to close on or about September 30, 2013. The Company believes that the continuing process to sell the remainder of the Automotive Experience Electronics business is progressing as planned.

Liquidity and Capital Resources

The Company believes its capital resources and liquidity position at June 30, 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 during the remainder of 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 June 30, 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 June 30, 2013, consolidated shareholders' equity attributable to Johnson Controls, Inc. as defined


per the Company's debt financial covenants was $11.9 billion and there was a maximum of $320 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 nine months of fiscal 2013, the Company made approximately $61 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                   Nine Months Ended
                      June 30,                            June 30,
(in millions)     2013         2012      Change       2013         2012      Change

Net sales $ 10,831 $ 10,581 2 % $ 31,683 $ 31,563 0 %

• The increase in consolidated net sales for the three months ended June 30, 2013 was due to higher sales in the Automotive Experience business ($248 million) and Power Solutions business ($106 million), partially offset by lower sales in the Building Efficiency business ($66 million) and the unfavorable impact of foreign currency translation ($38 million). Excluding the unfavorable impact of foreign currency translation, consolidated net sales increased 3% as compared to the prior year. The favorable impacts of higher Automotive Experience volumes in North America and Europe, and higher global battery shipments were partially offset by continued soft demand in Building Efficiency's North American and European markets, and weaker industry-wide aftermarket battery demand in North America and Europe. Refer to the segment analysis below within Item 2 for a discussion of net sales by segment.

• The increase in consolidated net sales for the nine months ended June 30, 2013 was due to higher sales in the Power Solutions business ($347 million) and Automotive Experience business ($157 million), partially offset by the unfavorable impact of foreign currency translation ($251 million) and lower sales in the Building Efficiency business ($133 million). Excluding the unfavorable impact of foreign currency translation, consolidated net sales increased 1% as compared to the prior year. The favorable impacts of higher Automotive Experience volumes in North America, and higher global battery shipments were partially offset by lower Automotive Experience volumes in Asia and Europe, softness in global building demand and weaker industry-wide aftermarket battery demand in North America and Europe. 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                   Nine Months Ended
                      June 30,                            June 30,
(in millions)     2013         2012      Change       2013         2012      Change
Cost of sales $   9,151      $ 9,040       1 %     $ 27,007     $ 26,933       0 %
Gross profit      1,680        1,541       9 %        4,676        4,630       1 %
% of sales         15.5 %       14.6 %                 14.8 %       14.7 %

• The increase in cost of sales for the three months ended June 30, 2013 corresponds to the sales noted above, with gross profit percentage increasing by 90 basis points. Gross profit in the Automotive Experience business was favorably impacted by higher volumes, lower purchasing and operating costs, and net favorable pricing and commercial settlements, partially offset by unfavorable sales mix and higher launch 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 higher volume, increased vertical integration including the incremental contribution of the Company's battery recycling facility, and favorable pricing and product mix net of elevated lead core prices. Foreign currency translation had a favorable impact on cost of sales of approximately $32 million. Refer to the segment analysis below within Item 2 for a discussion of segment income by segment.


• The increase in cost of sales for the nine months ended June 30, 2013 corresponds to the sales noted above, with gross profit percentage increasing slightly. Gross profit in the Automotive Experience business was favorably impacted by lower purchasing costs, partially offset by higher operating and launch costs related to operational inefficiencies, and net unfavorable pricing and commercial settlements. 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, higher volumes and increased vertical integration including the incremental contribution of the Company's battery recycling facility, partially offset by higher costs for battery cores and lead. Foreign currency translation had a favorable impact on cost of sales of approximately $216 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                            Nine Months Ended
                                 June 30,                                      June 30,
(in millions)              2013             2012          Change          2013          2012          Change
Selling, general and
administrative
expenses               $      991       $      973            2 %     $    3,134     $   3,058            2 %
% of sales                    9.1 %            9.2 %                         9.9 %         9.7 %

• Selling, general and administrative expenses (SG&A) increased slightly as compared to the three month period ended June 30, 2012, while SG&A as a percentage of sales decreased slightly over the same period. The Automotive Experience business SG&A decreased primarily due to a gain on business divestiture partially offset by higher engineering expenses. The Building Efficiency business SG&A increased primarily due to higher employee related expenses partially offset by cost reduction programs. The Power Solutions business SG&A increased primarily due to a prior year insurance settlement and higher employee related expenses. Foreign currency translation had a favorable impact on SG&A of $4 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 nine month period ended June 30, 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 a gain on business divestiture. The Building Efficiency business SG&A increased primarily due to a prior year gain on business divestitures and higher employee related expenses, partially offset by a current year pension curtailment gain resulting from a lost Global Workplace Solutions contract and cost reduction programs. The Power Solutions business SG&A increased primarily due to a prior year insurance settlement and higher employee related expenses, partially offset by a net legal settlement and a prior year impairment of an equity investment. Foreign currency translation had a favorable impact on SG&A of $22 million. Refer to the segment analysis below within Item 2 for a discussion of segment income by segment.

Significant Restructuring Costs
Three Months Ended Nine Months Ended June 30, June 30, (in millions) 2013 2012 Change 2013 2012 Change Restructuring costs $ (143 ) $ (52 ) * $ (227 ) $ (52 ) *

* Measure not meaningful

To better align its resources with its growth strategies and reduce the cost structure of its global operations to address the softness in certain underlying markets, the Company committed to a significant restructuring plan in fiscal 2012 and recorded $52 million of restructuring costs in the third quarter of fiscal 2012. As a continuation of its restructuring plan announced in fiscal 2012, the Company recorded $227 million of restructuring costs in fiscal 2013, of which $84 million was recorded in the second quarter and $143 million was recorded in the third quarter of fiscal 2013. The restructuring actions related to cost reduction initiatives in the Company's Automotive Experience, Building Efficiency and Power Solutions businesses and included planned workforce reductions, plant closures and asset impairments. The restructuring actions are expected to be substantially complete by the end of fiscal 2014.


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                                   Nine Months Ended
                                      June 30,                                            June 30,
(in millions)                   2013                 2012         Change             2013              2012         Change

Net financing charges $ 67 $ 59 14 % $ 194 $ 171 13 %

The increase in net financing charges for the three and nine month periods ended June 30, 2013 was primarily due to higher interest expense as a result of higher debt levels in the current period.

Equity Income
                    Three Months Ended                         Nine Months Ended
                         June 30,                                  June 30,
(in millions)          2013             2012    Change           2013           2012    Change

Equity income $ 75 $ 70 7 % $ 308 $ 269 14 %

• The increase in equity income for the three months ended June 30, 2013 was primarily due to higher income at certain Building Efficiency and Automotive Experience partially-owned affiliates. Refer to the segment analysis below within Item 2 for a discussion of segment income by segment.

• The increase in equity income for the nine months ended June 30, 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 year equity interest gain in the Automotive Experience business ($15 million) and a prior year equity interest 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.

Income Tax Provision (Benefit)
                              Three Months Ended                           Nine Months Ended
                                   June 30,                                    June 30,
(in millions)                2013              2012        Change        2013             2012          Change
Income tax provision
(benefit)               $      (40 )       $       71            *   $      273       $      286           -5  %
Effective tax rate              (7 )%              13 %                      19 %             18 %

* Measure not meaningful

• In calculating the income tax provision (benefit), 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 nine months ended June 30, 2013, the Company's effective tax rate was different than the U.S. federal statutory rate of 35% due to tax audit resolutions and other matters, significant restructuring costs, valuation allowance adjustments, an uncertain tax position charge and foreign tax rate differentials. For the three and nine months ended June 30, 2012, the Company's effective tax rate was different than the U.S. federal statutory rate of 35% primarily due to foreign tax rate differentials and changes in uncertain tax positions.

• In the third quarter of fiscal 2013, tax audit resolutions resulted in a net $79 million benefit to income 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.


• 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.

• 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.

Income Attributable to Noncontrolling Interests
                                 Three Months Ended                                      Nine Months Ended
                                      June 30,                                               June 30,
(in millions)                   2013                 2012          Change               2013                2012         Change
Income attributable to
noncontrolling

interests $ 23 $ 25 -8 % $ 83 $ 98 -15 %

• The decrease in income attributable to noncontrolling interests for the three months ended June 30, 2013 was primarily due to lower income at certain Automotive Experience partially-owned affiliates, partially offset by higher income at certain Building Efficiency partially-owned affiliates.

• The decrease in income attributable to noncontrolling interest for the nine months ended June 30, 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                               Nine Months Ended
                                    June 30,                                        June 30,
(in millions)                  2013              2012         Change           2013            2012         Change
Net income
attributable to
Johnson Controls, Inc. $      571             $     431           32 %    $    1,073        $   1,234          -13  %

• The increase in net income attributable to Johnson Controls, Inc. for the three months ended June 30, 2013 was primarily due to higher gross profit, an income tax benefit, higher equity income and lower income attributable . . .

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