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JCI > SEC Filings for JCI > Form 10-Q on 3-Feb-2014All Recent SEC Filings

Show all filings for JOHNSON CONTROLS INC

Form 10-Q for JOHNSON CONTROLS INC


3-Feb-2014

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, 2013. 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, 2013 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, 2013. References in the following discussion and analysis to "Three Months" refer to the three months ended December 31, 2013 compared to the three months ended December 31, 2012.

Certain amounts as of September 30, 2013 and December 31, 2012 have been revised to conform to the current year's presentation.

Effective October 1, 2013, the Company reorganized the reportable segments within its Building Efficiency business to align with its new management reporting structure and business activities. Prior to this reorganization, Building Efficiency was comprised of five reportable segments for financial reporting purposes: North America Systems, North America Service, Global Workplace Solutions, Asia and Other. As a result of this change, Building Efficiency is now comprised of four reportable segments for financial reporting purposes, with the only change being the combination of North America Systems and North America Service into one reportable segment called North America Systems and Service. Historical information has been revised to reflect the new Building Efficiency reportable segment structure.

In the fourth quarter of fiscal 2013, the Company changed its method of inventory costing for certain inventory in its Power Solutions business to the first-in first-out (FIFO) method from the last-in first-out (LIFO) method. The Company's other businesses also determine costs using the FIFO method. Prior to the change, Power Solutions utilized two methods of inventory costing: LIFO for inventories in the U.S. and FIFO for inventories in other countries. The Company believes that the FIFO method is preferable as it better reflects the current value of inventory on the Company's consolidated statement of financial position, provides better matching of revenues and expenses, results in uniformity across the Company's global operations with respect to the method of inventory accounting and improves comparability with the Company's peers. The change has been reported through retrospective application of the new policy to all periods presented and resulted in a $5 million increase in net income attributable to Johnson Controls, Inc., and no impact on diluted earnings per share for the three months ended December 31, 2012.

Outlook

On January 23, 2014, the Company announced that it expects fiscal 2014 second quarter earnings to be $0.64 - $0.66 per diluted share. On that date, the Company also reaffirmed its full fiscal 2014 guidance of $3.15 - $3.30 per diluted share and expected segment margin improvement in all three of its businesses.

In January 2014, the Company announced that it had reached a definitive agreement to sell its remaining Automotive Experience Electronics business to Visteon Corporation, subject to regulatory and other approvals. In the first quarter of fiscal 2014, the Company signed a memorandum of understanding to create a joint venture with Hitachi to expand its Building Efficiency product offerings, launched a strategic review of its Automotive Experience Interiors business and was awarded the largest Building Efficiency business contract in Company history for the State of Hawaii energy savings project.

Liquidity and Capital Resources

The Company believes its capital resources and liquidity position at December 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 during the remainder of fiscal 2014 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 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 August 2018. There were no draws on the revolving credit facility as of December 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 December 31, 2013, consolidated shareholders' equity attributable to Johnson Controls, Inc. as defined per the Company's debt financial covenants was $11.2 billion and there was a maximum of $581 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 2014, the Company believes the long-term rate of return will approximate 8.00%, 4.65% and 5.80% for U.S. pension, non-U.S. pension and postretirement plans, respectively. During the first three months of fiscal 2014, the Company made approximately $25 million in total pension contributions. In total, the Company expects to contribute approximately $80 million in cash to its defined benefit pension plans in fiscal 2014. The Company does not expect to make any significant contributions to its postretirement plans in fiscal 2014.

Net Sales
Three Months Ended
December 31,
(in millions) 2013 2012 Change Net sales $ 10,908 $ 10,422 5 %

The increase in consolidated net sales was due to higher sales in the Automotive Experience business ($516 million) and Power Solutions business ($78 million), and the favorable impact of foreign currency translation ($18 million), partially offset by lower sales in the Building Efficiency business ($126 million). Excluding the favorable impact of foreign currency translation, consolidated net sales increased 4% as compared to the prior year. The favorable impacts of higher Automotive Experience volumes globally, and higher global battery shipments and improved pricing in the Power Solutions business were partially offset by lower demand in the Building Efficiency Other and Global Workplace Solutions segments. 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
                    December 31,
(in millions)     2013         2012      Change
Cost of sales $   9,251      $ 8,906       4 %
Gross profit      1,657        1,516       9 %
% of sales         15.2 %       14.5 %

The increase in cost of sales corresponds to the sales growth noted above, with gross profit as a percentage of sales increasing by 70 basis points. Gross profit percentage in the Automotive Experience business was favorably impacted by lower purchasing and operating costs due to improved operational performance and increased synergies, partially offset by unfavorable sales mix, and net unfavorable pricing and commercial settlements. Gross profit percentage in the Power Solutions business was favorably impacted by favorable pricing and product mix, and increased benefits of vertical integration. Gross profit percentage in the Building Efficiency business was favorably impacted by favorable margin rates. Foreign currency translation had an unfavorable impact on cost of sales of approximately $17 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
                                                   December 31,
(in millions)                                    2013         2012      Change
Selling, general and administrative expenses $   1,084      $ 1,052       3 %
% of sales                                         9.9 %       10.1 %

Selling, general and administrative expenses (SG&A) increased slightly as compared to the three month period ended December 31, 2012, while SG&A as a percentage of sales decreased slightly over the same period. The Power Solutions business SG&A increased primarily due to higher employee related expenses. The Building Efficiency business SG&A increased primarily due to a prior year pension curtailment gain resulting from a lost Global Workplace Solutions contract and net unfavorable contract related charges, partially offset by lower employee related expenses due to cost reduction initiatives. The Automotive Experience business SG&A decreased primarily due to a gain on business divestiture. Foreign currency translation had an unfavorable impact on SG&A of $3 million. Refer to the segment analysis below within Item 2 for a discussion of segment income by segment.

Net Financing Charges
                            Three Months Ended
                               December 31,
(in millions)                  2013             2012    Change
Net financing charges $       55               $  61     -10  %

The decrease in net financing charges was primarily due to lower interest expense as a result of lower average borrowing levels in the current period.

Equity Income
Three Months Ended
December 31,
(in millions) 2013 2012 Change Equity income $ 113 $ 85 33 %

The increase in equity income was primarily due to a gain on acquisition of a partially-owned affiliate in the Power Solutions business ($19 million) and higher income at certain Automotive Experience partially-owned affiliates. Refer to the segment analysis below within Item 2 for a discussion of segment income by segment.

Provision for Income Taxes
                              Three Months Ended
                                 December 31,
(in millions)                  2013          2012      Change
Provision for income taxes $     126       $    99       27 %
Effective tax rate                20 %          20 %

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 months ended December 31, 2013 and 2012, the effective tax rate was different than the U.S. federal statutory rate of 35% primarily due to global tax planning and foreign tax rate differentials.


In the first quarter of fiscal 2014, the Company determined that it was more likely than not that the deferred tax asset associated with a capital loss in Mexico would not be utilized. Therefore, the Company recorded a $21 million valuation allowance as income tax expense.

As a result of changes to Mexican tax law in the first quarter of fiscal 2014, the Company recorded a benefit to income tax expense of $25 million.

Income Attributable to Noncontrolling Interests
                                                      Three Months Ended
                                                         December 31,
(in millions)                                            2013             2012    Change
Income attributable to noncontrolling interests $       36               $  30      20 %

The increase in income attributable to noncontrolling interests was primarily due to higher income at certain Automotive Experience partially-owned affiliates.

Net Income Attributable to Johnson Controls, Inc.
                                                       Three Months Ended
                                                          December 31,
(in millions)                                            2013            2012    Change
Net income attributable to Johnson Controls, Inc. $     469             $ 359      31 %

The increase in net income attributable to Johnson Controls, Inc. was primarily due to higher gross profit, higher equity income and lower net financing charges, partially offset by higher selling, general and administrative expenses, an increase in the provision for income taxes, higher income attributable to noncontrolling interests and the unfavorable impact of foreign currency translation. Diluted earnings per share for the three months ended December 31, 2013 was $0.69 compared to diluted earnings per share of $0.52 for the three months ended December 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 and impairment costs and net mark-to-market adjustments on pension and postretirement plans.


Building Efficiency
                                            Net Sales                                Segment Income
                                       Three Months Ended                          Three Months Ended
                                          December 31,                                December 31,
(in millions)                           2013            2012        Change         2013           2012         Change
North America Systems and Service $      991         $    988           0  %   $      67       $      68          -1  %
Global Workplace Solutions             1,077            1,134          -5  %          18              35         -49  %
Asia                                     510              505           1  %          76              66          15  %
Other                                    803              905         -11  %         (15 )             3           *
                                  $    3,381         $  3,532          -4  %   $     146       $     172         -15  %

* Measure not meaningful

Net Sales:

The increase in North America Systems and Service was due to higher volumes of equipment, controls systems, energy solutions and truck-based service ($8 million), partially offset by the unfavorable impact of foreign currency translation ($5 million).

The decrease in Global Workplace Solutions was due to a decrease in services to new and existing customers ($105 million), and the unfavorable impact of foreign currency translation ($2 million), partially offset by incremental sales from a prior year business acquisition ($50 million).

The increase in Asia was due to higher service volumes ($19 million), and higher volumes of equipment and controls systems ($7 million), partially offset by the unfavorable impact of foreign currency translation ($21 million).

The decrease in Other was due to lower volumes due to a prior year business divestiture ($57 million), and lower volumes in the Middle East ($41 million) and Europe ($29 million), partially offset by higher volumes in unitary products ($18 million) and Latin America ($4 million), and the favorable impact of foreign currency translation ($3 million).

Segment Income:

The decrease in North America Systems and Service was due to unfavorable margin rates ($13 million), net unfavorable current year contract related charges ($9 million) and the unfavorable impact of foreign currency translation ($1 million), partially offset by lower selling, general and administrative expenses ($21 million), and higher volumes ($1 million).

The decrease in Global Workplace Solutions was due to a prior year pension curtailment gain resulting from a lost contract net of other contract losses ($22 million), lower volumes ($4 million) and unfavorable margin rates ($2 million), partially offset by lower selling, general and administrative expenses ($11 million).

The increase in Asia was due to favorable margin rates ($10 million) and higher volumes ($6 million), partially offset by higher selling, general and administrative expenses ($4 million), and the unfavorable impact of foreign currency translation ($2 million).

The decrease in Other was due to lower volumes ($22 million), net unfavorable current year contract related charges ($11 million), higher selling, general and administrative expenses ($2 million), and the unfavorable impact of foreign currency translation ($1 million), partially offset by favorable margin rates ($9 million), net unfavorable prior year contract related charges ($7 million) and higher equity income ($2 million).


Automotive Experience
                       Net Sales                             Segment Income
                  Three Months Ended                       Three Months Ended
                     December 31,                             December 31,
(in millions)       2013           2012     Change           2013           2012     Change
Seating       $    4,279         $ 3,889      10 %    $     176            $  85       107 %
Interiors          1,142           1,012      13 %           22              (10 )       *
Electronics          334             313       7 %           34               26        31 %
              $    5,755         $ 5,214      10 %    $     232            $ 101       130 %

* Measure not meaningful

Net Sales:

The increase in Seating was due to higher volumes to the Company's major OEM customers ($364 million), incremental sales due to business acquisitions ($44 million) and the favorable impact of foreign currency translation ($6 million), partially offset by lower volumes due to a prior year business divestiture ($16 million), unfavorable sales mix ($6 million), and net unfavorable pricing and commercial settlements ($2 million).

The increase in Interiors was due to higher volumes to the Company's major OEM customers ($126 million) and the favorable impact of foreign currency translation ($16 million), partially offset by lower volumes due to a business divestiture ($7 million), and net unfavorable pricing and commercial settlements ($5 million).

The increase in Electronics was due to higher volumes to the Company's major OEM customers ($58 million) and the favorable impact of foreign currency translation ($3 million), partially offset by lower volumes due to a prior year business divestiture ($33 million), and net unfavorable pricing and commercial settlements ($7 million).

Segment Income:

The increase in Seating was due to higher volumes ($56 million), lower operating costs ($21 million), lower purchasing costs ($21 million), higher equity income ($11 million), lower engineering expenses ($3 million), the favorable impact of foreign currency translation ($2 million) and incremental operating income due to business acquisitions ($1 million), partially offset by higher selling, general and administrative expenses ($11 million), unfavorable mix ($7 million), net unfavorable pricing and commercial settlements ($3 million), and lower operating income due to a prior year business divestiture ($3 million).

The increase in Interiors was due to higher volumes ($27 million), a gain on business divestiture ($9 million), lower purchasing costs ($4 million), net favorable pricing and commercial settlements ($2 million), lower selling, general and administrative expenses ($1 million), and lower operating costs ($1 million), partially offset by unfavorable mix ($8 million), lower operating income due to a business divestiture ($2 million), lower equity income ($1 million) and the unfavorable impact of foreign currency translation ($1 million).

The increase in Electronics was due to higher volumes ($19 million), lower depreciation and amortization due to held for sale classification ($9 million), lower purchasing costs ($6 million), lower operating costs ($2 million) and lower engineering expenses ($2 million), partially offset by lower income due to a prior year business divestiture ($15 million), net unfavorable pricing and commercial settlements ($9 million), unfavorable mix ($4 million) and the unfavorable impact of foreign currency translation ($2 million).


Power Solutions
                   Three Months Ended
                      December 31,
(in millions)        2013           2012     Change
Net sales      $    1,772         $ 1,676       6 %
Segment income        308             276      12 %

Net sales increased due to incremental sales due to a business acquisition ($34 million), favorable pricing and product mix ($31 million), the favorable impact of foreign currency translation ($18 million) and higher sales volumes ($13 million).

Segment income increased due to favorable product mix including lead . . .

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