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JCI > SEC Filings for JCI > Form 10-Q on 2-May-2014All Recent SEC Filings

Show all filings for JOHNSON CONTROLS INC

Form 10-Q for JOHNSON CONTROLS INC


2-May-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 required regulatory approvals that are material conditions for proposed transactions to close, 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 March 31, 2014 compared to the three months ended March 31, 2013, while references to "Year-to-Date" refer to the six months ended March 31, 2014 compared to the six months ended March 31, 2013.

Certain amounts as of September 30, 2013 and March 31, 2013 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 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.

At March 31, 2014, the Company determined that its Automotive Experience Electronics segment met the criteria to be classified as a discontinued operation, which required retrospective application to financial information for all periods presented. Refer to Note 4, "Discontinued Operations," of the notes to consolidated financial statements for further information regarding the Company's discontinued operations.

Outlook

On April 23, 2014, the Company announced that it is providing updated guidance now that the Automotive Experience Electronics business is being reported as a discontinued operation. Previously, the Company provided full year earnings guidance (including Electronics) of $3.15 - $3.30 per diluted share. Excluding Electronics earnings of approximately $0.10 - $0.12 per diluted share, the adjusted earnings guidance range for continuing operations would be $3.05 - $3.18 per diluted share. The Company revised this guidance for full year earnings from continuing operations to $3.10 - $3.15 per diluted share. For the third quarter of fiscal 2014, the Company expects earnings from continuing operations of $0.81 - $0.84 per diluted share, and expects segment margin improvements in all three of its businesses.

On April 16, 2014, the Company announced that it had reached a definitive agreement to purchase Air Distribution Technologies, one of the strongest and and largest independent providers of air distribution and ventilation solutions in North America, for $1.6 billion. This transaction, which is expected to close in July 2014 subject to regulatory and other approvals, is expected to significantly expand the Company's third party distribution channels and create cross-selling opportunities of existing and new products. The Company intends to finance this acquisition through the issuance of debt.

The Company believes that it is on target to close the sale of its Automotive Experience Electronics business by the end of the fiscal year and the review of strategic options for its Automotive Experience Interiors business is continuing.

Liquidity and Capital Resources

The Company believes its capital resources and liquidity position at March 31, 2014 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 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 August 2018. There were no draws on the revolving credit facility as of March 31, 2014. 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, 2014, consolidated shareholders' equity attributable to Johnson Controls, Inc. as defined per the Company's debt financial covenants was $11.3 billion and there was a maximum of $303 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 six months of fiscal 2014, the Company made approximately $47 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                   Six Months Ended
                     March 31,                           March 31,
(in millions)     2014         2013      Change       2014        2013      Change

Net sales $ 10,463 $ 10,102 4 % $ 21,037 $ 20,211 4 %

The increase in consolidated net sales for the three months ended March 31, 2014 was due to higher sales in the Automotive Experience business ($532 million) and Power Solutions business ($3 million), partially offset by lower sales in the Building Efficiency business ($148 million) and the unfavorable impact of foreign currency translation ($26 million). Excluding the unfavorable 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 were partially offset by lower demand for Building Efficiency in North America, Europe and the Middle East, and the impact of lower lead costs on pricing for Power Solutions. 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 six months ended March 31, 2014 was due to higher sales in the Automotive Experience business ($1.0 billion) and Power Solutions business ($81 million), partially offset by lower sales in the Building Efficiency business ($274 million) and the unfavorable impact of foreign currency translation ($11 million). Excluding the unfavorable 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 for Building Efficiency in North America, Europe and the Middle East, and the impact of lower lead costs on pricing for Power Solutions. 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                   Six Months Ended
                     March 31,                            March 31,
(in millions)     2014         2013      Change       2014         2013      Change

Cost of sales $   8,917      $ 8,662       3 %     $ 17,915     $ 17,335       3 %
Gross profit      1,546        1,440       7 %        3,122        2,876       9 %
% of sales         14.8 %       14.3 %                 14.8 %       14.2 %

The increase in cost of sales for the three months ended March 31, 2014 corresponds to the sales growth noted above, with gross profit percentage increasing by 50 basis points. Gross profit in the Automotive Experience business was favorably impacted by higher volumes globally, and lower purchasing and operating costs due to improved operational performance, partially offset by net unfavorable pricing and commercial settlements, and unfavorable sales mix. The Power Solutions business was impacted by favorable pricing and product mix, and increased benefits of vertical integration, partially offset by higher lead acquisition costs. Gross profit in the Building Efficiency business was unfavorably impacted by lower demand in North America, Europe and the Middle East, and contract related charges in the Middle East, partially offset by strong operating performance in North America and Asia due to cost and pricing initiatives. Foreign currency translation had a favorable impact on cost of sales of approximately $16 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 six months ended March 31, 2014 corresponds to the sales growth noted above, with gross profit percentage increasing by 60 basis points. Gross profit in the Automotive Experience business was favorably impacted by higher volumes globally, and lower purchasing and operating costs due to improved operational performance, partially offset by net unfavorable pricing and commercial settlements, and unfavorable sales mix. The Power Solutions business was impacted by favorable pricing and product mix, and increased benefits of vertical integration, partially offset by higher lead acquisition costs. Gross profit in the Building Efficiency business was unfavorably impacted by lower demand in North America, Europe and the Middle East, and contract related charges in the Middle East, partially offset by strong operating performance in North America and Asia due to cost and pricing initiatives. Foreign currency translation had an unfavorable impact on cost of sales of approximately $1 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                            Six Months Ended
                                March 31,                                    March 31,
(in millions)              2014            2013          Change          2014          2013          Change

Selling, general and
administrative
expenses               $      990       $   1,044           -5  %    $    2,028     $   2,047           -1  %
% of sales                    9.5 %          10.3 %                         9.6 %        10.1 %

Selling, general and administrative expenses (SG&A) decreased 5% as compared to the three month period ended March 31, 2013, and SG&A as a percentage of sales decreased 80 basis points over the same period. The Building Efficiency SG&A decreased primarily due to lower employee related expenses and other cost reduction initiatives. The Automotive Experience business SG&A decreased primarily due to prior year distressed supplier costs, the benefits of cost reduction initiatives and lower engineering expenses, partially offset by higher employee related expenses. The Power Solutions business SG&A increased primarily due to a prior year net favorable legal settlement. Foreign currency translation had a favorable impact on SG&A of $12 million. Refer to the segment analysis below within Item 2 for a discussion of segment income by segment.

SG&A decreased slightly as compared to the six month period ended March 31, 2013, and SG&A as a percentage of sales decreased 50 basis points over the same period. The Building Efficiency SG&A decreased primarily due to lower employee related expenses and other cost reduction initiatives, partially offset by a prior year pension curtailment gain resulting from a lost Global Workplace Solutions contract and net unfavorable contract related charges. The Automotive Experience business SG&A decreased primarily due to a gain on business divestiture, prior year distressed supplier costs, the benefits


of cost reduction initiatives and lower engineering expenses, partially offset by higher employee related expenses. The Power Solutions business SG&A increased primarily due to a prior year net favorable legal settlement and higher employee related expenses. Foreign currency translation had a favorable impact on SG&A of $9 million. Refer to the segment analysis below within Item 2 for a discussion of segment income by segment.

Restructuring and Impairment Costs
                                  Three Months Ended                                   Six Months Ended
                                       March 31,                                           March 31,
(in millions)                     2014                 2013        Change             2014                2013        Change

Restructuring and
impairment costs $ - $ 84 * $ - $ 84 *

* 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 2013 and recorded $84 million of restructuring and impairment 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 and impairment costs recorded in the three or six month periods ended March 31, 2014.

Refer to Note 9, "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                                   Six Months Ended
                                     March 31,                                           March 31,
(in millions)                   2014                 2013         Change             2014             2013         Change

Net financing charges $ 56 $ 66 -15 % $ 111 $ 126 -12 %

The decrease in net financing charges for the three and six month periods ended March 31, 2014 was primarily due to lower interest expense as a result of lower average borrowing levels and rates.

Equity Income
                   Three Months Ended                        Six Months Ended
                        March 31,                               March 31,
(in millions)         2014            2013    Change          2014           2013    Change

Equity income $ 73 $ 147 -50 % $ 185 $ 231 -20 %

The decrease in equity income for the three months ended March 31, 2014 was primarily due to a prior year gain on acquisition of a partially-owned affiliate in India in the Automotive Experience business ($82 million) and lower income at certain Building Efficiency partially-owned affiliates, partially offset by 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.

The decrease in equity income for the six months ended March 31, 2014 was primarily due to a prior year gain on acquisition of a partially-owned affiliate in India in the Automotive Experience business ($82 million) and lower income at certain Building Efficiency partially-owned affiliates, partially offset by higher income at certain Automotive Experience partially-owned affiliates and a gain on acquisition of a partially-owned affiliate in the Power Solutions business ($19 million). Refer to the segment analysis below within Item 2 for a discussion of segment income by segment.


Provision for Income Taxes
                              Three Months Ended                    Six Months Ended
                                   March 31,                           March 31,
(in millions)                 2014           2013      Change       2014         2013     Change

Provision for income taxes $    110       $    214      -49  %   $    221       $ 299      -26  %
Effective tax rate               19 %           55 %                   19 %        35 %

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, 2014, the Company's effective tax rate was lower than the U.S. federal statutory rate of 35% primarily due to global tax planning and foreign tax rate differentials. For the three months endedMarch 31, 2013, the Company's effective tax rate was higher 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 six months ended March 31, 2013, the Company's effective tax rate was equal to the U.S. federal statutory rate of 35% due to valuation allowance adjustments, an uncertain tax position charge and significant restructuring costs, offset by 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.

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 (Loss) From Discontinued Operations, Net of Tax

                              Three Months Ended                          Six Months Ended
                                  March 31,                                   March 31,
(in millions)                2014             2013        Change        2014             2013        Change

Income (loss) from
discontinued

operations, net of tax $ (172 ) $ 14 * $ (154 ) $ 30 *

* Measure not meaningful

The decrease in income (loss) from discontinued operations, net of tax, for the three and six months ended March 31, 2014 was primarily due to a second quarter discrete non-cash tax charge of $180 million related to the repatriation of foreign cash associated with the divestiture of the Electronics business.

Refer to Note 4, "Discontinued Operations," of the notes to consolidated . . .

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