Fitch Affirms Johnson Controls at 'BBB'; Outlook Revised to Stable

• Press Release
• Source: Fitch Ratings
• On 11:58 am EST, Monday November 2, 2009

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the Issuer Default Rating (IDR) and long-term ratings for Johnson Controls, Inc. (JCI) at 'BBB'. The short-term IDR and commercial paper ratings have been affirmed at 'F2'. The Rating Outlook has been revised to Stable from Negative. A detailed list of rating actions follows at the end of this release.

As of Sept. 30, 2009 JCI had nearly $4 billion of outstanding debt, including $46 million of equity units to which Fitch has assigned 100% equity credit.

The revision of the Rating Outlook to Stable reflects JCI's recent debt reduction, extensive restructuring that has contributed to lower costs, and a slowly improving economy that is raising automotive production modestly from extremely weak levels earlier in the year. JCI's financial profile remains weaker than it was prior to the recession, and leverage remains somewhat high for the ratings. However, the company's restructuring should allow it to be profitable at lower sales volumes and reduce leverage during the next several quarters. JCI has been clear about its intent to rebuild credit metrics that could be accomplished through a combination of better operating performance and debt reduction. Future rating upgrades are possible but will depend on the path of the economy, the amount and timing of government stimulus spending, and JCI's discretionary spending.

The ratings are supported by JCI's strong position as a global automotive supplier and its well-established market presence in the Building Efficiency (BE) business. The company is well positioned to benefit from the growing importance of environmental sustainability, and it has a large proportion of profitable aftermarket revenue in the Power and BE segments.

Free cash flow in fiscal 2010 is expected to improve substantially compared to 2009 when it was negative due to the sharp economic contraction and restructuring costs. By the end of fiscal 2009 destocking had largely been completed in the Power segment, and the Automotive Experience (AE) segment had returned to profitability. However, free cash flow could remain below the solid levels that JCI generated prior to the recession until end-market demand improves further. Rating concerns include future automotive production levels, expected weakness through 2010 in JCI's late-cycle BE business, risks related to JCI's development of new battery technology, and commodity costs.

Many of the concerns surrounding JCI's AE segment have been resolved or reduced, including the exit from bankruptcy of GM and Chrysler and JCI's gradual assumption of certain parts production from distressed suppliers. Most of JCI's restructuring efforts were concentrated at AE which reported a profit in the fourth fiscal quarter ended Sept. 30, 2009 following several quarterly losses. Although automotive production is likely to remain low, AE has reduced its breakeven volume which should permit it to be profitable even without a strong rebound in the automotive sector. JCI estimates its breakeven levels at 8.3 million units in North America and 14.3 million units in Europe which are below its estimates for actual production in both markets in 2010. Furthermore, AE is well positioned to maintain or build its market share and profitability over the long-term due to a large number of new contracts, a continuing emphasis on controlling capital investment and commodity price risk, AE's global presence, customer diversification and focus on product innovation.

JCI's other businesses are beginning to improve following weak results earlier in 2009. At BE several end-markets (security for public buildings, energy efficiency, developing countries) are generally expected to see favorable growth rates despite economic concerns. BE's late-cycle non-residential construction markets are likely to be weak through 2010 or later, but this concern is mitigated by BE's large proportion of recurring and services business and by its focus on the institutional sector (government, health care, education) that is not expected to decline as sharply as the commercial and industrial sectors. In addition, stimulus spending is expected to be directed toward building retrofit and renewable energy projects in North America that are aligned with BE's core capabilities.

The Power Solutions segment has been affected by the same challenges as AE related to low volumes in the automotive industry. However, 80% of battery sales are to the more stable global aftermarket. Margins should benefit from restructuring, new retail business added in 2009, and the planned completion of a lead smelter in calendar 2010 that should reduce production costs. Long-term issues for the battery business include the development of hybrid battery technology and expansion in Asia that will be important to the segment's long-term performance. The business has received government incentives and has applied for matching funds to assist building a lithium-ion battery facility. Challenges include alternative technologies and other large competitors.

In September 2009 JCI exchanged, for a combination of shares and cash, most of the $402 million of convertible notes and $450 million of equity units originally issued in March 2009. Fitch assigns 100% equity credit to the $46 million of equity units that remain outstanding. As a result of the exchange, debt declined by $800 million during the fourth quarter, returning it to approximately the same level reported at the beginning of the year. Debt/EBITDA at Sept. 30, 2009 was approximately 2.9 times (x) on a preliminary basis, adjusted for equity credit and excluding restructuring and certain one-time non-cash items.

At Sept. 30, 2009 JCI's liquidity included $761 million of cash and approximately $2.4 billion of committed long-term bank credit facilities, including a $2 billion facility that matures in December 2011. The credit facilities are available to back commercial paper (CP) issued under two CP programs in the U.S. and Europe. Available liquidity is offset by nearly $800 million of short-term debt and current maturities. An additional $1 billion of debt matures in fiscal 2011. Pension contributions represent another cash requirement. JCI made voluntary contributions of $150 million in fiscal 2009, including $90 million in the fourth quarter. Future contributions will partly depend on asset returns which rebounded strongly in the last half of fiscal 2009. The net pension liability totaled $789 million at the end of fiscal 2008.

Fitch affirms the ratings for JCI and its subsidiary, York International Corp. as follows:

JCI

--IDR at 'BBB';

--Senior unsecured credit facilities at 'BBB';

--Senior unsecured long-term debt at 'BBB';

--Equity units convertible on March 31, 2012 at 'BBB-';

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

York International Corp.

--IDR at 'BBB';

--Senior unsecured long-term debt at 'BBB'.

Additional information is available at 'www.fitchratings.com'. The issuer did not participate in the rating process other than through the medium of its public disclosure.

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Fitch Ratings
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