Fitch Affirms Johnson Controls at 'BBB+'; Outlook Revised to Negative

  Fitch Affirms Johnson Controls at 'BBB+'; Outlook Revised to Negative

Business Wire

CHICAGO -- August 31, 2012

Fitch Ratings has affirmed the Issuer Default Rating (IDR) and long-term
ratings for Johnson Controls, Inc. (JCI) at 'BBB+'. The Rating Outlook is
revised to Negative from Stable. A full rating list is shown below.

The Negative Rating Outlook reflects increased concerns about JCI's operating
performance in certain businesses and the company's financial flexibility
associated with negative free cash flow (FCF) and higher debt and leverage. In
the absence of operating improvements and a reduction in cash deployment for
capital expenditures and working capital, an uncertain global economic outlook
could pressure revenue and margins and delay a meaningful improvement in
credit metrics. At June 30, 2012, debt/EBITDA was 2.3x compared to 1.9x at the
end of fiscal 2011 and 1.4x at the end of fiscal 2010.

Other rating concerns include low margins in parts of the Automotive
Experience (AE) and Building Efficiency (BE) segments; weak construction
markets in the BE business; difficult conditions in Europe and slowing growth
in emerging regions; and volatile prices for lead and other raw materials. In
the AE segment, low-margin business on legacy platforms has pressured results,
and metal operations in the seating business continue to face challenges
related to purchasing and manufacturing processes. The seating issues have not
been resolved as quickly as anticipated, but the acquisitions in 2011 of
seating businesses including C. Rob Hammerstein Group (Hammerstein) and
Keiper/Recaro Automotive (Keiper) should provide additional scale and
expertise to address them effectively. In the Power Solutions (Power) segment,
lead-related costs have been high due to low retail demand that reduced
supply, but the impact is expected to be temporary.

These concerns are partly offset by JCI's diverse customer base, substantial
service and aftermarket revenue in the Power and BE segments, and effective
cost management. The company recognized a $52 million restructuring charge in
the third quarter of fiscal 2012 and expects an additional charge in the
fourth quarter. Third-quarter restructuring charges were concentrated in the
BE ($41 million) and AE ($11 million) segments and primarily involved
adjustments to production levels in response to lower-than-expected demand.

Concerns about FCF and leverage would be reduced if JCI maintains lower
spending levels expected in the fourth quarter of 2012, effectively addresses
operating challenges in certain businesses, and repays some debt. Working
capital could also begin to improve, subject to the financial condition of the
company's supply chain, particularly in Europe where suppliers could
potentially experience more stress related to declining auto production.

FCF after dividends through the first nine months of fiscal 2012 was negative
$1 billion. FCF could be positive in the fourth quarter as JCI's capital
expenditures decline from peak levels and in the absence of additional pension
contributions for the year. In addition, JCI expects modest working capital
improvements. However, Fitch estimates FCF will be negative for the full year.
Additional cash is being generated by small divestitures.

FCF could improve in 2013 to a modestly positive level of approximately $200
million-$300 million or more as estimated by Fitch. FCF in 2013 will depend on
the amount of additional pension contributions, which Fitch assumes will
remain stable, as well as cash restructuring costs, improvements in working
capital, and lower capital expenditures. Capital expenditures have been
directed toward expansion in emerging markets, new automotive launches, and
additional lead recycling capacity in the Power business. Some of these
projects are reaching completion, and others could be reduced due to slower
global economic growth. Expenditures for acquisitions and share repurchases
have been limited while JCI focuses on internal growth following approximately
$1.2 billion of acquisitions in 2011, primarily for Hammerstein and Keiper.

Pension contributions totaled $400 million through the first nine months of
fiscal 2012 and likely represent JCI's full contributions for the year. The
company estimates its pension plans will be 90% funded at the end of fiscal
2012 as a result of contributions and favorable assets returns, despite the
negative impact of a lower discount rate. As of Sept. 30, 2011, pension plans
were underfunded by $1.1 billion on a global basis. The majority of global
plans have been closed and frozen, which limits future accruals. JCI plans to
adopt mark-to-market pension accounting in the fourth quarter of fiscal 2012.

Over the long term, Fitch anticipates that JCI's operating performance could
improve as the company gains traction from ongoing actions to vertically
integrate the Power and AE businesses and as BE's construction markets
eventually recover. The company is well positioned to benefit from global
growth in its key end markets, including demand related to environmental
sustainability and energy efficiency. The ratings are also supported by the
company's leading market positions, disciplined cost structure, an expanding
presence in emerging regions, a strong presence on new automotive program
launches, and significant aftermarket business which provides attractive
margins and mitigates the impact of economic cycles.

At June 30, 2012, JCI's liquidity included $602 million of cash and a
committed long-term bank credit facility of $2.5 billion that matures in 2015.
The credit facility is available to back commercial paper. JCI also has other
smaller credit facilities available. Liquidity was offset by approximately
$925 million of short-term debt and $110 million of current maturities of
long-term debt. Scheduled long-term debt maturities are spread out, with
annual maturities ranging up to approximately $800 million during the next
five years.

WHAT COULD TRIGGER A RATING ACTION

Positive: Future developments that may, individually or collectively, lead to
a positive rating action include:

--Lower leverage resulting from debt reduction or stronger earnings;

--Higher margins in the AE segment, particularly Europe, and improvements in
the metal operations of the seating business;

--Stronger FCF that could result from a reduction in working capital
requirements, capital expenditures and pension contributions;

--Controlled discretionary spending for share repurchases and acquisitions.

Negative: Future developments that may, individually or collectively, lead to
a negative rating action include:

--Increasing pricing pressure from customers in the AE business;

--Low FCF resulting from weak sales volumes, poor margin performance or high
working capital requirements and capital expenditures;

--Large debt-funded acquisitions.

Fitch has affirmed JCI's ratings as follows:

--IDR at 'BBB+';

--Senior unsecured credit facilities at 'BBB+';

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

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

York International Corp.

--IDR at 'BBB+';

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

The Rating Outlook is now Negative.

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. The ratings above were unsolicited and have been provided
by Fitch as a service to investors.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology', Aug. 8, 2012.

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

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