Fitch Affirms Johnson Controls at 'A-'; Outlook Revised to Stable

2008-11-10 06:04:01 -

- Fitch Ratings has affirmed the ratings for Johnson Controls, Inc. (JCI) and revised the Rating Outlook to Stable from Positive:

JCI

--Issuer default rating (IDR) at 'A-';

--Senior unsecured credit facilities at 'A-';

--Senior unsecured debt at 'A-';

--Short term IDR at 'F2'.

--Commercial paper at 'F2'.

York International Corp.

--Issuer default rating (IDR) at 'A-';

--Senior unsecured debt at 'A-';

As of Sept. 30, 2008, JCI had approximately $3.9 billion of outstanding debt.

The revision of the Outlook to Stable reflects a more gradual improvement in JCI's credit metrics than had been anticipated by Fitch, together with increasing concerns about the impact of a weakening economy on JCI's key automotive and construction markets. The ratings continue to be supported by the company's operating results and cash flow which remain solid, and JCI could potentially benefit over the long term from its strong competitive position compared to financially weaker participants, especially in the automotive businesses. However, these strengths are partly offset in the near term by a challenging operating environment that has contributed to JCI's deployment of free cash flow for restructuring and acquisitions.

In the most recent fiscal quarter, JCI acquired Plastech by forming a 70%-owned joint venture to which it contributed a cash payment of $135 million and five injection molding plants. JCI was the largest customer of Plastech, a maker of automotive interior components which filed bankruptcy in February 2008. The transaction will support JCI's automotive-related revenue although Plastech is not expected to contribute to profitability until 2010. In addition to costs to integrate Plastech, JCI announced a $495 million restructuring charge in the fourth quarter of fiscal 2008 to reduce its cost base in the automotive business and realign parts of its Power Solutions and European Building Efficiency businesses. In the near term, JCI's credit metrics are unlikely to change materially while it undertakes its restructuring efforts, addresses lower automotive production anticipated during 2009 in North America and Europe, and increases its voluntary pension contributions to improve the funded status of the plans.

Although JCI will be challenged by economic conditions, it remains focused on building stronger financial measures over the long term. Fitch believes JCI could achieve stronger credit metrics after near-term challenges have subsided, but the timing is uncertain. The company has a strong operating profile that includes a well-established presence in the Building Efficiency segment, a leading market share in automotive batteries, and a growing presence among global automotive original equipment manufacturers (OEMs) that helps to reduce exposure to the big three North American OEMs relative to JCI's total revenue. Conditions in the automotive industry, which include lower demand and the impact of strained credit markets, are expected to remain difficult at least through the end of 2009. In JCI's other segments, concerns about performance are partly mitigated by lower commodity costs and a high backlog in the Building Efficiency segment.

Debt-to-EBITDA at the end of fiscal 2008 was 1.7 times (x) on a preliminary basis (1.4x when excluding restructuring charges), above the level of around 1.2x prior to the acquisition of York in fiscal 2006. Liquidity at Sept. 30, 2008 included $384 million of cash and approximately $2,360 million of committed long-term bank credit facilities, offset by $743 million of short-term debt and current maturities. The credit facilities are available to back commercial paper (CP) issued under two CP programs in the U.S. and Europe, which JCI has been able to utilize despite recent credit market turmoil. Long-term debt maturities are minimal through 2010 and primarily include term loans of slightly more than $300 million that mature during calendar 2009.

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Fitch Ratings
Eric Ause, 312-606-2302
Cheryl Peterson, 312-606-2309 (Chicago)
Media Relations:
Cindy Stoller, 212-908-0526 (New York)
cindy.stoller@fitchratings.com