RPT-Fitch affirms and withdraws ratings on Johnson Controls

Tue Jun 4, 2013 8:55am EDT

June 4 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings affirms and simultaneously withdraws the following ratings on Johnson Controls, Inc. (JCI) and its subsidiaries:

Johnson Controls, Inc.

--IDR 'BBB+';

--Senior unsecured credit facilities 'BBB+';

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

--Short-term IDR 'F2';

--Commercial paper 'F2'.

York International Corp.

--IDR 'BBB+'.

The Rating Outlook is Negative.

Fitch has decided to discontinue the ratings, which are uncompensated. The ratings incorporate JCI's leading market positions, diverse customer base, and substantial service and aftermarket revenue in the Power Solutions and Building Efficiency segments. The company is well positioned to benefit from demand related to environmental sustainability and energy efficiency, and from growth in emerging regions.

The Negative Outlook reflects concerns about weak operating performance, particularly in the Automotive Experience business, negative annual free cash flow (FCF) and higher debt and leverage. At March 31, 2013, debt/EBITDA was 2.6x compared to 2.3x at the end of fiscal 2012 and 1.9x at the end of fiscal 2011.

Leverage would be somewhat lower when including equity income from joint ventures. An improvement in JCI's operating performance and credit metrics will depend on the effectiveness of restructuring actions initiated in the last half of fiscal 2012 and second quarter of 2013, as well as stabilization in European automotive production which has declined to a low level. FCF during the first half of 2013 was negative but improved from the year earlier period.

If JCI's cost structure is reduced and weak demand in Europe stabilizes, Fitch believes the company could achieve its 2013 FCF target of $1.2 billion before dividends, including the impact of lower cash requirements to support new platform launches and JCI's focus on core businesses. These improvements could potentially address some of the concerns incorporated in the negative rating outlook. In addition, the company announced in March 2013 it is exploring the potential divestiture of its automotive electronics business, and any cash proceeds would boost near-term cash and liquidity. JCI expects to reduce net debt by approximately $1 billion during the second half of fiscal 2013.

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