Johnson Controls Reports Record Quarterly Results
MILWAUKEE, April 19 -- Johnson Controls, Inc. today reported record results for the second quarter of fiscal 2006. In addition, the company increased its full-year earnings outlook.
Chairman and Chief Executive Officer John M. Barth said, "The quarterly operating performance was in line with our expectations. Our strategies for profitable growth and disciplined approach to cost reduction and quality improvements continue to enable us to achieve our financial commitments. We remain confident that we will extend our track record for consecutive years of record sales and earnings in 2006."
Mr. Barth continued, "We have 136,000 employees around the world who are devoted to our customers, to continuous improvement and to innovation. They make us successful, and I commend them for their efforts."
Second-Quarter Results
For the three months ended March 31, 2006, sales increased 18% to a record $8.2 billion from $6.9 billion last year, primarily reflecting increases in the building efficiency and power solutions businesses. The negative effect of foreign currency in the quarter reduced sales by approximately $315 million.
Operating income was a record $266 million versus $43 million which was reduced by a 2005 restructuring charge of $210 million. The tax rate in the 2006 quarter was 17.3%, reflecting a cumulative reduction in the annual base effective tax rate to 21% from 24.3% (see tax note). This reduction principally reflects a higher proportion of 2006 earnings coming from lower tax jurisdictions. The company expects the tax rate in 2007 to be within the range of 23% to 24%.
Income from continuing operations in the current quarter was $162 million versus $54 million in the prior year. Diluted earnings per share from continuing operations were $0.83 compared with $0.28 in the prior year.
Second-Quarter Results Excluding Special Items (Non-GAAP)
The following discussion focuses on the performance of the ongoing operations of the company and therefore excludes 2005 special items such as restructuring costs, gains from businesses divested, and a tax credit. A reconciliation to GAAP measures is provided in the footnotes to the attached Condensed Consolidated Financial Statements.
Operating income was 5% higher than the prior year due to increased earnings from the building efficiency and power solutions businesses. Income from continuing operations of $162 million compares with $165 million for 2005, as the net interest expense and acquisition accounting related to the December 2005 York acquisition more than offset York's earnings and the benefit of the lower base effective tax rate. Diluted earnings per share from continuing operations were $0.83 versus $0.85 in the prior year.
Interior experience sales for the second quarter of 2006 totaled $4.8 billion, approximately level with sales in 2005 while operating income was $135 million, 1% lower than in the prior year. Excluding the negative effect of foreign currency, sales increased 5% and operating income increased 8%. Industry light vehicle production in North America was approximately 4% higher; European production is estimated to have been up 2%. The European interiors operating margin increased over the prior year. The North American operating margin declined year-over-year due to commodity pressures and a negative vehicle mix, but improved slightly compared to the first quarter of 2006.
Power solutions sales were up 29% to $874 million from $680 million due to the impact of the July 2005 acquisition of Delphi's battery business as well as higher organic shipments. Operating income increased 14% to $75 million from $66 million due to the higher volume and improved operational efficiencies. Operating margin declined due to record high lead costs, most of which are expected to be recovered in customer pricing, as well as the Delphi battery acquisition.
Building efficiency sales increased 74% to $2.5 billion from $1.4 billion in 2005 primarily reflecting the York acquisition as well as increased sales of control systems and services for non-residential buildings in North America. Operating income increased 10% to $56 million from $51 million due to the higher volume. Excluding non-recurring acquisition costs of $22 million, operating income was up 53%. York's results improved over its 2005 second quarter, led by a strong performance by its residential air conditioning business. The backlog of uncompleted contracts was $3.3 billion, up 8% from the previous year (pro-forma including York).
2006 Full Year and Third-Quarter Outlook
Johnson Controls forecast that its diluted earnings per share from continuing operations for 2006 would be in a range of $5.25 - $5.35, including a $0.22 to $0.24 benefit from the lower effective tax rate. The company previously provided earnings guidance of $5.00 to $5.15 per share from continuing operations. Sales expectations for the year are unchanged at approximately $32 billion.
For the third quarter of 2006 the company anticipates diluted earnings per share from continuing operations of $1.65 to $1.70, an increase of 26% to 30% over the $1.31 per share earned in the third quarter of 2005.
Johnson Controls said the expected substantial increase in earnings in the second half of 2006 is primarily attributable to its building efficiency business, reflecting the absence of York acquisition accounting costs, the positive seasonality of the air conditioning industry and increased customer demand. The company said it also expects a continued strong performance by its European interiors and power solutions businesses.
The company expects that its financial position will remain strong. It anticipates that its ratio of total debt to total capitalization will decline to approximately 40% by the end of 2006 from 45% at March 31, 2006.
"We continued to make progress transforming our businesses to take advantage of the global growth opportunities," Mr. Barth said. "The underlying performance of each of our businesses continues to improve. Additionally, as we improve our cost structure, we continue to identify more opportunity to deliver greater value to our customers."
Johnson Controls is a global leader in interior experience, building efficiency and power solutions. The company provides innovative automotive interiors that help make driving more comfortable, safe and enjoyable. For buildings, it offers products and services that optimize energy use and improve comfort and security. Johnson Controls also provides batteries for automobiles and hybrid electric vehicles, along with systems engineering and service expertise. Johnson Controls , founded in 1885, is headquartered in Milwaukee, Wisconsin. For additional information, visit http://www.johnsoncontrols.com/.
JOHNSON CONTROLS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share data; unaudited)
Three Months Ended March 31,
2006 2005
GAAP GAAP Non-GAAP
Net sales $8,167 $6,899 $6,899
Cost of sales 7,114 6,072 6,072
Gross profit 1,053 827 827
Selling, general and administrative
expenses 787 574 574
Restructuring costs - 210 -
Operating income 266 43 253
Interest expense - net (69) (28) (28)
Equity income 20 19 19
Miscellaneous - net (8) (12) (12)
Income from continuing operations before
income taxes and minority interests 209 22 232
Provision (benefit) for income taxes 36 (38) 58
Minority interests in net earnings of
subsidiaries 11 6 9
Income from continuing operations 162 54 165
Income and gain on sale from discontinued
operations, net of income taxes 3 149 4
Net income $165 $203 $169
Diluted earnings per share from
continuing operations $0.83 $0.28 $0.85
Diluted earnings per share $0.84 $1.04 $0.87
Diluted weighted average shares 196 194 194
Shares outstanding at period end 195 192 192
JOHNSON CONTROLS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share data; unaudited)
Six Months Ended March 31,
2006 2005
GAAP GAAP Non-GAAP
Net sales $15,695 $13,517 $13,517
Cost of sales 13,725 11,884 11,884
Gross profit 1,970 1,633 1,633
Selling, general and administrative
expenses 1,473 1,161 1,161
Restructuring costs - 210 -
Operating income 497 262 472
Interest expense - net (114) (54) (54)
Equity income 44 40 40
Miscellaneous - net - (16) (16)
Income from continuing operations before
income taxes and minority interests 427 232 442
Provision for income taxes 74 1 108
Minority interests in net earnings of
subsidiaries 24 21 24
Income from continuing operations 329 210 310
Income and gain on sale from discontinued
operations, net of income taxes 1 161 16
Net income $330 $371 $326
Diluted earnings per share from
continuing operations $1.68 $1.08 $1.59
Diluted earnings per share $1.69 $1.91 $1.68
Diluted weighted average shares 196 194 194
Shares outstanding at period end 195 192 192
JOHNSON CONTROLS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in millions; unaudited)
March 31, September 30, March 31,
2006 2005 2005
ASSETS
Cash and cash equivalents $154 $171 $245
Accounts receivable - net 5,661 4,987 4,522
Inventories 1,598 983 890
Assets of discontinued operations 145 - -
Other current assets 1,352 998 942
Current assets 8,910 7,139 6,599
Property, plant and equipment - net 3,950 3,581 3,384
Goodwill - net 5,672 3,733 3,674
Other intangible assets - net 791 289 287
Investments in partially-owned
affiliates 470 445 423
Other noncurrent assets 1,376 957 848
Total assets $21,169 $16,144 $15,215
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt and current portion
of long-term debt $1,028 $765 $601
Accounts payable and accrued
expenses 5,348 4,686 4,279
Liabilities of discontinued
operations 36 - -
Other current liabilities 2,062 1,390 1,300
Current liabilities 8,474 6,841 6,180
Long-term debt 4,185 1,577 1,665
Minority interests in equity of
subsidiaries 138 196 143
Other noncurrent liabilities 2,069 1,472 1,535
Shareholders' equity 6,303 6,058 5,692
Total liabilities and
shareholders' equity $21,169 $16,144 $15,215
JOHNSON CONTROLS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions; unaudited)
Three Months
Ended March 31,
2006 2005
Operating Activities
Net income $165 $203
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation and amortization 181 159
Equity in earnings of partially-owned
affiliates, net of dividends received (7) (7)
Minority interests in net
earnings of subsidiaries 11 6
Gain on sale of discontinued operations - (145)
Other - net 74 (58)
Changes in working capital, excluding
acquisitions and divestitures of businesses:
Receivables 39 (467)
Inventories (55) 8
Accounts payable and accrued liabilities (61) 349
Change in other assets and liabilities 11 138
Cash provided by operating activities 358 186
Investing Activities
Capital expenditures (193) (141)
Sale of property, plant and equipment 7 4
Business divestitures - 687
Other - net (21) 27
Cash (used in) provided by
investing activities (207) 577
Financing Activities
Decrease in short and long-term debt - net (114) (534)
Payment of cash dividends (105) (92)
Other - net 54 -
Cash used in financing activities (165) (626)
Increase (decrease) in cash and
cash equivalents $(14) $137
JOHNSON CONTROLS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions; unaudited)
Six Months
Ended March 31,
2006 2005
Operating Activities
Net income $330 $371
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation and amortization 346 321
Equity in earnings of partially-owned
affiliates, net of dividends received 1 (28)
Minority interests in net
earnings of subsidiaries 24 21
Gain on sale of discontinued operations - (145)
Other - net 82 (56)
Changes in working capital, excluding
acquisitions and divestitures of businesses:
Receivables (10) (249)
Inventories (43) (2)
Accounts payable and accrued liabilities (336) 48
Change in other assets and liabilities (21) 74
Cash provided by operating activities 373 355
Investing Activities
Capital expenditures (262) (283)
Sale of property, plant and
equipment 13 8
Acquisition of businesses, net of
cash acquired (2,564) (33)
Business divestitures - 687
Other - net 65 13
Cash (used in) provided by
investing activities (2,748) 392
Financing Activities
Increase (decrease) in short and
long-term debt - net 2,352 (519)
Payment of cash dividends (109) (96)
Other - net 115 14
Cash provided by (used in)
financing activities 2,358 (601)
Increase (decrease) in cash and
cash equivalents $(17) $146
FOOTNOTES
1. Business Highlights
Three Months Six Months
Ended March 31, Ended March 31,
(in millions) (unaudited) (unaudited)
2006 2005 % 2006 2005 %
Net Sales
Building efficiency $2,490 $1,432 74% $4,298 $2,810 53%
Interior experience 4,803 4,787 0% 9,548 9,307 3%
Power solutions 874 680 29% 1,849 1,400 32%
Total $8,167 $6,899 $15,695 $13,517
Operating Income
Building efficiency $56 $51 10% $93 $86 8%
Interior experience 135 136 -1% 220 227 -3%
Power solutions 75 66 14% 184 159 16%
Total $266 $253 $497 $472
Restructuring costs - (210) - (210)
Consolidated operating
income $266 $43 $497 $262
Building efficiency - Provides facility systems and services including comfort, energy and security management for the non-residential buildings market and provides heating, ventilating, air conditioning and refrigeration products and services for the residential and non-residential buildings market.
Interior experience - Designs and manufactures interior systems and products for passenger cars and light trucks, including vans, pick-up trucks and sport/crossover utility vehicles.
Power solutions - Designs and manufactures automotive batteries for the replacement and original equipment markets.
2. Acquisition
On December 9, 2005, the Company completed its acquisition of York International Corporation (York). The Company paid $56.50 for each outstanding share of common stock plus the assumption of debt. The total value of the acquisition was approximately $3.2 billion, including approximately $565 million of debt.
3. Discontinued Operations
The Company acquired York's Bristol Compressor business as part of the York acquisition on December 9, 2005. The Company is currently exploring strategic alternatives for this business.
In February 2005, the Company completed the sale of its engine electronics business to Valeo for approximately 316 million euro, or approximately $419 million. This non-core business was a part of the Sagem SA automotive electronics business that was acquired in fiscal 2002 and was included in the interior experience business.
In March 2005, the Company completed the sale of its Johnson Controls World Services Inc. subsidiary to IAP Worldwide Services Inc. for approximately $260 million. This non-strategic business was acquired in fiscal 1989 from Pan Am Corporation and was included in the building efficiency business.
The Bristol Compressor business, the engine electronics business and the Johnson Controls World Services Inc. subsidiary are reported as discontinued operations in the Condensed Consolidated Financial Statements in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
4. Income Taxes
The Company's estimated annual base effective income tax rate for continuing operations declined to 21.0% from the 24.3% used in the prior quarter and from the 25.7% used for the prior fiscal year, primarily due to increased income in certain foreign jurisdictions with a rate of tax lower than the U.S. statutory tax rate, decreased income in higher-tax jurisdictions and certain tax planning initiatives. The adjustment to the effective tax rate resulted in a $14 million cumulative reduction in income tax expense for the six months ended March 31, 2006, which impacted diluted earnings per share from continuing operations by $0.07.
The table below shows a reconciliation of the tax provision, as reported, for the three and six months ended March 31, 2006 (amounts in millions):
Three Months Ended Six Months Ended
March 31, 2006 March 31, 2006
Amount Tax Rate Amount Tax Rate
(unaudited) (unaudited)
Base effective tax rate $44 21.0% $104 24.3%
Reduction in base effective tax rate (7) (14)
37 90 21.0%
Valuation allowance release (32) (32)
Foreign earnings repatriation 31 31
Change in status of foreign
subsidiary - (11)
Disposition of a joint venture - (4)
Tax provision $36 17.3% $74 17.3%
5. Non-GAAP Reconciliation
The following tables reconcile the Company's Non-GAAP amounts included in the press release to the most directly comparable GAAP measure (in millions, except for per share amounts):
Three Months Ended
March 31, 2005
(unaudited)
Non-GAAP operating income $253
Restructuring costs (210)
GAAP operating income $43
Three Months Ended
March 31, 2005
(unaudited)
Non-GAAP income from continuing operations $165
Restructuring costs (180)
European capital loss tax credits 69
GAAP income from continuing operations $54
Three Months Ended
March 31, 2005
(unaudited)
Non-GAAP diluted EPS from
continuing operations $0.85
Restructuring costs (0.92)
European capital loss tax credits 0.35
GAAP diluted EPS from continuing operations $0.28
Full Year Earnings Per Share Guidance
(unaudited)
2006 2005
(estimate) (actual) % Inc
Non-GAAP EPS from continuing $5.25-$5.35 $4.41 * 19-21%
operations
Restructuring costs - (0.92)
European capital loss tax credits - 0.40
GAAP EPS from continuing operations $5.25-$5.35 $3.90 *
* Due to the use of weighted-average shares outstanding for the fiscal
year in computing earnings per share, the sum of the quarterly
components may not equal the per share amounts listed for the fiscal
year.