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Johnson Controls Inc. revealed 15% growth in net income to $441 million in the third quarter of its fiscal year ending September 30, 2012 from $383 million in the comparable quarter of prior year. On per share basis, adjusted net income grew 14% to 64 cents from 56 cents a year ago. (All excluding non-recurring items.)

However, earnings per share lagged the Zacks Consensus Estimate by 3 cents. It was lower than the management’s expectation as well, which projected earnings to improve 20% on a year-over-year basis for the quarter.

Management believes sluggish demand in some of the company’s key markets and a considerably weaker Euro led to lower-than-expected earnings growth. Further, weak demand in the automotive aftermarket and higher input costs led to the subdued growth during the quarter.

Revenues in the quarter went up a tad 2% to $10.6 billion during the quarter. It could not meet the Zacks Consensus Estimate as well, which amounted to $10.9 billion. However, revenue growth was higher (7%) excluding the impact of foreign exchange.

Pre-tax income increased 7.5% to $504 million from $469 million a year ago. Income from business segments rose 14% to $615 million from $541 million in the prior-year quarter.

Segment Results

Automotive Experience: Revenues in the segment scaled up 7% to $5.5 billion on higher production volumes in North America and Asia, as well as new program launches, which were partially offset by lower production volumes in Europe and a weak Euro. Segment income went up 18% to $202 million from $171 million a year ago.

Building Efficiency: Revenues in the segment slipped 2% to $3.8 billion as higher sales in Asia and Global Workplace Solutions were more than offset by depressing sales in Europe. Residential Heating, Ventilating and Air Conditioning (HVAC) sales grew 24% due to strong demand on the back of higher temperatures in North America. Segment income appreciated 28% to $264 million from $207 million in the 2011 quarter due to strong earnings in all businesses.

Excluding the impact of foreign exchange, the backlog of projects at the end of the quarter rose 7% to $5.3 billion driven by double-digit growth in Asia. Orders in the quarter were flat as lower orders in Europe and other emerging markets offset a 12% rise in Asia.                                     

Power Solutions: Revenues in the segment fell 3% to $1.3 billion due to lower-than-expected aftermarket battery demand in North America and original equipment battery demand in Europe. Segment income decreased 9% to $149 million from $163 million in the third quarter of fiscal 2011 due to higher costs for acquiring spent battery cores for recycling.

Financial Position

Johnson Controls had cash and cash equivalents of $602 million as of June 30, 2012 compared with $335 million as of June 30, 2011. Total debt increased to $6.7 billion as of June 30, 2012 from $5.2 billion as of June 30, 2011. This translated into a higher debt-to-capitalization ratio of 36.5% as of June 30, 2012 compared with 31.3% as of June 30, 2011.

In the first nine months of fiscal 2012, Johnson Controls’ operating cash flow improved significantly by 56% to $765 million from $489 million in the year-ago period, mainly driven by higher net income, increase in deferred income tax and reduction in inventories. Meanwhile, capital expenditures increased to $1.4 billion from $900 million in the prior year.

Outlook

Due to the continued softness in the global markets and a weak Euro, Johnson Controls lowered its fourth quarter earnings growth guidance. The company anticipates earnings in the quarter to grow 0 to 5% compared with the earlier projection of 25%. However, it expects to improve long-term profitability based on inherent strength in all its businesses.

Our Take

Johnson Controls is a supplier of automotive interiors, batteries, and other control equipment. Its main competitors include Magna International in the Automotive Experience segment, Honeywell International Inc. in the Building Efficiency segment and Exide Technologies in the Power Solutions segment.

Due to lower-than-expected earnings and soft guidance, the company currently retains a Zacks #3 Rank on its stock, which translates to a short-term rating (1–3 months) of Hold and we reiterate our Neutral recommendation on its shares for the long-term (more than 6 months).

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