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Johnson Controls Inc. (JCI - Analyst Report) 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 (MGA - Analyst Report) in the Automotive Experience segment, Honeywell International Inc. (HON - Analyst Report) 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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