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Johnson Controls Sees Lower Profits

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Johnson Controls Inc. (JCI - Free Report) reported a 5% decline in profits to $363 million or 53 cents per share (excluding non-recurring items) in the second quarter of fiscal 2012 from $383 million or 56 cents (excluding non-recurring items) in the same quarter of previous year. However, the profits were in line with the Zacks Consensus Estimate.

The lower earnings can be attributable to lower income in the company’s Automotive Experience and Building Efficiency segments. Net sales in the quarter rose modestly by 4% to $10.6 billion, lagging behind the Zacks Consensus Estimate of $10.7 billion.

Segment Performance

Revenues in the Automotive Experience segment rose 7% to $5.6 billion driven by incremental revenues associated with the acquisitions made in 2011 and launches of new automotive seating and interior programs. The segment income went down 4% to $236 million due to lower income in North America and Europe.

The lower earnings in North America were attributable to higher costs associated with the start-up of a metals plant as well as higher engineering and launch costs associated with new business wins. Meanwhile, lower profits in Europe were attributable to operating inefficiencies from certain programs launched over the past two years.

Revenues in the Building Efficiency segment inched up 3% to $3.6 billion driven by a 10% rise in Asian revenues and 6% increase in revenues from North America Systems and Global Workplace Solutions. The segment had a record backlog of $5.3 billion, an increase of 3% over the prior year with gains in Asia and North America, partially offset by lower demand in Europe.

The segment income fell 4% to $127 million as higher income and profits in North America Systems, North America Service, Asia and Global Workplace Solutions were offset by lower profits in Europe and residential Heating, Ventilating and Air Conditioning (HVAC) systems.

Revenues in the Power Solutions segment was almost flat at $1.4 billion as higher volumes in Europe and China as well as a favorable product mix were offset by lower demand in North America. The segment income increaseD 10% to $195 million, driven by a favorable product mix and the benefits of increased vertical integration.

Financial Position                                                                             

Johnson Controls had cash and cash equivalents of $240 million as of March 31, 2012 compared with $40 1 million as of March 31, 2011. Total debt rose to $6.3 billion as of March 31, 2012 from $4.5 billion as of March 31, 2011. Consequently, debt-to-capitalization ratio deteriorated to 35% from 29% as of March 31, 2011.

In the first half of fiscal 2012, Johnson Controls’ operating cash flow improved significantly to $243 million from $36 million in the year-ago period, driven by lower inventories and accounts receivable. Meanwhile, capital expenditures increased to $448 million from $275 million in the prior-year period.


Johnson Controls expects financial results in the second half of 2012 to improve compared with the first half of the year. The company has projected earnings to increase 20% on a year-over-year basis in the third quarter of the year and 25% in the fourth quarter of the year.

Our Take

Johnson Controls is a supplier of automotive interiors, batteries, and other control equipment. Its main competitors include Tenneco Inc. (TEN - Free Report) . Despite its disappointing result, we are currently sticking with the company’s optimistic guidance. As a result, the company has a Zacks #3 Rank on its stock, which translated to short-rating (1–3 months) of “Hold”.

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