Johnson Controls Inc. (JCI) reported a 31% increase in profit to $383 million (excluding non-recurring items) in the second quarter of fiscal 2011 from $292 million (excluding non-recurring items) in the same quarter of previous year. On earnings per share, profits improved 30% to 56 cents from 43 cents per share in the prior year, beating the Zacks Consensus Estimate by a penny.
The improvement in earnings during the quarter was attributable to higher sales on the back of the company’s strong position in the key geographic markets. Net sales in the quarter grew 22% to $10.14 billion, which was higher than the Zacks Consensus Estimate of $9.25 billion.
Segment Performance
Revenues in the Automotive Experience segment went up 25% to $5.22 billion, driven by higher production volumes and automotive seating and interior program launches. The company has completed 18 major launches during the quarter for Ford Motor Co. (F), Kia, Volkswagen, Tata Motors (TTM), Daimler and Honda Motor Co. (HMC).
The segment revenues in North America rose 22%, Europe increased 26%, and Asia surged 37%, including a 31% rise in China. The segment reported an income of $247 million, a 31% increase from $189 million in the previous year quarter driven by higher volumes and improved operational efficiencies.
Revenues in the Building Efficiency segment escalated 18% to $3.52 billion led by a 31% rise in sales in Asia and a 27% increase in sales in Global Workplace Solutions. The segment had a backlog of $5.1 billion as of March 31, 2011, an increase of 18% over the prior year. The segment recorded a 27% rise in income to $132 million from $104 million driven by higher volumes.
Revenues in the Power Solutions segment appreciated 19% to $1.41 billion, reflecting higher shipments of both aftermarket and original equipment batteries. Aftermarket sales increased 17% in the Americas while original equipment (OE) and aftermarket unit sales in Asia jumped 163% due to higher volumes associated with the consolidation of a Korean joint venture, market share gains and incremental production from the company's second manufacturing plant in China.
The segment income soared 33% to $178 million from $134 million in the second quarter of fiscal 2010 as a result of the higher volumes and strong operational performance.
Financial Position
Johnson Controls had cash and cash equivalents of $401 million as of March 31, 2011 compared with $770 million in the year-ago period. Total debt amounted to $4.54 billion as of the above date compared with $3.38 billion a year ago. Consequently, debt-to-capitalization ratio deteriorated to 29% from 26% a year ago.
In the first half of fiscal 2011, Johnson Controls’ operating cash flow declined to $168 million from $1.02 billion in the year-ago period, driven by higher inventories and accounts receivable. Meanwhile, capital expenditures increased to $535 million from $311 million in the prior year.
Fiscal 2011 Guidance
Johnson Controls expects earnings to be affected by automotive production disruptions in Japan and at Japanese OE customers in North America and Europe during the upcoming quarter. It anticipates disruptions to negatively affect revenues by $500 million in the third quarter, which will lower earnings by 16 cents–18 cents per share. Taking this into account, the company expects to earn 51 cents to 53 cents per share in the third quarter of the fiscal year.
The company anticipates revenues to increase 15% to $39.5 billion in fiscal 2011, up from the previous forecast of $38.5 billion. The increased guidance was driven by growth expectations for Building Efficiency and a stronger Euro. However, higher Building Efficiency revenues will be partially offset by a negative impact associated with automotive production disruptions in Japan in the third quarter.
Our Take
We are optimistic about Johnson Controls given its improved results and clear cut guidance. However, tough competition and higher exposure to original equipment manufacturers are expected to hamper its results in the future. 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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