A Weak Europe Offsets Johnson Controls’ Gains From Asia

by Trefis Team
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Johnson Controls
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Johnson Controls (NYSE:JCI) posted a decline in top line and a net loss in its fourth quarter earnings of fiscal 2012 on continued weakness in Europe and unfavorable impacts from currency. The company posted growth in Asia and North America but this was more than offset by a decline in Europe. Earnings of the company were also impacted by charges related to restructuring activities. In the fourth quarter revenues were down 4% y-o-y to $10.4 billion and the company posted a net loss of $8 million, compared to a net profit of $234 million in the year-ago period. [1] For its fiscal 2013 the company anticipates earnings to be in line with fiscal 2012, as a slowdown in Europe and the adverse impact of currency are expected to persist.

Weaker Europe offsets gains from Asia

All the businesses of Johnson Controls, namely heating, ventilation and air-conditioning (HVAC) systems, automotive interiors and automotive batteries posted growth in Asia. Though sales in local currency terms were impacted adversely by a stronger dollar. Sales from Asia in automotive interiors division which manufactures floor consoles, dashboards, seats and other interior systems for automobiles increased 2% y-o-y to $663 million in the fourth quarter. [1] Sales and earnings from Asia also increased in HVAC and automotive battery divisions. Asia constitutes approximately 15% of the total sales at Johnson Controls and the company has been steadily increasing its presence in the region over the past several years. [2]

In North America sales increased 13% y-o-y to $2.2 billion in the automotive interiors division. [1] This growth was in line with the overall industry expansion in North America during the period. However, sales and earnings from North America declined in the other divisions of the company in the fourth quarter. The region constitutes approximately 40% of the total sales of the company. [2]

However, gains from Asia and North America were offset by lower sales in Europe. Sales from the region in automobile interiors division declined 15% y-o-y to $2.2 billion in the fourth quarter. [1] In particular, demand from European original equipment manufacturers (OEMs) of automobiles was weak. Sales from the region also declined in automotive battery and HVAC divisions of the company. Europe constitutes approximately 40% of the total sales of the company. [2]

In addition, the top line was impacted by a stronger dollar in the fourth quarter. Excluding the impact of currency conversion, revenues increased 1% y-o-y. [1]

Restructuring charges impact earnings

Johnson Controls also initiated several restructuring activities in the fourth quarter to better align its resources with growth markets and to reduce its cost structures. These restructuring activities, which included workforce reductions and plant consolidations resulted in a $245 million pre-tax charge. [1] This was largely responsible for causing a net loss in the fourth quarter. These restructuring activities are expected to continue till the end of fiscal 2014.

Weak growth forecast for fiscal 2013

For full fiscal year 2012 revenues increased 3% y-o-y to $42 billion but net income declined 13% y-o-y to $1.2 billion. [1] For the fiscal 2013, the company forecasts weak growth. In the first half of fiscal 2013 it anticipates earnings to be significantly lower compared to earnings in the first half of fiscal 2012 on continued weakness in Europe. Further, it anticipates the restructuring activities undertaken in the fourth quarter to benefit earnings in the second half of fiscal 2013. Overall, Johnson Controls anticipates earnings in fiscal 2013 to be in line with the earnings in fiscal 2012.

We currently have a stock price estimate of $28.68 for the company, approximately 10% above its current market price. We are in the process of incorporating fourth quarter earnings and will update our analysis shortly.

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Notes:
  1. Johnson Controls Reports 2012 Fourth Quarter Earnings In-Line with Previous Guidance and Record Full-Year Results, October 30 2012, www.johnsoncontrols.com [] [] [] [] [] [] []
  2. 2012 Q3 10-Q, www.johnsoncontrols.com [] [] []
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