Europe Weighs On Johnson Controls’ Otherwise Solid Earnings

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Johnson Controls

    Quick Take
  • Johnson Controls posted a decline in sales and profits in the second quarter of fiscal 2013 due to lower auto production and construction spending in Europe. The region constitutes nearly a third of its worldwide sales.
  • The negative impact from Europe was partially offset by higher automotive production in China and North America and higher sales of heating and air-conditioning systems from North America.
  • Looking ahead, in the second-half of fiscal 2013, the company anticipates to post higher year-over-year earnings on continued growth from Asia and North America and gains from restructuring activities.

Johnson Controls‘ (NYSE:JCI) revenues declined to $10.4 billion in the second quarter of fiscal 2013 from $10.6 billion in the prior year period due to lower auto production in Europe, partially offset by higher production in China and North America. Profits also dipped sharply to $148 million from $379 million in the year ago period due to a number of one-time cost items, including restructuring costs of $84 million. [1]

Looking ahead, the company anticipates better performance on a year-over-year basis in the second-half of fiscal 2013 due to benefits from restructuring and continued growth from Asia and North America. Accordingly, Johnson Controls reaffirmed its earnings outlook of $2.60-$2.70 per share for 2013. [1]

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We currently have a stock price estimate of $32.90 for Johnson Controls, approximately 5% below its current market price.

See our complete analysis of Johnson Controls here

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Slowdown In Europe Impacts All Segments Of Johnson Controls

Automotive Experience

In the recently concluded quarter, automotive production declined by 8% year-over-year in Europe. [2] This impacted Johnson Controls’ sales of automotive interiors like seating systems, electronics and door/floor/front panels. The impact was severe as Europe constitutes nearly 50% of the company’s worldwide auto interior sales. [3] However, a 10% higher y-o-y auto production in China and around 1% higher y-o-y production in North America offset weakness from Europe to some extent. [2] Overall, Johnson Controls’ sales at its automotive experience segment declined by 3% y-o-y to $5.4 billion in the second quarter.

On the bright side, the company’s profits (excluding restructurings) from this segment improved sequentially – from $101 million in the quarter ended December 31, 2012 to $185 million in the quarter ended March 31, 2013 – due to a gradual improvement in results from Europe. [1] [4]

Johnson Controls also reaffirmed that it was looking for potential buyers for its auto electronics business, a sub-segment of the automotive experience segment. This business accounted for slightly over $1 billion of $21.3 billion sales at the auto experience segment in fiscal 2012. [5] [4] Johnson Controls is a niche player in the global auto electronics market, and in order to grow in this space, it needs to make capital investments in navigation and other auto electronic technologies. However, it believes that it is better off investing that capital in strengthening its leadership position in some of its other businesses like auto batteries.

Automotive Batteries

Europe also weighed on the second quarter sales of Johnson Controls’ automotive batteries. The company’s auto battery shipments to original equipment manufacturers (OEMs) in Europe declined by 1% y-o-y during the quarter. However, a relatively lower exposure to Europe in this segment allowed it to offset this decline by increased battery shipments to OEMs in Asia (up 14% y-o-y) and the Americas (up 2% y-o-y). [2]

Johnson Controls has been aggressively expanding its presence in the fast-growing auto battery markets of Asia-Pacific, particularly China. The company is currently constructing its second auto battery plant in the country. In all, Johnson Controls’ sales from its auto battery segment increased by 10% y-o-y to $1.6 billion in the second quarter. [1]

Building Efficiency

In the building market related businesses too – York brand heating and air-conditioning systems and facility management services – sales were impacted by a 9% y-o-y decline from Europe. However, this was partially offset by 2% y-o-y growth in sales of residential heating and air-conditioning systems from North America. [2]

Looking ahead, for the third quarter of fiscal 2013, the company concurs with the analyst earnings estimate of $0.75 per share. [1]

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Notes:
  1. Johnson Controls second quarter earnings release, Form 8-K, April 23 2013, www.johnsoncontrols.com [] [] [] [] []
  2. Johnson Controls second quarter earnings presentation, April 23 2013, www.johnsoncontrols.com [] [] [] []
  3. Johnson Controls presentation at Barclays Industrial Select Conference, February 21 2013, www.johnsoncontrols.com []
  4. Johnson Controls first quarter fiscal 2013 10-Q, February 1 2013, www.johnsoncontrols.com [] []
  5. JCI’s 10-K for fiscal 2012, November 19 2013, www.johnsoncontrols.com []