Johnson Controls (NYSE:JCI) posted better than guided results in its third quarter (of fiscal 2013) earnings. Profits excluding special items rose 18% annually to $535 million, on gains from cost reduction measures and pricing initiatives at the company’s building market related businesses.  Johnson Controls’ European automotive business, which was returning a loss for the last few quarters also turned profitable in the third quarter on gains from restructuring activities. Overall, the company posted a significant improvement in profitability despite a challenging macro environment.
Johnson Controls also announced the sale of its HomeLink product line, which is part of its auto electronics segment, to Gentex Corp. for approximately $700 million.  For the last few months, the company has been looking for a buyer for its auto electronics business. It sold the HomeLink product line separately after it was unable to find a buyer who was interested to purchase the entire auto electronics segment. Although, the company maintained that separating HomeLink from the rest of its auto electronics business maximized value as this offered unique synergies to different sets of buyers. The HomeLink products are car interior electronics that allow activation of garage doors, home lighting and security systems from within the car itself.
Looking ahead, the company guided its fourth quarter earnings to lie between $0.93 per share and $0.95 per share, and narrowed its fiscal 2013 earnings guidance to $2.64-$2.66 per share, from $2.60-$2.70 per share announced earlier.  
We currently have a price estimate of $40 for Johnson Controls, approximately in line with its current market price.
Restructuring Gains Improve Profitability
In the third quarter, the company posted double-digit growth in profits across all three of its segments, namely auto batteries, auto experience and building efficiency, which includes the business of York-brand heating and air-conditioning systems. This strong growth in the company’s profits was driven by gains from cost-cutting measures like headcount reductions and plant consolidations that were initiated in the fourth quarter of fiscal 2012.
Mixed Macro Environment
With regard to the external environment, Johnson Controls faced a mixed economic environment across its businesses in the third quarter. On the bright side, in the automotive sector, production in China despite the country’s slowing economic growth increased by 10% annually, and in North America, it grew by 6% year-over-year. While on the flip side, auto production in Europe declined by 1% year-over-year, and demand from non-residential building markets remained soft in the quarter ended June 30, 2013. 
As a result, Johnson Controls posted mixed top line results across its businesses. While it posted positive growth at its auto battery and auto experience segments, sales at its building efficiency segment declined marginally.
Going forward, the company anticipates the demand environment from the auto industry will improve with strong growth from China, continued improvement from North America and stabilization from Europe.
Johnson Controls also anticipates benefits from its restructuring activities to continue to aid results in the fourth quarter. In addition, the 3%-4% price hike that the company announced on July 1 for auto batteries in North America will help it offset the higher purchase price of used battery cores, which are a key source of lead for the company. Notes:
- Johnson Controls Q3 fiscal 2013 earnings Form 8-K, July 18 2013, www.johnsoncontrols.com [↩] [↩] [↩]
- Johnson Controls second quarter earnings release, Form 8-K, April 23 2013, www.johnsoncontrols.com [↩]
- Johnson Controls Q3 fiscal 2013 earnings presentation, July 18 2013, www.johnsoncontrols.com [↩] [↩]