Johnson Controls (JCI) Tops Q3 Earnings on Strong Performance


Johnson Controls, Inc. (JCI) reported adjusted earnings of 84 cents per share in third-quarter fiscal 2014 (ended Jun 30, 2014), surpassing the Zacks Consensus Estimate of 82 cents. Earnings were up 16.7% from 72 cents in the comparable quarter of the previous year. Notably, the financial details of last year have been revised as the company has classified Automotive Electronics business as a discontinued operation.

Including restructuring and non-recurring items, Johnson Controls’ net income amounted to $238 million or 35 cents per share.


Operational Update

Revenues in the quarter went up 2.9% year over year to $10.81 billion, lagging the Zacks Consensus Estimate of $10.83 billion. Revenue growth across Automotive Experience and Power Solutions segments led to the upside. Revenues also benefited from a marginal improvement in the Building Efficiency business.

Cost of sales increased 2.4% year over year to $9.2 billion from $8.9 billion. Gross profit improved 6.3% year over year to $1.7 billion.

Selling, general and administrative expenses in the third quarter totaled $977 million, in line with the prior-year quarter figure. The company reported business segment income of $794 million, up 15.1% from $690 million in the year-ago quarter.

Segment Results

Automotive Experience: Revenues in this segment improved 6.9% year over year to $5.7 billion on higher automotive production across all geographic regions. Adjusted segment income surged to $295 million from $241 million mainly due to higher profit from its Seating and interiors business.

Building Efficiency: In this segment, revenues decreased 3.7% year over year to $3.6 billion due to lower demand in North America, Latin America and the Middle East. The quarter-end backlog stood at $4.7 billion, compared with $5.0 billion in the prior-year quarter.

Also, orders were 8% lower than the last year. Adjusted segmental income decreased 2.5% in the reported quarter to $306 million from $314 million in the comparable quarter last year owing to lower volumes.

Power Solutions: Revenues in the Power Solutions segment increased 5.7% to $1.5 billion from $1.4 billion year-ago. Adjusted segment income escalated 43% to $193 million from $135 million a year ago  on the back of improved product mix, higher volumes and operational efficiencies.

Financial Position

Johnson Controls had cash and cash equivalents of $160 million as of Jun 30, 2014, indicating a decrease from $391 million as of Jun 30, 2013. Total debt rose to $7.5 billion as of Jun 30, 2014 from $6 billion as of Jun 30, 2013. Consequently, the debt-to-capitalization ratio stood at 38.8% as of Jun 30, 2014 versus 33.1% as of Jun 30, 2013.

In the first nine months of fiscal 2014, Johnson Controls’ operating cash flow was $1.2 billion  as against $1.5 billion in the year-ago period. Meanwhile, capital expenditures decreased to $876 million from $929 million in the prior-year period.


Johnson Controls anticipates earnings  in the range of $1–$1.02 in the fourth quarter of fiscal 2014,  reflecting a 11% increase from the earnings recorded in the fourth quarter of 2013.

Johnson Controls reaffirmed free cash flow guidance of about $1.6 billion which will provide opportunities for future capital expenditures, strategic acquisitions, share repurchases and dividend payouts. Margins are expected to improve across all operating segments in fiscal 2014.

However, the company assumes that benefits from the recent acquisition of Air Distribution Technologies will not impact its fourth quarter results.

Our Take

Johnson Controls will initiate the production of traditional and AGM lead-acid batteries in China from 2016. Meanwhile, the company also won new aftermarket businesses in the U.S, Europe and Japan, worth about three million units annually. The company also expects incremental production in the later half of  this calendar year.

Johnson Controls is a supplier of automotive interiors, batteries and other control equipment. It currently holds a Zacks Rank #3 (Hold).

Some better-ranked automobile stocks worth considering include China Automotive Systems Inc. (CAAS), Magna International Inc. (MGA) and Meritor, Inc. (MTOR), all of which sport a Zacks Rank #1 (Strong Buy).

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