Johnson Controls Misses on Earnings

Zacks Equity Research
April 23, 2014

Johnson Controls, Inc. (JCI) reported adjusted earnings of 64 cents per share in second-quarter fiscal 2014 (ended Mar 31, 2014), up 52% from 42 cents in the comparable quarter of the prior year. Earnings per share missed the Zacks Consensus Estimate of 65 cents.

Including non-recurring items, Johnson Controls’ net income amounted to $261 million or 39 cents per share.

Operational Update

Revenues in the quarter went up 4% year over year to $10.5 billion, lagging the Zacks Consensus Estimate of $10.7 billion. Revenue growth across Automotive Experience and Power Solutions segments led to the increase. Revenues also benefited from enhanced global automotive production partially offset by a decline in Building Efficiency revenues.

Cost of sales increased 2.9% year over year to $8.9 billion from $8.7 billion. Gross profit improved 7.4% year over year to $1.5 billion.

Selling, general and administrative expenses in the second quarter declined to $990 million from $1.04 billion in the prior-year quarter. The company reported segment income of $629 million, up 15.8% from $543 million in the year-ago quarter.

Segment Results

Automotive Experience: Revenues in this segment improved 11% year over year to $5.6 billion on higher automotive production in all geographic regions. Adjusted segment income surged to $241 million from $74 million mainly due to higher income from its Seating segment. The Automotive Experience results benefited from higher revenues, restructuring initiatives, improvement in the European business and operational efficiency in the metals and mechanisms business.

Building Efficiency: In this segment, revenues decreased 5% year over year to $3.3 billion due to lower demand in Europe, the Middle East and North America, partially offset by higher revenues in Asia. The quarter-end backlog stood at $4.8 billion, in line with the prior-year quarter. Orders were 2% lower than last year. Segment income improved 9% in the reported quarter to $152 million from $139 million in the comparable last-year quarter.

Power Solutions: Revenues in the Power Solutions segment remained in line with the year-ago level of $1.6 billion. Segment income fell 5% to $236 million.

Financial Position

Johnson Controls had cash and cash equivalents of $209 million as of Mar 31, 2014, a decrease from $481 million as of Mar 31, 2013. Total debt declined to $6.3 billion as of Mar 31, 2014 from $6.7 billion as of Mar 31, 2013. Consequently, the debt-to-capitalization ratio was 34.8% as of Mar 31, 2014 versus 35.9% as of Mar 31, 2013.

In the first half of fiscal 2014, Johnson Controls’ operating cash flow was $449 million compared with $515 billion in the year-ago period. Meanwhile, capital expenditures decreased to $602 million from $664 million in the prior-year period.

Acquisition

On Apr 16, 2014, Johnson Controls announced the agreement to purchase Air Distribution Technologies for $1.6 billion. The deal is expected to close in July. Air Distribution Technologies is one of the biggest independent providers of air distribution and ventilation products in North America.

Divestiture

On Jan 13, 2014, Johnson Controls announced an agreement to sell its Automotive Electronics business to Visteon Corporation (VC). The $265 million deal covers Johnson Controls' instrument cluster, infotainment, display, and body electronics products. The company now reports earnings from the Automotive Electronics business under discontinued operations. The divestiture is expected to be completed by the end of fiscal 2014.

Outlook

Johnson Controls anticipates earnings to be within the range of 81–84 cents in the third quarter of fiscal 2014.

Johnson Controls expects earnings per share in the band of $3.10 to $3.15 for the year. Income from discontinued operations is expected to be about 10 cents to 12 cents.

Johnson Controls predicts free cash flow generation 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.

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

Other stocks performing well in the same industry include Superior Industries International, Inc. (SUP) and Magna International Inc. (MGA). Superior Industries holds a Zacks Rank #1 (Strong Buy) while Magna has a Zacks Rank #2 (Buy).

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