US: Johnson Controls reports quarterly earnings up 17% (but disappoints)
Johnson Controls has reported that net income in the quarter ended June 30 rose 17% year-on-year to US$417 million.
However, the results were seen as disappointing and Johnson Controls acknowledged that it was hit by the weak euro and weak demand in core product markets (such as aftermarket batteries).
Automotive sector sales in the quarter increased 7 percent to $5.5 billion due primarily to higher production volumes in North America and Asia and new program launches, which were partially offset by lower production volumes in Europe and the weaker euro.
Johnson Controls also shaved its outlook, sending the share price down. It said that due to continued softness in its global markets and expectations for a lower euro, it expects 2012 fourth quarter earnings to be up 0-5% year-over-year versus earlier expectations for double-digit earnings improvements.
For the third quarter of fiscal 2012, Johnson Controls reported $417 million in net income, up 17 percent over last year, on a two percent increase in revenues. Diluted earnings per share were $0.61 compared with $0.52 per share in the third quarter of fiscal 2011.
The 2012 quarter includes pre-tax restructuring charges of $52 million, partially offset by non-recurring tax benefits of $22 million, resulting in net charge of $0.03 per diluted share. The 2011 third quarter included non-recurring pre-tax charges of $29 million or $0.04 per share.
Excluding these non-recurring items, highlights for the company's third quarter of 2012 include:
- Record net revenues of $10.6 billion vs. $10.4 billion in Q3 2011, up 2 percent
- Excluding the impact of foreign exchange, revenues increased 7 percent
- Income from business segments of $615 million compared with $541 million a year ago, up 14 percent
- Net income of $441 million vs. $383 million in Q3 2011, up 15 percent
- Diluted earnings per share of $0.64 vs. $0.56 last year
Johnson Controls said it believes that using the adjusted numbers provides a more meaningful comparison of its underlying operating performance.
"While we saw a significant improvement in profitability in the third quarter, sluggish demand in some of our key markets along with a much weaker Euro resulted in lower top line growth than we expected," said Stephen A. Roell, Johnson Controls chairman and chief executive officer. "Despite challenging markets, Building Efficiency segment income improved by 28 percent over last year as the business continues to gain market share."
Mr. Roell continued, "General weak demand in the automotive aftermarket was a negative for battery shipments in the quarter. At the same time, the prices for the spent battery cores we use in recycling lead hit an all-time high in the quarter, negatively impacting profitability. We do not expect this unusual combination of soft demand and higher input costs to continue past the fourth fiscal quarter. Automotive Experience benefitted from the higher auto production levels in North America, but the downturn in Europe slowed progress in our efforts to reduce operational inefficiencies," he said.
The company said that the restructuring initiated in the third quarter is targeted to improve profitability in Building Efficiency and Automotive Experience as well as to address the softness in some of its underlying markets. Additional restructuring actions are expected in the fourth quarter.
Business segments, excluding non-recurring items
Building Efficiency sales in the 2012 third quarter were $3.8 billion, down 2 percent compared with $3.9 billion last year as higher revenues in Asia and Global Workplace Solutions were more than offset by lower results in Europe. Residential HVAC sales increased 24 percent as demand was positively impacted by the record high temperatures in North America.
The backlog of projects at the end of the quarter, excluding foreign exchange, increased 7 percent to a record $5.3 billion primarily due to double-digit growth in Asia. Orders in the quarter were level as a 12 percent increase in Asia was offset by lower orders in Europe and other emerging markets.
Building Efficiency segment income was $264 million, up 28 percent from $207 million in the 2011 quarter, with strong double-digit earnings increases in all five segments. North America Service segment income increased 49 percent due to the benefits of investments in new service delivery technologies and improved labor utilization. North America Systems income was 21 percent higher due to improved productivity and operational efficiencies.
Automotive Experience sales in the quarter increased 7 percent to $5.5 billion versus $5.1 billion last year due primarily to higher production volumes in North America and Asia and new program launches, which were partially offset by lower production volumes in Europe and weaker Euro.
North American automotive revenues increased 31 percent to $2.3 billion from $1.8 billion last year compared with a 27 percent increase in overall industry production. European sales were down 12 percent to $2.5 billion from $2.8 billion in the 2011 quarter. Excluding the impact of foreign exchange, sales were level with last year, compared with a 5 percent decline in industry production. Sales in Asia increased 24 percent to $679 million from $546 million in 2011. Total revenues in China, including non-consolidated joint ventures, rose 24 percent to $1.2 billion compared with $936 million a year ago.
Automotive Experience reported segment income of $202 million in the current quarter, up 18 percent from $171 million the prior year. North America earnings in the current quarter more than doubled, to $154 million, from $67 million a year ago due primarily to the higher production levels. Automotive Europe reported a loss of $37 million in the quarter compared to a profit of $53 million last year as a result of the lower volumes and operational inefficiencies. Segment income in Asia was $85 million, up 67 percent from the 2011 quarter primarily as a result of the higher revenues and higher profitability in its Chinese joint ventures.
Power Solutions sales in the third quarter of 2012 decreased 3 percent to $1.3 billion on slightly higher unit shipments. Aftermarket battery demand in North America and original equipment battery demand in Europe were lower than expected.
Power Solutions segment income declined 9 percent to $149 million versus $163 million in the third quarter of 2011 due primarily to higher costs for acquiring spent battery cores for recycling. Industry core prices have risen to record levels due to the lower aftermarket shipments in recent quarters, as fewer new aftermarket batteries sold translates to fewer spent batteries being returned, reducing the overall supply.
Q4 2012 update
Johnson Controls said that due continued softness in its global markets and expectations for a lower Euro, it expects 2012 fourth quarter earnings to be up 0 - 5 percent year-over-year versus earlier expectations for double-digit earnings improvements.
In addition, Johnson Controls announced that in the fourth quarter, it will change its accounting policy for recognizing pension and post retirement expenses. The current accounting treatment smoothes asset returns and amortizes deferred actuarial gains and losses over a number of years. The new mark-to-market method will recognize those gains and losses in the fourth quarter of each fiscal year. The company believes this new policy will provide greater transparency to on-going operational results. The change will have no impact on pension and post retirement funding or benefits paid to participants.
"As we look forward to the next several months, we expect continued softness in our markets and industries," said Mr. Roell. "We will continue to take appropriate action to adjust as market conditions warrant. While these short-term challenges may be disruptive, we still believe in our long-term ability to outpace our markets and improve profitability across all of our businesses."
Johnson Controls, Inc. has made forward-looking statements in this document pertaining to its financial results for fiscal 2012 and beyond that are based on preliminary data and are subject to risks and uncertainties. All statements, other than statements of historical fact, are statements that are, or could be, deemed "forward-looking" statements and include terms such as "outlook," "expectations," "estimates" or "forecasts." For those statements, the Company cautions that numerous important factors, such as automotive vehicle production levels, mix and schedules, energy and commodity prices, the strength of the U.S. or other economies, currency exchange rates, cancellation of or changes to commercial contracts, as well as other factors discussed in Item 1A of Part I of the Company's most recent Form 10-k filing (filed November 22, 2011) could affect the Company's actual results and could cause its actual consolidated results to differ materially from those expressed in any forward-looking statement made by the Company.
Original source: Johnson Controls