Johnson Controls Biz Better - Analyst Blog

Johnson Controls Inc. (JCI) posted a profit of $375 million or 55 cents per share in the first quarter of fiscal 2011, exceeding the Zacks Consensus Estimate by a penny. The profit increased 30% from $288 million or 43 cents per share in the comparable quarter a year ago.

The higher profit during the quarter was mainly driven by higher earnings in the company's Automotive Experience segment on the back of an overall recovery in the global automotive market. Net sales in the quarter rose 13% to $9.5 billion, higher than the Zacks Consensus Estimate of $8.72 billion.

Segment Performance

Revenues in the Automotive Experience segment grew 12% to $4.6 billion, driven by higher production volumes which is further enhanced with the introduction of automotive seating and new interiors. The segment revenues increased 9% in North America, 13% in Europe and 49% in Asia. The segment reported an income of $177 million, up 46% from $121 million in the prior year quarter. The increase was driven by higher volumes and higher profitability at its automotive joint ventures.

Revenues in the Building Efficiency segment escalated 13% to $3.4 billion led by a sales increase of 31% in Asia and 21% in Global Workplace Solutions product. The segment recorded a 34% rise in income to $139 million due to higher volumes.

Revenues in the Power Solutions segment appreciated 21% to $1.6 billion, due to a rise in aftermarket and original equipment unit shipments. The segment income went up 20% to $217 million from $181 million last year as a result of higher volumes.

Financial Position

Johnson Controls had cash and cash equivalents of $321 million as of December 31, 2010 compared with $791 million in the year-ago period. Total debt amounted to $3.53 billion as of the above date. This translated into a debt-to-capitalization ratio of 25%, an improvement from 27% a year ago.

In the quarter, Johnson Controls' operating cash flow decreased to $106 million from $808 million in the year-ago quarter, due to unfavorable changes in the working capital (excluding acquisitions). Meanwhile, capital expenditures increased to $260 million from $177 million in the prior year. Capital expenditures for 2011 are expected to be $1.4 billion versus earlier guidance of $1.2 billion.

Guidance

Johnson Controls anticipates sales to increase 12% to $38.5 billion, up from the prior forecast of a 9% increase to $37 billion for the full fiscal 2011, based on European automotive acquisitions, higher automotive production in North America and Europe and higher volumes in the Power Solutions aftermarket battery business.

Automotive production in North America is anticipated at 12.5 million vehicles for the fiscal year compared with the earlier estimate of 12.3 million vehicles. Meanwhile, European automotive production is expected to be 18.3 million vehicles compared with the previous estimate of 17.6 million vehicles.

Johnson Controls expects to record earnings in the range of $2.50–$2.55 per share for the year (excluding acquisition and integration related costs) compared to earlier guidance of $2.30 - $2.45 per diluted share. The company expects second quarter 2011 earnings to be $0.52–$0.54 per share in the upcoming quarter, reflecting a 20% improvement from the second quarter of fiscal 2010.

Our Take

We are optimistic about Johnson Controls given its improved results and inspiring guidance. However, tough competition and higher exposure to original equipment manufacturers are expected to hamper its results in the future. As a result, the company has a Zacks #3 Rank on its stock, which translated to short-term rating (1–3 months) of Hold.