Johnson Controls Profits Increased 4%

| About: Johnson Controls, (JCI)

Johnson Controls Inc. (NYSE:JCI) posted a modest 4% increase in profit to $383 million (excluding non-recurring items) in the third quarter of its fiscal year ended June 30, 2011. The result compares to $367 million (excluding non-recurring items) in the same quarter of fiscal 2010.

On a per share basis, profits rose to 56 cents from 54 cents, beating the Zacks Consensus Estimate by 3 cents per share.

The increase in profit was attributable to double-digit increases in sales for all the company’s business segments, which was partially offset by disruptions in automotive production resulting from the earthquake and tsunami in Japan in March 2011.

The company’s Automotive Experience segment benefited from a faster-than-expected market recovery. Meanwhile, backlog in the company’s Building Efficiency segment increased at a double-digit pace, especially across its Heating, Ventilation, and Air Conditioning (HVAC) equipment offerings.

Net sales in the quarter rose 21% to $10.36 billion, exceeding the Zacks Consensus Estimate of $9.51 billion. Gross profit increased 16% to $1.55 billion (15.0%) from $1.34 billion (15.7%) a year ago.

Segment Results

Automotive Experience: Sales in the segment rose 21%, driven by higher production volumes, new program launches and incremental sales from recent acquisitions. The impact of higher global volumes was partially offset by lower production by Japanese automakers due to disruptions emanating from the earthquake. Segment income dipped 17% to $142 million from $171 million a year ago.

Power Solutions: Sales in the segment grew 22% to $1.4 billion, reflecting higher volumes in Asia, incremental volume associated with the consolidation of its Korean joint venture at the end of last year and higher lead prices. Segment income went up 21% to $163 million driven by higher volumes.

Building Efficiency: Sales in the segment escalated 21% to $3.9 billion, led by sales growth in Asia (43%) and Global Workplace Solutions (33%). Segment income inched up 9% to $207 million, driven by higher income from North America systems and services, Global Workplace Solutions and Asia.

Financial Position

Johnson Controls had cash and cash equivalents of $335 million as of June 30, 2011, compared with $908 million in the corresponding period a year ago. Total debt amounted to $5.18 billion as of the above period. This translated into a long-term debt-to-capitalization ratio of 31%, compared with 26% in the corresponding quarter-end a year ago.

In the first nine months of fiscal year 2011, Johnson Controls’ operating cash flow decreased to $561 million from $1.45 billion in the year-ago period, mainly driven by increases in accounts receivable and inventories and a decrease in accounts payable and accrued liabilities. Meanwhile, capital expenditures increased to $900 million from $526 million in the prior year.

Outlook

Johnson Controls said it expects to earn 75 cents per share (GAAP) in the fourth quarter of its fiscal year. This includes charges of up to 3 cents per share for acquisition and related costs and up to 2 cents per share due to disruptions in Japanese automotive production.

Our Take

We are optimistic about Johnson Controls given its improved results and clear cut 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 translates to a short-rating (1–3 months) of “Hold”. We reiterate our “Neutral” recommendation on the stock for the long term (more than 6 months).