July 20, 2011 / 11:30 AM / in 7 years

UPDATE 5-Johnson Controls building unit weak; stock falls

* Q3 EPS ex-items 56 cents vs Street view of 54 cents

* Johnson Controls sees Q4 EPS of 75 cents

* Margins weak in building efficiency business-analyst

* Shares down 4 percent (Adds CEO comments, CFO comments, updates shares)

By Clare Baldwin

DETROIT, July 20 (Reuters) - Johnson Controls Inc’s (JCI.N) building heating and cooling systems business fell short of expectations in the third quarter, raising questions about the company’s immediate growth prospects.

The company’s overall profit beat expectations due to a fast recovery from the impact of the Japan earthquake in March and higher auto production levels in some markets, but its shares fell 4 percent on Wednesday.

JCI’s second-largest business, heating and cooling systems for buildings, reported margins that were far smaller than some were expecting and the company’s fourth-quarter outlook failed to promise an immediate improvement.

“That sort of begs the question of ‘Where do we go from here?’” said Jefferies & Co analyst Peter Nesvold. “The markets get skeptical when a company misses margins two quarters in a row and the reasons change. You combine that with a flattish (sequential) backlog and I think the markets are going to take a second look.”

There were repeated questions about JCI’s margins on the company’s conference call with analysts. Chief Executive Officer Stephen Roell highlighted the company’s May hiring of Bill Jackson whose “sole purpose in life is to help us drive our margins” and ended the call by again acknowledging the concerns.

“We understand the pressure on margins and we understand the fact that we need to go after those. That’s why I brought some additional resources in and that’s why we’re moving our compensation to focus on that point. So we got that message and we understand that, and that’s where our focus will be,” Roell said.

Prior to Wednesday’s sell-off, Johnson Controls shares had rallied nearly 16 percent since a closing low of $35.81 on June 10.


Analyst concerns about JCI’s margins zeroed in on the company’s building efficiency unit.

The company said previously it was targeting a margin of around 10 percent, excluding the global workplace solutions part of the business. In the third quarter, the company was at 7.7 percent.

“I think we would acknowledge with the residential and the service headwinds that we have this year, we are not going to see the margin improvement that we are forecasting for 2011, but we are not backing away from the longer-term objective,” Chief Financial Officer Bruce McDonald said.

Jefferies’ Nesvold said the building heating and cooling unit made only a 2.5 percent margin on its revenue growth from last year compared with the 8 percent he was expecting.

Citi analyst Itay Michaeli also said earnings and margins at Johnson Controls’ building efficiency unit as well as the power solutions unit fell short of his expectations.

JCI said in a statement that the results were lower than anticipated due to a late start to the summer cooling season.

U.S. manufacturers are entering a period where growth is more muted, profit margins are harder to raise and earnings beats are less common. [ID:nN1E76B057]

In the fourth quarter, Johnson Controls, which is also one of the world’s largest auto parts suppliers, expects a net profit of 75 cents per diluted share.

That figure includes charges of up to 3 cents per share related to acquisitions and up to 2 cents per share for production disruptions related to Japan. The company said it would provide more details in October.

Analysts on average are expecting fourth-quarter earnings of 80 cents per share excluding one-time items.


The biggest part of Johnson Controls’ business is selling interior systems and batteries for vehicles.

The March earthquake, tsunami and nuclear crisis in Japan disrupted the supply of key auto parts and forced automakers to idle plants and cut output.

JCI said on Wednesday the Japan crisis will have less of an impact than expected — it now looks like the revenue impact will be around $400 million rather than $500 million — but the cost will be spread over a longer period.

The company now expects to lose about $70 million worth of revenue in the fourth quarter because a Toyota plant that makes Tundra and Tacoma trucks in Texas has not yet recovered, CFO McDonald said.

Overall, JCI reported net income attributable to shareholders in the third quarter fell to $357 million, or 52 cents a share, compared with $418 million, or 61 cents a share, in the year-earlier quarter.

Excluding one-time items, it earned 56 cents a share, 2 cents better than the average analyst estimate as polled by Thomson Reuters I/B/E/S had expected.

Sales rose 21 percent to $10.4 billion, above the $9.55 billion analysts had expected.

Shares of the Milwaukee-based company were down 3.7 percent at $39.98 on Wednesday afternoon, off an earlier low at $39.50. (Additional reporting by Ben Klayman and Deepa Seetharaman; Editing by Derek Caney, Maureen Bavdek and Matthew Lewis)

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