Johnson Controls' European results signal trouble for some suppliers
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DETROIT -- Despite improved net income for its latest quarter, supplier Johnson Controls Inc. saw a significant fall in its European profit margins -- setting the stage for more supplier struggles on the continent and more jitters on Wall Street.
Johnson Controls on Thursday said its net income for the quarter ending Dec. 31 increased 9.3 percent from the same quarter last year. But European profit margins fell to 1 percent -- down from 2.9 percent during the quarter ending Sept. 30. The company lowered its earnings projections for the rest of the year, in part because of Europe.
The company's stock plunged after the financial report, falling 8.8 percent to $32.46 at the close in New York -- the biggest drop since July 2, 2009, Bloomberg News reported. The stock continued to decline today, falling another 3 percent to $31.50 a share just over 4 p.m. ET.
Lars Holmqvist, CEO of the European Association of Automotive Suppliers, said the fall of Johnson Controls's stock indicates a nervous market that will affect other suppliers with major ties to the European market.
"If that happened to Johnson Controls, which is a very well managed company with a good portfolio, it can happen to other suppliers," he said today. "Such a big fall in one day really indicates the market is extremely nervous."
Johnson Controls, which makes auto interiors, plastic parts, and batteries, says its fiscal first quarter net income was $410 million, or 60 cents a share, up from $375 million, or 55 cents a share, a year ago. Revenue rose 9 percent to $10.4 billion. The results included the company's building efficiency systems business.
More pressure
Production in Europe is expected to be 18.5 million units in 2012, down 7.9 percent from expected final numbers for 2011, said Mark Fulthorpe, Europe vehicle production forecast analyst for IHS Automotive.
Fulthorpe said European demand is going to continue to be under significant pressure due to long running sovereign debt and expects demand for new vehicles will continue to become strained.
"Supplier's exposure to the major money operations in Europe will be better or worse based on who their business is with," Fulthorpe said in an interview. "We see that there are still those brands or manufacturers that have a strong export profile which can be a positive, but if you heavily export to customers that largely build in Europe for European consumption, that would be more of a concern."
Johnson Controls said it expects earnings at 52 cents to 54 cents a share for the quarter ending March 31, which was way below analysts' estimates of 70 cents a share. Overall, the company said it expects fiscal year profit of $2.70 to $2.85 a share, down from its earlier forecast of $2.85 to $3 a share.
"A lot of what we are experiencing are things that are not under our control," CEO Stephen Roell said Thursday. "We recognize we have certain short term challenges to our original expectations, but our fundamental growth story remains intact."
More major North American suppliers with significant ties to European production will be reporting quarterly results in the coming weeks, including: Tenneco Inc. (33 percent of its business in Europe), Lear Corp. (42 percent), BorgWarner Inc. (50 percent), TRW Automotive (51 percent), Magna International Inc. (43 percent), Delphi Automotive (43 percent), Visteon Corp. (36 percent), and Federal-Mogul Corp. (53 percent). The European figures are drawn from Automotive News research.
Johnson Controls ranks No. 7 on the Automotive News list of the top 100 global suppliers with worldwide sales to automakers of $16.6 billion in its 2010 fiscal year. Europe accounted for 49 percent of that total.
Reuters contributed to this story.
You can reach Ellen Mitchell at emitchell@crain.com.
