Johnson Controls Inc., which makes seats and batteries for cars, is expected to report a drop in first-quarter earnings as weaker demand for batteries, higher commodity prices, the expense of a new metals plant, and higher engineering and launch costs from new business ventures offset stronger revenue.
The company reports Friday before the markets open.
Analysts polled by Reuters expect Milwaukee-based JCI's first quarter profit to decline 5.2 percent to 53 cents per share. However, revenue is expected to rise 4.4 percent to $10.6 billion.
However, operating profits are expected to be $498.2 million, with a profit margin of 4.7 percent, up from 4.6 percent in the fourth quarter of 2011.
JCI lowered its earnings guidance for 2012 in January due to a drop in the value of the euro; lower automotive production in Europe (which was down 3.5 percent); lower demand for residential heating, ventilation and air-conditioning equipment; and the continued government-mandated shutdown of a Shanghai, China battery plant.
Automotive batteries made up approximately 32.8 percent of JCI's stock value in late February, according to Trefis. Margins in that division have risen steadily for the past four years from 12 percent in 2007 to almost 20 percent at the end of 2011. However, continued strong battery margins in the first quarter were largely offset by fierce competition in the industry and an increase in raw material prices.
Emerging market demand increased the cost of raw materials for batteries, and a warm winter in much of the northern hemisphere cut demand for aftermarket batteries.
Power Solutions sales in the first quarter of 2012 increased 4 percent to $1.6 billion due to a favorable product mix. Unit shipments were lower than expected. The company attributed the soft demand to unseasonably warm winter temperatures which negatively impacted shipments starting in December, JCI said.
JCI's Power Solutions division, which includes car batteries, did increase income 25 percent to $271 million in the first quarter, though, as a result of vertical integration, non-recurring equity income and product mix, the company said.
North American earnings in the first quarter were driven down by costs associated with a new metals plant and increased engineering and launch costs, according to JCI. The company is currently constructing a new recycling plant in South Carolina and a third Chinese battery plant.
During the first quarter 2012, the U.S. EPA issued new air toxin standards for lead smelters, effective January 2014, a move that came shortly after a similar action by the Chinese government that affected lead acid battery plants. The new standards will require substantial investments to upgrade facilities, and JCI will spend $162 million to make the improvements to its plants in North America.
However, JCI is passing along the expense to its customers and raised prices by 8 percent in the first quarter.
This additional cost, in spite of being a drag, is also beneficial for big companies like Johnson Controls ... which enjoy economies of scale and can pass costs on to their customers. The smaller companies might not be able to deal with rising costs and this might result in output cuts or closures, both of which can help cut excess capacity from the market, Trefis said.
JCI sales for the first quarter increased 15 percent globally to $5.3 billion on contributions from 2011 acquisitions and new automotive seating and interior programs.
While there are some short-term changes to our original 2012 expectations, our primary growth and profitability story is intact. We believe actions we have taken to improve our execution and profitability will provide momentum through the balance of the year and beyond. Despite the near-term challenges, we believe Johnson Controls will deliver double-digit earnings increases in 2012, Stephen Roell, JCI's CEO, said in January.
Shares closed down 49 cents to $32.35 on Thursday.