Johnson Controls to Pare Inventories : (overestimated demand for its automotive batteries ?)

Posted on October 17, 2011


Auto parts supplier Johnson Controls Inc. said it overestimated demand for its automotive batteries and will spend much of the next year working down its inventories.

Chief Financial Officer Bruce McDonald admitted that the Milwaukee, Wis., company “took [its] eye off the ball” concerning its inventories, which ballooned by nearly 50% between mid-2010 and June 30.

“Working capital is one area of real disappointment,” Mr. McDonald said in an interview following a meeting with investors on Wednesday.

He said accounts receivables and inventories, two main elements of working capital, are between $500 million and $600 million higher than the company anticipated.

Accounts receivables exceeded $7 billion as of June 30, up 30% from a year earlier, according to Johnson Controls’s fiscal third-quarter results.

Part of the issue has been a rise in days receivable outstanding, which Mr. McDonald attributes to sales in Europe making up an increasing amount of Johnson Controls’s revenue.

“Payment terms are shorter in North America than Europe,” he explained.

But the biggest problem for Johnson Controls in terms of working capital is inventories, which swelled to $2.45 billion as of June 30, up nearly 50% from a year earlier.

“We’re not going to duck the fact that we took our eye off the ball,” Mr. McDonald said in reference to the battery inventories.

During the recession and early parts of the recovery, Johnson Controls worked to keep inventories slim. Between June 30, 2008 and Sept. 30, 2009, the company cut overall inventories for five straight quarters, shaving them by a third over that time, according to Securities and Exchange Commission filings.

But it began to modestly increase its battery inventories at the end of 2009, and really ramped up in the second half of 2010 in anticipation of the economic recovery picking up steam. After demand came in softer than expected, the company was left with excessive inventory. Whittling them down will take time.

“Being realistic, it’s going to take most of 2012,” Mr. McDonald said. “You can’t do it quickly.”


Posted in: Uncategorized