Jul 20, 2011
Executives
Glen Ponczak - Director of IR R. McDonald - Chief Financial Officer and Executive Vice President Stephen Roell - Chairman of the Board, Chief Executive Officer, President and Chairman of Executive Committee
Analysts
David Leiker - Robert W. Baird & Co.
Incorporated Rod Lache - Deutsche Bank AG H. Nesvold - Jefferies & Company, Inc.
Brian Johnson - Barclays Capital Christopher Ceraso - Crédit Suisse AG Timothy Denoyer Himanshu Patel - JP Morgan Chase & Co John Murphy - BofA Merrill Lynch Theodore O'Neil - Wunderlich Securities Inc.
Operator
Welcome, and thank you for standing by. [Operator Instructions] Today's conference is being recorded.
If you do have any objections, you may disconnect at this time. I would now like to turn the call over to your host for today, Mr.
Glen Ponczak. Sir, please go ahead.
Glen Ponczak
Well, thank you, Melissa. Good morning, everybody, and thank you for joining us for our third quarter 2011 earnings conference call.
Before we begin, I'd like to remind you of our forward-looking statements. Johnson Controls has made forward-looking statements in this presentation and documents pertaining to its financial results for fiscal 2011 and beyond that are based on preliminary data and are subject to risks and uncertainties.
All statements other than statements of historical fact are statements that are or could be deemed forward-looking statements and include terms such as outlook, expectations, estimates or forecasts. For those statements, the company cautions that numerous important factors, such as automotive vehicle production levels, mix and schedules, customer or supplier disruptions, energy or commodity prices, the strength of the U.S.
or other economies, currency exchange rates, cancellation of or changes to commercial contracts, as well as other factors discussed in Item 1A of Part 1 of the company's most recent Form 10-K filing, which was filed November 23, 2010, could affect the company's actual results and could cause its actual consolidated results to differ materially from those expressed in any forward-looking statement made by or on behalf of the company. Joining this morning is Steve Roell, our Chairman and Chief Executive Officer.
Steve will give an overview of the third quarter. After that, Bruce McDonald, Executive Vice President and Chief Financial Officer, will give a more detailed review of the businesses and the financial review.
And that will be followed with questions and answers concluding right at noon, Eastern Time. And with that, I'll turn it over to Steve.
Stephen Roell
Okay, well, thank you, Glen, and good morning, everyone. We're generally very pleased with our fiscal third quarter results.
Our consolidated sales of $10.4 billion was a record for us, with each of our 3 business segments achieving sales growth in excess of 20%. I should note, this was the seventh consecutive quarter of double-digit sales growth for us and 6 of those have been in excess of 15%.
If you exclude the impact of foreign exchange, our revenues were up 15%. But if you correct for the impact of the Japan disaster of almost $400 million, our growth rate was 22%.
In previous presentations, I've highlighted the fact that a large portion of our growth is organic and that's going to continue to be the case. This quarter, we achieved market share gains in the global aftermarket battery segment.
We have significant [ph] higher sales from new awards in our European seating business, and we saw increased demand for energy efficiency and Global Workplace Solutions services. Once you adjust for the metal and fabrication acquisitions that we had, as well as the Korean battery transaction of late last fiscal 2010, our organic growth was 16% in the period.
Coming into the quarter, we were concerned that the production interruptions stemming from the Japan disaster would be more extensive and prolonged. The auto industry in general lacked visibility in the end of the entire supply chain as we discussed at that time.
I believe that a combination of higher inventory, product substitution by the automakers and certainly, alternate sourcing helped mitigate the impact to some extent. But as you can see, it still had a major impact on our earnings.
Now looking at the macroenvironment in the quarter, the underlying automotive production levels were certainly more stable than we initially thought that they would be and, obviously, I'm putting China on the side of that. Emerging markets remain strong, with China being the major market for us.
But I will mention that the growth of the period was achieved despite several headwinds, and let me just comment on a few of those. We talked about our battery shipments, and we had strong battery shipments in the quarter.
Our aftermarket was up over 10%, and we saw 5% growth in North America, as an example. But in this market, as well as in Europe, we noted that there were significantly higher inventories coming into the period.
I think we can tell you what happened. If you go back to the January/February timeframe, there was strong demand.
And as a result of that, the distribution really ordered inventory that as a result, we believe, had them carry excessive inventories out of the March timeframe and into April. So April and May were characteristically lower, weaker than what we normally would have seen, and then we saw a recovery in June.
We can tell you that in July, we continue to see strong demand despite what would be cooler weather in Europe than normal and, of course, the hot heat that we're seeing here in the U.S. So demand has recovered but we thought we would highlight for you that there was a weak period of battery shipments that took place early in the last quarter.
There was eventually a significant [ph] market after we saw 2 consecutive quarters of good growth. Our first half of the year shipments were up almost 15%.
Battery recovery was not sustained as we had expected, and the market was extremely weak in the quarter just ended. And finally, it's difficult to remember given our current heat wave, but if you recall, the quarter started out very cool and that cooling season late start had impacted our technical services.
So those are the headwinds. And despite that, we were able to achieve the 20%-plus top line growth.
In terms of the financial results, as I mentioned earlier, our sales were $10.4 billion, up from the $8.5 billion last year. Segment income increased 9% from $496 million to $541 million while net income increased 4%.
Our EPS was $0.56 per share versus $0.54. This year's results that I'm referring to exclude the costs associated with our acquisitions, while the prior year results also exclude the onetime tax gain of roughly $51 million.
On this slide, you'll also note the reference to $400 million of estimated revenue impact of the Japan disruption versus our original estimate of roughly $500 million. On the next page, I'd like to just comment briefly about working capital levels at the end of June.
The absolute working capital levels have been impacted by several things. First is when you look at the absolute numbers on our balance sheet, it's hard to isolate what the impact has been from our recent acquisitions.
You also have the seasonal pattern of higher working capital in our business at this time of the year. And then thirdly, we had a voluntary pension contribution of $175 million, which when you just look at working capital, also impacted our overall cash flow for the period.
Beyond that, there's been a deterioration in several underlying metrics. Our accounts receivable DSO has increased from 53 days to 55 days.
Our inventory turns have declined, and we have one less day of accounts payable in our -- as we do our calculation accounts payable as a percent of our cost of sales. If you look at those 3 elements, there's roughly $450 million of higher working capital.
And I'm confident that you'll see improvements by the end of September, partially due to the seasonal impact but also to the actions that we've initiated. In the quarter, we continue to invest for our future growth.
We've projected our capital expenditures will approximate $1.4 billion in 2011. That's no different than what we provided guidance the last time, and our acquisitions will also be in that $1.4 billion level.
The benefits associated with those investments will largely be realized in fiscal 2012. Demand for AGM batteries for Start-Stop applications continues to be strong.
I know that a number of you on the call had the opportunity to meet with our Power Solutions management last month. We enjoyed sharing with you the significant growth opportunities and the margin enhancement plans that we have for that business segment.
We also at the time announced the investment in AGM technology in our Toledo plant in North America. And at our board meeting next week, we'll be talking about reviewing our first investment in AGM technology in China.
Beyond the capital and M&A, we continue to add sales force, project management and technicians to support our future growth in BE. I should note, you might be interested, we've added -- if you look at our workforce, since September, our workforce is up about 17,000 people.
Half of that is through acquisitions, half of that is just supporting the growth in our business. So we've added 7,500 people globally since September, and I would -- x the acquisitions and about 5,000 of those are in the U.S.
to support our growth. Now with that, I'm going to turn it over to Bruce, and he's going to provide you more information on the business segments, our outlook.
And I'm sure he'll talk about the margins. So, Bruce, I'll turn to you.
R. McDonald
All right. On Slide 9.
First, let me focus on Automotive Experience here, who had another very solid quarter against the backdrop of significantly lower volumes to our Japanese customers. If you look at the sales, up 21% on a constant currency basis, 15% increase.
Sales gains were significantly better than the OE production levels, reflecting the launch of new business awards. If you look at that on a regional basis, in North America, our sales were up 2% versus about a 1% increase in production levels.
In Europe, if you sort of back out currency, our sales were up 24% versus a 3% increase in production levels. If you adjust for the acquisitions, the underlying bills increase was 8% or 9% versus that 3% production increase.
Then Asia, our sales were up 21% on a constant currency basis. Our new business awards to the Japanese and in China and the Korean's more than offset the downturn that we saw in the production volumes within the Japanese market.
In terms of China, our business continues to perform very well there. You can see in the quarter, our sales were up about 20% and we're on track.
And that, by the way, compares to a passenger increase of sales of up about 6% in the quarter. We feel pretty good about where we are in China.
We will acknowledge there's been a little bit of softness in the market, but we're confident that we'll achieve the $4 billion target that we set for our business there this year. We're about just a shade below $3 billion through the first 9 months.
Turning to segment income. If we back out the $29 million of acquisition-related cost, our segment income was flat versus last year, $171 million.
As the trend, as we've talked about in previous quarters, we'll continue to invest in innovation and growing our backlog and you sort of see that. As we noted here, our net engineering and product launch costs were about $41 million higher on a year-over-year basis.
In terms of the margins. Probably the best way to look at the margins and backing out the acquisition-related cost and I've also tried to back out adjust for the impact of Japan.
So if you sort of normalize for Japan here, here's kind of how our regional margins would've shaken out here. So North America, in the quarter, our margins were about 6.2% on that basis, and that's up from 5.6% last year.
In Asia, our margins were 11.9%, up from 5.7% last year, and I'd note that last year, our Asian margins were a little bit depressed by a charge that we took to relocate one of our regional headquarters. And then Europe, on that same basis, our margins in the quarter were 2.1% and that compares to 2.4% in the year-ago period.
As we've talked about in the past, our containment costs and some of our problematic launches, cost associated with distressed suppliers and supply shortages, those are still with us. But we are starting to see those trend downward, and we expect to see a step improvement here in the fourth quarter.
Not to say they're going to be gone but we're confident with the trend lines that we're seeing as we went through the third quarter here. Turning to Building Efficiency.
Our sales at $3.9 billion or 21% higher or 16% higher on a constant currency basis. We saw pretty broad-based revenue strength across all segments.
If you just look at some of the regional areas: North America, our sales were up 14% and our Global Workplace Solutions were up 33%; Asia, we're up 43%; China, within Asia, we're up 54%. We're on track to deliver about $1 billion in revenue China this year, and that compares to about $675 million last year, so it's tremendous growth in that market.
Similarly, the Middle East, we're up about 55%. And if you look at our equipment business on a global basis, our global chiller shipments were up about 33% on a year-over-year basis.
Sort of looking at some of the activity in our markets, it's probably more relevant to look at the order activity as revenue kind of lags a little bit here. But geographically and if you look at our order activity in Asia, it's up 21%.
Europe, we saw pop to the positive, it's up 23%. Although, if you back out exchange, it was still up double digit.
North America, order activity was up 2%. And North America really have kind of a tale of 2 businesses here.
If you look at our systems business, our order activity was up about 7%, while we saw pretty strong demand in some of the institutional markets, particularly state and local government and the healthcare sector. On the downside, our service business, we saw orders down 2%, and they we're continuing to be negatively impacted by the cool weather in the start of the quarter here and just general lower discretionary project orders kind of across the board.
So that's kind of the headwind that we've been talking to the last few quarters. And I think last quarter, we were up a little bit in service, but we're sort of bouncing along the bottom here.
And we're hoping that we see that pick up a little bit here in the fourth quarter with hotter temperatures. In terms of our Solutions business.
Our growth actually slowed to about 5%. That's really just the result of the deferral of some large orders that we think are going to slip into the fourth quarter.
So on a year-over-year basis, we're still expecting our Solutions business to grow 20%-plus. It's just the timing of some large orders.
Those larger orders are taking a little bit more lead time to sort of book into -- in the sales cycle turn into a solid order. If you look at our segment income, $207 million, we're up about 9%.
Our margins, by the way, excluding GWS, were 7.7% in the quarter. I know some folks have asked about that.
That's what that number would be. We saw a pretty strong profit growth in all geographic regions and across many of our lines of business as a result of higher volumes.
The headwinds that we really faced here were in our residential business where we were impacted by pretty significant downturn in the industry. Maybe just to put that in perspective, if you look at our residential business through the first 6 months of the year, we were up about 14%.
And that largely is -- we think that's significantly better than the industry. If you look at the third quarter, however our revenues in the residential business were down 15%.
Now we tend to be more exposed to the new construction segment than some of our competitors but it was a pretty -- that the sort of uptick that we typically see in the residential business in the third quarter just did not happen, and we've got a pretty pessimistic outlook, I would say, for the residential business for the balance of this year. In the quarter, we've called out about $20 million of charges, net charges that we took and maybe just comment on those.
First of all, we received an indirect tax assessment, actually central sales tax assessment, in Brazil and we chose to be conservative and booked that in the quarter. We had a number of commercial settlements that relate to old contracts that we resolved.
And those were partially offset by a reduction in our warranty reserves, which really reflect favorable trends in our claims data. In terms of our old backlog, you can see we're up about 16%, $5.1 billion, which is largely consistent with where we were last year.
And that's the fourth consecutive quarter of what we see in double-digit growth in our backlog in the business. Turning now to Power Solutions.
Another very strong quarter for Power Solutions with our sales up 22%. Unit volumes were up about 9%.
We're starting to see here the impact of higher lead prices. So if you just look at the units, first of all, aftermarket volumes, as Steve indicated earlier, up 10%, 'OE, up 8%.
If you look at lead in the quarter, you can see on the upper right in this chart, lead was up about 31% year-over-year, and that inflated our revenue in the quarter by almost $78 million. So if you look at the margin x lead, it's about a 60 basis point improvement.
We're going to have to start adjusting our comparable numbers if lead sort of starts to be this volatile. In Asia, significantly stronger volumes in the quarter, up about 155%.
That really reflects the acquisition of our Korean joint venture, as well as growth that we're seeing in China. And just as a reminder, in China, we're ramping up to manufacturing our second facility and we started construction of our third manufacturing facility, which will come online towards the end of next year.
In Power Solutions, our investment in our key growth initiatives remain on track during the quarter. We did start to see some of the benefit of the second North American lead smelter coming in improve our margins.
Our investment in the smelting in our South Carolina facility, our China expansion, the AGM investments that we've talked about earlier. Calls are all of sort of tracking as expected and those will start to really pay some dividends for us as we get into 2012.
In terms of our segment income, you can see up about 21% versus -- at $163 million versus $135 million last year. Here we've benefited from higher volumes, a slight of mature mix of product, i.e.
more AGM, the impact of the in-house lead recycling and some of our other investments. Now maybe I'll flip it as to the third quarter financial highlights here.
And as I review the numbers, you can see, we've made a couple of adjustments here. First of all, we're going to take out the acquisition-related charges of about $0.04 in this year and the $0.07 nonrecurring tax benefit that we had in 2010 to sort of make things comparable.
So from my overall sales perspective, we are $10.4 billion, which is a 21% increase. If you back out the impact of foreign exchange, which is primarily the Euro, which was about 13% higher than last year, our underlying sales growth was 15%.
And as we talked about in our business review there that pretty broad-based with all of our businesses are showing a midteens growth on our foreign exchange basis. In terms of our gross profit.
You can see we're down about 70 basis points. Now here, this is where we really see the impact of the Japan volumes falling off, hurting us and some product mix issues, i.e.
the residential and the service business being lower in Building Efficiency. And as we look into the fourth quarter, we do expect our margins to be up year-over-year, which is a trend we've seen through the other quarters this year, so we'll get on track here as we move into the fourth quarter.
In terms of SG&A expenses, a 20 basis point reduction, down to 10.3% of sales. And again, we've talked about earlier, we're continuing to make our investment in some of those growth initiatives: innovation, emerging market infrastructure and some IT systems.
In terms of the net financing charge, you can see it, $43 million, a little bit of an uptick. This is largely consistent with the guidance that we gave.
We've talked about net financing cost being that $45 million to $50 million per quarter, generally benefiting from interest lower -- short-term interest rates, particularly our U.S. commercial paper, and that's kind of offsetting some of the higher debt levels associated with our elevated levels of working capital.
In terms of the tax line, we're at 19%, consistent with our guidance, and up about 1%, up versus the 18% last year. And maybe the last comment here would be the income attributable to noncontrolling interest of $23 million, a big increase from last year.
There's where you really seeing the impact of the improved profitability of our consolidated automotive joint ventures. Let me last focus on our 2011 outlook for here for the fourth quarter.
So if you look at kind of where we see things shaken out, we expect our revenues here in the fourth quarter to be in the $10 billion to $10.5 billion range and earnings per share to be in that $0.75 area. I'd note that the $0.75 is now on a GAAP basis.
So in the past couple of quarters, because the acquisitions were coming on stream, we've sort of backed away from what we thought would be acquisition-related costs. We now have much better visibility on those to about a $0.03 headwind as we go into the fourth quarters.
So that's in the $0.75. As we look into 2012, those charges are going to be about $0.05 this year for the full year, $0.01 or so a the quarter, just to put that in perspective.
In terms of Japan, in terms of our last call, we talked about Japan being kind of neutral in the fourth quarter. We actually expect there's going to be about a $70 million negative impact associated with Japan.
And for us, it's really around the Tundra and Tacoma production, which is in San Antonio, for Toyota. That facility still remains well below precrisis levels and was slightly impacted by some component shortages in telematics business.
So those are kind of the area where we would be negatively impacted. In terms of -- if I just look at each of the business segments.
I mean, Automotive, we expect to see the fourth quarter production line tick up a little bit. We're actually forecasting 2% year-over-year increase in production.
We feel good about the 3 acquisitions, Michel Thierry, Hammerstein and Keiper, becoming increasingly accretive to our margins. And as I mentioned, earlier, we're confident that we'll see our European operational efficiencies begin to improve.
In terms of Building Efficiency, continuation of strong broad-based growth, and our margins we think will be comparable to year-ago levels. Our backlog continues to improve and we're forecasting double-digit increase in orders again for the fourth quarter here.
Emerging markets continue to remain strong for us. And as I said earlier, we're forecasting a pretty downward outlook in terms of the residential outlook here for the balance of the year.
With Power Solutions, we feel good about the uptick in the aftermarket. We think we bled through some of the inventory correction here in the third quarter, and we'll see a nice pop here in the fourth quarter.
And as we get into the fourth quarter and into 2012, we'll start to see increasing benefits from our vertical integration investment and that China capacity coming on line. So I think if you sort of just step back and look at the sort of the key financial takeaways here, good double-digit growth in all 3 of our businesses; the Japan impact at this point 3 months ago, we still have some concern about things could maybe get worse.
That's substantially behind us, and we expect to see the benefit of rebuilding some of the dealer inventories positively impact our business as in the beginning of 2012. We're confident in terms of our European margin expansion.
The momentum in Building Efficiency remains very robust, with orders growing at double-digit rates. We're increasing the level of our investment both organic and M&A.
And that's going to accelerate our growth over the medium term. And we still have a strong balance sheet, which gives us the opportunity to continue to increase investments in areas that are going to deliver superior shareholder value.
And then just the last point here, in terms of the green box, we do have our Annual Analyst Meeting in New York scheduled for October 12. That's going to be at the New York Times Center here, and we're hoping to see many of you there.
So with that...
Stephen Roell
Just a comment to it, if you are meaning -- for those of you that haven't been to that session in the past, we'll have our presidents will be attending with us at that session. We do really give you time and each one of them gets the chance to start to object there, provide you with our outlook for their business units.
So, sorry Bruce, with that, we'll turn over -- and for questions.
Glen Ponczak
Yes. And Melissa, before we do, just -- I would assume there's a fairly large number in the queue, like there always.
[Operator Instructions]. Melissa, we'll take questions.
Operator
[Operator Instructions] Our first question comes from John Murphy.
John Murphy - BofA Merrill Lynch
Just a question, I mean, in how you're tracking year-to-date versus your outlook. It looks like your revenue is coming in a little bit stronger than expected originally in your outlook and that margins are a little bit weaker.
I'm just curious, you've explained a lot of puts and takes as to why the margin might be a little bit lighter. It makes a lot of sense here.
But do you think you can get back to those ranges that you're originally looking for in all 3 of your segments early next year and you could get back on track on top of that sort of for these midterm targets that you'd laid out of small 50 basis point growth in Building Efficiency, in Auto and then 100 basis point growth in Power margins going forward? I'm just trying to understand is this sort of margin suppression going to get reversed and then we'll get back on track to that expansion that you outlined earlier?
R. McDonald
Well, let me just sort of at level say it, I think John, we've given sort of intermediate guidance for all 3 of our businesses. So if we talked about Power Solutions, our expectation is about 100 basis points year over the next, say, 4 years.
We're not backing away from that at all. We're firmly committed to that.
Lead, as you know, will impact us. So if lead goes higher and lower, it's going to change the absolute dollar of our profit.
It could affect the reported margins. But underlying, we're committed there.
In terms of Automotive, we've guided some margins be in that 6% to 7% range, and we've also talked about the fact that the recent acquisitions that we've made we expect will be accretive to that. So I think that on an intermediate basis, again, we're not backing away from the 6% to 7%.
In the short term, the real driver here is our European performance. And as we look into the fourth quarter, our expectation is we'll see European margins at about 3% in the fourth quarter.
And that compares to -- I think if you look at last year, we're sort of around the break-even levels. So you'll start to see with the Japan situation coming back online, with these acquisitions coming under our belt, you will start to see steady improvement there and progress towards our intermediate goal.
In Building Efficiency, here, we talked about a 50 basis point improvement on an annual basis in terms of our margins and getting up to that 10%, excluding GWS. If you just look at this quarter, we're 77, excluding GWS.
So we got about 200, say, 30, 250 basis points to go to get there. A key for us here is going to be -- and we've talked about this before is we've got to get a recovery in the residential market.
That's one of our highest contribution businesses. And it's coming much, much softer than we had expected, and that's going to -- I mean, that's going to eventually reverse.
Same thing on service. We've got -- our service margins tend to be very rich.
And coming out of the downturn here, it's been a choppy environment. So no change to the long term.
I think we had acknowledged with the residential and the service headwinds that we have this year, we're not going to see the margin improvement that we're forecasting for 2011 but we're not backing away from the longer-term objective.
Stephen Roell
Let me see if I can add something here, John, just from a broader standpoint. I want to go back in a little more detail first, and that's on GWS.
On GWS, we probably had the effect of that mix as a dramatic impact if you just look at the Building Efficiency margins themselves. In the quarter, as an example, GWS revenues were up 33%.
The big clients, I mean, it's Eli Lilly, it's Bristol-Myers, Verizon, Deutsche Bank, good names. But nevertheless, the margins and as we've talked about are normally -- are not what the norm is for the segment and that weights it down.
Now in the broader sense, let me tell you what I'm trying to do here. In the past, our compensation for our executives has always been based on year-over-year earnings growth, and we want to continue that.
But in 2012, I'm talking to our board about including a debenture that which would also drive ROS. And it would support what Bruce just described relative to the margin improvement goals that we have for the businesses long term.
And so we would step those up and the compensation of the management team, including myself, would be tied to ROS expansion going forward. Second thing, if you recall, we have made announcement, we may have been very subtle, but we brought in Bill Jackson to our executive team.
And Bill's sole purpose in life is to help us drive our margins. He's working with the business units, both on a short-term and long-term basis, short-term things like pricing strategies, looking at our business models and long-term in driving innovation.
So Bill really becomes an accelerant with the team he'll be building to help come across and work with our business leaders to drive margins. So just a couple of subtle points that may not be obvious to the audience, okay?
John Murphy - BofA Merrill Lynch
That's extremely helpful. Just one follow-up question on the interiors business in Europe.
It sounds like you're pretty optimistic that you're moving in the right direction there. Is that because volumes are coming in a little bit better than expected?
Or is there something else going on with pricing with your customers or is something specific with your restructuring? I'm just trying to understand why that's going so well.
And it's a good thing it's going well, I just wanted to understand that.
R. McDonald
It's a reduction, John, in the launch and containment cost. I mean, we also are just working our way through.
And they're not going to go away in the fourth quarter but they're on a glide path down, and that's really what drives it and the acquisitions. The acquisitions will be accretive to our margins.
Operator
Our next question comes from Himanshu Patel.
Himanshu Patel - JP Morgan Chase & Co
I just wanted to drill into the North American Auto business a little bit. I think, Bruce, you had mentioned that adjusted for Japan, the margins were 6.2%, I think, is what you said?
R. McDonald
Yes.
Himanshu Patel - JP Morgan Chase & Co
And it looks like the reported number was maybe somewhere around 3.5% or so. I guess the revenues in the North American Auto business were, at the end of the day, not as weak as maybe what a lot of us would have thought at the start of the quarter.
So I'm just trying to understand like what drove the margin weakness on a reported basis? Was it just kind of friction cost related to abrupt production shutdowns or is there something else that is going on there as well?
R. McDonald
Well, it's actually kind of interest, Himanshu, if you look at the -- when we talk about the impact to Japan was $400 million. If you sort of look at a regional basis, about 15% was what hit us in -- 15% of the $400 million hit us in Japan, the country of Japan.
And really, Nissan is the main impact there. And about 5% of that $400 million was Europe.
80% of it is North America. So the lion's share of the downturn that we experienced is North America.
The other thing I would point out is we do have a number of nonconsolidated joint ventures that deal with the Japanese exclusively in North America, so we're losing the equity income there. But I think those are the 2 -- those are really 2 factors, Himanshu.
Himanshu Patel - JP Morgan Chase & Co
Oh I see. So the Tundra plant is on an equity basis, right?
R. McDonald
No, that one is actually consolidated but the other ones that are nonconsolidated.
Himanshu Patel - JP Morgan Chase & Co
I see. So okay, that make sense.
And then, could you just refresh us, inside of your North American auto business, what's kind of the OEM mix? I used to remember sort of a roughly 50-50 split between domestics and transplants.
Is that still the same?
R. McDonald
It's around -- it was actually lower than that, obviously. More in North American continent this quarter because of the Japan situation, but it's plus or minus 50%, 55% is the Detroit 3 and 45% to 50% is the not all transplants.
Himanshu Patel - JP Morgan Chase & Co
Okay. And then on European autos, I think you said adjusted for the Japan issue and acquisition if you were kind of at a 2.1% margin.
And I think in response to John's question, you had said 3% was sort of the kind of target for the fourth quarter.
R. McDonald
That's correct.
Himanshu Patel - JP Morgan Chase & Co
So I guess I'm just noticing you had a very nice 200 basis points sequential increase in that division's margins from the December quarter to the March quarter. And then, you've got maybe another 100 or so in the September quarter.
But between the March and the June quarter, even on an adjusted basis, it looks like margins were kind of flattish. And I know there wasn't a whole lot of revenue growth but there was a little bit there.
So can you just talk a little bit about the cadence or what's going on there on the issues that you've talked about that are JCI-specific, namely the distressed supplier cost, the launch cost, engineering cost was there? It just felt like the pace of improvement, even on an underlying basis, adjusting for Japan, kind of slowed down on the June quarter.
R. McDonald
Yes. I think -- well, first of all, if you look at containment costs, they were comparable, okay?
So Q3 containment launch -- I think difficult launch containment cost to stress supply and those types of things were comparable quarter-to-quarter. So we really didn't see a big benefit Q3 versus Q2 there.
The main issue that I would say sequentially hit us was our engineering and normal launch cost where like we talked about there $41 million higher year-over-year. I don't have those at the top of my fingers what they were by region quarter-over-quarter, but maybe Glen can follow up.
But they did pick up in the quarter. And then, when we talk about Q4, Himanshu, when I say we're going to be at that sort of 3%, keep in mind I'm guiding with the acquisition-related amortization, some of the step-up things like that in the number, okay?
So my 2.1% excludes those types of costing in Q4. You're going to see those in the numbers.
That's going to get across the 3%.
Himanshu Patel - JP Morgan Chase & Co
So the 3% would be higher excluding the amortization cost?
R. McDonald
Yes.
Operator
Our next question comes from Tim Denoyer.
Timothy Denoyer
I'd like to ask a little bit more about the Power Solutions margins. I appreciate the commentary about the 80 basis point impact from higher lead.
But can you give a little bit more color on several other factors that are impacting that margin in the quarter? You had a price increase, I believe, in April.
Can you say if that was fully felt during the quarter? And can you give a little bit of dimension around the China and Mexico and AGM impact?
R. McDonald
Sure. We did increase our prices in the quarter, as you indicated.
I think we announced those in April and they went into effect in May 1, I believe, in North America. But those were basically price increases to offset, I would say, non-lead commodity type inflations, so things like tin, some of the resins, acid, those other...
Stephen Roell
Transportation cost.
R. McDonald
Transportation cost. Those price increases kind of offset that.
In terms of AGM, we really don't -- I'd say it's a slight benefit. The AGM production, really -- I mean, it's higher than last year but it's not really moving the needle a heck of the lot right now.
The real step-up comes in '12 and '13, '13 really. The smelter investment in Mexico, that was online for the whole quarter, not quite at 100% ramp-up but pretty close.
So we got the benefit from that in the margins.
Stephen Roell
The only thing I can add, Bruce, is that also when we saw the demand slowdown in the April May timeframe, we did get back to production. So we had some absorption from demand [ph].
Timothy Denoyer
Can you give a sense of how much of that might improved or beat the tailwinds going into the fiscal fourth quarter?
Stephen Roell
Well, I've indicated is that we saw the demand come back, Tim, so that shouldn't be an issue to us. We -- at this point in time, by the time we get in the September/October timeframe, in particular, we'll be at full board, just ramping up at the stocking period.
But I was indicating earlier is we're seeing, I think, the inventory flow out at the distribution to the point where in June -- and certainly, in Europe, we're already starting to see a nice recovery. So I don't expect that to be an issue at all in the quarter.
Glen Ponczak
Let me just add one thing because I've got in the call a question a couple of times here, be careful looking at margin in Power Solutions sequentially. There's a lot of seasonality in that business.
And so look at it year-on-year, that's a better way of looking at it.
Timothy Denoyer
Sure. And just a follow-up on the price increase question.
With the May 1 price increases, that start hitting your revenue on May 1 or is there a transition that goes to the retailers?
Stephen Roell
There's a little bit of a lag but it's not much, Tim.
Operator
Our next question comes from Brian Johnson.
Brian Johnson - Barclays Capital
I would like to drill down and I know -- as much as you can give me, that's going to be in the Q around the profit margins by the business product line and service segments within Building Efficiency. You did mention that you had 7.7% x GWS.
But can you tell [ph] where system service solutions came out? And then are you -- is unitary still going to be buried like it was last quarter within other?
And even if it is, can you give a sense, is that a break-even now or what would be need to do to see to get margins up there?
R. McDonald
Well, we're -- I think because we have 10 segments, we're not -- we're only -- we got to focus our attention on the 3 pieces, so I can give you a little bit of color within that. I mean, generally speaking, I think if you looked at the segment detail within Building Efficiency, what you're going to see is kind of what we described.
Our North American Systems business performed quite well. Our Asian business performed quite well.
The GWS was kind of in line with last year, and our Service business in North America was down from a margin or I'd say it didn't live up to expectation, actually had a light uptick, I think, possibly year-over-year, but negatively impacted by the softness. In terms of the residential business volume, it is within the other.
We will, in our 10K -- Q, sorry, talk about residential in what was happened there, but it's profitable. It's not losing money.
We've restructured that business so that it's profitable. It's just kind fortunately because it's like a double -- it's like a 10% return on sales business going into the quarter.
Contribution margins hurt when the revenue drops like it did, 15%.
Stephen Roell
Let me see if I can add anything. I'm not sure I'm going to help you with the segments, but let me say what I think is key.
If I look at the fourth quarter, there is a couple of key things that have to happen. One is that service that Bruce referred to in terms of the truck-based service is critical to us, and the heating season should help us but that's high-margin business for us.
So it's growth is going to have an impact on the margin. Second, Solutions.
Solutions is another very important element to us, and I think the trip will be fine. The key thing is the booking.
I've looked at the bookings, and Bruce talked about the fact that there was a lull this past quarter. But as I look at the specific jobs in the pipeline, we have a very, very strong booking period from Solutions in the fourth quarter.
Unfortunately, when that's recorded in the fourth quarter and when we can begin to bill against that, that's going to be critical. That's another variable that we're monitoring, okay?
As I look forward into 2012, the major elements in terms of margin expansion within Building Efficiency are tied to a couple of things. We have heavy investments planned for IT, innovation and our sales force expansion.
We're going to have to look at those and gauge which ones are critical and which ones we can potentially spread longer to get some expansion as we look in '12. That's what we're be working on between now and when we meet with you in October.
But I think near term, it's service and the Solutions business that are doing the revenue part of that in the quarter, again there are 2 bigger variables. Residential won't be a big factor for us, as Bruce mentioned.
Brian Johnson - Barclays Capital
So you don't have a big upturn in housing starts in order to turn around that business?
Stephen Roell
No, not at all.
Brian Johnson - Barclays Capital
And strategically, any progress in building distribution and the unitary products business. And then there's about my air conditioner replacement, which is a Carrier because of your lack of distribution?
Stephen Roell
There's some but not nearly. We probably have more momentum in the early half of the year than we have recently.
It's an area that we focus. We had a lot of success with that distribution, taking distribution market share in the first half.
Brian, I'm not sure what I can tell you that it will continue in the third quarter but that's an area of focus for us.
Brian Johnson - Barclays Capital
And then finally, I guess this is more to getting ahead to October. But you talk about the business, overall, a 10% percent goal but Global WorkPlace Solutions, given the pace of revenue, I guess, there are questions about whether that margin goal is realistic in light of that.
And then, for those who are thinking to ask the question, I guess realization that, that may not matter. So you're thinking about maybe giving more, breaking out your guidance, for example, between the Global Workplace Solutions and other parts of that business?
Stephen Roell
We can try to do that for you. Let me think about that, Brian.
We can provide that. But remember, our goal of 10% was without GWS.
Stephen Roell
Yes, and we only stated that it was 10% with GWS because we couldn't factor that in.
Brian Johnson - Barclays Capital
Right, which then makes it hard for us to track when the numbers come out...
Stephen Roell
I guess the best way you could use is Bruce used the number of 7.7% in the quarter. Say it's in the 7.5% range, that's what we're trying to drive and stair step and guide quite up to 10.
Operator
Our next question comes from Chris Ceraso.
Christopher Ceraso - Crédit Suisse AG
So even in the -- if we adjust for lead, it looked like margins in the battery business were still a little bit light. Are you still incurring costs for the expansion in China and for the smelting?
R. McDonald
Oh, yes, yes, and for the AGM investment. So it's still -- there's still investment costs running through our numbers.
But like we sort of said at the beginning, if you look at the -- or in the last question about the factory absorption in battery, I'd say, and this is just the fact that we produced less units than we sold. I would put the impact of that at like $15 million or $20 million in the quarter.
So that's like a onetime hit that we take an absorption that won't kind of reoccur as our production schedules ramp up here in the fourth quarter.
Christopher Ceraso - Crédit Suisse AG
On the Japan impact, you give us the number x Japan. I haven't had a chance to do the math.
But can you maybe equate the $400 million of revenue impact? What was the appropriate operating profit impact?
And then, will it be the same kind of ratio in Q4, if it's in $70 million revenue, what's the EBIT impact related to that?
R. McDonald
Yes, we -- well, I think when we -- the best way to sort of look at it without getting in total nitty gritty is we talked about the impact was going to be $500 million and the EPS impact of like $0.16 to $0.18. And now we're saying the revenue $0.16 to $0.18 now we're saying the revenue with $400 million, so you can take 80% of what we said before, Chris.
In terms of the fourth quarter, in our outlook slide, I said it's about $0.02 a share on that $70 million, both for the contribution margins, both 20%. So it's lower contribution margin in Q4 as opposed to Q1 -- sorry Q3, and that's really because it's 1 or 2 plants that are affected, not the 50 that we had in this current quarter and we're better able to respond in terms of our labor strategies.
Stephen Roell
It's also probably a little less automatic, Bruce, than what it was before.
Christopher Ceraso - Crédit Suisse AG
And you mentioned that the DSOs and your inventory turns deteriorated, but I didn't catch why. What was going on there?
R. McDonald
Well, the DSO is really a business mix. So it's not we've got a credit like overdues or anything like that are improving -- or deteriorating.
It's really just the mix of business. Some of our business have lower DSOs than other.
And it's -- some unbuild things like -- as we worked through some of our launch issues in Europe, we have tooling receivable balances that hasn't been paid because we haven't finalized their sign-ups [ph], things like that. We have some unbilled issues in Building Efficiency in some of our larger contracts that have come online just sort of streamlining those.
So that's where we see some the benefits, we see some of the actions that we're implementing turn that around. In terms of inventory, it’s -- I'd say the one area that’s a focus for us is on -- is in power solutions.
We probably got $100 million savings, $2 million, $2.5 million units of finished goods inventory, more than we ought to have right now. We'll bleed that out here in the fourth quarter.
Stephen Roell
I guess, another thing is that -- and a lot of our growth is international, and we're shipping some of our larger equipment into the Middle East and China. And unfortunately, the in-transit, it just -- it builds up on our books that way.
When we looked at the times, there's things we can do, though I don't want to -- it's not all a function of the fact that it's a business. But there's some things we can improve on our performance.
I'm sure we can get there. Payables will have a seasonal impact, so will receivables.
And so we'll get cash flow based on that as we do every year in the fourth quarter. But there are some things we need to do.
And as Bruce mentioned in our inventory area within Power Solutions and also, within our inventory even within our Automotive groups. So those are the 2 focus points.
Operator
Our next question comes from Peter Nesvold.
H. Nesvold - Jefferies & Company, Inc.
Two quick ones on Building Efficiency. First, it looks like in terms of the backlog, usually seasonally the backlog is down in fiscal fourth quarter.
I think based on the comments you've made on the call so far, it seems like you have high conviction the backlog will be up sequentially third quarter to fourth quarter based on what you're seeing in terms of the pipeline, but I wanted to just confirm that.
Stephen Roell
Yes, Peter, that's -- I've got to be careful here because -- also, if you look at the fourth quarter, so-so seasonally high revenue period for us, okay? So when I talked about the fact that I'm confident that we're going to be booking strongly in terms of our Solutions business, we're also be revenue-ing, okay?
I'd be very happy if we continue to revenue at 20% and backlog grows at 15%, I'll be very pleased, but that's just -- I just don't want to mislead you there, okay? Looking at our very strong backlogs, I don't think we ever expected any time in our planning to be -- have our backlogs be as high as they have gone.
Certainly, last quarter, I think they were in the 16%, what, 17% range? So we had early success.
At the same time, if you think about this last quarter and people have said, "Well, at least you didn't get any sequential increase." Well, our revenue was up 21%.
And so I guess what I'm telling you hit bottom line is we're going to have a strong booking period. We're going to have a strong revenue period.
And so I'd expect backlog to be up again from last year, but they're not going to sequentially continue to grow 20%, 25%.
H. Nesvold - Jefferies & Company, Inc.
And then my follow-up question is on pricing and residential HVAC market. And we take it that the market is weak right now.
I guess from what I'm seeing, it looks like Carrier had increased pricing kind of in the 2% to 6% range in residential during February. And now it's gone out with another 6%-type price increase.
Are you seeing anything comparable to that? I mean how would you describe the pricing environment given where our demand is right now?
R. McDonald
We've had 2 price increases this year as well, Peter. Glen, do you know what the dates -- well, one was very early, [indiscernible].
And one I think was in April.
Stephen Roell
But I'm not -- to the extent that -- I've not heard any further discussion on further price increases where we are. Industry, Peter, to be honest, the industry's very, very disciplined.
It always has and seems to tracked where industry moves pricing-wise across the board, all competitors seem to follow.
R. McDonald
Because we've all got the same issue with copper.
Operator
Our next question comes from David Leiker.
David Leiker - Robert W. Baird & Co. Incorporated
I just want to clarify one number here first. The DEX GWS you said was 7.7%.
Bruce, what was the comp for last year? Do you happen to have that?
Stephen Roell
7.6%.
R. McDonald
Right.
David Leiker - Robert W. Baird & Co. Incorporated
Okay. And then on the Building Efficiency, Steve, and going to return on sales versus return on cap versus other metric.
My understanding is in that GWS business, while it's diluted the margin, is accretive to return on capital. Does it make more sense to look at return on capital for that cap metric as opposed to the optical number for return on sales?
Stephen Roell
Well, on GWS, I have to look at return on capital. But for the rest of the business, ROS is a good metric.
David, I also have an ROA, which is what business units look at. That's also a component of the calculation as well.
So we haven't given up the ROA, and that would be the same as your ROIC, okay?
R. McDonald
The other thing I would just remind folks when we talk -- look at GWS is what you don't see in that segment is the systems and the service work that we get from the Global Workplace Solutions customers. That is a $50 million to $75 million annual contribution into our systems and services business that it just doesn't get bookkeep-ed in the GWS segment.
So when we look at the business internally, we are all very conscious of that pull-through.
Stephen Roell
But, David, your overall questions are very good and that is that the GWS is not a capital-intensive business. And therefore, we monitor that based on its pull-through, as Bruce just mentioned.
R. McDonald
And it's growth.
Stephen Roell
And the rest of the business was the right thing. I think we need to focus on that and we believe there's opportunities there to improve it.
If you look at some of the value we provide to our customers in terms of outcome metrics, typically around Solutions, the question is whether not we're getting paid, whether we're booking it properly, pricing it properly. That's the work that Dave Myers and Bill Jackson are working with their teams.
That's really where we think there are opportunities.
David Leiker - Robert W. Baird & Co. Incorporated
And then secondly, as we look at China, in a market that's growing 5% or 6%, you're driving 20% revenue growth. How sustainable is that level of performance relative to the market as we look over in the next couple of years?
Stephen Roell
Well, we've looked at -- we've taken a preliminary look at 2012, and we feel good about the China outlook based on our bookings. So we feel good about our ability to drive really strong double-digit growth out of that market in 2012.
We're studying beyond that. But remember, when we talked about our new business awards, China is a critical component of that and it continues to be.
So I think we've got a good view of what we believe our market share is going to be in the next 3 years. And, we'll try to give you more color on that on October, okay?
Operator
Our next question comes from Rod Lache.
Rod Lache - Deutsche Bank AG
Did you happen to mention how much of this working capital you expect to reverse by year end? Because you had given some full year cash flow objectives previously.
And also, I was hoping you can just clarify, these acquisition charges that you're calling out for Q4, the $0.03, is that acquisition accounting or is that some integration-related costs?
R. McDonald
It's both, Rod. It's like the ongoing -- like the step-up in some of the amortization and depreciation.
And then there's some nonqualifying type cost like cost to integrate IT systems and things like that, but it has to go through to your P&L. And that's what we said, those -- we talked about $0.03 here, fourth quarter, that will kind of break the back on it.
Next year, if you look at sort of the ongoing impact, it'll be some of that will carry forward. So it's going to be about $0.05 for us in 2012.
Stephen Roell
On the working capital, we didn't quantify it, Rod. Right now, our use of cash working capital is about $990-some million year-to-date.
R. McDonald
Inclusive of pension.
Stephen Roell
Inclusive of the pension, and we're trying to claw back $600 million of that in the fourth quarter.
Rod Lache - Deutsche Bank AG
Okay. And my last one is just the Building Efficiency business.
Was the 7.7% margin x GWS excluding the charge, which would imply you're getting like just under 10% incremental?
R. McDonald
No, no. If I exclude it, the internal for $20 million, Rod?
Rod Lache - Deutsche Bank AG
Yes.
R. McDonald
No, that would -- the 7.7% would go up to I think 8% to about 50 basis points delta there.
Rod Lache - Deutsche Bank AG
So your incremental margins x GWS have improved to the teens in other words?
R. McDonald
To the teens. I'm not sure I follow you there.
Rod Lache - Deutsche Bank AG
Just, excluding GWS, I can't do the math in my head, but when I included it in there, it looked like a 9.9% incremental margin, excluding that it must be quite a bit better.
R. McDonald
[indiscernible] year-over-year. Yes, you're right.
Rod Lache - Deutsche Bank AG
But you've been commenting on a pretty significant amount of fixed cost investment that's coming in here from additional headcount and you also alluded to maybe spreading that out next year.
Stephen Roell
Well, what I alluded to is I think we can do some things on the IT piece, okay? But I think we'll get our growth again.
We'll give it some -- we'll get some benefit next year from purely the leverage of that growth against that SG&A investment too. That's the thing that we're working on right now, Rod, okay?
Rod Lache - Deutsche Bank AG
Okay. So can you just tell us roughly what you're thinking in terms of just the fixed cost increases that you're planning in that business, what sort of a pace that you're looking at IT and additional sales force?
Stephen Roell
Well, I think Rod, to be honest, at this point, I may have those numbers for my Building Efficiency Group, but we've not reviewed the budgets. We don't review BE until next week.
So it would be premature.
Operator
Our final question comes from Theodore O'Neill.
Theodore O'Neil - Wunderlich Securities Inc.
I'm just wondering if you could give us some additional color on the aftermarket success in the battery business, and whether or not you're seeing any channel shifting from say to more Wal-Mart, Costco, Interstate versus other sellers?
Stephen Roell
It's difficult. We serve all those, okay.
And I would tell you that the growth that we've seen has been pretty broad-based. So I don't see it -- I don't, at this stage, see a lot of channel shift between the retail channel, the special channels, et cetera.
I don't see it yet. Our growth was pretty broad-based.
So as I look across our aftermarket groups, I mean part of those Wal-Mart, in fact, we're serving more Wal-Mart locations. But I mean if I look at the group of customers you just mentioned, Theodore, we're getting good growth from all of those.
So I'm not seeing a lot of share shift at this stage. Okay, listen, we're going to wrap up.
We're going to be around for questions and we'll certainly be there to help. Thank you very much for your interest and your questions.
They were very good. We're optimistic about not only our outlook for the fourth quarter, but as we put together our plans for 2012 and we see some exciting things there, you should expect that from us, because of the acquisitions and the capital investments that were made this year, we've tried to guide all year that we expect 2012 to be a significant improvement in our earnings.
We understand the pressure on margins, and we understand the fact that we need to go after those. That's why I've 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. We won't give up our focus on growth.
That's an important part of our culture. That's who we are and that's what we do.
So again, thank you very much for your attention and have a good day.
Operator
Thank you very much for participating in today's conference call. At this time, all parties may now disconnect.