Johnson Controls’ Revenue To Grow On ADT Acquisition, Growing Automotive Production

Johnson Controls‘ (NYSE:JCI) is set to release its first quarter fiscal year 2015 results on January 22. The maker of auto batteries, auto seats, and building cooling and heating systems reported a good fiscal fourth quarter in October, with revenue growing 3% year-on-year to reach $11 billion. This was primarily driven by growth in its Automotive and Power Solutions segments, as global automotive production continued to rise. ^[1] The company’s Building Efficiency segment posted sluggish growth, benefiting from the consolidation of Air Distribution Technologies (ADT). We expect to see the same trends continue to drive growth in Johnson Controls revenue in the first quarter of fiscal 2015.

Johnson Controls expects its fiscal 2015 revenues to reach approximately $42.3 billion with diluted earnings per share of $3.55-$3.70. ^[2] This excludes the impact of any non-recurring charges. The company plans to spend $1.3 billion in capital expenditures.

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Growth From Global Auto Sector Will Lift Revenue

In its outlook for fiscal 2015, Johnson Controls expects automotive industry production to rise across all key markets, led by an estimated 10% growth rate in China and 2% in Europe and North America. ^[3] In fiscal 2014, growth in automotive production in these regions benefited Johnson Controls’ Automotive and Power Solutions segments. The company, through its auto batteries and automotive seats, generates more than half of its revenues from the global automotive sector. The rising production in the global auto industry will likely play a key role in driving top line growth in Johnson Controls’ first quarter results.

Building Efficiency To Grow On Air Distribution Technologies

In June 2014, Johnson Controls acquired ADT, one of the largest providers of air distribution and ventilation products for buildings in North America. The acquisition has not only helped Johnson Controls through the consolidation of its revenues with the Building Efficiency segment, but also with significant cross-selling opportunities.

Johnson Controls’ Building Efficiency segment’s fourth quarter revenue grew 1% year-on-year on the ADT acquisition, which more than offset the 3% decline in organic sales. ^[1] We expect ADT to drive growth in the segment’s first quarter 2015 revenues as well.

Weak Commercial HVAC Markets May Turn Around

Johnson Controls’ Building Efficiency segment suffered throughout fiscal year 2014 due to weak commercial heating, ventilation and air-conditioning (HVAC) equipment demand in North America. However, the trend might reverse soon, as indicated by the Architecture Billings Index (ABI), a leading indicator for nonresidential construction activity in the U.S.

According to the November 2014 report, the ABI stood at 50.9, making it the eighth consecutive month of positive momentum. ^[4] Since sales of Johnson Controls’ HVAC products are highly dependent on nonresidential construction activity in the U.S., this gives rise to expectations of a good year for Johnson Control’s Building Efficiency segment.

Johnson Controls has already begun to see the impact of the expanding nonresidential construction activity on its Building Efficiency segment. In the fourth quarter of fiscal year 2014 Johnson Controls reported a 2% increase in new orders. This excludes the contribution from Air Distribution Technologies and impact of foreign exchange.

Looking Out For GWS Divestiture

In September 2014, Johnson Controls’ announced that it is looking to sell off its facilities management business unit, Global Workplace Solutions, which is a part of its Building Efficiency segment. ^[5] Though the divestiture from the Global Workplace Solutions will lead to a 10% decline in revenues, it will help drive up Building Efficiency’s EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) margin by 2%. In the first quarter results, we will look for any new information related to the company’s ongoing review of its Global Workplace Solutions.

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1. Johnson Controls’ F2014 Q4 8-K SEC Filing, October 30, 2014, www.sec.gov [↩] [↩]
2. Strategic Review and 2015 Outlook Annual financial analyst meeting, December 2, 2014, www.johnsoncontrols.com [↩]
3. Johnson Controls projects higher profitability across all three businesses in fiscal 2015, December 2 2014, www.johnsoncontrols.com [↩]
4. AIA Architecture Billings Index, www.aia.org [↩]
5. Johnson Controls announces its intention to divest its Global Workplace Solutions business, September 30, 2014, www.johnsoncontrols.com [↩]