FX Dampens Johnson Controls’ Strong Performance

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Johnson Controls

Johnson Controls‘ (NYSE:JCI) first quarter fiscal 2015 revenues grew 1% year-on-year, to reach $10.7 billion, as gains were primarily offset by the negative impact of currency translation, particularly the Euro. [1] Though revenue grew across all segments, currency translation effects led to a decline in Automotive Experience segment, while tempering revenues at the Building Efficiency and Power Solutions segments. Margin improvements across all these segments helped boost profits by 8%. Johnson Controls’ earnings per diluted share for the quarter grew 10% to $0.79, exceeding market expectations, which helped drive the stock up by nearly 5%.

In its earnings release, Johnson Controls announced its expectations of $0.74-0.76 earnings per diluted share in the second quarter of fiscal 2015. [2] The company reaffirmed its guidance of $3.55-3.70 for fiscal 2015.

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FX Offsets Gains On High Automotive Production

In the first quarter ended December 31, global automotive industry production rose by 5% in North America and 6% in China, but Europe was down by 2%. [2] The overall growth in production helped raise demand for automobile seats and batteries, pushing up sales volumes of Johnson Controls’ Automotive Experience and Power Solutions segments. However, weak Euro and Yen currencies presented headwinds, which tempered revenue growth.

After excluding the impact of foreign exchange and lead prices, the revenue of Johnson Controls’ Power Solutions segment, which sells automobile batteries, increased by 8%. However, Power Solutions’ reported revenues show just 4% growth. [2] Similarly, Automotive Experience revenues grew 2%, but due to the negative impact of foreign exchange rates, the reported revenues depict a 3% decline.

ADT Drives Building Efficiency

In the first quarter fiscal 2015, Johnson Controls’ Building Efficiency revenues grew 5%. [1] Air Distribution Technologies (ADT), acquired by Johnson Controls in June 2014, played a major role in the segment’s growth. Excluding ADT acquisition, Global Workplace Solutions (GWS) revenues and foreign exchange impact, Building Efficiency revenues grew just 1%. GWS revenue declined 3% in the quarter.

We believe that Johnson Controls’ Building Efficiency segment will likely continue to grow on improving nonresidential construction in the U.S. According to the November 2014 report of American Institute of Architects, the Architecture Billing Index, a leading indicator for nonresidential construction activity in the U.S., stood at 50.9, making it the eighth consecutive month of positive momentum. [3] Since sales of Building Efficiency products are highly dependent on nonresidential construction activity in the U.S., this gives provides reason for optimism for the segment.

Growing Demand For AGM Batteries Drives Power Solutions

Johnson Controls’ Power Solutions sales particularly benefited from strong demand for its Absorbent Glass Mat (AGM) batteries, volumes of which grew 31% during the quarter. [2] AGM batteries are used in vehicles with start-stop technology. Start-stop vehicles are gaining popularity as they help save fuel by turning off the engine when the vehicle comes to a rest. They are expected to account for more than 50% of global vehicle sales by 2022. [4] Being one of the predominant players in the market, Johnson Controls should benefit from this growth.

GWS Likely To Be Divested Soon

Johnson Controls claims that there has been a lot of buyer interest around its decision to divest its GWS business, and it is likely to make a concrete announcement by the third quarter of fiscal 2015. [2] While the divestiture from GWS 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%.

Joint Venture With Hitachi To Drive Market Leadership

In its earnings presentation, Johnson Controls provided further details about its agreement with Hitachi regarding their joint venture announced on January 21. [5] Johnson Controls announced that it will obtain a 60% stake in Hitachi’s global air conditioning business. The resulting joint venture will have a leadership position in the commercial air-conditioning market and will allow both companies to deliver a diverse technology portfolio in the heating, ventilation, air conditioning and refrigeration industry. Revenues for the Johnson Controls-Hitachi joint venture are expected to reach $3 billion in 2016. However, it is not certain if Johnson Controls will consolidate these revenues. [6] The transaction is likely to be completed by the fourth quarter of fiscal 2015.

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Notes:
  1. Johnson Controls reports double digit 2015 first quarter earnings improvement, January 22, 2015, www.johnsoncontrols.com [] []
  2. Johnson Controls FY 2015 first quarter Presentation, January 22, 2015, www.johnsoncontrols.com [] [] [] [] []
  3. AIA Architecture Billings Index, www.aia.org []
  4. Navigant Research forecasts stop-start vehicles to account for 53.4% of global vehicle sales by 2022, December 2013, www. navigantresearch.com []
  5. Johnson Controls and Hitachi sign definitive agreement to form global HVAC joint venture, January 21, 2015, www.johnsoncontrols.com []
  6. Johnson Controls’ (JCI) CEO Alex Molinaroli on Q1 2015 Results – Earnings Call Transcript, January 22, 2015, www.seekingalpha.com []