Johnson Controls Earnings Preview: FX May Dampen ADT and Automotive Growth

Johnson Controls‘ (NYSE:JCI) is set to release its second quarter fiscal year 2015 results on April 23. The maker of auto batteries, auto seats, and building cooling and heating systems reported a sluggish fiscal first quarter, with revenue growing 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 the automotive experience segment, while tempering revenues at the building efficiency and power solutions segments. We expect to see the same trends continue to impact Johnson Controls revenue in the second quarter of fiscal 2015.

At its previous earnings conference, Johnson Controls announced its expectations of $0.74-0.76 earnings per diluted share in the second quarter of fiscal 2015. ^[2] For fiscal 2015, Johnson Controls forecast its revenues to reach approximately $42.3 billion with diluted earnings per share of $3.55-$3.70. This excludes the impact of any non-recurring charges. The company plans to spend $1.3 billion in capital expenditures.

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Building Efficiency Growth Will Be Reliant On Air Distribution Technologies

Both residential and non-residential construction activity have been somewhat weak in the first two months of the quarter, which could lead to sluggish sales of Johnson Controls’ Building Efficiency segment, which offers heating, ventilation and air-conditioning (HVAC) equipment. After having declined to 49.9 in January, the Architecture Billings Index (ABI), an indicator of non-residential construction activity in the U.S., managed to crawl back into positive territory with a weak 50.4 in February. Experts attribute the weakness to declining oil prices and bad weather. Declining oil prices have impacted jobs in upstream oil-related sectors, leading to a drop in incomes for some parts of the population, while bad weather stalled many construction projects. ^[3] Construction spending in the U.S. was also weak, growing a sluggish 1.7% year-on-year for the two months ended February. ^[4]

On top of the weak growth in construction activity, Johnson Controls’ building efficiency segment will face headwinds from strong dollar exchange rates, which could partially offset gains from sales. The segment will therefore be heavily reliant on growth from Air Distribution Technologies (ADT), which Johnson Controls acquired in June 2014. ADT was 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.

ADT played a major role in the segment’s revenue growth in the first quarter. Excluding the ADT acquisition, Global Workplace Solutions (GWS) revenues and foreign exchange impact, building efficiency revenues grew just 1%. ^[2] However, including the ADT acquisition, building efficiency revenues grew 5%. We expect ADT to drive growth in the segment’s second quarter 2015 revenues as well.

FX Could Temper Revenue Growth From Automotive Sector

In its outlook for fiscal 2015, Johnson Controls expects the 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. ^[5] 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. Rising production in the global auto industry will likely play a key role in driving top line growth in Johnson Controls’ second quarter results.

However, weak Euro and Yen currencies will likely temper growth, as was seen in the previous quarter. After excluding the impact of foreign exchange and lead prices, Johnson Controls’ power solutions segment revenue increased by 8%. However, the segment’s reported revenues show just 4% growth. ^[2] Similarly, automotive experience revenues grew 2%, but due to the negative impact of foreign exchange rates, reported revenues saw a 3% decline.

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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. US Construction Spending Chart, www.ycharts.com [↩]
5. Johnson Controls projects higher profitability across all three businesses in fiscal 2015, December 2 2014, www.johnsoncontrols.com [↩]