Johnson Controls Earnings: Foreign Currency Headwinds Offset Otherwise Strong Results

Johnson Controls‘ (NYSE:JCI) second quarter fiscal 2015 revenues declined 3% year-on-year, to reach $9.2 billion, as gains were primarily offset by the negative impact of currency translation. ^[1] However, excluding the impact of foreign currency headwinds, revenue grew 4%. 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 segment income by 18%. Johnson Controls’ earnings per diluted share for the quarter grew 17% to $0.77, exceeding market expectations by $0.03, which helped drive the stock up by nearly 3%.

In its earnings release, Johnson Controls announced its expectations of $0.90-0.92 diluted earnings per share from continuing operations in the third quarter of fiscal 2015. ^[2] However, the company reduced its guidance for the fiscal from $3.55-3.70 to $3.30-3.45, as a result of Global Workplace Solutions divestiture.

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Air Distribution Technologies Drives Building Efficiency Revenues

During the third quarter of fiscal 2014, Johnson Controls completed its acquisition of Air Distribution Technologies, which was one of the largest providers of air distribution and ventilation products for buildings in North America. The acquisition not only helped Johnson Controls by the consolidation of its revenues with the Building Efficiency segment but also with significant cross-selling opportunities. Driven by ADT, the Building Efficiency segment’s revenue grew 4% year-on-year, to reach $2.4 billion. ^[2]

The benefits from the ADT acquisition will end after the third quarter of fiscal 2015, since the acquisition will have cycled a full year. However, it seems that Johnson Controls Building Efficiency segment will be able to generate significant cash flows in the future given its backlogs and new order bookings. In the second quarter, Johnson Controls reported an 8% increase in new orders, excluding contribution from ADT and impact of foreign exchange, while backlogs were consistent with the previous fiscal’s second quarter.

Higher Automotive Industry Production Raised Johnson Controls’ Top Line

In the second quarter of fiscal 2015, global automotive industry production rose by 2% in North America, 6% in China. ^[2] Though production was flat in Europe, new car registrations increased 9%, the nineteenth consecutive monthly increase. The overall growth in production helped raised demand for auto seats and auto batteries, pushing up sales in Johnson Controls’ auto segments. Sales at the company’s auto seats segment rose by 1% year-on-year and at its auto batteries segment rose by 8% year-on-year, both excluding impact of foreign currency headwinds.

The company has been benefiting from the growing demand for batteries that help power start-stop vehicles. Start-stop batteries are gaining popularity as they help save fuel by turning off the engine when the vehicle comes to a rest. Johnson Controls is taking advantage of this increasing adoption of start-stop technology in vehicles through its AGM batteries. The company has invested large sums in increasing its global AGM production capacity, and we’re seeing concrete benefits from these investments as demand for start-stop batteries continues to rise. In the second quarter, sales volume of Johnson Controls AGM batteries grew 34%. ^[2]

We believe that Johnson Controls is likely to see continued growth in the sales of its AGM batteries. Start-stop vehicles are expected to grow in demand driven by stricter vehicle emission norms and efficiency requirements. Johnson Controls expects start-stop vehicles to account for more than 40% of the global new vehicle sales by 2020. ^[3] To this end, the company will be expanding their AGM battery manufacturing capacity by five million units in China. Additionally, its long-term supply contract of AGM batteries with SAIC Motors, which is one of the largest car manufacturers in China, will enable Johnson Controls to increase its market share in the fast-growing start-stop battery market.

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1. Johnson Controls reports double-digit profitability improvement in 2015 second quarter, April 23, 2015, www.johnsoncontrols.com [↩]
2. Johnson Controls FY 2015 Second Quarter Presentation, April 23, 2015, www.johnsoncontrols.com [↩] [↩] [↩] [↩]
3. Johnson Controls’s (JCI) CEO Alex Molinaroli on Q2 2015 Results – Earnings Call Transcript, April 23, 2015, www.seekingalpha.com [↩]