Johnson Controls Earnings Preview: Growth Across Segments May Be Offset By FX Headwinds

Johnson Controls (NYSE:JCI) is set to release its third quarter fiscal year 2015 results on July 24. ^[1] We expect to see growth in all three of its segments – Building Efficiency, Power Solutions, and Automotive Experience. However, the company – which makes auto batteries, auto seats, and building cooling and heating systems – will likely suffer from foreign exchange headwinds, as the U.S. dollar has been strong over the past few months.

In the previous quarter, Johnson Controls’ revenues declined 3% year-on-year, to reach $9.2 billion, as gains were primarily offset by the negative impact of currency translation. ^[2] However, excluding the impact of foreign currency headwinds, revenue grew 4%. Margin improvements across all 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. In its earnings release, the company reduced its guidance for the fiscal from $3.55-3.70 to $3.30-3.45, as a result of the Global Workplace Solutions divestiture. ^[3]

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Strong Construction Activity, ADT To Drive Building Efficiency

The Architecture Billings Index (ABI), an indicator of non-residential construction activity in the U.S., stood at 48.8 in April, pointing towards a decline in billings. ^[4] However, new project inquiries and contract designs remained strong, giving positive indications for the construction sector. In May, the ABI managed to climb back into positive territory with a strong 51.9. Construction spending in the U.S. was also strong, crossing $1 trillion in March and maintaining strong momentum through May. ^[5]

As both residential and non-residential construction activity has been considerably strong in the first two months of the quarter, we expect to see decent growth in sales of Johnson Controls’ Building Efficiency segment, which offers heating, ventilation and air-conditioning (HVAC) equipment.

The segment will also be driven by 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. Driven by ADT, the Building Efficiency segment’s revenue grew 4% year-on-year, to reach $2.4 billion in the second fiscal quarter.

New orders from the previous quarters will also add to the segment’s top line. In the second quarter, Johnson Controls reported an 8% increase in new orders, excluding contribution from ADT and impact of foreign exchange.

FX Could Temper Revenue Growth From Automotive Sector

Rising production in the global auto industry will likely play a key role in driving top line growth in Johnson Controls’ third quarter results, since the company, through its auto batteries and automotive seats, generates more than half of its revenues from the global 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. ^[6] In the first half, this turned out to be the case, and in the third quarter, we anticipate the trend to continue.

However, the weak Euro and Yen 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 showed just 2% growth. ^[2] Similarly, automotive experience revenues grew 1%, but due to the negative impact of foreign exchange rates, reported revenues saw a 7% decline.

Looking Out For News On Automotive Seating Strategic Review

Continuing with its spree of strategic reviews and divestitures, Johnson Controls recently announced that it was looking to exit its Automotive Seating business. ^[7] The business involves the manufacturing of complete automobile seating systems, foam, metal components and mechanisms. Johnson Controls did not reveal how or when it will exit the business. By exiting the Automotive Seating business, Johnson Controls would be letting go of the segment that makes the largest contribution to its revenues.

In the third quarter earnings call, we will look for any new information related to the company’s ongoing review of its Automotive Seating business.

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1. Johnson Controls announces Third Quarter 2015 Earnings Conference Call Webcast, July 10, 2015, Johnson Controls News Release [↩]
2. Johnson Controls reports double-digit profitability improvement in 2015 second quarter, April 23, 2015, www.johnsoncontrols.com [↩] [↩]
3. Johnson Controls FY 2015 Second Quarter Presentation, April 23, 2015, www.johnsoncontrols.com [↩]
4. AIA Architecture Billings Index, www.aia.org [↩]
5. US Construction Spending Chart, www.ycharts.com [↩]
6. Johnson Controls projects higher profitability across all three businesses in fiscal 2015, December 2 2014, www.johnsoncontrols.com [↩]
7. Automotive Review Conference Call, June 10, 2015, Johnson Controls’ News Release [↩]