Johnson Controls Earnings: Building Efficiency Strength, Automotive Experience Spin-Off In Focus

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Johnson Controls‘ (NYSE:JCI) third quarter fiscal 2015 revenues declined 2% year-on-year, to reach $9.6 billion, as gains were primarily offset by the negative impact of currency translation. [1] However, excluding the impact of foreign currency headwinds, revenue grew 5%, driven by double digit growth at its Building Efficiency segment. Margin improvements across all these segments helped boost segment income by 14%. Johnson Controls’ earnings per diluted share for the quarter grew 15% to $0.91, in line with market expectations. However, the biggest news was the announcement of the spin-off of Johnson Controls’ Automotive Experience segment.

In its earnings release, Johnson Controls announced its expectations of $1.00-1.03 diluted earnings per share from continuing operations in the third quarter of fiscal 2015. [2] However, the company narrowed its guidance for the fiscal from $3.30-3.45 to $3.38-3.41.

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Strong U.S. Construction Activity Drives Building Efficiency

According to Johnson Controls, its third party sales in North America were up 3%. We believe this was due to the strong growth in construction activity in the U.S. 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. [3] 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. [4] This helped drive Johnson Controls’ Building Efficiency sales up by 10%, excluding the impact of foreign exchange.

The segment was also 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.

Johnson Controls Will Spin Off Automotive Experience

In the second quarter of fiscal 2015, global automotive industry production rose by 2% in North America and China, and 4% in Western Europe. [2] The overall growth in production helped raised demand for auto seats and interiors, pushing up Johnson Controls’ Automotive Experience sales by 3%, excluding the impact of foreign currency headwinds. However, Johnson Control will soon lose out on these revenues, as the company has decided to spin it off.

The Automotive Experience segment accounted for a little over $22 billion in sales in fiscal 2014, which is 51.4% of Johnson Controls’ overall revenues. Following its announcement a month back regarding its intention to put the Automotive Experience under strategic review, Johnson Controls now intends to spin off the segment, which includes its automotive seating and interiors business. (Click here to read our article) The separation will take around a year to complete and will result in a publicly traded entity. Johnson Controls will be providing further details later on.

In the meantime, the company has entered into a joint venture for its automotive interiors business with Yanfeng Automotive Trim Systems, which was completed on July 2. [5] This will result in the earnings from the interiors business being accounted as earnings from an equity affiliate, leading to a dip in revenues from the fourth quarter onwards.

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Notes:
  1. Johnson Controls reports record fiscal third quarter earnings from continuing operations, July 24, 2015, Johnson Controls News Release []
  2. Johnson Controls FY 2015 Second Quarter Presentation, April 23, 2015, www.johnsoncontrols.com [] []
  3. AIA Architecture Billings Index, www.aia.org []
  4. US Construction Spending Chart, www.ycharts.com []
  5. Johnson Controls and SAIC’s Yanfeng Automotive Trim Systems Co., Ltd. form global joint venture for automotive interiors, Johnson Controls News Release []