How Will Johnson Controls Perform In Its Fourth Quarter?

Johnson Controls (NYSE:JCI) will report its fourth quarter and year ended September 30th earnings on November 8, with consensus estimates of $1.17 for EPS and revenues of $9.71 billion in the fourth quarter. The merger of Johnson Controls and Tyco was also completed in the quarter, which created an Ireland-based company that will be run from Milwaukee, and have approximately $30 billion in annual sales. This figure excludes the revenue earned from the automotive seating business which will be spun off. The company will realize savings of $1 billion, related to both “merger synergies and productivity initiatives.”  The new company combines the heating, ventilating, and air conditioning (HVAC) equipment business of Johnson Controls with the fire and security protection products of Tyco.

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The main purpose of the merger seems to be gaining size in its area of focus, which is becoming a colossus in the building controls and equipment market. The new company will be able to witness immediate opportunities for growth, through cross-selling of products, complementary distribution networks, and a widened global reach. The geographic fit seems to be ideal, with JCI strong in the Chinese market, and Tyco effective in Europe. The combined company is expected to furnish minimum operational synergies of $500 million over the first three years, after closing. According to Johnson Controls, this will be achieved by increasing efficiencies, removing redundancies, integrating global branch networks, and leveraging the combined scale of the $20 billion building’s business platform. Besides the above savings, tax synergies of over $150 million are expected as a result of the inversion deal, wherein the tax domicile of the new company will be shifted to Ireland, home of Tyco. In Ireland, the corporate tax rate is 12.5%, as opposed to the 35% in the U.S.  In such a scenario, while the new company still has to pay U.S. taxes on U.S. income, it can avoid paying U.S. taxes on overseas income.

The outlook for the company’s power solutions business also looks bright. Johnson Controls recently announced plans to invest $445 million to boost the output of its Absorbent Glass Mat (AGM) batteries. These are technologically advanced car batteries that are more expensive than a conventional lead acid battery, but they are better equipped to handle the strain of frequent engine restarts and the ever-increasing load placed on car batteries. They are employed in vehicles with the start-stop technology, which, while being fuel-saving, can tax a car battery since the electrical system still uses the energy from the battery when the vehicle turns off. Of the investment, $245 million will be expended to double its battery output in North America by investing in existing plants, and $200 million will go towards building a new battery plant in China. JCI also stated that it plans to invest a total of $780 million globally by 2020 to increase the production of these batteries. The fuel savings with the start-stop technology is one of the main drivers for its increased adoption. Under average driving conditions, savings amount to 3% to 5%. However, with a high number of stops and with traffic lights staying red for extended periods, the figure can rise to 10%, according to Robert Fascetti, vice president for powertrains at Ford.

Car manufacturers are also under intense pressure to meet strict fuel economy standards by 2025, and with the increased fuel efficiency of AGM batteries, this technology is destined to be on a majority of cars in the next few years. Currently, this technology is present in 10% of the U.S. and between 5% and 10% of the Chinese market. This figure is expected to rise to 50% during the next five years, according to Alex Molinaroli, CEO of Johnson Controls. It has a much wider presence in Europe already, comprising as much as 60% to 65% of the market currently. By 2020, 85% of all new vehicles in Europe are predicted to be powered with start-stop batteries. In Europe, JCI has in the past invested over $112 million in its facility in Hannover, Germany, to grow the production of AGM batteries by 65% since 2011. A similar investment was also made to expand its Zwickau plant, making it the largest production site for AGM batteries.

Have more questions on Johnson Controls? See the links below:

• How Is Johnson Controls’ Power Solutions Business Expected To Grow In The Next Five Years?
• How Is Adient Expected To Perform In The Next Year?
• Why Has Johnson Controls’ Stock Price Appreciated 29% This Year?
• What Drivers Will Ensure Growth For Adient In The Future?
• What Is Adient’s Position In The Global Automotive Seating Market?
• How Has Adient Performed For Johnson Controls?
• How Can Increasing Interest In Energy Efficiency Help Johnson Controls?
• How Did Johnson Controls Fare In Q3 2016?
• How Will Johnson Controls Perform In Q3 2016?
• Why Is Johnson Controls Banking On China For Its Absorbent Glass Mat Batteries?
• Why Is Johnson Controls Increasing The Production Of Its Absorbent Glass Mat (AGM) Batteries?
• What Are The Prospects For Johnson Controls’ Power Solutions Business?
• What Will Be The Effect On The Segment Operating Margin As A Result Of The Johnson Controls-Tyco Merger?
• What Are The Benefits Johnson Controls Will Attain From The Tyco Merger?
• Will The U.S. Treasury Department Rules, That Killed The Pfizer-Allergan Deal, Affect Johnson Controls-Tyco Merger?
• Johnson Controls’ Earnings Beats Expectations
• Will Johnson Controls Miss Estimates Again?
• How Has Johnson Controls’ Net Sales Changed By Geographic Areas?
• How Does The Adient Spin-Off And Tyco Merger Create Value For Johnson Controls’ and Tyco’s Shareholders?

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