Johnson Controls Beats On Earnings Estimates, But Net Income Falls

Shares in Johnson Controls (NYSE:JCI) fell 3% once the company reported its earnings on February 1, when it missed analyst expectations on revenue, but beat on earnings. The company also disappointed on guidance, saying it expects the second quarter earnings to be between $0.48 and $0.50 per share, against a consensus estimate of $0.53 per share. This quarter was the first full quarter combining the operations of the buildings and batteries business of Johnson Controls, with the buildings business of Tyco. Acquisition, integration, and restructuring costs weighed on the results. Net income of the company fell to $378 million, from $490 million last year, but the adjusted diluted EPS rose 10% to 53 cents, 2 cents higher than expected.

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Growth Opportunities In Asia Pacific

The region holds both short term, as well as long term, growth opportunities for the company, particularly in China. In the buildings segment of the company, the organic growth is in the low to mid-single digit range, and in Power, a growth rate north of 20% is being witnessed on a year-on-year basis. The company has undertaken significant investment in the region in recent years, which is paying off, as the company has continued to see profitability improvements, with several hundred basis points of margin expansion. The joint venture with Hitachi continues to bear fruitful results, with strong year-on-year improvement.

Integration With Tyco

The collaborations with the two teams has resulted in a number of wins for the combined company, such as a large fire sprinkler project in Canada, and a hospital in Latin America. In terms of synergies, the company expects to capture $250 million to $300 million in cost synergies and productivity savings in 2017, with the company off to a good start. In the quarter, JCI achieved approximately $50 million in synergies and savings, or about $0.05 on an EPS basis. A similar amount is expected to be realized in the next quarter. As the year progresses, the benefits of the combination are expected to ramp up; $0.07 is estimated for the third quarter, and another $0.08 in the fourth.

Financial Performance

Sales in the quarter were flat as compared to the year ago period, on a reported basis. However, organically, sales grew at a little over 1%, with a modest decline in Buildings more than offset by increased volume and a favorable mix in Power. The growth momentum of the start-stop battery continues to be a boon for the company. Adjusted EBIT margins expanded 90 basis points overall, above the expectations of a 30 basis points improvement.

In Building Technologies & Solutions, sales declined 2%, or a little less than 1% organically, to $5.2 billion. Organically, the field side of the business, which constitutes 70% of the business, was flat, with strong growth in HVAC systems and field and security. On the other hand, performance contracting was negatively impacted by federal government budget delays, and tougher year-on-year comparisons, while industrial refrigeration was pressured by the oil and gas and process end markets. The products business, which comprises the remaining 30%, declined 3% organically. Strength in the Unitary Products Group (UPG) business was more than offset by a mid-single-digit decline in fire and security products. Moving forward, a stabilization on the orders front in industrial refrigeration is encouraging. Moreover, with revenues starting to flatten out in the fire and security products, the decline in this should begin to ease. Margin improvement in this segment was a result of strong productivity savings and the early traction on cost synergies, as well as the joint venture with Hitachi.

In Power Solutions, sales increased 9% on a reported basis, and 7% organically, to $1.9 billion. Global unit shipments increased 5%, as compared to the first quarter last year. Global start-stop shipments continued to grow impressively, with a 27% increase, driven by strong growth in China and the Americas. The margins in the segment were down 20 basis points, including a 110 basis point headwind from the impact of higher lead cost.

The company has started reporting Corporate as a standalone segment, which is comprised of enterprise-wide costs like executive management costs, public company costs, and other functional administrative costs, which aren’t attributable to the primary businesses. This expense declined 12% year-on-year, due to the productivity initiatives and merger synergies realized in the quarter.

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

• Will The Merger With Tyco Result In Improved Margins For Johnson Controls?
• What Trends Will Ensure Growth For Johnson Controls In The Future?
• Adient To Rely On China For Growth In The Future
• Johnson Controls Powers Through Its Financial Year 2016
• How Will Johnson Controls Perform In Its Fourth Quarter?
• 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?
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• How Did Johnson Controls Fare In Q3 2016?
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• 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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