Johnson Controls Beats Expectations, Trims Guidance

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Johnson Controls

Johnson Controls (NYSE:JCI) released its second quarter earnings, for the three months ended March 2017, on April 27, wherein it beat consensus estimates on both sales and earnings. The diluted EPS of the company came in at $0.50, up 11% over the prior year, beating expectations by a penny, while the net sales of $7.24 billion reflected a growth of 3% over the second quarter of the previous year. The company was able to deliver significant progress on the Buildings organizational structure, post the merger with Tyco. While approximately $50 million in savings were expected as a result of synergies in the quarter, JCI saw a benefit of around $70 million. This also resulted in the company reporting 2% organic growth, with 3% registered in the Buildings segment, offset by negative 1% in Power.

JCI Q2 2017 Earnings

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Stock Price Falls Despite The Beat

JCI undertook some strategic portfolio actions in the quarter, including the sale of ADT South Africa, and announcing of the divestiture of Scott Safety to 3M. These actions were taken in relation to the $4 billion Tsarl debt the company had put in place to facilitate the deal with Tyco. By accelerating the debt repayment, JCI will be able to move quickly on its restructuring and synergy actions.

JCI FY 2017 Synergies

The company also announced a share repurchase program of $500 million, an increase from the previously announced $200 to $250 million worth of buybacks that is already in place. This takes it up to $750 million for the financial year. At the same time, JCI also updated its financial year guidance, knocking down its organic growth forecast to 3% from an earlier expected range of 2.5% to 4.5%, and trimming its EPS range to $2.60 to $2.68, from $2.60 to $2.75 earlier.

JCI FY 2017 Guidance

Cutting the guidance, while announcing an upsized share buyback may not sound very favorable. Furthermore, despite better than expected synergies, the company managed to beat analysts’ expectations on earnings by only a penny per share. This resulted in the stock price of the company falling in the aftermath of the results announcement, despite delivering a beat.

JCI Stock Price

Financial Performance

On a reported basis, the Buildings segment grew 1% over the prior year, as the 3% organic growth was offset by the impact of foreign currency and net M&A activity. In the Field side of the business, which represents 65% to 70% of the total Buildings sales, organic growth was up 4%, led by strong growth in North America. The company witnessed strong growth in US residential and light commercial HVAC business, which grew at high-teens organically, benefiting from a number of new product launches, which is expected to continue into FY 2018. Steps taken to streamline the business, as well as investments in its products and services, together with the order pipeline and backlog, will ensure growth and margin expansion in the second half of the year.

JCI Q2 2017 Segment Info

In Power Solutions, sales increased 7% on a reported basis, with organic sales down by 1%, driven by warmer weather in North America and China, which negatively impacted the aftermarket demand. This also resulted in the total global unit shipments to be down 3% year-on-year. However, global start-stop shipments continued their strong growth, with a 36% expansion reported in the quarter, reflecting another quarter of exceptional growth in the Americas and China.

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