Johnson Controls’ Q4 Earnings In Line With Consensus Expectations

by Trefis Team
Johnson Controls
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A lot has happened for Johnson Controls (NYSE: JCI) in its FY 2017 (year ended September 2017). The company made significant progress on the integration with Tyco, completed the spin-off of Adient, and divested ADT South Africa and Scott Safety, besides several other small noncore assets.  JCI also completed a major reorganization of its operating structure across the globe, most recently in North America. The alignment of the cost structure with Tyco helped to generate $300 million in incremental cost synergies and productivity savings, driving 90 basis points of margin expansion for the year. These factors helped the company to meet the consensus expectations on earnings. JCI has identified a few areas where it needs to improve its performance, including accelerating organic growth in orders and expanding gross margins in Buildings. Below we have highlighted key factors that will impact the company’s performance in the future.

We have a $49 price estimate for Johnson Controls, which is higher than the current market price.

  • In FY 2017, the company managed to achieve synergy and productivity savings at the higher end of its $250 to $300 million range, or $0.27 per share. In FY 2018, the company has planned for incremental savings of $250 million.

  • JCI intends to expand its sales force in its Buildings segment, in response to feedback from customers. While there may be challenges in the beginning of the financial year as the new salespersons ramp up, the increase in capacity will eventually drive improvements in execution, and ultimately in growth. In the fourth quarter, the company achieved net adds of 50 salespeople, and is targeting 400 in FY 2018.

  • A backlog of $5.2 billion in its North American field business will put 75 basis points of pressure on the gross margins. However, with improved price discipline, greater sales productivity, better project management, and increased service acceleration, the company can improve the margins and drive higher profitability.

  • In Power Solutions, the global shipments of Start-Stop units increased 30% led by strong growth in China (72%) and the Americas (64%). The company expects the penetration of batteries with the start-stop technology to increase from 24% today to over 60% in 2020. Hence, this market is set to witness strong growth in years to come. In anticipation of this growth, Johnson Controls will invest more than $780M globally between 2015 and 2020 in AGM technology in order to increase capacity. This factor is likely to pressure the margins of this segment.

  • Sales in FY 2018 are expected to be impacted by the recent divestitures estimated to be a headwind of $700 million. On the other hand, tailwinds from changes in foreign currency and lead prices will impact sales by $335 million.

  • In FY 2018, the company has about $800 million of cash outflows, net of a tax refund, related to restructuring and integration costs, severance fees, and Scott Safety tax payments. As has been the case in recent years, the adjusted free cash flow will be skewed towards the second half of the year, with an outflow in Q1 and the largest inflow in Q4.

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