What Can Be Expected From Johnson Controls’ First Quarter?

FY 2017 (year ended September 2017) was a big year for JCI in terms of reorganization. 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 non-core 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. While the impact of all these changes in FY 2018 remains to be seen, we will get a glimpse of it in the company’s first quarter earnings, scheduled to be released on January 31. As per consensus estimates, a flat earnings growth on a marginal improvement in sales is to be expected, with a backlog in the North American field business and restructuring and integration costs weighing on the margins. Below we’ll highlight some of the factors that could have an impact on the quarter’s results.

We have a $48 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 of FY 2017, 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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Have more questions on Johnson Controls? See the links below:

• Why Did 3M Acquire Johnson Controls’ Scott Safety?
• Will The Merger With Tyco Result In Improved Margins For Johnson Controls?
• Johnson Controls: A Focus On China