Johnson Controls’ Earnings Jump Ahead of Tyco Merger

Adient spin-off remains on track for completion by the end of October 2016

J1Technology and industrial giant Johnson Controls Inc. (NYSE: JCI) announced its Q3 FY16 financial results on July 21st, 2016. The Milwaukee, Wisconsin-based company operates through three business segments: Building Efficiency, Automotive Experience, and Power Solutions. The Building Efficiency segment designs, produces, markets and installs integrated heating, ventilating and air conditioning systems, building management systems, controls, and mechanical equipment. The Automotive Experience segment provides innovative interior systems through its design and engineering expertise. The Power Solutions segment is a global supplier of lead-acid automotive batteries for passenger car, light truck and utility vehicles. It also supplies batteries to power Start-Stop vehicles as well as lithium-ion battery technologies to power certain hybrid and electric vehicles. The Company reported FY15 revenues of $36.22 billion. Read more about Johnson Controls’ financial results below.

Q3 FY16 financial highlights

During Q3 FY16, Johnson Controls reported a 1% decline in net revenues to $9.5 billion versus $9.6 billion in the prior-year quarter, owing to the deconsolidation of the Company’s Automotive Interiors joint venture and foreign exchange impact. Excluding the foreign exchange impact, Q3 FY16 revenues inched up 1% driven by higher organic revenues and incremental revenues from its Johnson Controls-Hitachi (JCH) joint venture.

Johnson Controls’ segment income from continuing operations during Q3 FY16 jumped 18% to $1,003 million compared to $848 million in the prior year quarter, and rose 19% excluding foreign exchange, owing to contribution of the JCH joint venture and ongoing Johnson Controls Operating System benefits. Segment income margins expanded 170 basis points versus the prior year period during the reporting quarter.

Source: Company's Presentation
Source: Company’s Presentation

During Q3 FY16, Johnson Controls reported net income from continuing operations of $383 million, which includes non-recurring items and a net charge of $0.48 per share. The Company incurred transaction and separation costs of $167 million related to the proposed Adient spin-off, the Tyco merger, and the JCH joint venture integration, as well as restructuring charges of $102 million related to workforce reductions, plant closures, and asset impairments. The Company also incurred a non-cash tax charge of $85 million related to changes in entity tax status related to the proposed Adient spin-off. As a result, diluted EPS from continuing operations came in lower at $0.59 for Q3 FY16. However, adjusted non-GAAP diluted EPS from continuing operations for the reporting quarter jumped 18% to $1.07 versus $0.91 in the year-ago period.

Segmental highlights

Source: Company's Presentation
Source: Company’s Presentation

Building Efficiency: This segment’s Q3 FY16 sales jumped 33% to $3.6 billion versus the prior year quarter. Excluding the incremental revenue related to the JCH joint venture and the impact of foreign currency, revenues grew 4% versus the prior year quarter with higher revenues in North America and Asia. The segment’s backlog at the end of Q3 FY16 increased 2% to $4.8 billion, excluding the impact of foreign exchange.

Building Efficiency segment’s income jumped 46% to $397 million from $272 million in the prior year quarter primarily as a result of incremental segment income from the JCH joint venture and higher volumes, partially offset by product and sales force investments. Overall, Building Efficiency segment’s margins expanded 90 basis points to 10.9% compared with the prior year quarter.

Source: Company's Presentation
Source: Company’s Presentation

Power Solutions: This segment’s Q3 FY16 revenues inched up 3% to $1.5 billion versus the prior year quarter. Excluding the impact of foreign exchange and lower lead pass-through costs, sales grew 5% with higher volumes in all regions. Global original equipment battery shipments grew 5% and aftermarket shipments rose 1% during the reporting quarter versus the prior year period.

Power Solutions segment’s income jumped 12% to $262 million from the prior year period and grew 13% excluding foreign exchange impact, due to higher volumes, pricing discipline, and mix. The segment’s margins expanded 130 basis points to 17.2% during the reporting quarter as compared to the prior year quarter.

Source: Company's Presentation
Source: Company’s Presentation

Automotive Experience: This segment’s Q3 FY16 revenues fell 19% to $4.4 billion compared to the prior year period, primarily due to the deconsolidation of the Interiors joint venture and foreign exchange impact. Excluding this impact, sales decreased 1%, with growth in Asia and Europe offset by expiring programs in North America. Revenues in China, which are primarily generated through non-consolidated joint ventures, grew by a robust 49% to $2.9 billion (up 11% excluding the impact of the deconsolidation of Interiors and foreign exchange).

Automotive Experience segment’s income grew 1% to record $344 million versus the prior year period due to restructuring and cost reduction initiatives, and operational efficiencies. The segment’s margins expanded 160 basis points to 7.9% in the reporting quarter and expanded 20 basis points adjusting for the impact of the deconsolidation of the Interiors joint venture.

Tyco merger on track

Johnson Controls expects to complete its merger with Tyco International PLC (NYSE: TYC) on September 2nd, 2016. Consequently, the Board of Directors has declared an accelerated dividend of $0.23 per ordinary share, payable on August 26th, 2016, to shareholders of record at the close of trading on August 5th, 2016. Tyco is the world’s largest pure-play fire protection and security company and provides more than three million customers with the latest fire protection and security products and services. Tyco has approximately 57,000 employees in more than 900 locations across 50 countries serving various end markets.

Adient spin-off

Adient, the Company’s automotive seating and interiors business, remains on track for a spin-off to be completed by the end of October 2016. The Company has determined that Adient will be incorporated in Ireland, and is in talks with financers to secure funding as a first step of the spin-off. Management has reconfirmed Adient’s previously disclosed expected tax rate of between 10% and 12%.

Other highlights

During the reporting quarter, Johnson Controls announced the formation of joint ventures with Binzhou Bohai Piston Co. Ltd., an auto parts affiliate of Beijing Automotive Industry Group Co., Ltd. (BAIC Group), to build its fourth Chinese automotive battery manufacturing plant. This partnership is expected to provide Johnson Controls with further access to the Chinese automotive battery market. The plant is expected to begin production in 2019 with an annual capacity of 7.5 million batteries.

The Company also announced that it is investing $245 million between 2016 and 2020 to double Absorbent Glass Mat battery production capacity in North America.

Share repurchases

Johnson Controls spent $500 million for common stock repurchases during the reporting quarter.

Guidance for full year FY16

Johnson Controls expects its full year FY16 diluted EPS to range between $3.95 and $3.98, reflecting continued strong operational performance. The Company’s Q4 FY16 diluted EPS is predicted to range between $1.17 and $1.20. Quarterly and FY16 guidance excludes the impact of the Tyco merger as well as transaction, integration and separation costs, year-end pension/postretirement mark-to-market adjustments and other non-recurring items.

Stock Performance

J6Johnson Controls’ stock ended the day at $45.33, slipping 0.42%, at the close on Monday, August 8th, 2016, having vacillated between an intraday high of $45.76 and a low of $45.22 during the session. The stock’s trading volume was at 3,488,954 for the day. The Company’s market cap was at $29.16 billion as of Monday’s close.

Be the first to comment

Leave a Reply

Your email address will not be published.


*