Johnson Controls (NYSE:JCI) is set to report fourth-quarter earnings on Nov. 8. During the earnings presentation, management will surely pay plenty of attention to the merger with Tyco and the spin-off of the automotive-experience business into the new entity, Adient. But there's much more to a company's earnings than just this, so let's look at some things we'll probably hear about when the company reports and how we could interpret them.
Recognizing a significant opportunity in the start-stop battery market, management, last quarter, announced that it would be investing approximately $780 million from 2015 through 2020 in absorbent glass mat (AGM) battery manufacturing capacity. Currently, the company retains about 70% market share and is working diligently to maintain its dominant position.
In the third quarter, the company reported that global shipment of AGM batteries grew 22% year over year. Driven by 79% growth in China and 78% growth in the Americas, the company reported a 4% increase in sales in mature markets -- Europe, the Middle East, and Africa.
According to Alex Molinaroli, the company's CEO, start-stop growth "is the future of our business over the next five years," so investors should be keenly focused on this point in the earnings report. Specifically, they can look to see if management achieves its guidance for AGM sales to increase 22% in fiscal 2016, which it expects to drive growth -- between 9% and 11% for fiscal 2016 -- in the power-solutions segment.
Building up building efficiency
As important as the power-solutions segment is to the company, the building-efficiency segment -- which reported more than twice the revenue of power solutions last quarter -- will surely account for the lion's share of attention.
Plus, Johnson Controls recently completed its merger with Tyco, resulting in a company that management believes "is uniquely positioned as a leader in products, technologies, and integrated solutions for the buildings and energy sectors." Management plans to include about one month of Tyco's results in the fiscal 2016 consolidated financial statements.
Excluding foreign exchange effects and the joint venture with Hitachi, the segment reported a 4% revenue increase, driven by the Asian market, which reported a 9% increase -- much higher than North America, where systems and service for North America grew only 3%, as did products for North America.
Investors should expect to see continued growth in the segment, driven by China. On the Q2 conference call, Molinaroli reported that the quoting activity is strong in China because of success with its joint venture with Hitachi, as well as "some fairly significant-size orders" in the company's large tonnage business.
A third thing to keep an eye on when the company reports is whether it meets its free cash flow guidance. Identifying a $1.5 billion target for adjusted free cash flow for fiscal 2016 during an investors' conference last December, management has consistently affirmed its guidance throughout the year.
In line with expectations, the company reported $400 million in adjusted free cash flow for Q3. On the conference call, management conceded that it expects several factors will contribute to lower adjusted free cash flow in Q4 compared than in the same period last year. Because of about $200 million in additional capital expenditures and between $50 million and $100 million in cash restructuring costs in the fourth quarter, management anticipates seeing adjusted free cash flow come up short of the $1.4 billion it reported in Q4 last year. Nonetheless, it remains confident that it will achieve its $1.5 billion target.
In merging with Tyco, Johnson Controls recognizes significant growth potential, but investors must remember that Johnson Controls is also taking on about $2 billion of Tyco's debt and $4 billion in new debt associated with the completion of the transaction. This, in addition, to the $7.5 billion of net debt Johnson Controls had at the end of the third quarter, suggests that it's imperative for the company to achieve its free cash flow targets to adequately service its debt.
Excluding the impact of the Tyco merger, the company is guiding for Q4 earnings to fall between $1.17 and $1.20 per diluted share. Management is guiding full-year fiscal 2016 guidance from a range of $3.85 to $4.00 in earnings per diluted share to a new range of $3.95 to $3.98. Though these figures are important, there are plenty of other figures to keep a keen eye on -- figures that will provide much more clarity into how the company is performing.