It's been a difficult year for Johnson Controls (NYSE:JCI) investors, as they have watched their stock underperform the market. The market was looking for some signs of improvement in its fourth-quarter results. In the end, the company delivered a solid quarter with the headline numbers pretty much in line with expectations.
It's time to look at what happened in the fourth quarter, and to look for any indications of where the company is headed next.
Johnson Controls fourth-quarter results
A quick look at the headline numbers:
Fourth-quarter revenue of $11 billion versus analyst estimates of $11.2 billion
Fourth-quarter adjusted diluted EPS of $1.04 versus analyst estimates of $1.01 and internal guidance of $1-$1.02
First-quarter 2015 EPS guidance of $0.74-$0.77 versus analyst estimates of $0.77
Fourth-quarter EPS is ahead of estimates, but the guidance for the first quarter is a little light compared to analyst estimates. In short, it was a mixed set of earnings, with sales up 3% and gross profit up 2%.
However, earnings reports are not just about the headline numbers. Management has been actively restructuring this year, and making acquisitions and divestitures in order to grow the business. The good news is that some of these efforts are starting to show up in its numbers.
Even while gross profit only increased by $44 million, its selling, general, and administrative, or SG&A, expenses decreased by $22 million -- evidence that its cost-cutting measures are working. Moreover, its equity income (income derived from joint venture activities) increased by $28 million -- although management disclosed that around half of that was due to a nonrecurring gain. This is a demonstration of the success of its joint venture initiatives in the auto experience segment.
In the end, its operating income was up by $94 million, leading to an 11% increase to $983 million -- a $50 million improvement from the SGA and equity income lines, on top of the $44 million from gross profit improvement.
A breakout of its segmental performance in the fourth quarter:
|Segment||Sales ($bn)||Sales Increase||Income ($mn)||Increase||Margin movement (bp)|
The automotive experience segment has been the standout performer this year, and management highlighted the margin improvements of 20 basis points and 360 basis points in its seating and interiors operations, respectively. In particular, the joint venture with China's Yanfeng Automotive Trim Systems (interiors) appears to be paying off, as its China sales increased 17% versus a China production market up 8%.
Elsewhere, its Europe sales were down 1%, in line with the market. North America was up 6%, a figure below North American industry production growth of 8%. Moreover, margin improvement of 100 basis points attests to its success in restructuring the segment.
Management has been busy trying to grow its building efficiency segment, partly in order to diversify the business from an overreliance on the cyclical car industry. Unfortunately, top-line growth has been somewhat disappointing this year. Sales grew only 1% in the fourth quarter; but there are some positive signs for future growth.
For example, management is feeling pretty bullish about the strength in the Architectural Billings Index, particularly as the institutional market -- the company's core strength -- appears to be improving. Johnson Controls order book, excluding mergers and acquisitions and foreign currency effects, came in with a 2% improvement -- the first increase in a year. Moreover, the acquisition of Air Distribution Technologies, or ADT, helps expand its coverage in the light commercial market.
Its power solutions segment makes automotive batteries, with aftermarket demand tending to make up three-quarters of demand versus a quarter from original equipment manufacturing, or OEM. As such, end demand is subject to the vagaries of the weather -- hard-driving weather increases demand, while clement weather curtails it.
Europe had a mild winter last year, and Johnson Controls has seen its Europe growth slow this year as customers continue to engage in destocking -- selling off their excess stock while not buying new stock. As such, growth of 4% from Europe OEM demand wasn't enough to offset a decline of 5% in Europe aftermarket demand, so overall Europe sales came in with a 3% decline.
Meanwhile, Asia sales were up 10%, and Americas were up 6%. Margin came in lower by 100 basis points due to the timing of lead purchases, according to the conference call presentation.
These were a solid set of earnings, and investors should look out for the analyst day presentation on Dec. 2 for detailed guidance for 2015. The company's restructuring activity carries on, and an improvement in its building efficiency end demand looks likely going forward. Meanwhile, power solutions could see an end to customer destocking in Europe in 2015 -- customers can't destock forever, and who knows what the weather will be like?
If there is a concern, it's with the company's reliance on growth in China within its automotive experience segment. If China's automotive sales growth slows markedly, then Johnson Controls could feel it. However, for now, the company looks on the right track for 2015, and the detail in the earnings demonstrates the success of its restructuring activities.