Johnson Controls (NYSE:JCI) pleased the market by reporting first-quarter results Thursday that beat analyst estimates. Furthermore, management reaffirmed the full-year guidance given at its investor day presentation in December. The company remains in transformational mode, and its earnings confirm many of its underlying positive trends. Let's take a look at them.

Johnson Controls' first-quarter results
A brief look at the figures and guidance.

  • First-quarter revenue of $10.67 billion versus analysts' estimate of $10.67 billion
  • First-quarter diluted earnings per share from continuing operations of $0.79 versus analysts' estimate of $0.77
  • Second-quarter EPS guidance of $0.74-$0.76 versus analysts' estimate of $0.76
  • Full-year EPS guidance reaffirmed at $3.55-$3.70 versus analysts' estimate of $3.60

In a nutshell, revenue was in line with estimates but EPS came in ahead. Superficially speaking, it's hard to get too excited by this performance, as sales increased by only 1% and gross profit by just 7%.

However, a look at bottom-line profitability tells a different story.

Operating income from continuing operations increased 18% to $768 million in the quarter and operating income margins expanded from 6.2% to 7.2%. How is Johnson Controls generating such bottom-line growth?

Johnson Controls delivers
Essentially, the company is creating margin improvement from its focus on internal execution and restructuring activities -- particularly within its building efficiency and automotive experience segments. A breakout of segmental revenue and sales illustrates where its income growth is coming from.

MetricAutomotive Experience Building Efficiency Power Solutions
Sales ($billion) 5.3 3.5 1.8
Increase (3%) 5% 4%
Segment income ($million) 249 201 318
Increase 26% 38% 4%
Share of total segmental income increase 44% 46.7% 9.3%

Source: Johnson Controls Presentations.

Segmental commentary
Power solutions (automotive batteries) appears to be the laggard, but there are underlying improvements. Net sales and segment income both grew by just 4% in the quarter, while the segment income margin fell by 10 basis points (100 basis points, or bp, equals 1%). However, excluding lead price movements and foreign exchange, sales were up 8%.

Moreover, power solution volumes increased 7% in Europe. This was a noticeable improvement from the previous quarter's decline of 3%, and a sign that its customers might be past the destocking phase caused by a mild winter in Europe last year. Car batteries are replaced less during mild weather, so some battery retailers in Europe would have had excess inventory in 2014. Finally, note that last year's power solutions results included a $19 million nonrecurring gain. Adjusting for this would result in a margin increase of 90 bp -- not bad at all.

Automotive experience (car interiors and seating) net sales declined 3%, but excluding foreign currency effects, they were up 2%. The underlying story here is more about the margin improvement. (Find out more about the company's restructuring activities in this article.) Automotive experience segment margins increased by 110 bp, with seating margin up 90 bp to 5% and interiors margin up 170 bp to 3.6%.

On a less positive note, growth in automotive industry production appears to be slowing. According to the earnings release, "Automotive industry production in the quarter increased 5 percent in North America and 6 percent in China, but declined 2 percent in Europe." The figures for the previous quarter were 8%, 8%, and a decline of 1%, respectively, indicating that growth slowed in the first quarter.

Building efficiency (heating, ventilation, and air conditioning, or HVAC) could be the most exciting segment in 2015. There are signs that the institutional construction market (a core strength for Johnson Controls) is picking up. Segment income increased by a whopping 38% in the quarter, with segment operating margin increasing 140 bp to 5.7%.

Moreover, if the planned divestiture of its facilities management business, Global WorkPlace Solutions, or GWS, takes place, then margin could increase further. For example, excluding GWS, the building efficiency segment margin would have been 6.7% in the quarter.

Set for a strong 2015?
All told, the reaffirmation of full-year guidance suggests an EPS growth rate of nearly 14% for 2015. Given the first-quarter margin expansion and the success of its restructuring strategy, investors have good cause to believe the company will hit its estimates. There is much to like about Johnson Controls in 2015.