For the third quarter of fiscal 2016, Johnson Controls Inc. (JCI), reported $9.5 billion in revenues and net income from continuing operations of $383 million, which includes several non-recurring items. Diluted earnings per share from continuing operations for the quarter were 59 cents. Adjusted non-GAAP diluted earnings per share from continuing operations for the quarter were $1.07, up 18 percent from the prior year quarter.
The company said the net revenues of $9.5 billion, which is decreased versus $9.6 billion in fiscal third quarter 2015, was due primarily to the deconsolidation of the company’s Automotive Interiors joint venture and foreign exchange, largely offset by higher organic revenues (up 1 percent) and incremental revenues from its Johnson Controls-Hitachi (JCH) joint venture.
“The company delivered another excellent quarter continuing our momentum as we progress toward separation into two world-class companies,” said Alex Molinaroli, Johnson Controls CEO. “We experienced solid organic growth in both Building Efficiency and Power Solutions and delivered significant margin expansion across all our businesses. Power Solutions drove unit growth in all regions with start-stop units increasing 22 percent versus the prior year quarter, the Johnson Controls-Hitachi joint venture continues to exceed our expectations and Automotive Experience generated another quarter of exceptional profitability.”
Sales in the company’s Power Solutions business in the fiscal third quarter of 2016 were $1.5 billion, up 3 percent from the prior year quarter. Excluding the impact of foreign exchange and lower lead pass-through costs, sales increased 5 percent, with higher volumes in all regions. Global OE battery shipments were up 5 percent and aftermarket shipments up 1 percent in the quarter versus the prior year.
Power Solutions segment income of $262 million increased 12 percent from the prior year fiscal 2015 third quarter (up 13 percent excluding foreign exchange) due primarily to higher volumes, pricing discipline and mix. Segment margins were 17.2 percent in the quarter, up 130 basis points from the prior year quarter.
In the quarter, JCI 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 the company with further access to and influence within the expanding Chinese automotive battery market. Construction is expected to begin in 2017, with production slated to begin in 2019. Once up and running, the plant will have annual capacity of 7.5 million batteries. JCI also announced during the quarter it is investing $245 million between 2016 and 2020 to double absorbent glass mat (AGM) battery production capacity in North America.
Automotive Experience revenues in the fiscal third quarter of 2016 were $4.4 billion, down 19 percent compared to the prior year quarter, primarily due to the deconsolidation of the Interiors joint venture and the impact of foreign exchange. Excluding the impact of the Interiors deconsolidation and foreign exchange, sales were down 1 percent, 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, increased 49 percent to $2.9 billion (up 11 percent excluding the impact of the deconsolidation of Interiors and foreign exchange).
Automotive Experience segment income was a third quarter record at $344 million, an increase of 1 percent versus the prior year third quarter. The increase in segment income in the quarter was primarily due to restructuring savings, cost reduction initiatives and operational efficiencies. Segment margins at 7.9 percent were up 160 basis points in the quarter (up 20 basis points adjusting for the impact of the deconsolidation of the Interiors joint venture).
Also during the quarter, Adient, the company’s automotive seating and interiors business, initiated discussions with lenders as a first step in securing its financing in advance of the planned spin-off. The strength of Adient’s underlying business and positive outlook was affirmed with S&P’s preliminary BB+ corporate credit rating. At the time of separation, Adient’s net debt position and corresponding dividend back to JCI is expected to be $3 billion. New business wins at Adient continue to accelerate with $4.3 billion booked through June 30, 2016, versus $3.6 billion for the full fiscal 2015 year.
Tightens full year earnings guidance to higher end of previous range
JCI tightens its full year fiscal 2016 guidance from $3.85 to $4 earnings per diluted share to $3.95 to $3.98, reflecting continued strong operational performance. The company expects 2016 fiscal fourth quarter earnings per diluted share of $1.17 to $1.20. Quarterly and fiscal year guidance excludes the impact of the Tyco merger as well as transaction, integration and separation costs, year-end pension/post-retirement mark-to-market adjustments and other non-recurring items.
Other matters
The Adient spin-off remains on track for completion by the end of October. Adient will incorporate in Ireland, and Adient’s previously disclosed expected tax rate of between 10 and 12 percent.
JCI also announced it expects to accelerate the closing of its merger with Tyco International plc to Sept. 2, 2016. In conjunction with this closing date, the company will pull forward its fiscal 2016 fourth quarter dividend to an Aug. 5, 2016 record date and Aug. 19, 2016 payment date.
Beginning in the fiscal third quarter, the company has now completed $500 million in common stock share repurchases in conjunction with its previously announced program.
“I am very proud of the progress our team has made toward the execution of the most significant transformation in Johnson Controls’ history,” said Molinaroli. “The Adient team is now operationally ready and we expect they will soon become the independent world leader in automotive seating and interiors. My enthusiasm and confidence in the future of Johnson Controls only continues to grow as I work closely with our future colleagues from Tyco. With the leadership team established, we continue to progress in our integration planning to create what we believe will be the world leader in buildings and energy, uniquely positioned to deliver superior value to our customers, employees and shareholders through this powerful strategic combination.”
