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Read our responses to frequently asked investor questions
Based on inquiries from the investor community, here are answers to some of the most frequently asked questions.Please note that Johnson Controls, Inc. (“the Company”) has made forward-looking statements on this frequently asked investor questions website pertaining to its financial results for fiscal 2010 and beyond that are based on preliminary data and are subject to risks and uncertainties. All statements other than statements of historical fact are statements that are or could be deemed forward-looking statements and included terms such as “outlook,” “expectations,” “estimates,” or “forecasts.” For those statements, the Company cautions that numerous important factors, such as automotive vehicle production levels, mix and schedules, financial distress of key customers, energy prices, the strength of the U.S. or other economies, currency exchange rates, cancellation of or changes to commercial contracts, liquidity, changes in the levels or timing of investments in commercial buildings, the ability to execute on restructuring actions according to anticipated timelines and costs as well as other factors discussed in the Company’s Form 8k (filed March 9, 2009) could affect the Company’s actual results and could cause its actual consolidated results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, the Company.
What is the impact on Johnson Controls of the recent decline in the value of the Euro?
Has anything meaningfully changed recently in terms of your end market assumptions?
Is there any impact now of the Greece/Spain/Portugal financial crisis on your Building Efficiency business outlook?
What is the primary cause of the lack of profitability in European Building Efficiency business?
Why were Q2 2010 margins in your North American service business lower?
During the Q2 2010 earnings call, the commentary around building spending at the local government level was relatively bullish. How does that jibe with the fiscal challenges and budget constraints we’re hearing from the states?
What is the status of the permitting process for your Power Solutions lead recycling facility in South Carolina?
How much of the Q2 2010 strong margin performance in Automotive Experience North America was due to better auto production volumes and how much was profitability improvements in the interiors business?
How long will it be until lithium hybrid batteries account for a meaningful amount of Power Solutions sales?
Is your automotive backlog moving higher again?
What are you doing to improve your penetration of the mid-market (mid-sized) buildings market?
Johnson Controls has forecast higher margins in each of its businesses in the next few years. Why do you expect they will be higher?
When will your lithium-ion hybrid vehicle battery business become meaningful to Johnson Controls earnings?
When will demand for technical services in Building Efficiency recover?
What are the company’s acquisition targets and what is the timing?
What is the impact on Johnson Controls of the recent decline in the value of the Euro?
The impact of the Euro currency translation is primarily top line more than bottom line. For example, in the second quarter of 2010, the Euro was $1.39, about 7% higher compared with $1.29 in the second quarter of 2009. The Q2 2010 benefit to our top line of the higher Euro was about $286 million. The benefit to the bottom line was around $11 million.
Has anything meaningfully changed recently in terms of your end market assumptions?
Automotive: We raised our automotive production assumptions when we announced our Q2 2010 earnings in April. Production in the Q3 2010 quarter was already fairly clear to us at the time of our Q2 earnings release. As of our April 23, 2010 guidance, our production assumptions for our 2010 fiscal year are for 10.9 million vehicles in the North America and 16.7 million vehicles in Europe.
Is there any impact now of the Greece/Spain/Portugal financial crisis on your Building Efficiency business outlook?
We can’t point to anything specifically at this point. We certainly have a presence in these countries, though the bigger markets for us tend to be the more heavy industrialized areas where there are a greater number of complex buildings, which is our core market. The European buildings market has already been trending downward for the last couple of quarters. It’s hard to say how much, if any, of the recent economic news is a factor. At this point, it is too early to know how this issue will evolve.
What is the primary cause of the lack of profitability in European Building Efficiency business?
It’s primarily attributable to the volume in the region. Sales were down in the 12% range the most recent quarter. We made cost structure improvements in Europe over the past 18 months focused on improving profitability and as the market recovers there we expect to see the bottom line benefits from those actions. That being said it’s going to be a while as we believe the recovery in Europe will be slow.
Why were Q2 2010 margins in your North American service business lower?
The margins in that business have been lower for a couple of quarters, and that’s primarily attributable to the fact that customers are deferring higher-margin service work. That market trend likely continues for another couple of quarters. In addition, in Q2 2010, there were a couple of items that negatively impacted North America service profitability, including a charge associated with an inventory write-down and costs associated with the implementation of a new IT system.
During the Q2 2010 earnings call, the commentary around building spending at the local government level was relatively bullish. How does that jibe with the fiscal challenges and budget constraints we’re hearing from the states?
Some of our recent order growth in the government building vertical market reflects a greater volume of projects flowing from the ARRA (stimulus). While the overall project dollars associated with ARRA are still less than we thought they would be by this point, they are certainly flowing at an increasing pace. The value of the projects associated with ARRA funding that were booked in Q2 2010 was bigger than the aggregate of Q1 2010 and all of 2009.
In addition, when federal, state and local governments don’t have access to more traditional funding, they turn to performance contracting. Some of the increased demand in the government sector can be attributed to the growing popularity of this funding mechanism. Using performance contracting, federal, state and local buildings are able to implement energy efficiency improvements without the need for upfront capital funding. We provide a bundled product and service solution that reduces energy and operational costs for the customer. The savings are then used to make payments to a third party financier over a pre-determined period of time. These savings are typically greater than the monthly debt service, so the customer is cash-flow positive throughout the term of the contract. Our performance contracting business increased at a double-digit pace in Q2 2010.
What is the status of the permitting process for your Power Solutions lead recycling facility in South Carolina?
We recently received the critical permit that allows us to begin construction of the plant. There are some additional permits that are required as the process continues.
Construction of our lead recycling plant in Mexico also continues on schedule. We expect that facility will be up and running in the fall of 2010.
Once both of these facilities are completed, we expect to have the capacity to internally recycle 50% of our lead requirements. Currently, we internally process about 15% of our lead needs.
How much of the Q2 2010 strong margin performance in Automotive Experience North America was due to better auto production volumes and how much was profitability improvements in the interiors business?
The primary driver of our improved North American margins was the higher auto production in the quarter which was leveraged over our improved cost structure. Our automotive seating business in North America is still more profitable than for other interior systems. We expect that interiors profitability will increase over time as volume recovers.
How long will it be until lithium hybrid batteries account for a meaningful amount of Power Solutions sales?
Through a non-consolidated joint venture with Saft, Johnson Controls is the first company to produce lithium-ion battery systems for production vehicles. We currently produce batteries for the Mercedes S-Class and BMW 7-Series hybrid vehicles and will launch additional programs in 2010. That beings said, our hybrid battery business is still very much in the start-up phase and will not be a significant potential positive or negative top or bottom-line driver to Johnson Controls for several years.
The production volume of electrified vehicles expected to launch in the next couple of years is still a fairly small number. Forecasts show a more meaningful increase in those production levels beyond 2015. Our forecast is that by 2020, 10-15% of all vehicles are will have some level of electrification.
While it is currently a small part of our business, the market for lithium-ion hybrid vehicle batteries is expected to be as much as $30 billion annually by the end of the decade. The pace of consumer acceptance of hybrid vehicles will be continue to be impacted by fuel prices, increased fuel efficiency or greenhouse gas reduction legislation, and the implementation of government incentives to consumers.
For more perspective on the lithium ion hybrid battery outlook, refer to the article posted in the investor relations section of www.jci.com.
Is your automotive backlog moving higher again?
(NOTE: Backlog = new program wins minus programs lost/discontinued. Backlog total includes non-consolidated sales).
We provide backlog once a year in October, when we provide the estimates for the three upcoming years. We have disclosed that as we look at backlog for 2013, we see an improvement overall and a higher proportion of new business wins in North America. This higher figure results from higher production assumptions, the resumption of programs that were cancelled or delayed during the downturn, as well as market share gains in every geographic region.
What are you doing to improve your penetration of the mid-market (mid-sized) buildings market.
We’ve made several acquisitions in the last five years to expand our mid-market capabilities. It is a market where traditionally we haven’t had a strong presence. We believe the way to be successful in the mid-market is to be able to provide local contractors a single source for the equipment they need to configure and install mid-market HVAC systems. The acquisitions we made to better serve this market have been focused on expanding our range of mid-market technologies, we can provide more and more of what contractors need
Johnson Controls has forecast higher margins in each of its businesses in the next few years. Why do you expect they will be higher?
Automotive Experience:
For fiscal 2010, segment margin for Automotive Experience is forecast to be 3.1% - 3.3%. This is based upon the assumption of an automotive build rate of 10.9 million units in North America and 16.7 million in Europe.
We expect the future margins to be in the range of 6-7% due to several factors:
- We have $2.5 billion in net new business scheduled to launch between 2010 and 2012 that has been booked at the target margin rate.
- Automotive production is expected to increase over the next several years. We need volumes of approximately 13.5 million units in North America and 20 million in Europe to achieve the target margins.
- We significantly improved our cost structure over the past year, reducing our break-even point and shifting costs when possible to low cost countries.
- We de-risked the business over the past couple of years and now have commodity indexing in place for 90% of our automotive interiors business. In the past, the inability to pass along commodity increases to customers was a major factor in the decline of North American margins.
- The traditional contracted “price downs” expected by customers every year have changed and are now negotiated. NOTE: We achieved margins at the target level in the past (North America in the mid-2000s and Europe in 2008).
NOTE: We achieved margins at the target level in the past in certain geographic markets (North America in the mid-2000s and Europe in 2008).
Building Efficiency:
For fiscal 2010, the forecast margin for Building Efficiency is 5.6% - 5.8%, assuming a revenue increase of 5%. We expect future margins to be in the range of 8.5% (10% excluding our Global Workplace Solutions business).
The forecast is based on the expectation that higher margin service work, which has been depressed lately due to general economic conditions, will recover in the mid-term. In addition, the company expects good growth in emerging markets, especially China and Latin America, where it has a strong market presence.
The company’s residential HVAC business, though a smaller component of revenues, is expected to continue to recover. This has traditionally been a double-digit margin business but posted a loss in 2009. Cost improvement initiatives taken in 2009 will provide an increasingly positive benefit to earnings.
Power Solutions
Power Solutions margins are forecast to be 11.8-12.0% in 2010 (excluding the impact of lead) with expectations of a 200-250 basis point increase in the mid-term.
The company is expanding its secondary lead smelting operations to increase in-house capacity to 50% of its lead needs (from current 15% in-house capacity). This vertical integration allows us to significantly lower the cost of recycling lead for new batteries and is expected to provide greater price stability in the lead recycling industry.
Continuous manufacturing process efficiency improvements, a better product mix (particularly start/stop micro-hybrid lead acid batteries), and rapid growth potential in China will also contribute to margin expansion.
NOTE: Lithium-ion hybrid batteries are not expected to have a meaningful positive impact on the company’s margin or earnings for several years.
When will your lithium-ion hybrid vehicle battery business become meaningful to Johnson Controls earnings?
Through a non-consolidated joint venture with Saft, Johnson Controls is the first company to produce lithium-ion battery systems for production vehicles. We currently produce batteries for the Mercedes S-Class and BMW 7-Series hybrid vehicles and will launch additional production contracts in 2010. That beings said, our hybrid battery business is still very much in the start-up phase and will not be a significant potential positive or negative margin or earnings driver to Johnson Controls for several years.
While it is currently a small part of our business, the market for lithium-ion hybrid vehicle batteries is expected to be as much as $30 billion annually by the end of the decade. The pace of consumer acceptance of hybrid vehicles will be continue to be impacted by fuel prices, increased fuel efficiency or greenhouse gas reduction legislation, and the implementation of government incentives to consumers.
When will demand for technical services in Building Efficiency recover?
Due to the economic slowdown and significant pressure on the commercial real estate market, building owners and businesses continue to defer maintenance on their HVAC equipment, creating a pent-up demand for Johnson Controls services. The level of the service deferrals is not yet recovering, but it’s not getting worse.
Maintenance on HVAC equipment can only be deferred for so long. The equipment could fail, significantly disrupting the operations of the building and creating a need for emergency service from Johnson Controls. In addition, equipment that is not maintained can result in higher energy costs for the customer. Ultimately, however, as the economy gradually recovers, our customers’ capital budgets will be restored, allowing for the resumption of normal scheduled maintenance.
What are the company’s acquisition targets and what is the timing?
Johnson Controls is not an industry consolidator. We don’t view acquistions as growth—we view them as an accelerant to growth. Acquisition must provide us with access to new customers, offer new technology, or increase our geographic footprint. In addition to these strategic requirements, an acquisition must bring a minimum 15% after-tax return on invested capital (ROIC) by the third year.
Areas of interest:
We believe that, over time, 80% of our merger and acquisition activity will be related to the Building Efficiency business. HVAC products, lighting services and integration of commercial building fire and security technologies are areas of interest as is expansion of our energy efficiency consulting capabilities.
Technology such as VRF products (mid-size multi-splits) has potential in Europe and non-residential commercial applications in North America.
We like the growth characteristic of the residential sector as the home market improves. Currently residential is 3% of company revenues.
We don’t see significant acquisitions that meet our criteria in the Automotive Experience division except for interior electronics technologies and possible strategic opportunities in high-growth emerging markets. Power Solutions acquisition opportunities are limited, though we continue to invest in organic growth and margin expansion.
There are many options to consider and they are being outlined in our company strategy plans which are presented to the Board of Directors in May of each year.
