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Jonathan Sheets

JCI AT A GLANCE

P/E ► -22.8   EV/EBITDA ► 35.0 HIGH ROA ► -1.7% AVG ROE ► -6.8% AVG Debt to Equity ► 1.73 AVG Current Ratio ► 1.10 AVG Interest Coverage Ratio ► -1.21 AVG

 

 

 

 

 

 

Johnson Controls (NYSE: JCI) makes car interiors and heating, ventilation and air conditioning (HVAC) products. The company's car parts business is shrinking with the overall US automotive business (the company's automobile sales fell 4% in 2007), but the HVAC business is more than making up for this loss - it grew 24% in 2007.^[1]. The HVAC business is also more profitable - although Johnson Control's automobile components sales generated 50% of 2007 total revenues, the segment only contributed 28% of income, while the company's HVAC and battery segments were much more profitable, comprising the other half of revenue but 72% of income.^[2]

61% of Johnson Controls revenue came from outside of the U.S.^[3] As a result, favorable exchange rates gave the company a $1.5 billion revenue boost in 2007.^[4]

Johnson Controls is one of the few companies, other than energy companies, that is benefiting from higher electricity prices. US electricity prices increased an average of $0.31 per kilowatt hour in 2007^[5], and higher electricity costs encourage building managers to replace their heating and air-conditioning systems with newer, more energy-efficient equipment.^[6]

Business Segments

JCI 2007 Revenues by Segment^[7]

• Automotive Experience (50% of 2007 Revenue, 28% of 2007 Segment Operating Income): designs and manufactures automotive interiors for automobile companies such as Ford Motor Company (F), General Motors (GM) and Daimler AG (DAI).^[8] The company's Automotive Experience products include seats, instrument panels, information displays, headliners and doors.^[9] Johnson Control's Automotive Experience revenues decreased 4% in 2007,^[10] mainly due to a decrease in sales to the American big three automakers.^[11] The decrease in Automotive Experience sales combined with 24% growth of the company's Building Efficiency segment^[12] resulted in Automotive Experience shrinking from 57% of Johnson Controls' total revenue in 2006 to 50% of its total revenue in 2007.^[13]

• Building Efficiency (37% of 2007 Revenue, 45% of 2007 Segment Operating Income): makes heating, ventilation, and air conditioning (HVAC) equipment for commercial buildings. In addition to manufacturing HVAC products, Building Efficiency offers services such as energy efficiency consulting and on site maintenance and property management.^[14] Building Efficiency's revenues grew 24% and its operating income increased 56% in 2007 making it the fastest growing of Johnson Controls' segments.^[15] This growth is partially due to the impact of Johnson Controls' acquisition of York^[16] and reflects a shift of focus from Automotive Experience to the company's other segments.

• Power Solutions (13% of 2007 Revenue, 27% of 2007 Segment Operating Income): produces lead-acid automobile batteries. The company sells most of its automobile batteries to aftermarket purchasers through retail outlets like Pep Boys-Manny, Moe & Jack (PBY) and Wal-Mart Stores (WMT). The company also sells batteries to automobile manufacturers. Power Solutions also manufactures absorbent glass matt (AGM), nickel-metal-hydride and lithium-ion batteries that power hybrid vehicles.^[17] Although Power Solutions is Johnson Controls' smallest segment, it is the most profitable contributing 27% of the company's Segment Operating Income in 2007.^[18] Although sales volumes for the segment were basically flat in 2007, the segment's sales still grew 10% due to increased prices and favorable exchange rates.^[19]

Business Financials

JCI 2007 Revenues by Geography^[20]

Johnson Controls Revenue, Operating Income and Net Income for years ending Sept. 30^[21][22] ($ in millions)

Net sales increased in 2007 due primarily to increased sales from Johnson Controls' Building Efficiency segment and favorable exchange rates.^[23] In 2006, net sales increased mostly due to the company's acquisition of York and Delphi.^[24]

Key Trends and Forces

Decreased automobile sales result in decreased sales of Johnson Controls' automobile interiors

Between 2006 and 2007 U.S. sales of automobiles fell from 16.5 million new cars to 16.1 million new cars.^[25] When consumers purchase fewer cars, automobile companies buy less interior products from companies like Johnson Controls as they decrease production to meet lowered demand. Despite attempting to minimize the effects of decreased automobile demand by negotiating contracts, Johnson Controls' Automotive Experience revenues decreased by $722 million dollars between 2006 and 2007.^[26]

^[27]

Exchange Rates resulting in a weak dollar boost Johnson Controls' International Revenue

Because Johnson Controls reports their revenues in U.S. dollars but does 61% of their business outside of North America, it is exposed to fluctuations in exchange rates.^[28] If foreign currencies appreciate, the dollar value of Johnson Controls' international revenues increases. Between June 18, 2007 and June 18, 2008 the Euro value of one U.S. dollar decreased from 0.75€ to 0.65€.^[29] During the same period of time, the dollar also depreciated in relationship to the Japanese Yen.^[30] As a result of the dollar's depreciation, Johnson Controls received a revenue boost to the tune of $1.5 billion in 2007.^[31]

Rising electricity costs result in more demand for Johnson Controls' Building Efficiency products and services

Between 2006 and 2007, the price of electricity supplied to commercial customers rose from $9.46 per kilowatt hour to $9.67 per kilowatt hour.^[32] According to a survey by Johnson Controls of 1,249 managers responsible for running commercial buildings, 28% of managers said that their facilities had replaced inefficient HVAC equipment before the end of its useful life due to the increased energy costs.^[33] Likewise, 23% of the managers said that they installed a building management system where there was not one before to combat high energy costs.^[34] Partially as a result of the equipment upgrades, Building Efficiency revenues increased 24% in 2007.^[35]

Key Competitors

• Ingersoll-Rand Company (IR) supplies its customers with climate control, industrial, and security products and services. The company acquired Trane, Inc in December 2007. The company's climate control operations, including Trane, compete with Johnson Controls' Building Efficiency products and services.^[36]
• Siemens AG (SI) offers it's customers products and services based on its expertise in electrical engineering. Siemens competes directly with Johnson Controls' Building Efficiency products and services through its Siemens Building Technologies brand.^[37]
• Honeywell International (HON) provides customers with products and services including aerospace products, building products and services, turbochargers, and chemicals. The company's building products and services compete directly with Johnson Control's Building Efficiency segment.^[38]
• United Technologies (UTX) provides technology driven products and services to the building systems and aerospace industries. The company also owns the Carrier Corporation, which competes directly with Johnson Controls' Building Efficiency operations.^[39]
• Lear (LEA) provides automobile manufacturers with seats and electrical distribution systems. The company's seats compete with the seats offered by Johnson Controls' Automotive Experience segment.^[40]
• Magna International (MGA) designs and manufactures automotive assemblies, modules and components such as seats, interiors, metal body systems and metal chassis systems. The company's seats and interiors compete with those produced by Johnson Controls' Automotive Experience segment.^[41]

Johnson Controls and Key Competitors 2007 ($ in millions)

Note: Johnson Controls ends its year on September 30. Figures for Siemens AG (SI) were converted from Euros using average 2007 exchange rates.^[42]

References

1. ↑ JCI 2007 10-K: Fiscal year 2007 compared to fiscal year 2008, pg 21
2. ↑ JCI 2007 10-K Segment Information, pg 76
3. ↑ JCI 2007 10-K Segment Information, pg 78
4. ↑ JCI 2007 10-K: Fiscal year 2007 compared to fiscal year 2008, pg 20
5. ↑ Average Retail Price of Electricity to Ultimate Customers: Total by End-Use Sector
6. ↑ JCI 2007 10-K: Fiscal year 2007 compared to fiscal year 2008, pg 21
7. ↑ JCI 2007 10-K Segment Information, pg 76
8. ↑ 2007 JCI 10-K: Notes to Consolidated Financial Statements, pg 79
9. ↑ JCI 2007 10-K: Business, pg 2
10. ↑ JCI 2007 10-K: Fiscal year 2007 compared to fiscal year 2008, pg 22
11. ↑ JCI 2007 10-K: Fiscal year 2007 compared to fiscal year 2008, pg 22
12. ↑ JCI 2007 10-K: Fiscal year 2007 compared to fiscal year 2008, pg 21
13. ↑ JCI 2007 10-K Segment Information, pg 76
14. ↑ JCI 2007 10-K: Business, pg 2
15. ↑ JCI 2007 10-K: Fiscal year 2007 compared to fiscal year 2008, pg 21
16. ↑ JCI 2007 10-K: Fiscal year 2007 compared to fiscal year 2008, pg 21
17. ↑ JCI 2007 10-K, pg 3
18. ↑ JCI 2007 10-K: Fiscal year 2007 compared to fiscal year 2008, pg 22
19. ↑ JCI 2007 10-K: Fiscal year 2007 compared to fiscal year 2008, pg 22
20. ↑ JCI 2007 10-K Segment Information, pg 78
21. ↑ JCI 2007 10-K: Consolidate Statements of Income, pg 44
22. ↑ JCI 2007 10-K Segment Information, pg 78
23. ↑ JCI 2007 10-K: Fiscal Year 2007 Compared with Fiscal Year 2006, pg 20
24. ↑ JCI 2007 10-K: Fiscal Year 2006 Compared with Fiscal Year 2005, pg 26
25. ↑ Sacramento Bee: Auto experts see annual new-car sales below 15 million
26. ↑ JCI 2007 10-K: Fiscal year 2007 compared to fiscal year 2006, pg 22
27. ↑ EUR to USD Exchange Rates
28. ↑ JCI 2007 10-K Segment Information, pg 78
29. ↑ EUR-USD Exchange Rates
30. ↑ USD-JPY Exchange Rates
31. ↑ JCI 2007 10-K: Fiscal year 2007 compared to fiscal year 2008, pg 20
32. ↑ Average Retail Price of Electricity to Ultimate Customers: Total by End-Use Sector
33. ↑ Johnson Controls Energy Efficiency Indicator Research: Final Report: North America – March 28th, 2008, pg 23
34. ↑ Johnson Controls Energy Efficiency Indicator Research: Final Report: North America – March 28th, 2008, pg 23
35. ↑ [JCI 2007 10-K: Fiscal year 2007 compared to fiscal year 2008, pg 21
36. ↑ Google Finance: IR
37. ↑ Google Finance: SI
38. ↑ Google Finance: HON
39. ↑ Google Finance: UTX
40. ↑ Google Finance: LEA
41. ↑ Google Finance: MGA
42. ↑ Monthly Average Graph (American Dollar, Euro) 2007