3 Takeaways From Johnson Controls' Q4 Earnings

By Markets Fool.com

Johnson Controls (NYSE: JCI), a leader in both building automation and power solutions, released its fourth-quarter earnings earlier this month. Beating analysts' earnings-per-share estimates of $1.05, Johnson Controls reported diluted EPS from continuing operations of $1.21 -- a 16% increase year over year.

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There's much more to a company's quarterly performance than one figure, so let's dig in a little deeper to see how the company fared overall.


Image source: Getty Images.

A pleasant surprise

Reporting adjusted free cash flow of $900 million in Q4, Johnson Controls ended fiscal 2016 with $1.7 billion in adjusted free cash flow -- $200 million more than the $1.5 billion it targeted during an investors' conference last December. Clearly, the increase in capital expenditures and cash restructuring costs during the fourth quarter didn't compromise the company's free cash flow, as management had suggested during the previous conference call. The extra cash will provide some breathing room for the company as it manages the debt it has recently incurred.

Having recently completed its merger with Tyco, Johnson Controls doesn't just gain expertise in fire and security solutions, it also gains about $2.2 billion in debt. Between this, an additional $4.0 billion in debt issuance related to Tyco, and its previous obligations, Johnson Controls ended 2016 with approximately $15.7 billion in total debt.

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Power play

Excluding the automotive experience segment, which will soon spin off into a new entity, Adient,Johnson Controls reported 4% organic growth year over year. This was driven by the power solutions segment, which reported an 8% increase, excluding the effects of foreign exchange and lead pricing.

Management attributed the segment's success in the quarter to higher sales volumes in all regions and a favorable product mix; however, the most important area of growth, arguably, was in absorbent glass mat (AGM) battery sales. In the fourth quarter, global shipments of AGM batteries grew 30% -- a greater clip than the 22% growth the company reported in the third quarter.

Image source: Johnson Controls corporate website.

Similar to the previous quarter, in which the greatest growth -- 79% year over year -- came from China, Johnson Controls reported a 136% year-over-year increase in sales from China in the fourth quarter, surpassing the 87% year-over-year growth in the Americas.

A building efficiency inspection

Turning to the building efficiency segment, we find mixed results. The company reported a 25% increase in net sales year over year, and it seems well positioned to see continued sales growth, reporting backlog growth of about 5% year over year to approximately $4.8 billion.

In terms of building efficiency segment income, though, the picture becomes hazier. Although it increased 17% year over year, the company experienced some contraction -- about 80 basis points -- in the segment income margin. Attributing this to "ongoing product and sales force investments" and a product mix related to the lower-margin Hitachi joint venture, management contends that the decrease was in line with expectations.

On the company's conference call, though, management addressed the Q4 margin contraction by putting it in the context of the full year -- in which there was general lumpiness -- reporting that the segment margin for fiscal 2016 was 9.2%. Providing further insight on the figure, CFO Brian Stief reported on the conference call that management thought the figure was "going to be in the 8.1% to8.3% range, so I think the folks at BE are actually pretty happy with where they ended up margin-wise."

The takeaway

Reporting fiscal-year EPS of $3.98, Johnson Controls met the upper end of its revised guidance, improving 16% upon the $3.42 it reported for fiscal 2015. Management remains optimistic that it will continue growing profits into the coming year, having completed its merger with Tyco and spinoff of Adient. As optimistic as management may be, however, the execution of multibillion-dollar mergers -- like the one with Tyco -- is far from simple and requires investors' steadfast attention.

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Scott Levine has no position in any stocks mentioned. The Motley Fool owns shares of Johnson Controls. The Motley Fool is short Johnson Controls. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.