Johnson Controls (JCI 0.83%) is set to report first-quarter earnings on Feb.1. It's easy to get flustered with the flurry of facts and figures that surround earnings season. So let's prepare by looking at some things we'll probably hear about when the company reports and how we could interpret them.
Image source: Getty Images.
The first time
Completing its merger with Tyco last September, Johnson Controls included one month of Tyco's earnings in the previous quarter. When the company reports Q1 earnings, not only will it be the first quarter that the company reports earnings for the newly-dubbed segment, building technologies and solutions, but it will also be the first full quarter which includes Tyco's earnings, affording investors the opportunity to see how well the integration is progressing.
Originally, management identified the merger as a more than $1 billion opportunity: $650 million in synergies, $300 million in productivity from Johnson Controls, and $100 million in productivity from Tyco. During an Analyst Day presentation earlier this month, however, management upwardly revised its estimate of the value, pegging the opportunity at $1.2 billion.
Further addressing the benefits of the merger, management forecast the effects of synergies and productivity to account for $0.03 in EPS. In the long-term, management estimates that the synergies and productivity will translate to approximately $1.10 in EPS through fiscal 2020.
Checking in on China
Whereas President Trump's skepticism about climate change and the Paris agreement is well-know, the Chinese government has taken the opposite stance. According to The New York Times, China plans on investing more than $360 million on renewable power sources through 2020. And the country recently scrapped plans to build more than 100 coal-fired power plants. This affords Johnson Controls a considerable opportunity.
Forecasting sales for the power solutions segment to grow 35% in 2017, management is already committed to seizing the market opportunity in China. The company -- building two new automotive battery plants -- is in the process of expanding its manufacturing capacity.
A worker assembles a battery at a manufacturing facility in China. Image source: Johnson Controls.
One facility is expected to begin production in 2018 while the other is slated to begin operations the following year.
Investors can look for references to China in the company's earnings release. In addition to confirming that the construction of the new construction facilities in on schedule, investors can make sure that the company is meeting its estimates for growing sales in the country -- perhaps even upwardly revising its revenue estimates.
Keeping things in balance
Besides focusing on the progress with Tyco and dealings in China, investors would be wise to check out the company's balance sheet. At the end of fiscal 2016, Johnson Controls had approximately $2 billion in cash on hand and net debt of $10.8 billion. Due to the recent restructuring of the business, this has translated to a debt-to-capital ratio of 40.4% -- the highest it has been in more than 10 years.
JCI Debt to Capital (Annual) data by YCharts
Assuming $2.2 billion in debt from the merger with Tyco, Johnson Controls also reported $4 billion in newly issued debt from the merger and $3.5 billion in debt associated with the spin-off of its automotive interiors business, Adient.
In order to maintain the strength of its balance sheet, management has identified a target between 35% and 40%, which it contends, will afford the company "the flexibility to pursue growth opportunities." The high debt-to capital ratio is not a red flag per se, but it's something to monitor. It's never a bad idea to keep an eye on the balance sheet to confirm that the company remains in sound financial health.
The takeaway
Management is guiding for earnings per share between $0.50 and $0.52, but there's much more to a company's earnings than just one figure. It's important to look at the particulars. For one, investors should confirm that the building technologies and solutions segment is reporting healthy growth; likewise, the company should be reporting success in China. Though not critical to see improvement, the balance sheet should also be monitored to confirm that the company's debt is not becoming too much of a burden.
