Johnson Controls Exercises Its Core

Like many other large companies, the Fortune 100 firm is shedding ancillary businesses and narrowing its focus.
David McCannJanuary 7, 2015
Johnson Controls Exercises Its Core

Many companies profiled by CFO have undergone radical transformations, or are start-ups making some noise, or are employing innovative or unusual strategies, or have executed a successful turnaround, or are embroiled in some controversy.

Brian Stief

Brian Stief

None of those scenarios describes Johnson Controls, which is simply a solid, consistently profitable (in a somewhat low-margin way) company that just happens to have a new CFO and, like many large companies, is restructuring its business. Brian Stief took over the top finance seat on Sept. 23, when his longtime predecessor, Bruce McDonald, was promoted to vice chairman. Stief had come to the company as controller in 2010 after more than 30 years with PricewaterhouseCoopers (Price Waterhouse when he joined in 1979).

To those who don’t closely follow the business world, Johnson Controls (or JCI, after its ticker symbol) isn’t really a household name. Yet it’s the 68th largest U.S. company for which financial results are publicly available, according to the 2014 Fortune 500 list.

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But JCI is amid a wave of companies that are shedding businesses that don’t fit with their core ones. In JCI’s case the core includes its Building Efficiency unit and three automotive-sector businesses, focused on seating, batteries (called the Power Solutions unit) and interiors. In 2014 the company announced its intention to sell Global Workplace Solutions, a facilities and real estate management business and the only JCI unit that’s not a manufacturer. It also finished the divestiture of its low-margin Electronics business.

Another big priority for the company is shareholder value. It repurchased $1.2 billion worth of shares in 2014 and expects to retake $600 million more in this year’s first quarter. And it plans an 18% increase in its dividend in 2015, on top of a 16% boost last year.

Stief met with CFO shortly after the company’s analyst day in December to talk about his new job and company strategy.

Many people get burned out at the big accounting firms and leave after the first year. But you stayed for 30 years! What was it like leaving after all that time?

I enjoyed public accounting and my clients. One of them was JCI, which I served as audit partner. I always thought if I left public accounting there was a short list of two or three companies that I would consider finishing my career with. I was very familiar with JCI’s management team and philosophies, so while there’s always going to be a transition, it wasn’t that difficult for me.

What’s your biggest initial priority?

At analyst day and in our 10-Ks and 10-Qs we’ve talked a lot about the business-portfolio changes that we have completed and more that are forthcoming in 2015. Over the last several years, through acquisition we had acquired a number of businesses that were non-core to our overall portfolio. While the Electronics business was a great business in the auto sector [with its systems for operating home electronics from vehicles], capital requirements to continue it were going to be so significant that we opted to sell it in a couple pieces, to GenTex in September 2013 and to Visteon in July 2014.

A lot of other big companies are also downsizing and zeroing in on their core businesses. Why do you think that’s happening?

It comes down to profitability and where you’re going to allocate your capital. If you get too diluted in the number of businesses and markets you’re trying to serve, you don’t get the scale leverage that’s required in your core businesses to drive margin improvement and topline growth. So it really comes down to where you want to invest to get the right level of returns on a long-term basis.

One of our key goals over the next two to three years is to drive margin improvement. The underpinnings of that really get back to being excellent in the engineering, manufacturing, procurement and IT spaces, which we’re making significant investments in.

Obviously the company is a very mature one. Your margin has been right at 3.1%, 3.2%, for three years in a row, and during that time your topline revenue has inched up from $40.6 billion to $42.8 billion. What’s your view of those numbers?

We haven’t been as focused on topline in the last 12 months, and won’t be over the next 12 months, as we will be in fiscal 2016 and beyond. That gets back to the portfolio changes. The sale of Global Workplace Solutions will take about $4 billion out of our topline. We’ve also announced we’ll be [pooling] our Interiors business in China with a joint venture partner there. We’ll maintain a [30%] equity interest in that but won’t consolidate those revenues. That’s another $4 billion off the reported topline.

So in 2015 we’ll be resetting our baseline for topline growth. It will be an execution year. We will work on a new joint venture with Hitachi [under which JCI plans to buy a 60% stake in the company’s air conditioning business] and integrate a large acquisition [of Air Distribution Technologies] that we made in 2014. Once we’ve done those things and refocused on our core businesses of making automotive seats, batteries and HVAC control systems and related products, we’ll then begin to invest for both organic and acquisition-type growth.

You mentioned the importance of capital allocation. Among the remaining core businesses, will some get more than others?

Because of the returns we can enjoy in Building Efficiency and Power Solutions, there will be a bias toward those on a go-forward basis. That’s not to say we aren’t going to invest at all in Automotive Seating and Interiors, but the automotive industry is a tough one, from a margin standpoint.

Johnson Controls' automotive crash test facility in Plymouth, Michigan.

Johnson Controls’ automotive crash test facility.

What are the top metrics you’re looking at right now to evaluate the company?

Return on sales, which is just operating income over total sales, is a metric we track very closely. That’s an area we have to improve in. In 2013 our ROS was 6.2% and it grew last year to 7.1%, a solid 90-basis-point improvement, and we’re forecasting 8% for 2015 and just north of 9% for 2016. Again, a lot of that growth will have to do with focusing our investments and capital allocations to those businesses where we can get the highest returns.

The other big metric we use is [return on invested capital]. For all of our investments, whether they’re in fixed assets like plants and equipment, or products or M&A, we target after-tax ROIC of 15% in year three and beyond. That’s tough to do with every investment you make, but that’s the hurdle we measure our investments against.

Other priorities?

Talent development is one. With the divestitures and with some new talent coming on board, we have an opportunity to rethink our finance organization. One thing I’d like to do is expand the number of finance leaders we import from foreign locations so they get exposure to the North America business model and what we do here at corporate. Historically we’ve exported a lot of talent from the U.S. to foreign locations; it’s been a bit one-sided.

Like a lot of other companies, your stock is at a historically high level. How much of the run-up is attributable to the general market environment and how much to JCI-specific factors?

All of our businesses are in pretty good places right now. We had a bit of a rocky year in 2012, when our stock price got down into the low $20s. Since then we’ve had a pretty nice run. [When this story was published, the stock was trading at about $46.] Some of the portfolio changes were well received by the market, and in fiscal 2014 we delivered on the guidance we had provided for each quarter.

JCI has a big position in China. What’s your strategy there?

We’ve been very successful at identifying joint-venture partners in China that are also customers of ours. We own less than 50% of our largest business there, Automotive Seating, so [as with the new joint venture for the Interiors business] we do not consolidate those revenues in our financial statements. Instead we pick up the earnings on an equity basis. But the revenues are north of $6 billion today and expected to grow to $9 billion or $10 billion by 2016 or 2017.

Our other businesses there, which we own 100% of, are much smaller than Seating and Interiors but [are projected to] have decent growth rates over the next three to five years. We really see our growth markets as North American and Asia, particularly China. In fact, this year we’re breaking ground on a co-global headquarters in Shanghai. Certain [JCI] leaders are already resident there, forming the leadership team that will be guiding our Asia-Pacific business going forward. This reflects our commitment to that region of the world.