Johnson Controls to spin off auto business into separate company

Johnson Controls to spin off auto business into separate company

Johnson Controls to spin off auto business into separate company

insto vs. Johnson Controls Office - By Thomas Content of the Journal Sentinel

Johnson Controls Inc. will break up into two separate, publicly traded companies, the company said Friday, announcing plans to spin off its automotive business.

Two of the company's top officers, one of whom now runs the automotive business from Shanghai, will lead the car supplier's management team.

The move was announced as Johnson Controls reported quarterly earnings Friday morning that met analysts' forecasts.

The company said last month that it was considering a sale or spin-off of the automotive seating business as part of a move to help it focus on growth prospects for its building and battery businesses based in Milwaukee.

According to the company, the new supplier "will benefit from strong existing relationships with customers, well established positions in growth markets including China, and will generate strong cash flow." The automotive side of Johnson Controls reported $22 billion in revenue in 2014, or more than half the company's total sales.

No decisions have been made yet on where the new company, still to be named, will be headquartered, Johnson Controls spokesman Fraser Engerman said. But the automotive company "will have a presence in Milwaukee, Plymouth, Mich., and Burscheid, Germany," he said.

Asked if Shanghai — where Beda Bolzenius, the automotive division's president-to-be, is based — is a possible location for the auto unit's headquarters, Engerman said he couldn't speculate, adding, "We'll be looking at all options."

Johnson Controls' current headquarters in Glendale has some corporate staff members that focus on the automotive business, but the automotive business' North America divisional headquarters is in Plymouth, a Detroit suburb. The auto business' European headquarters is based in Burscheid.

In preparation for the move, which is expected to be completed in about a year, the company said it is launching what it termed "a comprehensive cost savings program" that will encompass both sides of the corporation.

Asked why the company made the announcement so soon after announcing a strategic review of the automotive business' future, company Chairman Alex Molinaroli said Johnson Controls needed to provide certainty to its customers and its partners, particularly its customers and joint-venture partners in the world's largest car market, China.

It's still possible the automotive piece could be sold, but the company had discussions in recent weeks with potential buyers before deciding to move forward with the spin-off announcement, Molinaroli said.

Wall Street activist shareholders have been pressuring companies to consider breakups and spin-offs like the one announced Friday, but Molinaroli has said the company was not pressured to make the move.



In heavy trading Friday, the company's shares fell 4.5%, to $44.26.

Automaker, auto supplier and dealer stocks were down Friday, as was the broader stock market. Analyst David Leiker speculated that some investors might have preferred an outright sale of the automotive business "because they'd get their cash faster" than they would with a spin-off.

Johnson's automotive business is the world's largest maker of car seats, with a leading market share in China. The battery business is the global leader in production of lead-acid batteries and is seeing strong demand for its advanced lead-acid batteries that are used to help cars increase their gas mileage and meet global fuel economy and climate change mandates.

The remaining Johnson Controls will be in a position to make acquisitions to expand its offerings in both the energy storage business, based in Glendale, and the building business based in downtown Milwaukee, Molinaroli said.

The company is considering a wide variety of acquisitions for both businesses, ranging from smaller ones that would add a product line to "transformational" deals, he said during the investor conference call.

Molinaroli will continue to lead Johnson Controls, while vice chairman Bruce McDonald has been named chairman and chief executive of the new company. Bolzenius, a Johnson Controls vice chairman who currently runs the automotive business from Shanghai, will become president and chief operating officer of the automotive business.

Johnson Controls is currently building what it calls a "second corporate headquarters" in Shanghai, to symbolize the importance of the rapidly developing economy in the company's strategic growth plans.

In the third quarter, Johnson Controls reported net income of $178 million, or 27 cents a share, compared with $176 million, or 26 cents a share, during the same quarter last year. Excluding businesses being sold and restructuring costs, the company said its operating earnings were 91 cents a share, up 20% from 76 cents last year. Sales were $9.6 billion, which fell 2% from $9.8 billion because of the impact of currency exchange rates. Excluding those, sales grew 5%.

That included 10% sales growth for the Milwaukee-based building business, 6% for power solutions and 3% for automotive.

The Milwaukee-based building business is seeing strong demand from a key market — local, state and federal governments — with its backlog now at $4.7 billion and up 5% from this time last year. That's the biggest uptick for the backlog in three years, Molinaroli said.

Meanwhile, demand for advanced lead-acid batteries is growing faster than the company forecast, McDonald said. A new battery factory in northern China, which was to produce both starter lead-acid batteries and advanced batteries, will now make the advanced batteries only.

The automotive business outperformed the market, and the Wisconsin-based businesses did well in the quarter, said Leiker.

"There's a lot of momentum that's building in the business," he said. "Importantly, the building efficiency business is seeing end markets recover that have been depressed for four or five years. And the battery business is expanding market share around the world."

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About Thomas Content

Thomas Content covers energy, clean technology and sustainable business. A series he co-wrote on energy and climate change won top honors in 2008 from the National Press Foundation.

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