Johnson Controls announced an agreement to form a global automotive interiors joint venture with Chinese firm Yanfeng Automotive Trim Systems Company. The agreement is a critical strategic solution to accelerate Johnson Controls’ portfolio shift to exit a low-return business.
The agreement is structured as a noncash transaction under which both companies will contribute assets to create the world’s largest automotive interiors company, with revenue of about $7.5 billion and holding about 25% of the Chinese auto interiors market (15% of the world market).
The transaction is expected to be completed by about the middle of Johnson Controls’ fiscal 2015 (about March 2015). Johnson Controls expects to wind down its remaining fiscal 2014 $900 million revenue interiors business to about $250 million- $300 million in sales in fiscal 2016.
The yet-to-be-named joint venture is expected to have 2015 revenue of about $7.5 billion with a pretax margin between 5% and 6%, which should rise another 100 basis points in fiscal 2016 after $40 million-$50 million of planned cost synergies.
As part of the transformation to sharply reduce the scope of its interiors business, Johnson Controls expects to take a charge of about $125 million-$150 million to write down and restructure its remaining interiors business, which is expected to operate at about breakeven in fiscal 2016.
Yanfeng will hold the majority 70% share in the joint venture; Johnson Controls will have a 30% share. The new company will be based in Shanghai, with global engineering, development, and customer centers in the United States, Europe, China, Japan, and India.
Johnson Controls’ interiors business reported $4.2 billion in sales in 2013. It will contribute assets with about $3 billion in fiscal 2015 sales to the new joint venture after the divestiture of its headliner and visor business earlier and certain European businesses that will be run off through 2016.
Johnson Controls expects to receive about $125 million-$150 million in annual income from minority interests in fiscal 2016, with about $70 million-$80 million expected to be received in the second half of fiscal 2015.
We lowered our fiscal 2014 EPS estimate to $3.10 (from $3.15), increased our fiscal 2015 estimate to $3.85 (from $3.80), and introduced our preliminary fiscal 2016 estimate of $4.40.
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