Growth can be a double-edged sword. Businesses strive to grow and make the most profit possible, but the path to achieving that growth can make intangibles like culture and communication more difficult to successfully maintain. This is the balancing act Johnson Controls International has been trying to achieve over the past eight years, following its
Growth can be a double-edged sword. Businesses strive to grow and make the most profit possible, but the path to achieving that growth can make intangibles like culture and communication more difficult to successfully maintain.
This is the balancing act Johnson Controls International has been trying to achieve over the past eight years, following its transformative merger with Tyco International in 2016.
Based in Cork, Ireland – with its primary North American operations headquartered in Glendale – the public company designs and produces fire, HVAC and security equipment and digital solutions for buildings across the globe and, 140 years since its founding, remains one of the largest employers in southeastern Wisconsin with nearly 2,000 local employees as of 2022.
On a continuous journey to improve profitability and streamline its portfolio, Johnson Controls is in the midst of a head-to-toe revamp. Some changes, including the recent rollout of a new sales incentive plan, have been met with skepticism – and mounting legal challenges.
“We’ve lost all faith and trust in the company right now,” one longtime sales rep told BizTimes in January, speaking under condition of anonymity, on the detrimental impact of the new sales incentive plan on his personal income. “Our core values are out the window.”
The company’s origins trace back to 1885, when entrepreneur Warren Johnson moved from Whitewater – where he grew up in poverty as the son of farmers – to Milwaukee, in search of financing to build his invention of the earliest version of the electric thermostat. Today, Johnson Controls is an international company with $26.8 billion in annual revenue and more than 100,000 employees in 150 countries.
At the core of Johnson Controls’ ongoing transformation is the evolution of its hardwired, mechanical systems – the products that have long-defined the Johnson Controls name – to a technology-driven approach to maintaining the infrastructure and improving the sustainability of commercial buildings, while helping customers reduce their carbon footprints. The company is on a so-called “digital journey” as it expands its suite of building solutions under its new OpenBlue software platform.
Launched in July 2020, OpenBlue stores data from a building’s operating system, including HVAC, security, fire, power and electrical, and then uses analytics and artificial intelligence to provide facilities managers operational insights into the building’s sustainability and productivity. Currently, less than 10% of Johnson Controls’ services are digital but the company plans to turn that percentage on its head as it works to connect all of its “assets” – a massive footprint of installed equipment and controls – to the OpenBlue platform. The software service is projected to reach a value of $150 million to $200 million, George Oliver, chief executive officer of Johnson Controls, told investors at Citi’s 2024 Global Industrial Tech and Mobility Conference in February.
Through a spokesperson, Johnson Controls declined to speak on the record for this story. Johnson Controls did refer BizTimes to previously made statements/publicly available materials.
Strategic insight referenced throughout this piece was gleaned from Oliver’s remarks at the Citi event, background information provided by the company, earnings call transcripts and SEC filings.
[caption id="attachment_586651" align="alignnone" width="1280"] George Oliver[/caption]
Streamlining its portfolio
In conjunction with Johnson Controls’ merger with Tyco, the company redomiciled its headquarters to Cork, Ireland, where Tyco was headquartered even though its operational base was in New Jersey. That move saved Johnson Controls $150 million a year in taxes. Johnson Controls has continually made business decisions in support of its long-term goals of evolving into a company focused solely on being a pure building solutions provider. Those decisions have ranged from cost and workforce reductions to several segment divestitures and leadership changes.
When Morningstar analyst Brian Bernard first began covering Johnson Controls nearly eight years ago, he described it as “more of an auto supplier manufacturer.”
“They’re streamlining the business so that its core competency is in the commercial space,” he said. It wasn’t until 2016 that JCI began its transition to a “pure-play building technologies company.”
Adient, an automotive seating business, was spun off in 2016, followed by Scott Safety in 2017 and Johnson Controls’ power solutions business in 2019. Today, that company is known as Clarios, a manufacturer of car batteries.
Getting rid of these business segments and adding Tyco’s fire and security portfolio were instrumental in simplifying Johnson Control’s business proposition for customers.
“It’s more of a holistic product portfolio,” said Bernard. “Sort of a one-stop-shop for decision makers (in the fields of) HVAC and fire and security.”
Simplifying the company’s portfolio is an ongoing process. During the company’s first quarter earnings call in January, Oliver confirmed that Johnson Controls is actively pursuing “strategic alternatives” for some of its non-commercial product lines. And then, a January Bloomberg story broke the news that Johnson Controls is considering the sale of some of its HVAC assets for $5 billion.
“When you look at the non-commercial product lines, they’re excellent businesses, but are they consistent with our strategy over the longer term? That’s why we’re now pursuing the alternatives,” said Oliver. “These are good businesses and there’s an opportunity to be able to create more value for our shareholders.”
[caption id="attachment_586653" align="alignnone" width="1280"] Johnson Controls’ Glendale headquarters campus at 5757 N. Green Bay Ave.[/caption]
Optimization efforts
Divestitures aren’t the only way Johnson Controls is streamlining operations. Over the past several years, there have been ongoing cost-saving efforts aimed at delivering above-market growth and strong returns to shareholders.
At the time of the merger with Tyco, Oliver, who was previously the CEO of Tyco, said the company was confident it would be able to achieve $650 million in synergies – or the added value generated by an M&A transaction – within three years.
“In addition to the commercial benefits at the customer level, there is also significant value created for both Tyco and Johnson Controls shareholders, through the $650 million of synergies, and the stronger financial profile of the combined company,” he said in a May 2016 earnings call.
Of that $650 million projection, $150 million was attributed to tax synergies, $150 million to eliminating corporate headquarters costs and $350 million to operational synergies across both companies.
All told, Johnson Controls achieved more than a billion dollars in synergies from the merger, according to an analyst.
Prior to Tyco, Oliver spent 20 years at General Electric, serving as CEO of several different divisions. Going back to Jack Welch’s time as CEO from 1981-2001, GE has a long track record of cutting both operating costs and headcount. Nate Manning, Johnson Controls’ chief operations officer, global field operations, also spent time at GE before joining the company.
Similar to GE, Johnson Controls has emphasized the importance of cutting operating expenses and adjusting its workforce numbers.
In 2021, the company announced projections of $300 million in savings over the next three years, mostly through consolidation efforts. By then, Johnson Controls had already eliminated roughly 11,500 positions as part of restructuring plans aimed at accelerating growth and expanding margins in the years immediately following its merger with Tyco.
Johnson Controls is often compared to larger competitors like Honeywell International – which boasts “world-class results and margins,” said Bernard – but has always fallen behind in several key performance metrics.
“These companies are trading at premium multiples and Johnson Controls has lagged behind,” he said. “I think it’s an opportunity.”
A complete revamp
Johnson Controls is tapping into the smart building market, which has an estimated value of $150 billion, according to a 2023 Forbes article.
While smart buildings generally focus on balancing cost, efficiency and emissions, Johnson Controls believes the smart buildings of the future will also prioritize improved outcomes and experiences for occupants.
Today’s buildings account for nearly 40% of global greenhouse gas emissions, according to a Johnson Controls report on smart buildings. This means businesses are under increasing pressure to meet net zero goals while improving profits. Rising energy costs and changes to building occupancy patterns due to hybrid work trends are also accelerating the popularity of smart buildings.
Smart building technology can measure energy usage and determine how to balance sustainability with the comfort and wellness of its occupants. This might mean reducing ventilation and heating supplied to vacant or lightly used spaces, and increasing delivery to areas where there are more people.
When a building uses smart technology, it also can identify opportunities to replace fossil fuel-powered equipment with electrically powered equipment, reducing certain emissions.
“As technology evolves, future smart buildings will employ more advanced AI, seamless integration with personal devices, and even digital twins to offer more personalized, secure, and efficient experiences,” according to the report.
A digital twin is a virtual representation of a physical asset, system, or process that can be used to simulate, monitor, and optimize its performance.
The OpenBlue platform allows businesses to do everything from tracking live activity happening within a building to giving employees a way to pre-book workspaces virtually. OpenBlue can also intelligently adapt temperature and air quality levels within buildings based on occupancy levels. The platform provides several security features as well, including facial recognition technology.
The suite of apps available through OpenBlue’s Enterprise Manager system pulls data from a company’s OT and IT systems, and from external sources like weather forecasts and utilities. Enterprise Manager continuously scans this data and identifies opportunities to cut energy costs, reduce emissions and improve air quality. It also helps businesses optimize the performance and extend the life of their building’s various internal systems.
Johnson Controls has an advantage over its competitors due to its “huge install base” of equipment and controls that spans over 8 million customers, and its over 25,000 channel partners that help install, service and connect that equipment, according to Johnson Controls’ former chief commercial officer Rodney Clark, who was interviewed by Forbes last February. The OpenBlue platform gives customers a one-stop-shop for managing its building’s physical assets.
“Most of the equipment competitors in the segment focus on a single type of equipment or specialized building automation controls,” said Clark.
As an analyst, Bernard sees OpenBlue as Johnson Controls’ next growth platform. The company’s operational headquarters in Glendale includes a 12,000-square-foot OpenBlue Innovation Center, which hosts customers, prospective customers and other visitors interested in learning more about Johnson Controls’ products and services.
Johnson Controls has also been working to significantly decrease its selling, general and administrative expenses and simplify its IT systems now that the company relies on OpenBlue as its one operating system.
[caption id="attachment_586655" align="alignnone" width="1280"] Through Johnson Controls’ OpenBlue platform, facility operators can do everything from remotely adjusting air quality levels to monitoring the live activity happening in the building.[/caption]
Changes to sales plan
What’s more, the company is completely changing how it does business across all divisions. Among recent changes was a revised sales incentive plan, rolled out globally in November.
The new plan eradicates a system of backlog payments that were previously due to each salesperson under the previous incentive structure, in which salespeople received a portion of their commission when a project was booked and the remainder of their commission as the project hit key milestones.
This created a backlog of commission payments that salespeople say ranged in size from a little more than $1,000 to upwards of $400,000 per salesperson at the time the new system was unveiled. The new sales plan does away with that commission structure not only moving forward, but also on projects booked prior to Oct. 1, 2023, that had not reached required milestones.
To Oliver and the Johnson Controls executive team, shaking up the way salespeople are incentivized simply comes with the territory of “delivering what we believe is a very different value proposition” as Johnson Controls develops its new building solutions strategy.
“You’re changing the fundamentals of how that’s delivered, that includes updating sales plans,” Oliver said at the Citi conference. “We’re very competitive in how we attract, retain and develop our people across the board, and this would be in line with the enhanced strategy … the ability to incent what ultimately you’re looking to execute and do it consistently across the board.”
But to many of the 3,000-plus North American salespeople impacted by the new plan – some of whom say they expect a significant decrease in anticipated income – the issue is personal.
Several lawsuits have been filed challenging the legality of the sales incentive plan changes, including one in U.S. District Court for the Eastern District of Wisconsin, three in Michigan and two in New York. More than 20 salespeople have joined the class action lawsuit filed in Wisconsin.
Legal documents show millions of dollars in backlog payments are in question. BizTimes Milwaukee spoke to several Johnson Controls salespeople anonymously about the impact of the new sales incentive plan. On top of personal finance concerns, some expressed fears of possible backlash from the company while others questioned what the changes signify for the company’s overall culture.
“There’s a huge cultural shift that’s been happening ever since George Oliver became the CEO,” said one sales rep who’s been with Johnson Controls for a decade and had a backlog of $171,000. “The reason I came here was because a regional vice president recruited me. He became like my dad. He was so good to me and the most ethical people I met were at Johnson Controls.”
In a previously released statement on the legal challenges to the incentive plan, Johnson Controls said it routinely assesses its practices to “best support” the growth and achievements of its employees.
“We modified our sales incentive program to better align with our company strategy to deliver smart, healthy and more sustainable environments for our customers,” according to the statement. “We will continue to assist our sales organization to ensure a seamless transition to our revised competitive model.”
While it isn’t uncommon for employees to file lawsuits against their employers stemming from wage and hour issues, the traction this case has gained from disgruntled Johnson Controls salespeople is unique, according to Summer Murshid, an employment discrimination and class action wage lawyer at Glendale-based Hawks Quindel S.C.
“The level of participation and interest that we have seen from (Johnson Controls) salespeople is astounding,” said Murshid, who represents one of the plaintiffs in the original Wisconsin lawsuit. “I think that level of participation reflects just how surprised people were that JCI would do this.”
Typically, a larger class action lawsuit could draw 12 to 15 plaintiffs. As just one of five lawyers representing plaintiffs for the Wisconsin lawsuit, Murshid said she has talked to approximately seven people a week since the lawsuit surfaced in January, and she is still hearing from additional salespeople from across the country who have expressed interest in joining. In speaking with numerous salespeople, Murshid said she has not heard of any incidents of Johnson Controls retaliating against plaintiffs.
While it could take several months – or even years – for this legal battle to play out, there may be lessons to be learned from it in the short term.
“I think fundamentally, the principle that resonates with people is when you promise to pay someone a certain way, you can’t retroactively change that,” said Murshid.
In the long run, Johnson Controls could potentially end up paying more money than the total from the original employee backlogs. In Wisconsin, for example, wage payment and collection laws could require employers to pay the total sum of wages owed, plus 50% of each claim of unpaid wages.
Johnson Controls has officially filed a motion to dismiss the class action lawsuit filed in Wisconsin. This essentially leaves the case in a state of limbo until a judge decides whether to take it.
[caption id="attachment_586654" align="alignnone" width="1280"] Among Johnson Controls’ best-known, legacy products is its lineup of HVAC equipment.[/caption]
Increasing profitability
One key issue Johnson Controls is attempting to resolve is the company’s cash flow conversion. Changes to the sales incentive plan could help address this issue, said Bernard.
In 2023, Johnson Controls generated $1.8 billion in free cash flow, which represented a 76% conversion.
“All other kinds of world-class companies and their peers are closer to 100%,” said Bernard. “And they’ve been less than that. This is one of the things that would cause their working capital to not be at 100%. You’re not getting the revenue but you’re paying your employees.”
He believes Johnson Controls has “really strong” growth prospects and the company’s continuous cost saving measures are something any “world-class company” does if it is well managed.
“Sometimes you see this stuff because a company is struggling or not growing,” said Bernard. “That’s not the problem Johnson Controls is having. I think there are things that are misunderstood about the company and in the long term, it’s going to work out.”
Johnson Controls has managed to increase its profitability over the past several years, even if some of those increases didn’t quite meet analysts’ expectations.
In 2023, Johnson Controls reported gross profit of $8.9 billion, up from $8.3 billion in 2022, and $8.05 billion in 2021. Net income attributed to Johnson Controls in 2023 was $1.8 billion, compared to $1.5 billion the prior year. Full year reported sales were up 6% and increased 8% organically.
As of early March, Johnson Controls’ stock price was at about $60 per share, having recovered from a nearly 50% plunge in mid-2022 from an all-time high of $80.85 at the end of 2021.
The year ahead
Johnson Controls’ core strategy remains focused on “creating growth platforms, driving operational improvements and creating a high-performance culture,” according to the company’s latest 10-K filing.
During the company’s first quarter earnings call in January, Oliver stressed that Johnson Controls has the right operating system and overall strategy in place to create value for shareholders.
“We believe that we’re on the right path now to simplify the portfolio, continue to drive margin expansion and deliver much more consistent cash flow,” he said.
For the year ahead, Johnson Controls expects “well above-market” growth and continued margin expansion in the mid- to high-teens range.
While a decision has yet to be made on Johnson Controls’ non-commercial product lines, the possible sale is drawing mixed reactions from analysts.
“Sales could streamline the portfolio and offer attractive sales valuations for JCI. Conversely, these are assets in high-interest areas of HVAC and sales would lessen JCI’s overall exposure to HVAC itself,” a Baird Equity Research report states.
In addition, the company is continuing its restructuring efforts as it works to reduce SG&A costs. In the first quarter, Johnson Controls paid $39 million in pre-tax restructuring and impairment costs, primarily comprised of severance charges due to ongoing “restructuring actions,” according to an SEC filing.
Oliver acknowledged there’s still work to be done not only in cost saving efforts, but also in the development of the OpenBlue platform as Johnson Controls positions itself as a leader in the autonomous building market.
“We have successfully removed many layers of cost across the organization, but we know there is more work to be done,” said Oliver. “We will continue to simplify and standardize across our portfolio. As we continue to focus on simplifying the company, we’re always assessing opportunities to advance our transformation into a comprehensive solutions provider for commercial buildings.”
[caption id="attachment_586652" align="alignnone" width="1280"] Johnson Controls’ thermostat patent.[/caption]
Key milestones and hires at Johnson Controls
September 2016: Johnson Controls and Tyco International complete merger.
October 2016: Johnson Controls spins off its automotive seating business, Adient.
June 2017: Johnson Controls opens new China HQ.
September 2017: Former CEO Alex Molinaroli retires from Johnson Controls 18 months ahead of schedule.
September 2017: George Oliver is named new CEO of Johnson Controls
October 2017: Johnson Controls sells its Scott Safety business.
April 2018: Nancy Berce is named chief information officer after John Repko leaves to pursue other opportunities.
May 2019: Johnson Controls sells its power solutions business, now known as Clarios.
July 2020: Johnson Controls launches its OpenBlue software platform.
August 2020: Olivier Leonetti is named chief financial officer following the retirement of Brian Stief.
October 2020: Nate Manning is named president of Building Solutions North America.
August 2021: Francois Mandeville is named corporate development officer.
October 2021: Marlon Sullivan is named executive vice president and chief human resources officer following the retirement of Lynn Minella.
November 2022: Lei Schlitz is named president of Global Products business following the retirement of Jeff Williams.
April 2023: Julie Brandt is named president of Building Solutions North America.
April 2023: Nate Manning is named vice president and chief operations officer for global field operations.
August 2023: Marc Vandiepenbeeck is named president of Europe, Middle East, Africa and Latin America business.
January 2024: Marc Vandiepenbeeck is named executive vice president and chief financial officer after past CFO Olivier Leonetti leaves company for a new job.
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