Johnson Controls International plc — Form 10-Q Summary
Business context and period: Unaudited results for the three and six months ended March 31, 2019 (fiscal Q2 and first half), compared with the same 2018 periods. Johnson Controls’ continuing operations comprise building solutions and global products. Power Solutions, its automotive battery business, is presented as discontinued operations following the planned sale.
Financial performance
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Continuing net sales | $5.779 billion, up 3% reported; up 6% excluding FX, acquisitions and divestitures | $11.243 billion, up 3% reported; up 6% excluding FX, acquisitions and divestitures |
| Gross profit / margin | $1.844 billion / 31.9%, versus 32.4% | $3.569 billion / 31.7%, versus 32.2% |
| Income from continuing operations attributable to Johnson Controls | $240 million; diluted EPS $0.26 | $347 million; diluted EPS $0.38 |
| Income from discontinued operations attributable to Johnson Controls | $275 million; diluted EPS $0.30 | $523 million; diluted EPS $0.57 |
| Net income attributable to Johnson Controls | $515 million, versus $438 million; diluted EPS $0.57 versus $0.47 | $870 million, versus $668 million; diluted EPS $0.95 versus $0.72 |
Power Solutions discontinued-operations sales were $2.012 billion for the quarter and $4.439 billion for the half year. These sales are excluded from continuing net sales above. Continuing-operations income before tax was $321 million for the quarter and $565 million year to date. Net financing charges declined to $98 million for the quarter and $183 million for the half year.
Cash flow and liquidity: Continuing-operations operating cash flow was $103 million for the first half, versus $140 million; capital expenditures were $278 million, implying negative continuing-operations operating cash flow less capex of $175 million. Cash and equivalents were $239 million at March 31. Total debt was $12.386 billion and net debt $12.147 billion; net debt to total capitalization was 37.7%, versus 33.7% at September 30, 2018. Adjusted working capital, as defined by the company, was $1.683 billion, versus $471 million. The company reported access to committed credit facilities and compliance with debt covenants.
Material changes and drivers
- Continuing sales increased on higher organic volumes across segments; foreign currency translation and divestitures partly offset growth.
- Quarterly gross margin fell 50 basis points, with higher operating costs partly offsetting volume gains. Segment EBITA rose 8% for the quarter to $664 million, but declined 2% year to date to $1.247 billion.
- Year-to-date Global Products EBITA fell 14%, primarily reflecting the prior-year $114 million Scott Safety sale gain; Building Solutions North America and EMEA/LA EBITA rose, while Asia Pacific declined.
- First-half operating cash flow was pressured by unfavorable inventory and receivables movements and the absence of prior-year tax refunds. Inventory increased 17% from September 30.
Outlook, transactions and risks
- The Power Solutions sale closed April 30, 2019, after quarter-end, for stated net cash proceeds of $11.6 billion after tax and transaction-related expenses, against a $13.2 billion purchase price. Management said the sale’s strategic benefits and financial impact are not assured.
- No formal full-year revenue or earnings guidance is stated in the supplied filing text. Management said liquidity was adequate for projected needs and expected fiscal 2019 pension contributions of about $120 million and postretirement contributions of $15 million.
- Management expects the fiscal 2018 restructuring plan to reduce annual continuing-operations costs by about $300 million, with substantially all annual benefits expected in 2020; fiscal 2019 savings net of execution costs were estimated at about 70% of that annual reduction. Earlier plans also carry expected annual savings of about $260 million and $127 million, respectively.
- After the Power Solutions sale, the company announced a planned tender offer for up to $4.0 billion of shares and a cash tender offer for up to $1.5 billion of notes. It had repurchased $1.0 billion of shares in the first half.
- AFFF firefighting-foam litigation involves numerous putative class, individual and municipal claims. The company is defending the matters, but says outcomes and potential exposure are difficult to predict and exposure could be material. The Bosch joint-venture litigation is subject to an indemnity to the Power Solutions purchaser; management considers any ultimate liability immaterial.
- Asbestos exposure is a continuing contingency: the recorded discounted net liability was $175 million, based on a $541 million claims liability and $366 million of related cash, investments and receivables. Actual liabilities or insurance recoveries could differ materially from estimates.
- Other risks include commodity-price volatility, climate-related regulation and physical risks, environmental compliance, foreign exchange, and execution and potential earnings dilution from divestitures. The company expects adoption of lease accounting in fiscal Q1 2020 to materially increase balance-sheet assets and liabilities, without a material income-statement or cash-flow impact.
Important facts for investors to verify
- How the post-quarter Power Solutions sale proceeds are applied, including debt reduction, share repurchases and any resulting change in leverage.
- Underlying continuing-business growth and margin trends, particularly Global Products and Asia Pacific, excluding discontinued operations and prior-year divestiture gains.
- Cash conversion, working-capital movements and the ability to fund dividends, buybacks, capital spending and debt maturities while net debt is elevated.
- Developments, insurance recoveries and potential financial exposure in AFFF litigation, asbestos claims and the Bosch dispute.
- Delivery of restructuring savings, and the actual cost and balance-sheet effects of adopting lease accounting.