Johnson Controls International plc — Fiscal 2019 Q1 Form 10-Q
Reporting period: Three months ended December 31, 2018. The filing was signed February 1, 2019. Johnson Controls is a global building-technology and industrial company. Power Solutions, its automotive battery business, is presented as a discontinued operation following the planned sale; continuing-operations comparisons generally exclude it.
Key financial results
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Continuing-operations net sales | $5.464 billion | $5.305 billion |
| Gross profit / gross margin | $1.725 billion / 31.6% | $1.698 billion / 32.0% |
| Continuing-operations income (loss) before tax | $244 million | $170 million |
| Continuing-operations income (loss), attributable to Johnson Controls | $107 million | $(75) million |
| Discontinued-operations income, net of tax | $263 million consolidated; $248 million attributable to Johnson Controls | $318 million consolidated; $305 million attributable to Johnson Controls |
| Net income attributable to Johnson Controls | $355 million | $230 million |
| Diluted EPS | $0.38 | $0.25 |
| Continuing-operations operating cash flow | $(79) million | $(133) million |
Sales rose 3% reported and 6% excluding currency, acquisitions, and divestitures, supported by higher volumes across all segments. Gross margin declined 40 basis points. The continuing-operations effective tax rate was 44%, versus 128%, and included a $76 million discrete charge tied to valuation allowances on certain U.S. deferred tax assets. Net income growth also reflected lower restructuring costs and taxes; discontinued operations remained a significant contributor to reported earnings.
Segment EBITA was $583 million, down 11% from $656 million. Building Solutions North America EBITA increased 10% to $250 million; EMEA/LA increased 12% to $77 million; Asia Pacific decreased 11% to $66 million; and Global Products decreased 34% to $190 million. Global Products’ comparison was affected by the prior-year $114 million Scott Safety sale gain, alongside higher expenses and investments.
Financial position and liquidity
- At December 31, 2018, cash and cash equivalents were $292 million; total debt was $11.908 billion and net debt was $11.616 billion, up from $10.745 billion at September 30, 2018. Net debt was 36.6% of total capitalization, compared with 33.7%.
- Short-term debt rose to $2.319 billion from $1.306 billion. Long-term debt was $9.588 billion. The company reported compliance with its debt covenants.
- Current assets were $11.955 billion and current liabilities $11.653 billion. Management-defined working capital, excluding specified financing and held-for-sale items, was $924 million, versus $471 million.
- Continuing-operations investing cash use was $136 million and capital expenditures were $153 million. Financing provided $256 million, including a $1.014 billion net increase in short-term debt; the company repurchased $467 million of shares and paid $240 million in dividends.
- Management said liquidity was adequate for projected needs. It cited revolving credit facilities of $2.0 billion for the company and $1.25 billion for TSarl, with no draws at quarter-end, and estimated up to $1.8 billion of borrowing capacity on committed credit lines based on quarterly average borrowing levels.
Material changes, outlook, and notable items
- Planned Power Solutions divestiture: The company agreed to sell the business to a Brookfield-controlled purchaser for $13.2 billion; expected net cash proceeds were $11.4 billion after tax and transaction costs. Closing was expected by June 30, 2019, subject to customary conditions and regulatory approvals. The business reported quarterly sales of $2.427 billion and income from discontinued operations of $248 million attributable to Johnson Controls.
- Restructuring outlook: Management estimated the fiscal 2018 plan would reduce annual continuing-operations costs by about $300 million, with benefits substantially realized in 2020; fiscal 2019 savings net of execution costs were expected to be about 70% of that annual reduction. Earlier plans were also expected to deliver annual savings of $260 million and $127 million, substantially realized in fiscal 2019. These are management estimates, not guarantees.
- Revenue and backlog: Building Technologies & Solutions backlog was $8.8 billion. Remaining performance obligations were $13.7 billion, of which about 60% was expected to be recognized over the next two years; the measures differ in scope and should not be treated as directly equivalent.
- Accounting changes: Adoption of the new revenue standard reduced opening retained earnings by $45 million and had little effect on continuing-operations quarterly results. Adoption of guidance for intra-entity asset transfers reduced retained earnings by $546 million. The company expected lease accounting adoption in fiscal 2020 to materially increase balance-sheet assets and liabilities, without a material income-statement or cash-flow effect.
- Legal and contingent exposure: Subsidiaries face numerous AFFF firefighting-foam lawsuits concerning alleged PFAS contamination and related injury, property, and remediation claims. The company said ultimate exposure was extremely difficult to predict and could be material; it was pursuing insurance coverage and vigorously defending the matters. Separately, the recorded discounted net asbestos liability was $194 million, with significant estimation and insurance-recovery uncertainties.
- Other risks and commentary: Management identified transaction timing and benefits, regulatory approvals, tax-law changes, economic conditions, trade restrictions and tariffs, automotive production, commodity and raw-material availability, and foreign-exchange movements as factors that could affect results. Foreign-currency translation reduced comprehensive income, primarily due to weakening of the British pound and euro against the U.S. dollar. No specific consolidated earnings guidance was provided in the supplied filing text.
Important facts for investors to verify
- Progress, regulatory approvals, final proceeds, taxes, and closing timing for the Power Solutions sale.
- Continuing-operations growth and margins by segment, especially the decline in Global Products EBITA and the lower consolidated gross margin.
- Cash conversion, working-capital movements, short-term borrowing, and the company’s ability to fund capital returns while reducing net debt.
- Delivery and timing of restructuring savings relative to execution costs and the stated targets.
- Developments in AFFF litigation, insurance recovery, asbestos estimates, and any resulting changes to recorded contingencies.
- Effects of tax-law developments and the upcoming lease-accounting transition on reported results and the balance sheet.