Johnson Controls International plc — FY2018 Form 10-K
Reporting period: Fiscal year ended September 30, 2018. The filing also reports fourth-quarter results; this is an annual report, not a standalone quarterly filing. Johnson Controls is a global building technology and automotive battery company, operating through Building Technologies & Solutions and Power Solutions.
Financial performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $31.40 billion | $30.17 billion |
| Gross profit / gross margin | $9.38 billion / 29.9% | $9.34 billion / 31.0% |
| Income from continuing operations | $2.38 billion | $1.85 billion |
| Net income attributable to Johnson Controls | $2.16 billion | $1.61 billion |
| Diluted EPS from continuing operations | $2.32 | $1.75 |
| Cash from operating activities | $2.51 billion | $31 million |
| Capital expenditures | $1.03 billion | $1.34 billion |
| Total debt / net debt | $11.00 billion / $10.80 billion | $13.57 billion / $13.25 billion |
| Net debt as a share of total capitalization | 33.8% | 39.3% |
Fourth-quarter net sales were $8.37 billion, gross profit was $2.52 billion, net income attributable to Johnson Controls was $771 million, and diluted EPS was $0.83. FY2018 sales rose 4%; gross margin fell 110 basis points. SG&A declined to $6.01 billion from $6.16 billion, and net financing charges declined to $441 million from $496 million. The effective tax rate was 18%, versus 28%.
Building Technologies & Solutions generated $23.40 billion in sales and $3.14 billion in segment EBITA, up 2% and 11%, respectively. Power Solutions generated $8.00 billion in sales, up 9%, while segment EBITA edged down to $1.42 billion. Segment EBITA is the company’s measure and excludes specified costs, including financing, restructuring and certain pension items.
Changes, liquidity and capital allocation
- Sales growth reflected higher building-business volumes, favorable currency translation and higher Power Solutions sales, partly offset by divestitures. Power Solutions revenue also benefited from higher lead costs passed through in pricing.
- Gross margin pressure reflected higher operating costs, currency effects and less favorable pension mark-to-market results compared with FY2017. Lower SG&A reflected productivity savings, synergies, divestitures and a $114 million Scott Safety sale gain.
- Operating cash flow increased sharply from FY2017, when cash flow was affected by substantial tax payments related to the Adient spin-off and other outflows. FY2018 investing cash flow was positive $1.22 billion, including divestiture proceeds; financing cash flow was negative $3.75 billion, primarily reflecting debt repayments, dividends and repurchases.
- Cash and cash equivalents were $200 million at year-end. Defined working capital was $1.71 billion, up 7%. Management said liquidity was adequate; available revolving credit facilities were undrawn, and the company reported compliance with debt covenants.
- Debt declined 19% year over year. The company paid $954 million in cash dividends and repurchased approximately $300 million of shares in FY2018. The annual dividend was $1.04 per share.
Outlook, commentary and notable items
- No consolidated fiscal 2019 revenue, earnings or EPS guidance is provided in the supplied filing text. Management estimated approximately $300 million of annual operating-cost savings from the FY2018 restructuring plan, with benefits expected to be substantially realized in 2020; the plan was expected to be substantially complete in 2020.
- On November 13, 2018, after fiscal year-end, the company agreed to sell Power Solutions for $13.2 billion, with expected net cash proceeds of $11.4 billion after taxes and transaction expenses. Closing was expected by June 30, 2019, subject to approvals and other conditions. The business was to be reported as discontinued operations beginning in FY2019.
- FY2018 included $263 million of restructuring and impairment costs, $234 million of transaction and integration costs, a $114 million pre-tax Scott Safety divestiture gain, and a provisional $108 million net charge related to U.S. tax reform. The company also recorded $56 million of deferred-tax valuation allowances, primarily related to Germany.
- Material risks include the execution and timing of the Power Solutions sale; commodity, currency, tariff and economic exposure; integration and restructuring execution; significant tax uncertainties; and environmental and product-related litigation. The company disclosed extensive AFFF/PFAS litigation, asbestos claims, environmental matters and an outstanding approximately $50 million Qatar arbitration award. Management said the ultimate financial exposure from AFFF matters was difficult to predict and could be material.
- Management reported no goodwill impairment in FY2018. Goodwill was $19.5 billion, making impairment assumptions and forecasts relevant to monitor. PwC gave an unqualified audit opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Most important facts for investors to verify
- Whether the Power Solutions transaction received required regulatory approvals and closed on the expected terms, timing and net proceeds.
- Whether FY2018 operating cash flow is repeatable, given the comparison with FY2017’s unusually low cash flow and the effects of taxes, working capital and divestitures.
- Whether restructuring savings are realized as projected and whether gross-margin pressure persists.
- The potential cash and earnings impact of AFFF/PFAS litigation, asbestos claims, tax examinations and the Qatar arbitration award.
- The final tax effects of U.S. tax reform and the company’s ability to realize deferred tax assets.