Business context and reporting period
Johnson Controls International plc filed this Form 10-K for the fiscal year ended September 30, 2019. The company provides building HVAC, controls, security, fire-protection products and services, operating through four segments: Building Solutions North America, EMEA/Latin America, Asia Pacific, and Global Products. Power Solutions was sold on April 30, 2019 and is reported as a discontinued operation; prior periods were retrospectively reclassified.
The filing is an annual report, not a standalone quarterly filing. Fourth-quarter figures below are unaudited and cover the three months ended September 30, 2019.
Financial performance and position
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Net sales | $23.968 billion | $23.400 billion |
| Gross profit / gross margin | $7.693 billion / 32.1% | $7.667 billion / 32.8% |
| Segment EBITA | $3.041 billion | $3.138 billion |
| Income from continuing operations attributable to Johnson Controls | $1.100 billion | $1.175 billion |
| Net income attributable to Johnson Controls | $5.674 billion | $2.162 billion |
| Diluted EPS | $6.49 | $2.32 |
| Cash provided by continuing operating activities | $1.743 billion | $1.520 billion |
| Capital expenditures | $586 million | $645 million |
FY 2019 net income included $4.574 billion of income from discontinued operations attributable to Johnson Controls, principally reflecting the Power Solutions sale. The sale generated a $5.2 billion pretax gain, net of transaction and other costs, and $11.6 billion of net cash proceeds after tax and transaction-related expenses.
Fourth-quarter results: sales were $6.274 billion, gross profit $1.980 billion, net income attributable to Johnson Controls $612 million, and diluted EPS $0.77. Fourth-quarter net income included $626 million of net mark-to-market losses and $111 million of transaction and integration costs, stated before tax and noncontrolling-interest effects.
At September 30, 2019, cash and cash equivalents were $2.805 billion, total debt $7.219 billion, and net debt $4.414 billion, compared with $10.930 billion of debt and $10.745 billion of net debt a year earlier. Working capital, as defined by the company, was $975 million. Total net debt to capitalization was 18.3%, versus 33.7%. Continuing-operations cash provided by investing activities was a $533 million outflow; financing activities used $10.519 billion, including $5.983 billion of share repurchases and $2.333 billion of long-term debt repayments.
Material changes versus the prior comparable period
- Sales rose 2%; organic sales increased 5% excluding foreign exchange and acquisitions/divestitures. Higher volumes across segments were partly offset by $463 million of unfavorable currency translation and $172 million of lower sales from divestitures.
- Gross margin declined 70 basis points to 32.1%. Segment EBITA fell 3%; North America and EMEA/Latin America improved, while Asia Pacific and Global Products declined.
- Continuing-operations income attributable to the company decreased to $1.100 billion from $1.175 billion. The effective tax benefit was $233 million in 2019, versus a $197 million provision in 2018; tax audit reserve adjustments and other discrete items significantly affected the comparison.
- Cash from continuing operating activities increased to $1.743 billion, while cash and debt balances changed substantially following the Power Solutions sale, debt repayments and large share repurchases.
Outlook, risks and unusual items
- Management said liquidity was adequate for projected needs. It cited $2.8 billion of cash, a $2.0 billion revolving credit facility (maturing August 2020) and access to committed credit lines. No revolver borrowings were outstanding at year-end. The filing gives no specific FY 2020 revenue or earnings guidance.
- The company expected the FY 2018 restructuring plan to deliver approximately $300 million of annual operating-cost savings, substantially realized in 2020; about 70% of the expected annual reduction had been achieved in FY 2019, net of execution costs. The FY 2017 plan’s approximately $260 million annual savings were substantially realized in FY 2019.
- Global Products included a $140 million environmental charge. The company also recorded a $235 million impairment for a separate Global Products business held for sale. Goodwill was $18.178 billion; no goodwill impairment was recorded in FY 2019.
- Environmental reserves for continuing operations were $159 million, including increased reserves related to PFAS contamination and remediation at facilities in Marinette, Wisconsin. The company said it could not estimate potential losses above the accrual. Related AFFF litigation, including claims by individuals, municipalities and states, could have material exposure, though the ultimate outcome was described as difficult to predict.
- Asbestos-related net liability was $141 million after recorded insurance-related assets. Unrecognized tax benefits were $2.451 billion; management noted tax examinations or litigation could materially affect tax expense. A $2.5 billion valuation allowance against deferred tax assets was also reported.
- Other principal risks include economic and construction cycles, commodity and foreign-exchange volatility, cybersecurity and data privacy, regulatory and tax changes, pension assumptions, and realization of integration and divestiture benefits. The auditor issued an unqualified opinion and reported effective internal control over financial reporting.
Most important facts for investors to verify
- Separate continuing-operations performance from discontinued Power Solutions results and the one-time sale gain when assessing earnings and EPS.
- Review the sustainability of margins and segment EBITA, particularly the Global Products decline and the environmental charge.
- Track cash generation, debt reduction, share repurchases, and the company’s liquidity facilities and upcoming debt maturities.
- Assess potential PFAS, asbestos and other litigation or remediation costs against recorded reserves and insurance recoveries.
- Monitor tax audit outcomes, the large unrecognized tax-benefit balance, valuation allowances, and future tax effects.