Johnson Controls International plc — Q2 FY2020 Form 10-Q
Reporting period: Fiscal quarter and six months ended March 31, 2020; amounts are in U.S. dollars. Johnson Controls supplies building systems and services, including HVAC, controls, security, fire protection and related products. Its four reportable segments are Building Solutions North America, EMEA/Latin America, Asia Pacific, and Global Products. Power Solutions was sold in April 2019 and is reported as discontinued operations in the prior-year comparison.
Financial performance
| Metric | Three months ended March 31, 2020 | Three months ended March 31, 2019 | Six months ended March 31, 2020 | Six months ended March 31, 2019 |
|---|---|---|---|---|
| Net sales | $5.444 billion | $5.779 billion | $11.020 billion | $11.243 billion |
| Gross profit / margin | $1.801 billion / 33.1% | $1.844 billion / 31.9% | $3.604 billion / 32.7% | $3.569 billion / 31.7% |
| Continuing income attributable to Johnson Controls | $213 million | $240 million | $372 million | $347 million |
| Diluted continuing EPS | $0.28 | $0.26 | $0.49 | $0.38 |
| Segment EBITA | $617 million | $664 million | $1.240 billion | $1.247 billion |
Quarterly sales fell 6% reported and 5% excluding currency and portfolio changes; six-month sales fell 2% reported and 1% on that adjusted basis. Management attributed the organic declines primarily to COVID-19. Quarterly gross margin improved 120 basis points, while segment EBITA declined 7%; year-to-date gross margin improved 100 basis points and segment EBITA was down 1%.
Reported net income attributable to Johnson Controls was $213 million for the quarter and $372 million year to date, versus $515 million and $870 million in the prior-year periods. Comparisons include prior-year Power Solutions discontinued-operation income of $275 million for the quarter and $523 million year to date; therefore, reported net income and EPS are not directly comparable to continuing operations.
Cash flow and liquidity: For the six months, continuing-operations operating cash flow was $666 million, compared with $103 million; capital expenditures were $250 million, resulting in approximately $416 million of operating cash flow less capital expenditures. Investing activities used $288 million and financing activities used $2.036 billion. Cash and cash equivalents were $1.006 billion at March 31, versus $2.805 billion at September 30, 2019. Management attributed higher operating cash flow mainly to the timing of tax payments/refunds and improved receivables, partly offset by payables and accrued liabilities.
Total debt was $7.070 billion, versus $7.219 billion at September 30; net debt increased to $6.064 billion from $4.414 billion as cash declined. Net debt was 25.1% of total capitalization, compared with 18.3%. The company reported $3.0 billion of revolving credit facilities with no draws at quarter-end and stated that it was in compliance with debt covenants. It raised a further $1.25 billion through financing arrangements in April 2020.
Material changes and notable items
- COVID-19 affected manufacturing capacity, supply chains, customer access, project activity and demand. Management reported temporary operating-capacity reductions in China and warned that customers could defer or cancel projects.
- Quarterly sales declined across all segments. Asia Pacific sales fell 16% and Global Products sales fell 9%; North America fell 1% and EMEA/LA fell 3%. Six-month segment EBITA increased in EMEA/LA, was roughly flat in North America, and declined in Asia Pacific and Global Products.
- Restructuring and impairment costs were $62 million in the quarter and $173 million year to date. The quarter’s $62 million charge primarily reflected COVID-related impairment of indefinite-lived intangible assets, principally in the retail business. The fiscal 2020 plan recorded $111 million in the first quarter, primarily for workforce reductions, plant closures and asset impairments.
- Fiscal 2020 restructuring actions are expected to reduce annual operating costs by approximately $80 million, with most benefits expected in 2021. The company expected about 60% of that annual reduction, net of execution costs, to be realized in fiscal 2020.
- The company repurchased $1.467 billion of shares year to date, including $816 million in the quarter, then suspended repurchases in March to preserve liquidity. Approximately $3.1 billion remained authorized.
- Foreign-currency translation drove a $494 million quarterly other comprehensive loss and contributed to a $268 million comprehensive loss attributable to Johnson Controls.
Outlook, risks and contingencies
The filing gives no specific revenue, earnings or EPS guidance. Management said the duration and severity of COVID-19 and its effects on operations and demand were highly uncertain. It described liquidity as adequate for projected needs and said available resources should fund operations and obligations for the foreseeable future, while taking precautionary financing and cost-control measures, including furloughs and limits on discretionary spending.
Key risks include further pandemic-related disruption, reduced customer demand or project cancellations, supply-chain delays and costs, constrained or more expensive credit, and potential impairment charges if economic conditions deteriorate. Goodwill testing did not identify a triggering event in the quarter, but management warned that a longer or more severe downturn could require impairment. The filing also identifies cybersecurity, third-party financial distress, foreign exchange, tax examinations and litigation risks.
Environmental reserves for continuing operations were $143 million. The company faces PFAS-related investigation and litigation, including claims concerning firefighting foam; it said it could not predict the outcome or ultimate financial exposure and could not estimate losses beyond established environmental accruals. The discounted net asbestos liability was $165 million, against $333 million of related insurance-recovery assets and restricted cash/investments. Actual liabilities or recoveries could differ materially from estimates. Other legal matters include numerous AFFF lawsuits and a Wisconsin contamination investigation; management stated there can be no assurance AFFF exposure will not be material.
Important facts for investors to verify
- How COVID-19 affected subsequent-quarter sales, margins, manufacturing, service delivery and customer project decisions.
- Whether cash generation and liquidity remain sufficient after the April financing, debt maturities, dividends and operating needs.
- Progress and realized savings from the fiscal 2020 restructuring plan, including execution costs and timing.
- Further impairment testing and any changes in goodwill, intangible-asset or held-for-sale valuations.
- Developments in PFAS investigations and litigation, environmental remediation estimates, asbestos claims and insurance recoverability.
- Segment performance, especially recovery in Asia Pacific and Global Products, and the conversion of backlog and remaining performance obligations into revenue.
- Continuing-operations results separately from prior-year discontinued Power Solutions results when assessing year-over-year performance.