Johnson Controls International plc — Q1 FY2018 Form 10-Q
Reporting period: Three months ended December 31, 2017; unaudited. The company supplies building technologies and services and automotive batteries through Building Technologies & Solutions and Power Solutions.
Financial results and liquidity
| Metric | Q1 FY2018 | Prior-year quarter |
|---|---|---|
| Net sales | $7.435 billion | $7.086 billion |
| Gross profit / gross margin | $2.169 billion / 29.2% | $2.114 billion / 29.8% |
| Income from continuing operations | $271 million | $412 million |
| Net income attributable to Johnson Controls | $230 million | $329 million |
| Diluted EPS | $0.25 | $0.35 |
| Cash used by operating activities | $129 million | $1.885 billion |
| Capital expenditures | $230 million | $371 million |
- Sales increased 5% as reported; excluding foreign currency, higher lead-cost pricing and divestitures, management reported 3% growth. Gross margin declined 60 basis points.
- Net income attributable to the company fell 30%, mainly reflecting higher restructuring and impairment costs and a substantially higher tax provision, partly offset by lower SG&A.
- Operating cash use improved year over year, largely because the prior-year quarter included substantial Adient-related tax payments and cash outflows. Investing activities provided $1.774 billion, including $2.011 billion of business-divestiture proceeds.
- At December 31, cash was $552 million. Total debt was $12.500 billion and net debt was $11.948 billion, down from $13.572 billion and $13.251 billion, respectively, at September 30. Net debt was 36.8% of total capitalization, versus 39.3%.
- Current assets were $12.429 billion and current liabilities $11.246 billion. Management-defined working capital was $2.196 billion, up 37% from September 30, principally due to higher inventory and lower accounts payable.
Material changes and segment performance
- Building Technologies & Solutions sales rose 2% to $5.305 billion; segment EBITA increased to $656 million from $435 million. The comparison benefited from a $114 million Scott Safety divestiture gain and prior-year purchase-accounting, transaction and integration items.
- Power Solutions sales rose 12% to $2.130 billion, substantially reflecting higher lead-cost pass-through pricing and favorable currency. Segment EBITA declined 1% to $384 million as higher operating and transportation costs, lower volumes and lower equity income partly offset favorable pricing and mix.
- The company completed the sale of Scott Safety to 3M for approximately $2.0 billion gross selling price. Approximately $1.9 billion of net proceeds was used to repay merger-related debt. The sale generated a $114 million pretax gain.
- The company reorganized its Building Technologies & Solutions reporting segments effective July 1, 2017; historical segment information was revised to reflect the new structure.
Outlook, risks and unusual items
- Management said available capital resources and liquidity were adequate for projected needs and expected operations, supplemented if necessary by borrowing. The company reported compliance with debt covenants and no draws on its revolving credit facilities at quarter-end.
- The fiscal 2018 restructuring plan incurred $158 million of costs, with actions expected to be substantially complete in 2020. Management estimates approximately $150 million of annual operating-cost reductions when complete; expected fiscal 2018 savings, net of execution costs, were approximately 45% of that annual reduction. The remaining plan reserve was $128 million.
- The quarter included a 50% effective tax rate. U.S. tax reform produced a provisional $101 million deferred-tax remeasurement benefit and a provisional $305 million transition-tax charge; management cautioned that final amounts could change as calculations and guidance develop.
- Management gave no clear consolidated revenue or EPS forecast in the provided filing text. It reported an $8.5 billion Building Technologies & Solutions backlog, which it cautioned is not necessarily indicative of revenue for the fiscal year.
- Risks include uncertainty over tax-reform impacts, realization of merger and integration benefits, economic and automotive production conditions, commodity and currency movements, and litigation. PFAS firefighting-foam claims could have material exposure, although the company said the outcome and ultimate financial exposure were extremely difficult to predict. Asbestos claims and insurance recoveries also depend on estimates and assumptions.
- Other notable matters: restructuring and impairment costs rose to $158 million from $78 million; the quarter included a $25 million net tax benefit from audit resolutions. Operating cash flow remained negative.
Key facts for investors to verify
- How much of reported sales and segment EBITA growth reflects recurring volume, pricing and productivity versus currency, divestitures, the Scott Safety gain and prior-year comparison items.
- Final tax-reform accounting, particularly the transition-tax estimate and provisional deferred-tax remeasurement.
- Progress and cash costs against the restructuring plans, and delivery of the stated savings and timing.
- Debt repayment, cash generation and working-capital trends in subsequent quarters.
- Developments in PFAS litigation, asbestos liabilities and insurance recoveries, and the Qatar arbitration proceedings.