Johnson Controls International plc — FY2016 Form 10-K
Reporting period: Fiscal year ended September 30, 2016; fourth-quarter figures are identified separately. Unless otherwise noted, amounts are U.S. dollars. The filing reports the historical financial statements of Johnson Controls, Inc. as accounting acquirer in the September 2, 2016 reverse acquisition of Tyco. Tyco contributed results for only September 2–30, 2016. The October 31, 2016 Adient spin-off occurred after year-end.
Business context
The company operated across Buildings, Automotive Experience and Power Solutions, spanning HVAC and building services, fire and security, automotive interiors, and automotive batteries. FY2016 results include the Hitachi buildings joint venture and only a short period of Tyco results; Automotive Experience remained consolidated through year-end, then was spun off as Adient.
Financial performance and position
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $37.674 billion | $37.179 billion |
| Gross profit / gross margin | $7.314 billion / 19.4% | $6.447 billion / 17.3% |
| Segment EBIT | $3.023 billion | $3.258 billion |
| Income from continuing operations before tax | $1.586 billion | $2.151 billion |
| Income tax provision | $2.238 billion | $600 million |
| Net income (loss) attributable to Johnson Controls | $(868) million | $1.563 billion |
| Diluted EPS | $(1.30) | $2.36 |
| Cash from operating activities | $1.895 billion | $1.600 billion |
| Capital expenditures | $1.249 billion | $1.135 billion |
| Total debt at year-end | $16.353 billion | $6.610 billion |
Sales rose 1% reported and 3% excluding unfavorable foreign-exchange translation. Gross margin improved by 210 basis points, while segment EBIT declined about 7%. The net loss primarily reflected the sharply higher tax provision, SG&A including separation and transaction costs, and restructuring and impairment charges. The FY2016 effective tax rate was 141%; management attributed the increase chiefly to tax effects of the planned Adient separation and related transactions.
FY2016 operating cash flow less capital expenditures was approximately $646 million, calculated from the reported figures. Cash and cash equivalents were $684 million; an additional $2.034 billion was held in escrow for Adient debt proceeds and was not ordinary freely available cash. Defined working capital was negative $301 million, compared with positive $278 million in FY2015. Total debt to capitalization was 40%, versus 39%.
In Q4, sales were $10.198 billion, gross profit $2.065 billion, and net loss attributable to Johnson Controls $1.171 billion. The quarter included $514 million of pension and postretirement mark-to-market and settlement losses, $296 million of restructuring and impairment costs, and $293 million of transaction, integration and separation costs, all pre-tax.
Material changes versus the prior year
- Buildings sales increased $3.837 billion, including the Hitachi joint venture and the brief post-merger Tyco contribution; Power Solutions sales increased $63 million.
- Automotive Experience sales decreased $3.242 billion, largely reflecting the prior-year deconsolidation of most Interiors operations into a joint venture. The business was subsequently spun off as Adient on October 31, 2016.
- Tyco added $808 million in sales and recorded a $17 million segment EBIT loss for its partial-year contribution; the loss included purchase-accounting and transaction costs.
- Goodwill rose to $23.4 billion from $6.8 billion, primarily due to $16.4 billion recorded for the Tyco merger. The purchase-price allocation was preliminary and subject to adjustment.
- Debt increased to $16.4 billion, including acquisition financing and debt associated with the planned Adient separation. The company reported $4.0 billion borrowed under a Tyco-merger term loan.
Outlook, commentary, risks and unusual items
- Management expected its FY2016 restructuring plan to reduce annual operating costs by approximately $300 million, with benefits substantially realized by the end of FY2018; the plan was expected to be substantially complete in FY2018. No significant net savings from this plan were realized in FY2016.
- Buildings backlog was $9.5 billion at year-end, mostly relating to FY2017; the company cautioned backlog is not necessarily indicative of next-year revenue. Management said liquidity was adequate for projected needs and obligations.
- The merger’s expected benefits depend on integration, cost savings and revenue synergies, including cross-selling. The filing cautions that integration disruption, costs, liabilities and unrealized synergies could impair results. Tyco’s results were included for less than one month, limiting direct FY2016 comparability.
- The Adient separation generated substantial tax and separation costs. Management identified uncertainty around U.S. tax treatment of the Irish-domiciled company and potential legislative or regulatory changes. The filing also describes risks from economic and construction cycles, automotive production, commodities, currencies, pensions, environmental matters, asbestos claims, litigation and cybersecurity.
- The company recorded $620 million of restructuring and impairment costs. It also changed its asbestos defense-cost accrual policy retrospectively; the change did not affect income for periods presented. The SEC resolved an FCPA matter for $14 million; the DOJ closed its investigation. A European Commission competition investigation and merger-related litigation were also disclosed.
Important facts for investors to verify
- How the post-year-end Adient spin-off affected debt, cash, continuing operations, and the comparability of future results; in particular, the disposition of escrowed proceeds and Adient-related borrowings.
- Whether the Tyco purchase-price allocation, including goodwill and acquired intangibles, was finalized without material adjustments, and whether integration synergies and cost savings were achieved.
- Whether the FY2016 restructuring plan delivered the approximately $300 million annual savings target and what cash execution costs remained.
- The sustainability of earnings and cash generation excluding unusual tax, separation, restructuring, pension and acquisition-accounting items; and the drivers of the 141% effective tax rate.
- Developments in tax audits and tax-residence matters, asbestos and environmental exposures, and the European Commission competition proceedings.