Johnson Controls International plc — Form 10-Q, Fiscal 2019 Third Quarter
Reporting period: Three and nine months ended June 30, 2019. The filing is unaudited. The company is a global provider of building systems and services, including HVAC, controls, security, fire protection and related products. Power Solutions was sold on April 30, 2019 and is reported as a discontinued operation.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales, continuing operations | $6.451bn | $6.282bn | $17.694bn | $17.217bn |
| Gross profit | $2.144bn | $2.088bn | $5.713bn | $5.610bn |
| Gross margin | 33.2% | 33.2% | 32.3% | 32.6% |
| Income from continuing operations attributable to JCI shareholders | $141m | $474m | $488m | $583m |
| Diluted EPS from continuing operations | $0.16 | $0.51 | $0.54 | $0.63 |
| Net income attributable to JCI shareholders, including discontinued operations | $4.192bn | $723m | $5.062bn | $1.391bn |
Continuing-operations sales increased 3% in both periods; management reported 6% organic growth excluding currency and portfolio changes. Q3 continuing-operations income before tax was $464m, down from $607m. Segment EBITA was $832m in Q3, down 12%, and $2.079bn year to date, down 6%. Global Products EBITA fell 23% in Q3 and 18% year to date; management cited a $140m environmental charge, among other factors.
Reported net income and EPS were substantially lifted by Power Solutions’ sale. The company recorded a $5.2bn pretax gain, or $4.0bn after tax, and received $11.6bn in net cash proceeds after tax and transaction costs. Discontinued-operations income attributable to JCI shareholders was $4.051bn in Q3 and $4.574bn year to date; 2019 discontinued results include only one month and seven months, respectively, of Power Solutions operations.
Cash flow, debt and liquidity
- For the nine months, continuing-operations operating cash flow was $711m, versus $697m. Capital expenditures were $401m, versus $481m.
- At June 30, cash and cash equivalents were $3.685bn, total debt was $7.325bn, and net debt was $3.640bn. At September 30, 2018, cash was $185m and total debt was $10.930bn. Net debt to total capitalization declined to 15.2% from 33.7%.
- Continuing-operations financing activities used $9.5bn during the nine months, including $5.122bn of share repurchases, $2.333bn of long-term debt repayments and $712m of dividends. The company repurchased about 102m shares through a tender offer for approximately $4.035bn.
- Management said liquidity was adequate for projected needs. The company reported no draws on its $2.0bn revolving credit facility and compliance with debt covenants at quarter-end.
Material changes, outlook and risks
- The Power Solutions divestiture changed the company’s continuing-operations profile and generated substantial cash used in part to reduce debt and repurchase shares.
- Q3 included a $235m impairment charge to write down a Global Products business classified as held for sale. A further gain or loss may result when that business is sold.
- Continuing-operations effective tax rates were 52% for Q3 and 38% year to date, compared with 10% and 30%. Items included a $199m charge related to new U.S. tax regulations, a $27m non-U.S. tax examination charge, and the release of a $226m tax indemnification reserve. Management said certain tax examinations or litigation could materially affect tax expense, but the impact was not quantifiable.
- Environmental reserves for continuing operations rose to $163m from $37m at September 30, 2018, including $140m for PFAS-related remediation at or near the Wisconsin Fire Technology Center and further remediation at the Stanton Street facility. The company said it could not estimate potential losses beyond recorded accruals.
- Affiliates face numerous AFFF-related lawsuits involving alleged PFAS contamination, including claims by individuals, municipalities and states. The company is defending the matters and pursuing insurance coverage; it said ultimate exposure is difficult to predict and could be material. Asbestos matters are also disclosed; the recorded net asbestos liability was $167m.
- Management expected fiscal 2018 restructuring actions to reduce annual operating costs by about $300m, with benefits substantially realized in 2020; fiscal 2019 savings, net of execution costs, were expected to reach about 70% of that annual reduction. No numeric company-wide sales or EPS guidance is provided in the supplied filing text.
- Other stated risks include economic conditions, trade restrictions and tariffs, currency and commodity movements, raw-material availability, transaction-related risks and the ability to realize benefits from the Power Solutions sale. Management noted that results to date are not necessarily indicative of the full fiscal year.
Key facts for investors to verify
- Separate recurring continuing-operations earnings and cash generation from the one-time Power Solutions divestiture gain.
- Track execution and sale outcome for the impaired Global Products business, and the costs and expected benefits of restructuring.
- Monitor PFAS remediation costs, AFFF litigation developments and potential insurance recoveries against the recorded environmental and asbestos liabilities.
- Assess the sustainability of the company’s reduced net debt after substantial share repurchases, as well as its cash needs, dividends and remaining repurchase authorization.
- Review subsequent tax-examination developments and the final effects of the disclosed U.S. tax-rule charges and reserve adjustments.