Johnson Controls International plc — Q3 FY2020 Form 10-Q
Reporting period: Three and nine months ended June 30, 2020; amounts in U.S. dollars unless stated otherwise. Johnson Controls supplies building systems and services, including HVAC, controls, fire and security solutions. Power Solutions was sold in April 2019 and is reported as discontinued operations, so prior-year net income includes substantial sale proceeds and is not directly comparable.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $5.343 billion | $6.451 billion | $16.363 billion | $17.694 billion |
| Gross profit / margin | $1.832 billion / 34.3% | $2.144 billion / 33.2% | $5.436 billion / 33.2% | $5.713 billion / 32.3% |
| Continuing-operations income (loss) attributable to Johnson Controls | $(182) million | $141 million | $190 million | $488 million |
| Diluted EPS from continuing operations | $(0.24) | $0.16 | $0.25 | $0.54 |
| Operating cash flow from continuing operations | Not provided quarterly | Not provided quarterly | $1.499 billion | $711 million |
Q3 sales fell 17% year over year (16% excluding currency and acquisitions/divestitures); nine-month sales fell 8% (7% excluding those effects). COVID-19-related volume declines drove the decreases across all four segments. Gross margin improved despite lower sales. Q3 SG&A was $1.334 billion, or 25.0% of sales, versus $1.388 billion, or 21.5%; cost reductions lowered expense, but lower sales increased the ratio.
Q3 continuing-operations loss before tax was $123 million, including $610 million of restructuring and impairment costs. The charge included a $424 million noncash goodwill impairment tied to North America Retail and costs under the 2020 restructuring plan. Nine-month restructuring and impairment costs were $783 million. Prior-year Q3 and nine-month net income attributable to Johnson Controls included $4.051 billion and $4.574 billion, respectively, from discontinued operations, principally the after-tax gain on the Power Solutions sale.
Segment EBITA in Q3 was $839 million, up 1% year over year: Building Solutions North America $307 million (+2%), EMEA/LA $62 million (-39%), Asia Pacific $92 million (-6%), and Global Products $378 million (+14%). The Global Products comparison benefited from a $140 million prior-year environmental charge.
Financial position and liquidity
- At June 30, 2020, cash and cash equivalents were $2.342 billion, total debt $8.094 billion, and net debt $5.752 billion. Net debt was up 30% from September 30, 2019; net debt as a share of total capitalization rose to 24.4% from 18.3%.
- Current assets were $11.140 billion and current liabilities $10.304 billion. The company’s defined working capital was $866 million, down 11% from fiscal year-end.
- Nine-month operating cash flow was $1.499 billion; capital expenditures were $347 million. Continuing-operations investing activities used $309 million and financing activities used $1.316 billion. Operating cash flow benefited primarily from the timing of tax payments/refunds and receivables; payable and accrued-liability movements were a partial offset.
- The company raised $675 million through European financing and $575 million in bank term loans in April. It reported no draws on its $2.5 billion and $500 million revolving facilities at quarter-end and said it was in compliance with debt covenants. It repaid a $300 million term loan in July 2020.
Outlook, commentary and risks
- Management provided no specific revenue or earnings forecast in the supplied filing text. It said liquidity and capital resources were adequate for projected needs and planned to consider refinancing upcoming short-term maturities opportunistically.
- The 2020 restructuring plan is expected to reduce annual operating costs by approximately $430 million, with most annual benefits expected in 2021. Fiscal 2020 savings net of execution costs were estimated at approximately 30% of that annual reduction; actions are expected to be substantially complete in fiscal 2021.
- Management announced that share repurchases would resume in Q4 FY2020 after suspension in March to preserve liquidity. Approximately $3.1 billion remained authorized at June 30.
- COVID-19 reduced demand and customer-site access, delayed or canceled projects, constrained manufacturing in parts of China, India and Mexico, and disrupted supply chains. Management noted increased interest in building-health and reopening solutions, but the duration and financial impact of the pandemic remained uncertain.
- Further impairments are possible if pandemic-related conditions worsen or forecasts deteriorate. The company recorded $62 million of indefinite-lived intangible impairment in Q2 and the $424 million goodwill impairment in Q3. Q3 also included a $157 million U.S. pension actuarial loss, primarily due to lower discount rates, and $132 million of net mark-to-market losses.
- Contingencies include PFAS-related environmental remediation and litigation, including AFFF claims. The company reported $136 million of environmental reserves for continuing operations, but could not estimate possible losses above the PFAS-related accrual; it cautioned that additional exposure could be material. Asbestos-related net liability was $134 million. Other litigation outcomes and environmental developments could affect future costs and cash flows.
Important facts for investors to verify
- Whether demand, customer access and supply-chain conditions improve or deteriorate, and the resulting effect on sales, margins and cash flows.
- Whether the projected $430 million annual restructuring savings are achieved, and the cash costs and timing required to realize them.
- Whether additional goodwill, intangible-asset or other impairments become necessary, particularly for North America Retail.
- Near-term debt maturities, refinancing and post-quarter debt repayment, alongside liquidity, leverage and covenant compliance.
- Developments in PFAS/AFFF remediation and litigation, including possible exposure beyond recorded reserves.
- The sustainability of operating cash flow, which benefited from tax-payment timing, and the planned resumption of share repurchases.