Johnson Controls International plc — FY2017 Form 10-K
Reporting period: Fiscal year ended September 30, 2017. The filing also reports unaudited fourth-quarter results; figures are in U.S. dollars unless noted. The company is a global supplier of building systems and services and automotive batteries, operating principally through Building Technologies & Solutions and Power Solutions.
Business context and reporting period
Fiscal 2017 was the first full fiscal year following the September 2016 Tyco merger. The October 2016 spin-off of Automotive Experience to Adient makes year-over-year comparisons less directly comparable; Adient is reported as a discontinued operation. Building Technologies & Solutions generated 76% of FY2017 sales and Power Solutions 24%. The company reorganized its Buildings reporting segments effective July 1, 2017, and revised historical segment information.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $30.172 billion | $20.837 billion |
| Gross profit / gross margin | $9.339 billion / 31.0% | $5.654 billion / 27.1% |
| Income from continuing operations attributable to Johnson Controls | $1.654 billion | $732 million |
| Net income (loss) attributable to Johnson Controls | $1.611 billion | $(868) million |
| Diluted EPS, continuing operations | $1.75 | $1.09 |
| Diluted EPS, total | $1.71 | $(1.29) |
| Cash from operating activities | $12 million | $1.895 billion |
| Capital expenditures | $1.343 billion | $1.249 billion |
Sales rose 45%, but excluding the Tyco merger and foreign-currency translation, increased 4%. Segment EBITA was $4.258 billion versus $2.754 billion; this company-defined measure excludes, among other items, corporate expenses, financing charges, restructuring, amortization, and pension mark-to-market adjustments. Net financing charges increased to $496 million from $289 million, primarily reflecting merger-related debt, higher borrowing levels and rates, and debt exchange fees. The income tax provision was $705 million, with a 28% effective rate, compared with $197 million and 19%.
Operating cash flow fell sharply, primarily due to $1.2 billion of tax payments related to the Adient spin-off and working-capital movements. Cash and equivalents were $321 million at year-end. Total debt was $13.572 billion, up 6%; debt to total capitalization increased to 40% from 35%. Defined working capital was $1.608 billion versus $369 million. Management said liquidity was adequate for projected needs and cited undrawn $2.0 billion and $1.0 billion revolving credit facilities maturing in August 2020.
In the unaudited fourth quarter, sales were $8.136 billion versus $6.254 billion; net income attributable to Johnson Controls was $875 million versus a loss of $1.171 billion; diluted EPS was $0.93 versus a loss of $1.61. FY2017 segment sales and EBITA were $22.835 billion and $2.831 billion for Buildings, and $7.337 billion and $1.427 billion for Power Solutions.
Material changes versus the prior period
- Tyco merger contributions drove much of the reported sales and Buildings segment growth; underlying consolidated sales growth excluding the merger and currency was 4%.
- Gross margin improved 390 basis points. Management cited merger-related contribution, Global Products volume, and favorable Power Solutions pricing and mix, partly offset by higher operating costs.
- Operating cash flow declined to $12 million, largely reflecting spin-off-related taxes and working-capital changes. Debt rose, while equity declined partly due to the Adient spin-off.
- Power Solutions sales rose 10% and EBITA 8%; higher lead costs affected pricing, while start-stop battery volumes and growth in China supported volume and mix.
Outlook, management commentary, risks and unusual items
- The company forecast approximately $280 million in annual operating-cost reductions from its FY2017 restructuring plan, with most benefits expected in FY2018. The plan was expected to be substantially complete in FY2018; its year-end reserve was $239 million. A prior restructuring plan was expected to generate approximately $135 million in annual savings.
- After year-end, the Scott Safety sale closed on October 4, 2017, generating approximately $1.9 billion in net cash proceeds used to repay a significant portion of the merger-related term loan. This is a subsequent event, not FY2017 year-end cash.
- Unusual items included $367 million of restructuring and impairment costs, $428 million of transaction and integration costs, a $490 million non-cash tax charge related to the planned Scott Safety sale, a $191 million tax benefit from audit resolutions, and a $50 million unfavorable arbitration award. Pension and postretirement mark-to-market adjustments produced a net $420 million gain in FY2017, versus a $393 million charge in FY2016.
- Key risks include realizing Tyco merger synergies, integration and execution, cyclical construction and automotive demand, commodity and lead-price volatility, foreign exchange, debt and refinancing exposure, and changing tax laws. The filing notes substantial uncertainty around U.S. tax treatment of the Irish domicile and merger-related tax matters.
- Legal exposures include asbestos claims (a recorded net liability of $181 million), environmental remediation reserves of $51 million, and lawsuits alleging PFOS/PFOA contamination related to firefighting foam. The company said PFOS/PFOA outcomes and ultimate exposure were difficult to predict and could be material. It also recorded a $50 million Doha airport arbitration charge and is pursuing a related claim against the project steering committee.
Most important facts for investors to verify
- Whether core sales growth, margins, and cost savings persist after separating merger contributions, purchase-accounting effects, and other unusual items.
- How quickly operating cash flow recovers after the Adient-related tax payment and working-capital investment, and whether planned capital spending and shareholder returns remain supportable.
- Debt repayment progress after the Scott Safety proceeds, future interest expense, and compliance with credit-facility covenants.
- Realization and timing of restructuring savings, integration synergies, and the effect of the arbitration claim and award.
- Developments in PFOS/PFOA, asbestos, environmental, and tax contingencies; actual losses or recoveries could differ from recorded estimates.