Johnson Controls International plc — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2019; unaudited results compared with the three months ended December 31, 2018. Johnson Controls is a global provider of building systems and services, including HVAC, controls, security, fire protection, and related products. Its four reportable segments are Building Solutions North America, EMEA/LA, Asia Pacific, and Global Products. The Power Solutions business was sold in April 2019 and is reported as discontinued operations in the prior-year comparison.
Key financial results
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Net sales | $5.576 billion | $5.464 billion |
| Gross profit / margin | $1.803 billion / 32.3% | $1.725 billion / 31.6% |
| Income from continuing operations | $191 million | $136 million |
| Net income attributable to Johnson Controls | $159 million | $355 million |
| Diluted EPS | $0.21 | $0.38 |
| Cash from continuing operating activities | $511 million | $(79) million |
| Capital expenditures | $126 million | $153 million |
Net income and EPS declined chiefly because the prior-year quarter included $248 million of attributable income from discontinued operations, while the current quarter included $111 million of restructuring and impairment charges. Continuing-operations EPS increased to $0.21 from $0.12. Sales rose 2% reported and 3% organically, excluding currency and acquisitions/divestitures. Segment EBITA increased 7% to $623 million. Gross margin improved 0.7 percentage points. Net financing charges fell to $52 million from $85 million, and the effective tax rate was 25%, versus 44%.
By segment, sales increased 2% in North America, 2% in EMEA/LA, 3% in Asia Pacific, and 1% in Global Products. Segment EBITA rose 3%, 17%, 9%, and 7%, respectively.
Balance sheet and liquidity
- At December 31, 2019, cash and cash equivalents were $2.160 billion; total debt was $7.282 billion and net debt was $5.122 billion, up from $4.414 billion at September 30, 2019. Net debt was 20.9% of total capitalization, compared with 18.3%.
- Current assets were $11.320 billion and current liabilities $9.692 billion; the company-defined working capital was $787 million, down 19% from fiscal year-end.
- Continuing operating cash flow was $511 million, reflecting tax refunds and favorable changes in receivables and inventory, partly offset by payments in accounts payable and accrued liabilities. Financing used $850 million, including $651 million of share repurchases and $203 million of dividends.
- The company stated that liquidity was adequate for projected needs and reported compliance with debt covenants. It had $2.5 billion and $500 million committed revolving facilities, with no draws at quarter-end.
Outlook, notable items, and risks
- Restructuring: The fiscal 2020 plan incurred $111 million of charges, with actions expected to be substantially complete in 2020. Management estimated approximately $80 million of annual operating cost reductions, with benefits substantially realized in 2021; fiscal 2020 savings net of execution costs were expected to equal about 60% of the annual reduction.
- Other restructuring plans: Management estimated annual cost reductions of approximately $300 million from the fiscal 2018 plan, expected to be substantially realized in 2020, and approximately $260 million from the fiscal 2017 plan, substantially realized in fiscal 2019.
- Demand indicators: Building Technologies & Solutions backlog was $9.3 billion. Remaining performance obligations were $14.7 billion, of which about 60% was expected to be recognized as revenue over the next two years. The company cautioned that backlog is not necessarily indicative of revenue in the next fiscal year. No specific company-wide sales or earnings guidance is provided in the supplied filing text.
- Environmental and litigation exposure: Environmental reserves were $151 million. The company recorded substantial prior-year reserves related to PFAS remediation and said it could not estimate possible losses above accrued amounts. Numerous AFFF-related lawsuits and claims seek damages and remediation; the company stated outcomes and ultimate exposure are difficult to predict and could be material. It is pursuing insurance coverage. Asbestos-related net liability was $132 million, based on estimates and projected claims.
- Tax and other uncertainty: A $30 million noncash discrete tax charge arose from Swiss tax reform. Certain tax examinations or litigation could materially affect tax expense. Forward-looking results are subject to economic, currency, commodity, supply, legal, integration, and other risks described in the filing.
- Accounting change: Adoption of lease accounting guidance added $1.1 billion of right-of-use assets and related lease liabilities, with an immaterial retained-earnings impact.
- Management reported disclosure controls were effective and no significant changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of the sales and segment EBITA improvement is sustainable, and whether restructuring savings arrive on schedule.
- Cash conversion and working-capital trends, especially the timing of tax refunds and supplier payments.
- Debt maturities, net-debt trajectory, and the effect of share repurchases and dividends on liquidity.
- Developments in PFAS/AFFF remediation, litigation, regulation, and potential costs beyond recorded reserves.
- Tax audit outcomes and the effect of discrete tax items on future effective tax rates.
- Recognition timing and conversion to revenue of backlog and remaining performance obligations.