10-QPeriod: Q2 FY2017

Johnson Controls International plc Quarterly Report for Q2 Ended Mar 31, 2017

Filed May 4, 2017For Securities:JCI

Summary

Johnson Controls International plc's (JCI) fiscal second-quarter 2017 results show a significant increase in net sales primarily driven by the recent merger with Tyco. While net sales saw a substantial rise, the company reported a net loss attributable to shareholders. This loss appears to be influenced by substantial merger-related costs, restructuring charges, and a notable increase in interest expenses. However, the company also generated positive cash flow from financing activities, indicating active management of its capital structure, including debt exchanges and new issuances. The company is actively managing its portfolio, as evidenced by the divestiture of the Scott Safety business and the ongoing integration of the Tyco merger. Investors should monitor the successful integration of Tyco and the impact of restructuring initiatives on future profitability and cash flows. The significant increase in goodwill from the Tyco merger also warrants attention regarding future impairment risks.

Financial Highlights

52 data points
Beta

Revenue

$5.77B

39.5% Gross Margin

Net Income

-$148.00M

-2.6% Net Margin

EPS (Diluted)

$-0.16

Total Assets

$49.61B

Cash & Equivalents

$412.00M

Free Cash Flow

$366.00M

Financial Statements
Beta
Revenue$5.77B
Cost of Revenue$4.99B
Gross Profit$2.28B
SG&A Expenses$1.73B
Operating Income$224.00M
Interest Expense$118.00M
Net Income-$148.00M
EPS (Basic)$-0.16
EPS (Diluted)$-0.16
Shares Outstanding (Basic)939.20M
Shares Outstanding (Diluted)939.20M

Key Highlights

  • 1Net sales for the three months ended March 31, 2017, increased by 54% to $7.27 billion, largely driven by the Tyco merger and increased volumes in Building Technologies & Solutions and Power Solutions.
  • 2The company reported a net loss attributable to Johnson Controls of $148 million for the three months ended March 31, 2017, compared to a net loss of $530 million in the prior year period. Diluted loss per share was $(0.16) for the quarter.
  • 3Operating cash flow for the six months ended March 31, 2017, was negative at $(1.54) billion, a significant decrease from the prior year's positive $621 million, impacted by higher income tax payments related to the Adient spin-off and unfavorable working capital changes.
  • 4Financing activities provided $1.76 billion in cash for the six months ended March 31, 2017, driven by a dividend from the Adient spin-off and an increase in long-term debt, which helped offset the negative operating cash flow.
  • 5The company recorded $177 million in restructuring and impairment costs for fiscal 2017, primarily related to workforce reductions and plant closures aimed at reducing the cost structure.
  • 6Goodwill increased significantly to $19.64 billion as of March 31, 2017, from $21.02 billion as of September 30, 2016, largely due to purchase accounting for the Tyco merger.
  • 7The company is proceeding with strategic divestitures, including the announced sale of its Scott Safety business to 3M for approximately $2.0 billion.

Frequently Asked Questions

The substantial increase in net sales, particularly for the three and six months ended March 31, 2017, is primarily attributable to the completion of the merger with Tyco International plc in the fourth quarter of fiscal 2016. This merger integrated Tyco's operations into Johnson Controls, leading to a significant uplift in reported sales across its segments.

The net loss for the period is influenced by several factors. The company incurred significant restructuring and impairment costs ($177 million for the six months ended March 31, 2017) and merger-related transaction and integration costs. Additionally, net financing charges increased significantly due to higher average borrowing levels from assumed debt and interest rate changes. These expenses offset the revenue gains, leading to a net loss attributable to shareholders.

Operating cash flow for the six months ended March 31, 2017, was $(1.54) billion, a notable decline from the prior year, largely due to higher income tax payments related to the Adient spin-off and unfavorable changes in working capital. However, the company generated substantial positive cash flow from financing activities ($1.76 billion) due to the Adient dividend and increased long-term debt. Management believes its capital resources and liquidity are adequate to meet projected needs for the remainder of fiscal 2017, funded by operations and supplemented by borrowings if necessary.

The $16.4 billion in goodwill recorded from the Tyco merger reflects the excess of the purchase price over the fair value of the identifiable net assets acquired. Goodwill represents the future economic benefits expected from synergies, expanded market opportunities, and other benefits arising from the combination. Investors should be aware that goodwill is not amortized but is tested annually for impairment, and significant changes in future performance could lead to impairment charges, impacting future earnings.