Johnson Controls reports solid fiscal Q2 earnings with stronger orders and free cash flow

Johnson Controls International plc (NYSE: JCI) today reported fiscal second quarter 2018 GAAP earnings per share ("EPS") from continuing operations, including special items, of $0.47.  Excluding these items, adjusted EPS from continuing operations was $0.53, up 6% versus the prior year period (see attached footnotes for non-GAAP reconciliation).

Sales of $7.5 billion increased 3% compared to the prior year.  Excluding the impacts of M&A, foreign currency and lead prices, total sales grew 1% organically.     

GAAP earnings before interest and taxes ("EBIT") was $676 million and EBIT margin was 9.0%. Adjusted EBIT was $740 million and adjusted EBIT margin was 9.9%, up 10 basis points over the prior year.   Excluding the impact of the Scott Safety divestiture, foreign currency, and lead prices, the underlying adjusted EBIT margin increased 30 basis points.

"Second quarter results represent an important step in the continued transformation of Johnson Controls," said George Oliver, Johnson Controls chairman & chief executive officer. "We reported another quarter of solid operational performance and momentum continues to build. I am encouraged by the continued strength in orders across the Buildings platform driven by the significant efforts we have made to increase capacity and drive improved sales execution.  In addition, we are monetizing investments in sales and product and channel investments with 3% organic service growth and 6% organic product growth," Oliver continued.  

"In Power Solutions, we are encouraged by our new business wins in both Original Equipment and Aftermarket, driven by improved service levels and shifts to new technologies.  We expect to see this momentum positively impact our top line growth as we move into the second half of the fiscal year.  In addition, we are making good progress on our Power Solutions strategic review."

Income and EPS amounts attributable to Johnson Controls ordinary shareholders
($ millions, except per-share amounts)

The financial highlights presented in the tables below are in accordance with GAAP, unless otherwise indicated. All comparisons are to the second quarter of 2017.

Organic sales growth, adjusted segment EBITA, adjusted EBIT, adjusted EPS from continuing operations and adjusted free cash flow are non-GAAP financial measures. For a reconciliation of these non-GAAP measures and detail of the special items, refer to the attached footnotes.  A slide presentation reviewing second quarter results can be found in the Investor Relations section of Johnson Controls' website at http://investors.johnsoncontrols.com.

BUSINESS RESULTS

Building Solutions North America

Sales in the second quarter of 2018 were $2.1 billion, an increase of 1% versus the prior year quarter.  Excluding M&A and foreign currency, organic sales also increased 1% versus the prior year, driven primarily by solid growth in HVAC & Controls.        

Orders in the quarter, excluding M&A and adjusted for foreign currency, increased 4% year-over-year.  Backlog at the end of the quarter of $5.3 billion increased 5% year-over-year, excluding M&A and adjusted for foreign currency.

Adjusted segment EBITA was $244 million, up 7% versus the prior year. Adjusted segment EBITA margin of 11.6% increased 60 basis points driven by cost synergies and productivity savings as well as favorable volume/mix, partially offset by expected low margin backlog conversion and salesforce additions. 

Building Solutions EMEA/LA (Europe, Middle East, Africa/Latin America)

Sales in the second quarter of 2018 were $907 million, an increase of 2% versus the prior year quarter.  Excluding M&A and foreign currency, organic sales declined 3% versus the prior year driven by lower volumes across Europe and the Middle East, partially offset by continued strength in Latin America.        

Orders in the quarter, excluding M&A and adjusted for foreign currency, increased 10% year-over-year.  Backlog at the end of the quarter of $1.7 billion increased modestly year-over-year, excluding M&A and adjusted for foreign currency.

Adjusted segment EBITA was $78 million, down 1% versus the prior year quarter. Adjusted segment EBITA margin of 8.6% declined 30 basis points over the prior year, as the benefit from cost synergies and productivity savings was more than offset by lower volume de-leverage. 

Building Solutions Asia Pacific

Sales in the second quarter of 2018 were $586 million, an increase of 4% versus the prior year quarter.  Excluding M&A and foreign currency, organic sales declined 2% versus the prior year, as strong growth in service was more than offset by declines in project installations related to the timing of large project flow-through.        

Orders in the quarter, excluding M&A and adjusted for foreign currency, increased 10% year-over-year.  Backlog at the end of the quarter of $1.5 billion was 15% higher year-over-year, excluding M&A and adjusted for foreign currency.

Adjusted segment EBITA was $71 million, up 6% versus the prior year. Adjusted segment EBITA margin of 12.1% expanded 20 basis points over the prior year, including a 40 basis point headwind related to foreign currency.  Adjusting for foreign currency, the underlying margin improved 60 basis points driven by favorable mix as well as the benefit of cost synergies and productivity savings, partially offset by salesforce additions.    

Global Products

Sales in the second quarter of 2018 were $2.0 billion, an increase of 1% versus the prior year quarter.  Excluding M&A and foreign currency, organic sales increased 6% versus the prior year driven by mid-single digit growth in Building Management and HVAC & Refrigeration Equipment, and low-teens growth in Specialty Products.     

Adjusted segment EBITA was $237 million, down 6% versus the prior year, primarily attributable to the impact of the Scott Safety divestiture.  Adjusted segment EBITA margin of 11.6% declined 100 basis points over the prior year including a 120 basis point headwind related to the divestiture of the Scott Safety business. The underlying margin expanded 20 basis points as the benefit of cost synergies and productivity savings as well as favorable volume leverage was partially offset by planned product and channel investments and expected price/cost pressure. 

Power Solutions

Sales in the second quarter of 2018 were $1.8 billion, an increase of 9% versus the prior year quarter.  Excluding the impact of higher lead pass-through and foreign currency, organic sales declined 2% as favorable price and technology mix was more than offset by lower unit volumes. Global original equipment battery shipments declined 2% in-line with overall market demand and aftermarket shipments declined 6% driven primarily by weather impacts in the U.S. and Europe.  Start-stop battery shipments increased 14% year-over-year, led by growth in China and the Americas.  

Power Solutions adjusted segment EBITA was $314 million, a 4% increase compared to the prior year.  Adjusted segment EBITA margin of 17.0% decreased 90 basis points compared with the prior year, including a 60 basis point headwind related to the impact of foreign currency and lead prices. Power Solution's underlying margin declined 30 basis points as favorable mix and productivity savings were more than offset by higher transportation costs and planned incremental investments.    

Corporate

Adjusted Corporate expense was $110 million in the second quarter, a decrease of 14% compared to the prior year quarter driven primarily by cost synergies and productivity initiatives.   

OTHER ITEMS

• Cash from operating activities less capex was $0.4 billion for the quarter and nil year-to-date. Adjusted free cash flow was $0.6 billion for the quarter and $0.3 billion year-to-date. Adjusted free cash flow excludes net cash outflows of $0.2 billion in the quarter and $0.3 billion year-to-date primarily related to restructuring and integration costs.
• During the quarter, the Company repurchased 1.3 million shares for approximately $50 million; year-to-date share repurchases totaled 4.9 million shares for approximately $200 million.
• In March, the Company announced the decision to review strategic alternatives for its Power Solutions business and the review is ongoing.

About Johnson Controls:

Johnson Controls is a global diversified technology and multi industrial leader serving a wide range of customers in more than 150 countries. Our 120,000 employees create intelligent buildings, efficient energy solutions, integrated infrastructure and next generation transportation systems that work seamlessly together to deliver on the promise of smart cities and communities. Our commitment to sustainability dates back to our roots in 1885, with the invention of the first electric room thermostat. We are committed to helping our customers win and creating greater value for all of our stakeholders through strategic focus on our buildings and energy growth platforms. For additional information, please visit http://www.johnsoncontrols.com or follow us @johnsoncontrols on Twitter.