Johnson Controls International Plc quarterly report, Q3 FY2022

Johnson Controls International plc — Form 10-Q Summary

Reporting period: Fiscal third quarter and nine months ended June 30, 2022. The company supplies building products, systems and services, including HVAC, controls, fire and security, refrigeration, and smart-building solutions. Financial amounts below are in U.S. dollars; “Q3” means the three months ended June 30.

Financial performance

Metric	Q3 2022	Q3 2021	Nine months 2022	Nine months 2021
Net sales	$6.614 billion	$6.341 billion	$18.574 billion	$17.276 billion
Gross profit	$2.200 billion	$2.197 billion	$6.048 billion	$5.868 billion
Gross margin	33.3%	34.6%	32.6%	34.0%
Income from continuing operations	$443 million	$661 million	$914 million	$1.430 billion
Net income attributable to Johnson Controls	$379 million	$574 million	$771 million	$1.368 billion
Diluted EPS, continuing operations	$0.55	$0.80	$1.10	$1.72
Operating cash flow, continuing operations	Not stated for quarter	$811 million	$2.022 billion

Q3 sales rose 4%; excluding currency and acquisitions/divestitures, organic sales increased 7%. Nine-month sales rose 8% reported and 8% organically.
Gross margin fell 130 basis points in Q3 and 140 basis points year to date. Management cited supply-chain inefficiencies, inflation and price/cost pressures as offsets to volume growth and pricing.
Q3 SG&A was $1.589 billion, up 16%; nine-month SG&A was $4.412 billion, up 13%. Management attributed increases in part to pension and restricted-asbestos-investment mark-to-market effects.
For the nine months, working-capital changes included $637 million of cash use from receivables and $761 million from inventory. Capital expenditures were $430 million.
At June 30, cash and equivalents were $1.506 billion. Total debt was $9.492 billion, net debt $7.986 billion, and net debt to total capitalization 33.3% (26.7% at September 30, 2021). Short-term debt was $2.081 billion, including $1.6 billion of commercial paper.
Management reported $11.7 billion of backlog and $17.5 billion of remaining performance obligations; approximately 65% of the latter was expected to be recognized over the next two years.

Segments and changes versus prior periods

Q3 segment sales / EBITA: North America $2.426 billion / $260 million; EMEA/Latin America $952 million / $83 million; Asia Pacific $665 million / $85 million; Global Products $2.571 billion / $570 million.
Q3 segment EBITA declined 2% overall. North America and EMEA/Latin America EBITA fell 20% and 21%, respectively; Global Products EBITA increased 13%. Supply constraints and labor limitations affected building solutions, while Global Products benefited from pricing, mix and productivity.
Q3 net income attributable to the company declined 34%; diluted continuing-operations EPS declined from $0.80 to $0.55. Nine-month net income declined 44%, and diluted continuing-operations EPS declined from $1.72 to $1.10. The prior-year nine-month comparison also included $124 million of income from discontinued operations.
Nine-month operating cash flow declined to $811 million from $2.022 billion, primarily due to higher receivables and inventory. Total debt increased from $7.740 billion at fiscal year-end, while shareholders’ equity attributable to the company decreased from $17.562 billion.

Outlook, unusual items and risks

Management said supply-chain disruptions, component shortages, labor constraints and input-cost inflation were expected to affect results through the remainder of fiscal 2022 and possibly into fiscal 2023. These conditions delayed backlog conversion and pressured margins; pricing and productivity actions offset some, but not all, of the impact.
The company said it was on track to deliver by fiscal 2023 $300 million of annualized SG&A savings and $250 million of annual run-rate cost-of-sales savings. It expected to complete the related restructuring spending by the end of fiscal 2022; $90 million of restructuring reserves remained at June 30.
Q3 restructuring and impairment costs were $121 million; nine-month costs were $554 million. These included $235 million of goodwill impairment and $86 million of disposal-group impairment related to the Global Retail business classified as held for sale, plus a $60 million impairment for another Asia Pacific business classified as held for sale. Sale proceeds could differ from current carrying values.
The company suspended operations in Russia; it said the suspension itself was not expected to materially affect operating results, but warned that broader effects of the conflict could worsen inflation, supply disruption and economic uncertainty. COVID-19 restrictions in China also affected activity.
Management said liquidity was adequate for projected needs. It intended to repay the $1.5 billion commercial-paper borrowing by fiscal year-end and reported no draws on its revolving credit facilities. The company declared a $0.35-per-share dividend for the quarter and had approximately $3.6 billion remaining under its share-repurchase authorization.
Environmental exposure includes PFAS contamination investigations and remediation, including a Wisconsin state enforcement action. The company recorded $72 million of environmental reserves and said additional remediation reserves were anticipated in Q4 after further analysis. Separately, AFFF-related litigation includes thousands of individual or mass claims and more than 200 municipal cases; the company said ultimate exposure is difficult to predict and could be material.
Asbestos-related liabilities were $443 million, offset by $318 million of recorded assets, for a net liability of $125 million. The company also disclosed tax examinations and said a post-quarter statute-of-limitations expiration was expected to produce an approximately $300 million income-tax benefit in Q4; additional examinations or litigation could materially affect tax expense.
The filing provides no clear consolidated revenue or EPS guidance for fiscal 2022. Forward-looking statements are subject to economic, currency, supply-chain, labor, geopolitical, pandemic, cybersecurity and litigation risks.

Important facts for investors to verify

Whether pricing and productivity can offset persistent inflation and supply-chain costs, and whether delayed backlog converts into revenue as expected.
Cash conversion and working-capital trends, particularly inventory and receivables, alongside the planned repayment of commercial paper and near-term debt maturities.
Progress, final sale terms and any additional impairment or disposal loss for the businesses held for sale.
Future PFAS remediation costs, litigation outcomes and recoveries from insurers, which the filing says cannot yet be reliably quantified.
Delivery and timing of the announced restructuring savings, restructuring costs and expected Q4 tax benefit.