Johnson Controls International plc — Q1 FY2023 10-Q
Reporting period: Three months ended December 31, 2022; comparative period is the three months ended December 31, 2021. Johnson Controls supplies building products, systems and services, including HVAC, controls, fire and security solutions, and smart-building offerings. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Net sales | $6.068 billion | $5.862 billion | +4%; organic growth excluding currency and portfolio changes was 9% |
| Gross profit / margin | $2.091 billion / 34.5% | $1.891 billion / 32.3% | Gross profit +11%; margin +220 basis points |
| SG&A | $1.571 billion | $1.369 billion | +15%; 25.9% versus 23.4% of sales |
| Restructuring and impairment costs | $345 million | $49 million | Included $288 million of held-for-sale impairments |
| Net income attributable to Johnson Controls | $118 million | $381 million | -69% |
| Diluted EPS | $0.17 | $0.54 | Down from prior year |
| Operating cash flow, continuing operations | $(296) million | $392 million | Declined $688 million |
| Capital expenditures | $134 million | $135 million | Approximately flat |
Net sales growth reflected $497 million higher organic sales and $27 million from acquisitions, partly offset by $300 million of unfavorable currency translation and $18 million from divestitures. Management attributed improved gross margin mainly to favorable price/cost, partly offset by currency effects and year-over-year mark-to-market impacts. Net income fell primarily because of higher impairment and restructuring costs and SG&A.
Segments and operating indicators
- Building Solutions North America: Sales $2.367 billion, up 10%; segment EBITA $267 million, up 7%.
- Building Solutions EMEA/LA: Sales $975 million, up 2%; segment EBITA $75 million, down 28%, reflecting project mix and currency effects.
- Building Solutions Asia Pacific: Sales $646 million, down 4%; segment EBITA $68 million, flat.
- Global Products: Sales $2.080 billion, essentially flat; segment EBITA $382 million, up 27%. EBITA included a $40 million uninsured warehouse-fire loss.
- Backlog was $12.7 billion at quarter-end. Remaining performance obligations were $18.4 billion, with approximately 65% expected to be recognized as revenue over the next two years.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $1.509 billion at December 31, versus $2.031 billion at September 30, 2022. Cash, cash equivalents and restricted cash decreased $490 million during the quarter.
- Total debt was $9.747 billion, up from $8.960 billion; net debt was $8.238 billion, up from $6.929 billion. Net debt to total capitalization increased to 33.9% from 29.9%.
- Operating cash use was primarily attributed to payment timing for accounts payable and accrued liabilities. Inventory increased to $2.895 billion from $2.510 billion, which management linked primarily to supply-chain disruption.
- The company reported $715 million of commercial paper outstanding and no draws on its $2.5 billion and $500 million revolving credit facilities. It stated that liquidity was adequate for foreseeable needs and that it was in compliance with debt covenants.
- The company declared a $0.35-per-share dividend and said it intended to continue dividends through FY2023. It repurchased and retired $154 million of shares; approximately $3.5 billion remained under its repurchase authorization.
Outlook, risks and unusual items
- The filing provides no specific numerical revenue, earnings or EPS guidance. Management said results for this quarter are not necessarily indicative of the fiscal year because of seasonality and other factors.
- Management reported continuing demand for smart, efficient and sustainable buildings, and said supply-chain disruption and cost pressure had weighed on margins, while recent easing disruptions and conversion of higher-priced backlog were beginning to improve margins. Inflation and component shortages could persist.
- Foreign-currency translation adversely affected quarterly revenue and profit; management warned that continued U.S. dollar strength could remain a headwind. Other cited risks include economic and geopolitical volatility, labor shortages, COVID-related site-access issues, cybersecurity, and execution of portfolio transactions.
- The quarter included $288 million of impairment charges on businesses held for sale, principally Global Retail and a business in Building Solutions Asia Pacific. Both divestitures were expected to be finalized in FY2023; ultimate sale proceeds could differ from carrying values and result in further gain or loss.
- Environmental reserves totaled $275 million. The filing describes PFAS-related remediation and litigation, including Wisconsin proceedings and extensive AFFF-related claims. The company said it could not predict the duration, scope or outcome of key cases, and that ultimate exposure could be material. It also noted uncertainty from evolving regulation and remediation requirements.
- Tax examinations or litigation could materially affect tax expense within the next 12 months, but the impact was not quantifiable. The filing also identifies asbestos-related and other contingencies.
Investor verification priorities
- Track whether price/cost benefits and improving supply conditions continue to support gross margins, and whether foreign exchange remains a significant headwind.
- Review cash conversion, working-capital requirements, inventory levels and the timing of supplier payments after the quarter’s negative operating cash flow.
- Monitor debt, commercial paper, refinancing needs and capital returns against liquidity and the company’s stated capital requirements.
- Follow the completion and proceeds of the held-for-sale divestitures, including any additional impairment or disposal gains and losses.
- Assess developments in PFAS/AFFF litigation, environmental remediation costs and related insurance recoveries; outcomes and potential additional exposure remain uncertain.
- Distinguish recurring operating performance from quarter-specific impairments, restructuring costs, the warehouse-fire loss and mark-to-market effects.