Johnson Controls International plc — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2022; comparisons are with the corresponding 2021 periods. Amounts are in U.S. dollars. The filing is unaudited. Johnson Controls provides building HVAC, controls, fire and security products, services, and smart-building solutions, including through its OpenBlue platform.
Financial performance
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Net sales | $6.098 billion, up 9% | $11.960 billion, up 9% |
| Gross profit / gross margin | $1.957 billion / 32.1% (34.7% prior year) | $3.848 billion / 32.2% (33.6% prior year) |
| Income from continuing operations attributable to JCI | $11 million ($0.02 diluted EPS), versus $343 million ($0.48) | $392 million ($0.56 diluted EPS), versus $670 million ($0.93) |
| Cash from operating activities, continuing operations | Not separately presented for the quarter | $324 million, versus $1.160 billion |
- Quarterly sales growth reflected higher volumes and pricing; year-to-date organic sales increased $943 million, with acquisitions adding $247 million and currency and divestitures reducing sales by $165 million combined.
- Management attributed lower gross margins to supply-chain inefficiencies and price/cost pressures, which outweighed volume leverage. It cited labor constraints and supply disruption as pressures on building-solutions segment performance.
- Segment EBITA for the quarter was $800 million, up 13%. Global Products EBITA rose 45% to $412 million; Building Solutions North America fell 12% to $235 million, EMEA/LA fell 10% to $79 million, and Asia Pacific was broadly flat at $74 million.
- Quarterly pretax continuing income was $110 million, versus $606 million. Restructuring and impairment costs were $384 million versus $96 million; SG&A was $1.454 billion versus $1.253 billion. The reported income tax provision was $58 million and the effective tax rate was 52.7%, with impairment and planned-divestiture tax effects among the cited drivers.
- Six-month cash from continuing operations declined principally because receivables and inventory absorbed cash. Investing activities used $332 million, including $260 million of capital expenditures; financing activities provided $444 million, including $2.061 billion of net short-term borrowings.
Balance sheet, debt and liquidity
- At March 31, cash and cash equivalents were $1.787 billion; total debt was $9.650 billion and net debt was $7.863 billion. Net debt was 32.2% of total capitalization, versus 26.7% at September 30, 2021.
- Short-term debt rose to $2.044 billion from $8 million. The company reported $1.5 billion of commercial paper outstanding and said it intended to repay it by fiscal year-end. It also had €285 million of term loans due March 2023 and a €200 million term loan due October 2022.
- Committed revolving facilities totaled $3.0 billion, with no draws at quarter-end. Management said liquidity was adequate for projected needs and that the company remained in compliance with debt covenants.
- Operating working capital, as defined by the company, was $395 million, compared with negative $202 million at September 30, 2021; the increase was primarily associated with higher inventory. Inventory increased 22% to $2.515 billion.
Material changes, outlook and unusual items
- Global Retail was classified as held for sale during the quarter. The company recorded a $235 million noncash goodwill impairment, an $86 million write-down of the disposal group, and a $36 million impairment of internal-use software. The potential ultimate gain or loss on sale could be material; the business was not classified as discontinued operations.
- The company’s fiscal 2021 restructuring plan targets $300 million of annualized SG&A savings and $250 million of annual cost-of-sales savings by fiscal 2023. Estimated one-time pretax costs are $385 million; $318 million had been incurred through March 31, 2022. Management said it remained on track to deliver the savings. The plan includes about 4,500 workforce reductions, with about 2,800 completed by quarter-end.
- Management expected inflation, component shortages, supply-chain delays, and delayed backlog conversion to continue affecting fiscal 2022 results, with revenue supported by demand and pricing but margins pressured by costs and disruptions. China lockdowns were expected to continue affecting the third quarter. Operations in Russia were suspended; management said the direct operating impact was not expected to be material, while broader economic and supply-chain effects remained uncertain.
- Backlog was $11.4 billion; remaining performance obligations were $17.3 billion, about 60% expected to be recognized over the next two years. Management cautioned that backlog is not necessarily indicative of revenue in the next fiscal year.
- The company declared a quarterly dividend of $0.35 per share and reported about $4.0 billion remaining under its share-repurchase authorization. It repurchased $1.035 billion of shares in the first six months of fiscal 2022.
- Major disclosed exposures include PFAS environmental matters and AFFF litigation. Wisconsin filed a civil enforcement action in March 2022 seeking penalties and investigation and cleanup measures; the company said it was vigorously defending the action and could not predict its outcome. The company also disclosed more than 2,200 individual or mass AFFF actions and approximately 183 municipal or water-provider cases; ultimate exposure could not be predicted and could be material. Environmental reserves were $84 million.
- Other risks include asbestos claims, tax examinations and uncertain tax positions, foreign exchange, inflation, labor availability, cybersecurity, and geopolitical developments. Management stated that the effect of pending tax examinations concluding in the next 12 months was not currently quantifiable.
Important facts for investors to verify
- Whether pricing and productivity can offset inflation, supply constraints, labor shortages, and margin pressure as backlog converts.
- Progress, sale terms, and any further impairment or tax consequences related to the Global Retail divestiture.
- Cash conversion and inventory levels, plus repayment of commercial paper and near-term term-loan maturities.
- Restructuring savings achieved relative to the $550 million combined annualized savings targets and the remaining estimated costs.
- Developments in PFAS/AFFF litigation, remediation requirements, insurance recoveries, and whether exposures exceed recorded reserves.
- Whether reported quarterly and year-to-date earnings trends persist after the substantial impairment charges and other mark-to-market effects.