Johnson Controls International plc — Q1 FY2024 Form 10-Q
Reporting period: Three months ended December 31, 2023; unaudited. Comparisons are with the three months ended December 31, 2022 unless otherwise noted. The company provides building products, systems and services, including HVAC, controls, fire and security, and building-management solutions.
Key financial results
| Metric | Q1 FY2024 | Prior period | Change / context |
|---|---|---|---|
| Net sales | $6.094 billion | $6.068 billion | Flat reported; organic sales decreased 1% |
| Gross profit | $1.992 billion | $2.091 billion | Down 5% |
| Gross margin | 32.7% | 34.5% | Down 180 basis points |
| SG&A | $1.513 billion | $1.571 billion | Down 4%; 24.8% of sales versus 25.9% |
| Restructuring and impairment costs | $39 million | $345 million | Prior period included $288 million of impairments |
| Net financing charges | $99 million | $67 million | Up 48% |
| Net income attributable to Johnson Controls | $374 million | $118 million | Diluted EPS was $0.55 versus $0.17 |
| Operating cash flow | $(246) million | $(296) million | Seasonal cash use; cybersecurity-related billing disruption also affected Q1 |
| Investing cash flow | $(74) million | $(189) million | Lower capital expenditures and acquisitions |
Segments and operating changes
- Building Solutions North America sales rose 5% to $2.487 billion; EBITA increased 7% to $285 million, supported by pricing, favorable price/cost and service growth.
- Building Solutions EMEA/LA sales rose 6% to $1.038 billion; EBITA increased 7% to $80 million, with service growth contributing.
- Building Solutions Asia Pacific sales fell 22% to $507 million; EBITA declined 32% to $46 million, primarily due to weakness in China Install.
- Global Products sales decreased 1% to $2.062 billion; EBITA fell 3% to $369 million, reflecting lower volumes and unfavorable mix.
- Total segment EBITA was $780 million versus $792 million. Consolidated sales were supported by acquisitions/divestitures and foreign exchange, offset by lower organic sales. Management cited lower volumes and favorable price/cost as key influences on gross margin.
Cash, debt and liquidity
- At December 31, 2023, cash and cash equivalents were $1.801 billion; total debt was $10.609 billion and net debt was $8.808 billion. Net debt was 34.5% of net capitalization, compared with 32.6% at September 30, 2023.
- Short-term debt increased to $1.998 billion from $385 million, including $1.383 billion of commercial paper. Long-term debt was $7.959 billion; current portion of long-term debt was $652 million.
- Working capital was negative $355 million, broadly unchanged from negative $347 million at September 30. The company reported no draws on its $2.5 billion facility due 2028 or $500 million facility due 2024, and stated it was in compliance with debt covenants.
- Management said available liquidity and capital resources are adequate for operations and obligations for the foreseeable future. The company paid $252 million in dividends and declared $0.37 per ordinary share; it made no share repurchases during the quarter.
Outlook, unusual items and risks
- The filing gives no specific full-year numerical earnings or revenue guidance. Management expects China economic conditions to remain soft through the rest of FY2024, potentially affecting Asia Pacific.
- Remaining performance obligations were $19.9 billion, with approximately 64% expected to be recognized as revenue over the next two years. Backlog was $13.7 billion; management cautioned that backlog is not necessarily indicative of revenue in the upcoming fiscal year.
- A $80 million noncash Swiss tax-remeasurement benefit contributed to the quarter’s unusually low effective tax rate of negative 0.2%. The prior-year rate was 8.2%. The company also cited global tax planning benefits and other offsetting tax items.
- The September 2023 cybersecurity incident involved unauthorized access, data exfiltration and ransomware affecting internal IT systems. Management estimated a $27 million net-income impact in Q1, expects further response and remediation costs during FY2024, and anticipates substantial insurance reimbursement. It does not expect the full-year impact, net of insurance recoveries, to be material to net income or continuing-operations cash flows; recovery timing may differ from expense recognition.
- The company recorded $39 million of restructuring charges and expects additional charges in subsequent quarters. Expected savings are substantially offset by ongoing operating costs and growth investments.
- Environmental reserves were $232 million, primarily related to PFAS and other remediation. The company faces extensive AFFF-related litigation, including thousands of individual or mass actions and more than 770 municipal or water-provider cases. It cannot predict ultimate exposure, and states that additional exposure could be material. The Wisconsin FTC-related trial is scheduled for December 3, 2024.
- Disclosure controls were deemed ineffective at December 31 because of an existing material weakness in internal control over financial reporting. Remediation is ongoing; management stated the financial statements fairly present the company’s results. The CFO transition was scheduled to take effect January 31, 2024.
Important facts for investors to verify
- Whether gross-margin recovery and organic growth improve as volumes, pricing and higher-priced backlog develop.
- China demand and the trajectory of Building Solutions Asia Pacific sales and EBITA.
- Cash conversion, short-term borrowing levels, debt maturities and the timing of operating cash flow recovery.
- Cyber incident remediation progress, insurance recoveries, business disruption and completion of internal-control remediation.
- PFAS/AFFF litigation developments, remediation costs, insurance coverage and any changes to the company’s estimate of potential exposure.