Business context and reporting period
Johnson Controls International plc filed this unaudited Form 10-Q for its fiscal first quarter, the three months ended December 31, 2020. The company supplies building products, systems and services, including HVAC, fire and security, controls, and smart-building solutions, across four reportable segments. Comparisons are with the three months ended December 31, 2019, unless otherwise noted.
Financial performance and position
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Net sales | $5.341 billion | $5.576 billion |
| Gross profit / margin | $1.728 billion / 32.4% | $1.803 billion / 32.3% |
| Income from continuing operations | $372 million | $191 million |
| Net income attributable to Johnson Controls | $451 million | $159 million |
| Diluted EPS | $0.62 | $0.21 |
| Cash from continuing operating activities | $515 million | $511 million |
| Capital expenditures | $91 million | $126 million |
Q1 FY2021 net income included $124 million after tax from discontinued operations, resulting from a favorable resolution of post-sale working-capital and net-debt adjustments related to the 2019 Power Solutions divestiture. Continuing-operations diluted EPS was $0.45, versus $0.21.
At December 31, 2020, cash and cash equivalents were $1.839 billion; total debt was $7.933 billion and net debt was $6.094 billion. Net debt was 25.7% of total capitalization, compared with 25.2% at September 30, 2020. Current assets were $10.034 billion and current liabilities were $8.486 billion. Cash from continuing investing activities was an outflow of $37 million and cash used in continuing financing activities was $547 million, including $346 million of share repurchases and $190 million of dividends.
Remaining performance obligations were $14.9 billion, with approximately 60% expected to be recognized as revenue over the next two years. Backlog was $9.8 billion at quarter-end; management cautions that backlog is not necessarily indicative of revenue in the upcoming fiscal year.
Changes versus the prior comparable period
- Sales declined 4% as reported and 5% excluding currency, acquisitions and divestitures. Management attributed the organic decrease primarily to COVID-19-related demand and volume declines.
- Products and systems revenue fell to $3.799 billion from $4.036 billion; services revenue was broadly flat at $1.542 billion versus $1.540 billion.
- Gross margin increased 10 basis points. SG&A fell 9% to $1.294 billion, and SG&A as a share of sales declined to 24.2% from 25.6%, reflecting cost mitigation and lower discretionary spending, among other items.
- Segment EBITA rose 3% to $642 million. North America EBITA was $255 million (down 1%); EMEA/LA $95 million (up 6%); Asia Pacific $79 million (up 10%); and Global Products $213 million (up 5%).
- Net income rose substantially, but the comparison reflects the $124 million discontinued-operations benefit in the current quarter and $111 million of restructuring and impairment costs in the prior-year quarter. Current-quarter restructuring and impairment costs were zero.
- Operating cash flow from continuing operations was $515 million, versus $511 million. Cash used for share repurchases decreased from $651 million to $346 million.
Outlook, commentary, risks and unusual items
- The filing provides no specific quarterly or full-year sales or earnings guidance. Management said liquidity and capital resources were adequate for projected needs and expected operations and obligations to be funded through the foreseeable future, using operating cash flow and borrowings if needed. No draws were outstanding on the $2.5 billion and $500 million revolving credit facilities at December 31, 2020.
- The fiscal 2020 restructuring plan, with $297 million of costs recorded, is expected to reduce annual operating costs by approximately $430 million, with benefits substantially realized in fiscal 2021 and actions substantially complete in that fiscal year. The remaining reserve was $81 million, expected to be paid in cash.
- COVID-19 continued to weigh on demand and volumes, including through restricted customer-site access and reduced discretionary spending. Management reported facilities operating at normal levels but warned renewed restrictions could disrupt demand, operations and supply chains. Further pandemic-related impairment charges are possible if conditions deteriorate.
- Environmental and litigation exposure includes PFAS matters involving the company’s affiliates. Environmental reserves for continuing operations were $122 million, but the company could not estimate possible losses beyond established accruals for certain remediation matters. In December 2020, Wisconsin authorities notified the company of a potential civil enforcement action. A settlement announced January 7, 2021 provides for payment of up to $17.5 million in a Wisconsin-related lawsuit, subject to court approval and other contingencies; management did not expect a significant fiscal 2021 impact.
- The company reported approximately $876 individual or mass AFFF actions, 63 municipal cases and 31 putative class actions involving its affiliates, among other proceedings. It said outcomes and ultimate exposure are difficult to predict and could be material. Asbestos-related net liability was $93 million; environmental and asbestos estimates depend on assumptions and may change.
- The company was in compliance with debt covenants at quarter-end. Management reported no material changes to the risk-factor disclosure in its prior Form 10-K and no materially adverse change in market-risk exposures.
Important facts for investors to verify
- How much of the earnings increase reflects recurring operating performance versus the $124 million Power Solutions reserve reversal and the prior-year restructuring charge.
- Whether COVID-19-related demand, customer access and supply-chain costs improve or worsen, and whether further impairment charges become necessary.
- Progress toward the estimated $430 million annual restructuring savings and completion of the plan in fiscal 2021.
- Conversion of the $14.9 billion remaining performance obligations and $9.8 billion backlog into revenue, including timing and cancellation or modification risks.
- Developments in PFAS remediation, the potential Wisconsin enforcement action, the pending litigation and related insurance recoveries; the ultimate exposure is not clearly quantifiable in the filing.
- Debt maturities, cash levels, share repurchases and dividend funding, given quarter-end net debt of $6.094 billion and $453 million of current long-term debt.