Johnson Controls International plc — FY2020 Form 10-K
Reporting period: Fiscal year ended September 30, 2020. The filing also reports fourth-quarter results; amounts are in U.S. dollars unless noted. Johnson Controls is a global building technologies and services provider operating through four segments. Its portfolio includes HVAC, controls, fire protection, security, installation and maintenance services. The 2019 sale of Power Solutions completed its transition to a building-focused company.
Financial performance and position
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $22.317 billion | $23.968 billion |
| Gross profit / margin | $7.411 billion / 33.2% | $7.693 billion / 32.1% |
| Segment EBITA | $2.948 billion | $3.041 billion |
| Income from continuing operations attributable to Johnson Controls | $631 million | $1.100 billion |
| Diluted EPS from continuing operations | $0.84 | $1.26 |
| Cash from continuing operating activities | $2.479 billion | $1.743 billion |
| Capital expenditures | $443 million | $586 million |
| Total debt / net debt | $7.819 billion / $5.868 billion | $7.219 billion / $4.414 billion |
| Cash and cash equivalents | $1.951 billion | $2.805 billion |
FY2020 sales fell 7% (6% excluding currency and portfolio changes), principally from pandemic-related lower demand. Gross margin improved 110 basis points, with cost mitigation and favorable year-over-year pension mark-to-market effects offsetting some volume pressure. Segment EBITA declined 3%. North America segment EBITA was broadly flat; EMEA/LA, Asia Pacific and Global Products declined.
Net income attributable to Johnson Controls was $631 million, down from $5.674 billion. The prior year included $4.574 billion of income from discontinued operations, including the Power Solutions sale gain. FY2020 also included $783 million of restructuring and impairment costs, including a $424 million goodwill impairment and $62 million of intangible-asset impairment associated with retail operations and COVID-19 impacts. The annual effective tax rate was 12%, compared with a 2019 tax benefit.
In the fourth quarter, sales were $5.954 billion, gross profit was $1.975 billion, net income attributable to Johnson Controls was $441 million, and diluted EPS was $0.60.
Working capital, as defined by the company, was $147 million versus $975 million. Net debt as a percentage of total capitalization increased to 25.2% from 18.3%. The company reported $2.0 billion of cash and access to up to $3.0 billion under committed credit lines; it had no revolving-facility draws at year-end and reported compliance with debt covenants.
Material changes, outlook and commentary
- COVID-19 reduced demand, customer-site access and discretionary spending, and caused temporary manufacturing constraints in China, India and Mexico, as well as supply-chain costs and delays. Operations were generally at normal levels in Q4, though India capacity remained reduced.
- Management said liquidity was adequate for projected needs. The company resumed share repurchases in July 2020 after suspending them in March, and repurchased approximately $2.2 billion of shares during the fiscal year. It issued $1.8 billion of senior notes in September, partly to refinance near-term debt.
- The 2020 restructuring plan incurred $297 million of costs and is expected to reduce annual operating costs by approximately $430 million, with substantially all benefits expected in FY2021. Completion is expected in FY2021. Management said temporary COVID-related cost actions were intended to cease in FY2021, subject to pandemic conditions.
- Backlog was $9.4 billion at year-end; remaining performance obligations were $14.4 billion, approximately 60% expected to be recognized over the following two years. Management cautioned that backlog is not necessarily indicative of next-year revenue.
- The company launched OpenBlue, its connected-building solutions platform, and reported increased demand for certain building-health and safety offerings. The filing does not provide a clear numerical FY2021 revenue or earnings forecast.
Risks, contingencies and unusual items
- COVID-19’s duration and effects on customer projects, commercial-building demand, supply chains and asset valuations remain uncertain; further impairments or cost actions may be required.
- PFAS-related firefighting-foam lawsuits and environmental investigations remain significant uncertainties. Environmental reserves for continuing operations were $130 million; management could not estimate potential losses beyond recorded accruals in certain matters.
- Recorded asbestos-related net liability was $115 million, based on estimated claims and insurance recoveries; actual outcomes could differ materially.
- Unrecognized tax benefits were $2.528 billion, and the company reported a $5.518 billion valuation allowance against deferred tax assets. Tax audit outcomes and realization of tax assets remain uncertain.
- Other risks include cyclical construction and industrial markets, foreign exchange and commodity volatility, cybersecurity and data privacy, regulatory changes, pension assumptions, and the company’s ability to realize restructuring savings and sustain demand for new products.
- The filing identifies goodwill impairment and uncertain tax positions as critical audit matters. PwC issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Whether pandemic-related demand and customer project delays stabilized after FY2020, and whether India capacity and supply-chain costs normalized.
- Progress toward the approximately $430 million annual restructuring savings target and the timing and cash costs of implementation.
- Current outlook for retail operations and the valuation headroom of North America Retail goodwill and other sensitive intangible assets.
- Developments in PFAS litigation, environmental remediation and insurance coverage, and whether recorded reserves remain adequate.
- Debt maturities, refinancing costs, liquidity, and the effect of continued buybacks and dividends on net debt and capitalization.
- Changes in tax audits, uncertain tax positions and deferred-tax-asset realizability; also note the CFO succession disclosed in the filing, with Olivier Leonetti set to assume the role after filing.