Johnson Controls International plc — Q2 FY2023 Form 10-Q
Reporting period: Three and six months ended March 31, 2023; comparative periods ended March 31, 2022. Amounts are in U.S. dollars. The company provides building products, systems and services globally. Results are unaudited, and management cautions that interim results are not necessarily indicative of the full fiscal year.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $6.686 billion, up 10% | $12.754 billion, up 7% |
| Gross profit / gross margin | $2.241 billion / 33.5% (32.1% prior year) | $4.332 billion / 34.0% (32.2% prior year) |
| Net income attributable to Johnson Controls | $133 million, versus $11 million | $251 million, down 36% |
| Diluted EPS | $0.19, versus $0.02 | $0.36, versus $0.56 |
| Cash from operating activities | Not separately provided here | $18 million, versus $324 million |
Quarterly sales growth reflected higher organic sales, including pricing and volume, partly offset by unfavorable foreign currency translation. For the six-month period, organic sales increased $1.259 billion; currency translation reduced sales by $498 million. Gross margin improved in both comparisons, primarily from favorable price/cost. Six-month net income fell mainly because of higher restructuring and impairment costs and SG&A, partly offset by higher gross profit.
Quarterly segment sales increased across all four segments. Segment EBITA rose 19% to $951 million in the quarter and 14% to $1.743 billion year to date. Building Solutions North America and Global Products drove much of the EBITA growth; EMEA/LA EBITA declined 13% for the quarter and 21% year to date.
Cash, debt and liquidity
- At March 31, 2023, cash and cash equivalents were $1.975 billion. Total debt was $10.491 billion and net debt was $8.516 billion, up from $8.960 billion and $6.929 billion, respectively, at September 30, 2022. Net debt was 34.9% of total capitalization, versus 29.9%.
- Six-month operating cash flow was $18 million, with $314 million used in investing activities and $262 million provided by financing activities. Management attributed the operating cash flow decline primarily to the timing of accounts payable and accrued-liability payments.
- Short-term debt was $1.737 billion, including $1.554 billion of commercial paper. The company reported no draws on its $2.5 billion and $500 million revolving credit facilities and said it was in compliance with debt covenants.
- Management said available liquidity and capital resources were adequate for operations and obligations for the foreseeable future. It declared a $0.36-per-share quarterly dividend and stated its intent to continue dividends during FY2023.
- Non-GAAP working capital was $907 million, versus negative $202 million at September 30, 2022. Management cited increased inventory and receivables; inventory growth also reflected softer residential demand and project delays.
Material changes, outlook and risks
- Significant impairments: Restructuring and impairment costs were $418 million for the quarter and $763 million year to date, versus $384 million and $433 million in the prior-year periods. FY2023 charges included $210 million in the quarter and $498 million year to date for businesses held for sale, plus a $184 million noncash goodwill impairment for Silent-Aire. Silent-Aire has no remaining goodwill.
- Planned divestitures: Global Retail and another Asia Pacific business remained classified as held for sale; the company expected both divestitures to be finalized in FY2023. The ultimate sale prices could differ from recorded carrying values and result in a potentially material gain or loss.
- Demand and operating commentary: Management cited demand for smart, efficient and sustainable building solutions, supported in part by regulatory initiatives and customer decarbonization goals. It reported easing supply-chain disruption and improving margins as higher-priced backlog converted to sales, while warning that inflation, component shortages and supply disruptions could continue. Residential demand was softer, and foreign-exchange movements adversely affected revenue and profit.
- Orders and contracted work: Backlog was $13.0 billion at March 31, 2023; remaining performance obligations were $18.8 billion, with about 65% expected to be recognized as revenue over the next two years. These measures have different definitions and are not necessarily predictive of near-term revenue.
- Contingencies: Environmental reserves were $265 million. The company faces PFAS-related remediation and extensive AFFF litigation, including individual, municipal and state matters. It says the ultimate exposure is extremely difficult to predict and could be material; it is vigorously defending the claims. The company also reported net asbestos-related liabilities of $116 million. EPA proposed drinking-water limits for six PFAS compounds in March 2023; regulatory and enforcement developments could affect remediation costs.
- Other risks: Forward-looking results are subject to economic and construction cycles, inflation, supply constraints, foreign currency, geopolitical events, cybersecurity, labor availability, regulation and litigation. The filing gives no quantified earnings or revenue guidance. Management’s outlook statements are qualitative, not a specific forecast.
Most important facts for investors to verify
- Whether the planned divestitures close in FY2023 and the final proceeds compared with the carrying values after impairment.
- Whether operating cash flow recovers from the $18 million reported for the first half, and whether working capital and inventory normalize.
- Whether margin improvement continues as supply constraints ease and backlog converts to sales, particularly in EMEA/LA and residential markets.
- Changes in commercial paper, total debt, financing costs and net leverage, alongside dividend and repurchase activity.
- Developments in PFAS remediation, AFFF litigation, regulatory requirements and related costs beyond recorded reserves.
- Potential further impairment charges, including if Silent-Aire or other businesses underperform or disposal assumptions change.