Johnson Controls International plc — Q2 FY2021 Form 10-Q
Business context and period: Global provider of building technologies, HVAC, fire and security products, and building services. The quarter and six-month period ended March 31, 2021; the company’s fiscal year ends September 30. Amounts below are in U.S. dollars.
Financial performance
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Net sales | $5.594 billion, up 3% year over year | $10.935 billion, down 1% |
| Gross profit / margin | $1.943 billion / 34.7%, versus $1.801 billion / 33.1% | $3.671 billion / 33.6%, versus $3.604 billion / 32.7% |
| Income from continuing operations attributable to Johnson Controls | $343 million, versus $213 million | $670 million, versus $372 million |
| Net income attributable to Johnson Controls | $343 million, versus $213 million | $794 million, versus $372 million, including $124 million from discontinued operations |
| Diluted EPS | $0.48, versus $0.28 | $1.10, versus $0.49; continuing operations contributed $0.93 |
| Cash from continuing operations | Not separately presented for the quarter | $1.160 billion, versus $666 million |
For the six months, capital expenditures were $197 million; operating cash flow less capital expenditures was approximately $963 million. Cash and cash equivalents were $1.883 billion at March 31, 2021. Total debt was $7.767 billion and net debt was $5.884 billion; net debt was 25.0% of total capitalization. The company reported $25 million of working capital under its defined measure and had no draws on its revolving credit facilities.
Changes and operating drivers
- Quarterly sales growth reflected favorable currency translation and modest organic growth. For the six months, organic sales fell 2% excluding currency and acquisition/divestiture effects, primarily due to pandemic-related demand and volume impacts.
- Quarterly sales increased in EMEA/Latin America, Asia Pacific, and Global Products, while Building Solutions North America declined 4%. Global Products segment EBITA rose 32% in the quarter, supported by higher equity income from the Johnson Controls–Hitachi joint venture, volumes, and cost actions.
- Total segment EBITA increased 15% to $711 million in the quarter and 9% to $1.353 billion for the six months. Corporate expenses and SG&A declined, while equity income rose to $56 million for the quarter from $20 million.
- Six-month operating cash flow improved chiefly from favorable changes in accounts payable and accrued liabilities; financing cash use fell mainly because share repurchases were lower. The company repurchased $661 million of shares in the six months, versus $1.467 billion a year earlier.
Outlook, commentary, and notable items
- Management said liquidity and capital resources were adequate for projected needs and expected available resources to fund obligations for the foreseeable future. No specific earnings or revenue guidance is provided in the filing.
- Management expects the fiscal 2021 restructuring plan to cost approximately $385 million and targets $300 million of annualized SG&A savings plus $250 million of annual run-rate cost-of-sales savings by fiscal 2023. The fiscal 2020 plan is expected to deliver approximately $430 million in annual operating cost reductions, substantially realized in 2021.
- Reported results benefited from pension mark-to-market gains: a $203 million net actuarial gain on U.S. pension plans in the quarter, contributing to a $207 million pension mark-to-market gain disclosed for the quarter. A $105 million discrete tax charge related to valuation allowances on certain Mexico deferred tax assets increased the tax burden. The six-month discontinued-operations income of $124 million resulted from a favorable resolution of Power Solutions sale adjustments.
- COVID-19 recovery supported improving demand in fiscal 2021, but management cautioned that renewed restrictions, supply-chain disruption, and slower vaccine distribution could affect demand and operations. Future impairment charges remain possible if pandemic conditions worsen.
- After quarter-end, the company announced an agreement to acquire Silent-Aire for up to $870 million, subject to regulatory approval and customary closing conditions; it expected closing in fiscal Q3 2021.
- Environmental and legal exposures include PFAS matters associated with the Marinette, Wisconsin site and extensive AFFF litigation. The company said potential exposure is difficult to predict and could be material. It recorded $112 million of environmental reserves and a $93 million net asbestos liability at March 31. A proposed $17.5 million settlement for certain Peshtigo residents remained subject to court approval; the company did not expect it to significantly affect FY2021 results or cash flows.
- The company reported compliance with debt covenants and effective disclosure controls. It said there were no material changes to previously disclosed risk factors.
Key facts for investors to verify
- How much of the earnings and margin improvement is sustainable after pension mark-to-market gains, restructuring effects, and other nonrecurring items.
- Whether sales and segment performance continue to recover from pandemic-related volume weakness, particularly in North America building solutions.
- Progress against the stated restructuring savings targets and the remaining costs and timing of those actions.
- Cash conversion, working-capital trends, and capital allocation, including the expanded share-repurchase authorization and Silent-Aire acquisition costs.
- Developments in PFAS/AFFF litigation, regulatory actions, environmental remediation estimates, and asbestos insurance recoveries.
- Changes in the effective tax rate and unresolved tax examinations, whose potential impact the company said was not currently quantifiable.