Johnson Controls International plc — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2022. The company supplies building products, systems and services, including HVAC, controls, fire and security, refrigeration, and smart-building solutions. Financial amounts below are in U.S. dollars; “Q3” means the three months ended June 30.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $6.614 billion | $6.341 billion | $18.574 billion | $17.276 billion |
| Gross profit | $2.200 billion | $2.197 billion | $6.048 billion | $5.868 billion |
| Gross margin | 33.3% | 34.6% | 32.6% | 34.0% |
| Income from continuing operations | $443 million | $661 million | $914 million | $1.430 billion |
| Net income attributable to Johnson Controls | $379 million | $574 million | $771 million | $1.368 billion |
| Diluted EPS, continuing operations | $0.55 | $0.80 | $1.10 | $1.72 |
| Operating cash flow, continuing operations | Not stated for quarter | $811 million | $2.022 billion |
- Q3 sales rose 4%; excluding currency and acquisitions/divestitures, organic sales increased 7%. Nine-month sales rose 8% reported and 8% organically.
- Gross margin fell 130 basis points in Q3 and 140 basis points year to date. Management cited supply-chain inefficiencies, inflation and price/cost pressures as offsets to volume growth and pricing.
- Q3 SG&A was $1.589 billion, up 16%; nine-month SG&A was $4.412 billion, up 13%. Management attributed increases in part to pension and restricted-asbestos-investment mark-to-market effects.
- For the nine months, working-capital changes included $637 million of cash use from receivables and $761 million from inventory. Capital expenditures were $430 million.
- At June 30, cash and equivalents were $1.506 billion. Total debt was $9.492 billion, net debt $7.986 billion, and net debt to total capitalization 33.3% (26.7% at September 30, 2021). Short-term debt was $2.081 billion, including $1.6 billion of commercial paper.
- Management reported $11.7 billion of backlog and $17.5 billion of remaining performance obligations; approximately 65% of the latter was expected to be recognized over the next two years.
Segments and changes versus prior periods
- Q3 segment sales / EBITA: North America $2.426 billion / $260 million; EMEA/Latin America $952 million / $83 million; Asia Pacific $665 million / $85 million; Global Products $2.571 billion / $570 million.
- Q3 segment EBITA declined 2% overall. North America and EMEA/Latin America EBITA fell 20% and 21%, respectively; Global Products EBITA increased 13%. Supply constraints and labor limitations affected building solutions, while Global Products benefited from pricing, mix and productivity.
- Q3 net income attributable to the company declined 34%; diluted continuing-operations EPS declined from $0.80 to $0.55. Nine-month net income declined 44%, and diluted continuing-operations EPS declined from $1.72 to $1.10. The prior-year nine-month comparison also included $124 million of income from discontinued operations.
- Nine-month operating cash flow declined to $811 million from $2.022 billion, primarily due to higher receivables and inventory. Total debt increased from $7.740 billion at fiscal year-end, while shareholders’ equity attributable to the company decreased from $17.562 billion.
Outlook, unusual items and risks
- Management said supply-chain disruptions, component shortages, labor constraints and input-cost inflation were expected to affect results through the remainder of fiscal 2022 and possibly into fiscal 2023. These conditions delayed backlog conversion and pressured margins; pricing and productivity actions offset some, but not all, of the impact.
- The company said it was on track to deliver by fiscal 2023 $300 million of annualized SG&A savings and $250 million of annual run-rate cost-of-sales savings. It expected to complete the related restructuring spending by the end of fiscal 2022; $90 million of restructuring reserves remained at June 30.
- Q3 restructuring and impairment costs were $121 million; nine-month costs were $554 million. These included $235 million of goodwill impairment and $86 million of disposal-group impairment related to the Global Retail business classified as held for sale, plus a $60 million impairment for another Asia Pacific business classified as held for sale. Sale proceeds could differ from current carrying values.
- The company suspended operations in Russia; it said the suspension itself was not expected to materially affect operating results, but warned that broader effects of the conflict could worsen inflation, supply disruption and economic uncertainty. COVID-19 restrictions in China also affected activity.
- Management said liquidity was adequate for projected needs. It intended to repay the $1.5 billion commercial-paper borrowing by fiscal year-end and reported no draws on its revolving credit facilities. The company declared a $0.35-per-share dividend for the quarter and had approximately $3.6 billion remaining under its share-repurchase authorization.
- Environmental exposure includes PFAS contamination investigations and remediation, including a Wisconsin state enforcement action. The company recorded $72 million of environmental reserves and said additional remediation reserves were anticipated in Q4 after further analysis. Separately, AFFF-related litigation includes thousands of individual or mass claims and more than 200 municipal cases; the company said ultimate exposure is difficult to predict and could be material.
- Asbestos-related liabilities were $443 million, offset by $318 million of recorded assets, for a net liability of $125 million. The company also disclosed tax examinations and said a post-quarter statute-of-limitations expiration was expected to produce an approximately $300 million income-tax benefit in Q4; additional examinations or litigation could materially affect tax expense.
- The filing provides no clear consolidated revenue or EPS guidance for fiscal 2022. Forward-looking statements are subject to economic, currency, supply-chain, labor, geopolitical, pandemic, cybersecurity and litigation risks.
Important facts for investors to verify
- Whether pricing and productivity can offset persistent inflation and supply-chain costs, and whether delayed backlog converts into revenue as expected.
- Cash conversion and working-capital trends, particularly inventory and receivables, alongside the planned repayment of commercial paper and near-term debt maturities.
- Progress, final sale terms and any additional impairment or disposal loss for the businesses held for sale.
- Future PFAS remediation costs, litigation outcomes and recoveries from insurers, which the filing says cannot yet be reliably quantified.
- Delivery and timing of the announced restructuring savings, restructuring costs and expected Q4 tax benefit.