Johnson Controls International plc — FY2022 Form 10-K
Reporting period: Fiscal year ended September 30, 2022; this is an annual filing, not a standalone fourth-quarter report. Amounts are in U.S. dollars unless stated otherwise.
Business context
Johnson Controls is a global building-technology company operating in more than 150 countries. Its four segments are Building Solutions North America, EMEA/Latin America, Asia Pacific, and Global Products. Offerings include HVAC, refrigeration, building controls, fire and security systems, installation, maintenance, and digital building solutions through OpenBlue. Fiscal 2022 sales were approximately 37% products, 39% installations, and 24% services.
Financial performance
| Metric | FY2022 | FY2021 |
|---|---|---|
| Net sales | $25.299 billion | $23.668 billion |
| Gross profit / gross margin | $8.343 billion / 33.0% | $8.059 billion / 34.1% |
| Income from continuing operations | $1.723 billion | $1.746 billion |
| Net income attributable to Johnson Controls | $1.532 billion | $1.637 billion |
| Diluted EPS attributable to Johnson Controls | $2.19 | $2.27 |
| Cash from continuing operating activities | $1.990 billion | $2.551 billion |
| Capital expenditures | $592 million | $552 million |
| Total debt / cash | $8.960 billion / $2.031 billion | $7.740 billion / $1.336 billion |
| Net debt / net debt to capitalization | $6.929 billion / 29.9% | $6.404 billion / 26.7% |
- Sales increased 7% as reported and 9% excluding currency translation, acquisitions, divestitures, and specified adjustments. Higher volume and pricing were partly offset by a $741 million unfavorable foreign-currency impact.
- Gross margin fell 110 basis points as supply-chain inefficiencies and price/cost pressures outweighed volume leverage. SG&A rose 13% to $5.945 billion, including environmental and pension-related items.
- Operating cash flow declined 22%, mainly reflecting supply-driven inventory growth and higher unbilled receivables from shipment delays, partly offset by receivables factoring and higher accounts payable.
- Segment EBITA was $3.406 billion, up 1%. Global Products EBITA rose 11% to $1.594 billion; EBITA declined in each of the three regional Building Solutions segments.
- Backlog was $11.7 billion at year-end. Remaining performance obligations were $17.5 billion, with approximately 65% expected to be recognized as revenue within two years.
Material changes and unusual items
- Restructuring and impairment costs increased to $721 million from $242 million. FY2022 included $419 million of impairments related to businesses held for sale, a $75 million Silent-Aire goodwill impairment, and $182 million of costs under the 2021 restructuring plan.
- The company increased environmental remediation reserves by $228 million in the fourth quarter, primarily for PFAS-related work in Marinette, Wisconsin. Total environmental reserves reached $286 million, expected to be paid over as long as 20 years.
- The effective tax rate on continuing operations was negative 1%, versus 33% in FY2021, largely reflecting tax reserve adjustments after statute expirations and global tax planning benefits. FY2021 included a $417 million tax charge related to an intercompany intellectual-property transfer.
- Comprehensive income attributable to Johnson Controls fell 47% to $1.055 billion, mainly due to unfavorable foreign-currency translation.
- Fiscal 2022 included no discontinued-operations income; FY2021 included $124 million, net of tax, from a favorable post-sale adjustment related to the former Power Solutions business.
Liquidity, debt, and capital allocation
Cash and cash equivalents were $2.031 billion at September 30, 2022. Total debt rose 16% to $8.960 billion, and net debt increased 8% to $6.929 billion. The company reported $669 million of short-term debt and $865 million of current long-term debt. It had no draws on its revolving credit facilities at year-end and stated that liquidity was adequate for projected needs. The company was in compliance with debt covenants; S&P rated its long-term debt BBB+ and Moody’s rated it Baa2, both with stable outlooks.
FY2022 share repurchases were approximately $1.4 billion, and dividends declared were $1.39 per share. Approximately $3.6 billion remained under the repurchase authorization. Management intended to continue quarterly dividends in FY2023, subject to Board determination.
Outlook, management commentary, and risks
- Management expected supply-chain disruptions, component shortages, labor constraints, and cost inflation to continue affecting results in FY2023, despite some recent supply-chain improvement. These pressures had supported revenue through demand and pricing but weighed on margins and delayed backlog conversion.
- The company stated it was on track to deliver and exceed its targeted FY2023 annualized savings: $300 million from SG&A actions and $250 million from cost-of-sales actions. The 2021 restructuring plan’s expected total cost was $424 million, already incurred by September 30, 2022.
- Management highlighted demand opportunities in smart, healthy, and sustainable buildings, digital services, and sectors including healthcare, education, offices/campuses, and data centers. The filing does not provide a clear quantified FY2023 revenue or earnings forecast.
- Major risks include economic and construction-market downturns, inflation and supply constraints, foreign-exchange movements, labor availability, COVID-19-related disruptions, cybersecurity and data privacy, regulatory changes, and the ability to convert backlog profitably.
- PFAS/AFFF-related litigation is extensive, including more than 2,900 individual or mass actions and more than 250 municipal or water-provider cases, in addition to putative class actions and government matters. The company says outcomes and ultimate financial exposure are difficult to predict and could be material; it is vigorously defending the claims and pursuing insurance coverage.
- Other contingencies include asbestos claims and environmental remediation. Management said it could not estimate losses, if any, above the environmental accrual; changes in regulatory requirements, remediation scope, or litigation outcomes could increase costs.
- Auditors issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective as of year-end.
Important facts for investors to verify
- Whether supply-chain recovery, pricing, and productivity savings improve margins and cash conversion, especially given lower operating cash flow and elevated inventory.
- The cost, timing, and potential changes in PFAS remediation obligations and the outcome of AFFF litigation, including recoveries from insurers.
- Completion terms and proceeds for the businesses classified as held for sale, and any resulting gains, losses, or additional impairments.
- Near-term debt maturities, refinancing needs, interest costs, and the effect of higher net debt on capital allocation.
- Whether the unusually low FY2022 tax rate is repeatable; also monitor the $2.537 billion uncertain-tax-position liability and pending tax examinations.
- Progress against FY2023 cost-savings targets and the company’s stated liquidity expectations.