Johnson Controls International plc — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2021. The quarter is compared with the three months ended June 30, 2020; year-to-date figures are compared with the corresponding nine months. Amounts are in U.S. dollars.
Business context
Johnson Controls supplies building HVAC, controls, fire and security products and systems, and related services. Its four reportable segments are Building Solutions North America, EMEA/LA, Asia Pacific, and Global Products. Management attributed improved demand and volumes to recovery from the COVID-19 downturn.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $6.341 billion | $5.343 billion | $17.276 billion | $16.363 billion |
| Gross profit | $2.197 billion | $1.832 billion | $5.868 billion | $5.436 billion |
| Gross margin | 34.6% | 34.3% | 34.0% | 33.2% |
| Net income attributable to Johnson Controls | $574 million | $(182) million | $1.368 billion | $190 million |
| Diluted EPS | $0.80 | $(0.24) | $1.89 | $0.25 |
| Cash from continuing operating activities | Not stated for quarter | Not stated for quarter | $2.022 billion | $1.499 billion |
- Q3 sales increased 19% (15% excluding currency, acquisitions, divestitures, and purchase-accounting adjustments); nine-month sales increased 6% (4% on the same adjusted basis).
- Q3 segment EBITA was $1.020 billion, up 22%; nine-month segment EBITA was $2.373 billion, up 14%. Global Products and EMEA/LA led Q3 segment EBITA growth; Asia Pacific EBITA declined 9%.
- Q3 continuing-operations income attributable to Johnson Controls was $574 million. Nine-month continuing-operations attributable income was $1.244 billion; total attributable net income includes a $124 million discontinued-operations benefit from the prior Power Solutions sale.
- SG&A was $1.367 billion in Q3 and $3.914 billion year to date. Restructuring and impairment costs were $79 million and $175 million, respectively, versus $610 million and $783 million in the comparable periods.
- Continuing-operations operating cash flow was $2.022 billion for nine months. Capital expenditures were $324 million; operating cash flow less capital expenditures was approximately $1.698 billion. Investing activities used $886 million, including $707 million for acquisitions; financing activities used $1.650 billion.
- At June 30, cash was $1.450 billion; total debt was $7.779 billion and net debt was $6.329 billion. Net debt was 26.2% of total capitalization, versus 25.2% at September 30, 2020. The company reported $2.5 billion and $500 million revolving credit facilities with no draws and stated it was compliant with covenants.
- Current assets were $10.310 billion and current liabilities $9.285 billion. Defined working capital, excluding cash and specified financing items, was $36 million, down from $147 million at September 30, 2020.
- The company repurchased $1.001 billion of shares and paid $577 million in ordinary-share dividends during the nine months. Approximately $5.4 billion remained under its repurchase authorization at June 30.
Material changes and unusual items
- Sales and earnings rebounded as demand recovered from pandemic-related restrictions. Q3 year-over-year results also benefited from significantly lower restructuring and impairment costs than the prior-year quarter.
- The company completed its $751 million net-of-cash acquisition of Silent-Aire on May 12, adding data-center cooling and critical-infrastructure products to Global Products. The transaction includes estimated contingent earn-outs of $90 million, with a maximum payout of approximately $250 million.
- Nine-month results included a $124 million after-tax benefit from resolution of Power Solutions sale-related working-capital and net-debt adjustments. Q3 had no discontinued-operations income.
- Net mark-to-market adjustments were a $66 million gain in Q3 2021 versus a $132 million loss in Q3 2020; the nine-month amounts were a $296 million gain versus a $154 million loss. Pension remeasurement gains also affected comparisons.
- The company recorded a $105 million discrete tax charge in the second quarter related to Mexico deferred tax assets. Effective tax rates were 14% for Q3 and 21% year to date, compared with 1% and 20%, respectively, in the prior-year periods.
- Inventory rose to $2.064 billion from $1.773 billion at fiscal year-end; accounts payable increased to $3.719 billion from $3.120 billion. Management linked operating cash flow growth primarily to favorable accounts-payable and accrued-liability movements.
Outlook, management commentary, and risks
- No specific consolidated revenue, earnings, or EPS guidance is provided in the filing. Management said liquidity and capital resources were adequate for projected needs and expected to fund obligations for the foreseeable future.
- The fiscal 2021 restructuring program is expected to cost approximately $385 million pretax and deliver $300 million of annualized SG&A savings plus $250 million of annual run-rate cost-of-sales savings by fiscal 2023. The prior-year plan is expected to reduce annual operating costs by approximately $430 million, with benefits substantially realized in 2021.
- Management cautioned that temporary cost-reduction actions taken in fiscal 2020 were reversing, with a negative impact expected in the second half of fiscal 2021. It also cited labor shortages, component shortages, supply-chain disruption, higher input costs, and continued uncertainty from COVID-19 and variants.
- Backlog was $10.5 billion at June 30; remaining performance obligations were $15.6 billion, of which approximately 60% was expected to be recognized over the next two years. Management cautioned that backlog is not necessarily indicative of revenue in the next fiscal year.
- Significant contingencies include PFAS-related environmental remediation and litigation. Environmental reserves for continuing operations were $100 million; the company said it could not estimate potential losses beyond established PFAS accruals. Approximately 1,270 individual or mass AFFF actions and 119 municipal or water-provider cases were pending, among other proceedings; ultimate exposure is difficult to predict and could be material.
- The company recorded an estimated net asbestos liability of $78 million, after considering related assets and probable insurance recoveries. It also disclosed a potential Wisconsin civil enforcement action involving PFAS, as well as broader environmental, tax-audit, and litigation uncertainties.
- Other identified risks include inflation, economic and geopolitical conditions, foreign-exchange movements, raw-material availability, cybersecurity and IT reliability, and the ability to realize acquisition synergies. Management reported no material change to previously disclosed risk factors.
Most important facts for investors to verify
- Whether sales growth and segment margins persist after pandemic recovery effects and temporary cost actions unwind.
- How much of operating cash-flow improvement reflects sustainable earnings versus working-capital timing, particularly accounts payable and accrued liabilities.
- Progress against the $550 million combined annual savings targets, associated restructuring charges, and expected second-half fiscal 2021 cost pressures.
- Conversion timing and quality of the $10.5 billion backlog and $15.6 billion remaining performance obligations.
- Silent-Aire integration, purchase-price allocation, and contingent earn-out valuation and payments.
- Potential PFAS remediation, enforcement, and litigation exposure beyond recorded reserves, and the assumptions underlying asbestos liabilities and insurance recoveries.
- Debt maturities, liquidity, share repurchases, and the effect of capital returns on net debt.