Johnson Controls International plc — FY2023 Form 10-K
Reporting period: Fiscal year ended September 30, 2023. Although the request identifies 2023 Q4, this filing reports full-year results; it does not provide a standalone fourth-quarter income statement.
Business context
Johnson Controls is a global building-technology and services company operating in more than 150 countries. Its offerings include HVAC, refrigeration, building controls, fire and security systems, related services, and the OpenBlue digital platform. The four reportable segments are Building Solutions North America, EMEA/Latin America, Asia Pacific, and Global Products. Products and systems represented 76% of FY2023 sales; services represented 24%.
Financial performance and liquidity
| Metric | FY2023 / September 30, 2023 | FY2022 / September 30, 2022 |
|---|---|---|
| Net sales | $26.793 billion | $25.299 billion |
| Gross profit / gross margin | $8.971 billion / 33.5% | $8.343 billion / 33.0% |
| Income from continuing operations | $2.033 billion | $1.723 billion |
| Net income attributable to Johnson Controls | $1.849 billion | $1.532 billion |
| Diluted EPS | $2.69 | $2.19 |
| Cash provided by operating activities | $2.221 billion | $1.990 billion |
| Cash used by investing activities | $1.184 billion | $693 million |
| Cash used by financing activities | $2.174 billion | $516 million |
| Total debt / net debt | $8.848 billion / $8.013 billion | $8.960 billion / $6.929 billion |
| Cash and cash equivalents | $835 million | $2.031 billion |
Sales rose 6%; excluding foreign currency translation and acquisitions/divestitures, sales grew 8%, primarily reflecting pricing. Gross margin expanded 50 basis points, mainly on favorable price/cost. Segment EBITA increased 18% to $4.018 billion. The reported effective tax rate was negative 19%, producing a $323 million tax benefit; favorable tax adjustments were a major contributor to the increase in attributable net income. Restructuring and impairment costs totaled $1.064 billion, including $498 million related to businesses classified or previously classified as held for sale, $276 million of restructuring charges, and $184 million of Silent-Aire goodwill impairment.
Operating cash flow improved year over year. Investing cash use increased mainly due to the FM:Systems acquisition. Financing cash use included $625 million of share repurchases and $980 million of cash dividends. The company declared dividends of $1.45 per share for FY2023. Defined working capital was negative $152 million, compared with negative $51 million a year earlier. Net debt as a percentage of total capitalization rose to 32.6% from 29.9%.
At year-end, backlog was $13.6 billion, including $12.1 billion in Building Solutions; remaining performance obligations were $19.6 billion, with about 65% expected to be recognized over the next two years. Management said liquidity was adequate for foreseeable needs and reported compliance with debt covenants. Credit facilities were renewed after year-end: a $2.5 billion revolving facility now matures in December 2028, and a $500 million facility in December 2024.
Material changes and segment results
- Building Solutions North America sales rose 10% to $10.330 billion and EBITA increased 24% to $1.394 billion, reflecting pricing, volume leverage, and productivity.
- Building Solutions EMEA/LA sales rose 7% to $4.096 billion, but EBITA declined 12% to $316 million amid higher expenses and currency effects.
- Building Solutions Asia Pacific sales increased 1% to $2.746 billion and EBITA rose 3% to $343 million. China real-estate weakness began affecting the segment in the fourth quarter.
- Global Products sales rose 3% to $9.621 billion and EBITA increased 23% to $1.965 billion, supported by price/cost and productivity, partly offset by mix and lower manufacturing absorption.
- Net financing charges increased 32% to $281 million, largely reflecting higher interest expense. Total debt edged down, but lower cash increased net debt.
Outlook, risks, and unusual items
- Outlook: Management expects continued softening in China in FY2024. It points to customer demand for sustainable, healthy, and smart buildings as a growth opportunity, but the filing provides no specific consolidated FY2024 revenue or earnings guidance.
- Cybersecurity: A September 2023 ransomware incident involved unauthorized access and data exfiltration, disrupted internal systems and operations, and continued to affect some applications into early FY2024. The company estimated a roughly $30 million FY2023 net-income impact, or about $0.04 per diluted share. It expects additional FY2024 response costs, largely in the first half, and says the net impact after insurance recoveries is not expected to be material; timing of recoveries may differ from expenses.
- Controls: Management and the auditor concluded internal control over financial reporting was ineffective at September 30, 2023 because of a material weakness in IT controls over access monitoring, intrusion detection and response, patch management, and backup/recovery. The auditor nevertheless gave an unqualified opinion on the financial statements and stated the weakness did not cause a reported misstatement. Remediation is ongoing.
- Contingencies: PFAS-related environmental remediation and extensive AFFF litigation remain significant uncertainties. Environmental reserves were $242 million. Asbestos liabilities were $422 million, partly offset by $301 million of related assets. Management says ultimate exposure in the PFAS matters is difficult to predict and could be material; insurance recovery is also subject to uncertainty.
- Other risks: Exposure includes inflation and commodity costs, supply-chain and labor disruption, foreign exchange, cyclical construction markets, interest rates, regulation of refrigerants and PFAS, and tax audits. Tax audit resolutions and reserve adjustments materially benefited the FY2023 tax provision; further examination outcomes could materially affect tax expense.
- Impairments and restructuring: FY2023 charges included $184 million of Silent-Aire goodwill impairment, $78 million for Argentine security subscriber assets, and $438 million related to the Global Retail business. Global Retail was reclassified as held and used after sale efforts were discontinued.
- Environmental product change: The company plans to stop producing and selling fluorinated firefighting foams, including AFFF, by June 2024 and transition to non-fluorinated alternatives.
Most important facts for investors to verify
- Track remediation of the IT-control material weakness and any subsequent cybersecurity, data exposure, operational, or insurance developments.
- Review PFAS/AFFF litigation, regulatory proceedings, remediation assumptions, accrued reserves, and insurance coverage against the disclosures in the notes.
- Assess the sustainability of earnings excluding the unusually favorable tax benefit and the substantial restructuring and impairment charges.
- Monitor China demand, FY2024 segment performance, backlog conversion, and whether price/cost improvements persist.
- Reconcile debt maturities, cash, dividend and repurchase plans, and the effect of higher net debt and financing costs on liquidity.
- Note that the filing reports a prior-period revision to the presentation of certain short-term borrowing cash flows; management said total cash-flow amounts were unchanged and the presentation error was not material.