Johnson Controls International plc — Q1 FY2022 10-Q
Reporting period: Three months ended December 31, 2021, compared with the three months ended December 31, 2020, unless otherwise noted. Johnson Controls supplies building products, systems and services, including HVAC, controls, fire and security, and smart-building solutions.
Financial performance
| Metric | Q1 FY2022 | Prior year | Change |
|---|---|---|---|
| Net sales | $5.862 billion | $5.341 billion | +10%; organic growth +8% |
| Gross profit | $1.891 billion | $1.728 billion | +9% |
| Gross margin | 32.3% | 32.4% | Down 10 basis points |
| Income from continuing operations | $419 million | $372 million | +13% |
| Net income attributable to Johnson Controls | $381 million | $451 million | -16% |
| Diluted EPS | $0.54 | $0.62 | Prior year included discontinued-operation income |
| Operating cash flow from continuing operations | $392 million | $515 million | Down $123 million |
| Capital expenditures | $135 million | $91 million |
Sales growth reflected $440 million of higher organic sales and $128 million of acquisition contribution, partly offset by $45 million of unfavorable currency translation and $2 million from divestitures. Higher volume and pricing supported growth. Supply-chain inefficiencies and price/cost pressures slightly reduced gross margin. SG&A rose 6% to $1.369 billion, but fell to 23.4% of sales from 24.2%.
Segments
| Segment | Sales | Year-over-year sales change | Segment EBITA | Year-over-year EBITA change |
|---|---|---|---|---|
| Building Solutions North America | $2.152 billion | +6% | $250 million | -2% |
| Building Solutions EMEA/LA | $959 million | +1% | $104 million | +6% |
| Building Solutions Asia Pacific | $675 million | +12% | $68 million | -12% |
| Global Products | $2.076 billion | +18% | $301 million | +42% |
Total segment EBITA increased 13% to $723 million. North America and Asia Pacific EBITA were pressured by supply constraints, labor limitations, unfavorable mix and price/cost effects. Global Products growth reflected volume, mix, productivity and higher equity income, partly offset by supply-chain and price/cost pressures.
Financial position and liquidity
- At December 31, 2021, cash and cash equivalents were $1.207 billion; total debt was $8.049 billion and net debt was $6.842 billion. Net debt was 28.4% of total capitalization, versus 26.7% at September 30, 2021.
- Current assets were $10.353 billion and current liabilities were $9.987 billion. Defined working capital was negative $229 million, compared with negative $202 million at fiscal year-end. Inventory rose 18% from September 30, primarily amid supply-chain disruption.
- The company reported $392 million of operating cash flow, $218 million of cash used in investing, and $357 million of cash used in financing. Financing included $526 million of share repurchases and $191 million of cash dividends.
- Committed revolving credit facilities totaled $3.0 billion, with no draws at quarter-end. The company reported $150 million of commercial paper outstanding and stated liquidity was adequate for projected needs and obligations for the foreseeable future.
- The quarterly dividend was raised from $0.27 to $0.34 per share. Approximately $4.5 billion remained under the share repurchase authorization.
Outlook, commentary and material risks
- The filing provides no specific consolidated sales, earnings or EPS guidance. Management expects inflation, component shortages, supply-chain disruption and labor constraints to remain headwinds for the rest of fiscal 2022; mitigation actions have offset some, but not all, effects.
- The company expects its fiscal 2021 restructuring program to be substantially complete in fiscal 2023. It targets $300 million of annualized SG&A savings and $250 million of annual cost-of-sales run-rate savings by fiscal 2023. Estimated one-time pretax program costs are $385 million; $291 million had been recorded cumulatively by December 31, 2021.
- Backlog was $10.9 billion at quarter-end; remaining performance obligations were $16.5 billion, with approximately 60% expected to be recognized over the next two years. Management cautions that backlog is not necessarily indicative of revenue in the upcoming fiscal year.
- COVID-19 developments may affect customer-site access, demand, workforce availability and operations. Management also identifies economic and geopolitical conditions, inflation, raw-material and component availability, foreign exchange, cybersecurity, project cancellations and regulation as risks.
- Environmental exposure includes PFAS investigations and remediation in Wisconsin and related regulatory matters. The company had $93 million of environmental reserves at quarter-end and said it could not estimate potential losses above established accruals. AFFF-related litigation includes more than 1,900 individual or mass actions and approximately 168 municipal or water-provider cases; the ultimate exposure is difficult to predict and could be material.
- Tax examinations or litigation could affect tax expense; the company said the potential impact of matters that may conclude within twelve months was not currently quantifiable. The effective tax rate was 14.5%, versus 14.1% in the prior-year quarter.
- Unusual or notable items included $49 million of restructuring and impairment costs, a $42 million pension actuarial gain, and $57 million of net mark-to-market gains in the segment reconciliation. The prior-year quarter included $124 million of after-tax discontinued-operation income related to the 2019 Power Solutions sale, contributing to the year-over-year decline in reported net income.
Most important facts for investors to verify
- Whether pricing and productivity can continue to offset inflation, supply constraints and labor costs without further margin erosion.
- Progress against the fiscal 2023 restructuring savings targets, remaining program costs and cash payments.
- Cash conversion and working-capital trends, particularly inventory, receivables and the increase in net debt.
- Developments in PFAS/AFFF remediation, regulatory proceedings and litigation, including whether exposure exceeds recorded reserves.
- Execution and revenue conversion of the $10.9 billion backlog and $16.5 billion of remaining performance obligations.