Johnson Controls International plc — Q2 FY2024 Form 10-Q
Reporting period: Three and six months ended March 31, 2024; unaudited. Johnson Controls supplies building systems and products, including HVAC, controls, fire and security, alongside building services and digital solutions.
Financial performance
Amounts are in millions of U.S. dollars, except per-share data and percentages.
| Metric | Q2 FY2024 | Q2 FY2023 | Six months FY2024 | Six months FY2023 |
|---|---|---|---|---|
| Net sales | $6,699 | $6,686 | $12,793 | $12,754 |
| Gross profit / gross margin | $2,181 / 32.6% | $2,241 / 33.5% | $4,173 / 32.6% | $4,332 / 34.0% |
| Income (loss) before income taxes | $(361) | $223 | $42 | $393 |
| Net income (loss) attributable to Johnson Controls | $(277) | $133 | $97 | $251 |
| Diluted EPS | $(0.41) | $0.19 | $0.14 | $0.36 |
| Operating cash flow | Not stated separately for the quarter | Not stated separately for the quarter | $(449) | $18 |
- Q2 sales were essentially flat: organic growth and acquisitions were largely offset by unfavorable currency translation. Excluding currency and acquisitions/divestitures, sales rose 1% in Q2 and were flat year to date.
- Services grew, but weakness in China Systems/Install and declines in Residential HVAC weighed on results. Gross margin declined year over year, reflecting unfavorable mix and lower Global Products volumes, partly offset by stronger Systems/Install gross profit.
- Q2 SG&A was $2,251, up 43%, including the $750 AFFF water-systems settlement accrual. Restructuring and impairment costs were $254, including a $230 noncash goodwill impairment. Net financing charges were $93 for Q2 and $192 year to date.
- The six-month income-tax benefit was $128, including an $80 noncash benefit from Swiss tax reform; the reported year-to-date effective tax rate was (305%).
Segments, cash flow and financial position
- Q2 segment sales / EBITA: Building Solutions North America $2,739 / $373; EMEA/LA $1,064 / $89; Asia Pacific $491 / $54; Global Products $2,405 / $429. North America and EMEA/LA EBITA increased; Asia Pacific and Global Products EBITA declined.
- Cash flow: Six-month operating cash outflow was $449, versus $18 provided in the prior-year period. The company attributed the deterioration mainly to receivables and tax items; discontinuing receivables factoring also affected cash flow. Investing cash outflow was $211; capital expenditures were $225.
- Debt and liquidity: Total debt was $10,723 at March 31, compared with $8,848 at September 30, 2023; cash and equivalents were $843, making net debt $9,880. Short-term debt was $2,210, including $1,784 of commercial paper. Working capital was $(1,722), versus $(347) at fiscal year-end. The company reported no draws on its $3.0 billion committed revolving facilities and compliance with debt covenants.
- Six-month dividends paid were $504; shares repurchased were $474. The quarterly dividend declared was $0.37 per share. Approximately $2.5 billion remained under the share-repurchase authorization.
Material changes, outlook and risks
- AFFF settlement: Tyco Fire Products agreed on April 12, 2024, after quarter-end, to contribute $750 million to settle certain public-water-system claims. The company recorded the full charge in Q2. An initial $250 million payment was expected around May 25, 2024, with the remaining $500 million due six months after preliminary court approval. Insurance is expected to cover a substantial portion, but the amount and timing are uncertain. Court approval is required; other AFFF claims remain unresolved and potential additional losses cannot be estimated from the filing.
- Impairment and restructuring: A $230 million goodwill impairment was recorded for a previously at-risk reporting unit; the filing says up to $215 million of remaining goodwill there could be impaired if assumptions worsen. The company recorded $63 million of restructuring charges year to date and expects further charges. Expected savings are substantially offset by ongoing operating costs and growth investments.
- Operating outlook: Management expects China’s economic conditions to remain soft through the rest of FY2024, potentially affecting Asia Pacific. It cites continued demand for smart, efficient and sustainable buildings, but does not provide a specific earnings or revenue forecast in the supplied filing text. Building Solutions backlog was $12.6 billion, up 10% year over year excluding currency and portfolio changes; total backlog was $15.2 billion. Remaining performance obligations were $21.2 billion, about 66% expected to be recognized over the next two years.
- Cash needs: Management expects remaining FY2024 cash requirements to be funded from operations and short- and long-term borrowing, with some AFFF settlement payments expected to be funded by insurance recoveries. Discontinuation of receivables factoring is expected to reduce FY2024 operating cash flow by approximately $700 million.
- Cybersecurity and controls: The September 2023 ransomware incident affected internal IT systems; the company reported an approximately $29 million net-income impact for the six months, with further expenses expected but not expected to be material. Investigation and remediation continue. Disclosure controls were deemed ineffective at March 31 because of an existing material weakness in internal control over financial reporting; remediation remains ongoing.
- Other key exposures include extensive PFAS/AFFF litigation and remediation, environmental obligations, tax audits and uncertain tax positions, foreign-exchange movements, supply-chain and cost pressures, and geopolitical and cybersecurity risks. Environmental reserves were $222 million; net asbestos-related liabilities were $86 million.
Important facts for investors to verify
- Settlement approval, payment timing and actual insurance recoveries for the $750 million AFFF agreement, plus the potential exposure from claims it does not resolve.
- Underlying earnings and cash generation excluding the settlement, impairment and other unusual items; confirm the effect of discontinued receivables factoring.
- Whether China Systems/Install and Global Products stabilize, and whether backlog and remaining performance obligations convert to sales and cash as expected.
- Progress remediating the material weakness and any further financial, operational or data impacts from the cybersecurity incident.
- Debt refinancing and liquidity needs, including the April 2024 issuance of $700 million of 5.50% notes due 2029, and the company’s ability to maintain dividends and repurchases.