JOHNSON CONTROLS INTERNATIONAL PLC MANAGEMENT REPORT AND DISCUSSION OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-Q)
Cautions for forward-looking information
Unless otherwise specified, references to “
The Company has made statements in this document that are forward-looking and therefore are subject to risks and uncertainties. All statements in this document other than statements of historical fact are, or could be, "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. In this document, statements regarding the Company's future financial position, sales, costs, earnings, cash flows, other measures of results of operations, synergies and integration opportunities, capital expenditures, debt levels and market outlook are forward-looking statements. Words such as "may," "will," "expect," "intend," "estimate," "anticipate," "believe," "should," "forecast," "project" or "plan" and terms of similar meaning are also generally intended to identify forward-looking statements. However, the absence of these words does not mean that a statement is not forward-looking. The Company cautions that these statements are subject to numerous important risks, uncertainties, assumptions and other factors, some of which are beyond the Company's control, that could cause the Company's actual results to differ materially from those expressed or implied by such forward-looking statements, including, among others, risks related to: The Company's ability to manage general economic, business, capital market and geopolitical conditions, including global price inflation and shortages impacting the availability of raw materials and component products; the Company's ability to manage the impacts of natural disasters, climate change, pandemics and outbreaks of contagious diseases and other adverse public health developments, such as the COVID-19 pandemic; the strength of the
U.S.or other economies; changes or uncertainty in laws, regulations, rates, policies or interpretations that impact the Company's business operations or tax status; the ability to develop or acquire new products and technologies that achieve market acceptance and meet applicable regulatory requirements; changes to laws or policies governing foreign trade, including increased tariffs or trade restrictions; maintaining the capacity, reliability and security of the Company's enterprise information technology infrastructure; the ability to manage the lifecycle cybersecurity risk in the development, deployment and operation of the Company's digital platforms and services; the risk of infringement or expiration of intellectual property rights; any delay or inability of the Company to realize the expected benefits and synergies of recent portfolio transactions; the outcome of litigation and governmental proceedings; the ability to hire and retain senior management and other key personnel; the tax treatment of recent portfolio transactions; significant transaction costs and/or unknown liabilities associated with such transactions; fluctuations in currency exchange rates; labor shortages, work stoppages, union negotiations, labor disputes and other matters associated with the labor force; and the cancellation of or changes to commercial arrangements. A detailed discussion of risks related to CONTROLS-INTERNAT-31222816/news/JOHNSON-CONTROLS-INTERNATIONAL-PLC-MANAGEMENT-S-DISCUSSION-AND-ANALYSIS-OF-FINANCIAL-CONDITION-AND-37724956/xmltag.org">Johnson Controls'business is included in the section entitled "Risk Factors" in Johnson Controls'Annual Report on Form 10-K for the year ended September 30, 2021filed with the United States Securities and Exchange Commission("SEC") on November 15, 2021, which is available at www.sec.gov and www.johnsoncontrols.com under the "Investors" tab. The description of certain of these risks is supplemented in Item 1A of Part II of this Quarterly Report on Form 10-Q. The forward-looking statements included in this document are made only as of the date of this document, unless otherwise specified, and, except as required by law, Johnson Controlsassumes no obligation, and disclaims any obligation, to update such statements to reflect events or circumstances occurring after the date of this document.
Johnson Controls International plc, headquartered in Cork, Ireland, is a global leader in smart, healthy and sustainable buildings, serving a wide range of customers in more than 150 countries. The Company's products, services, systems and solutions advance the safety, comfort and intelligence of spaces to serve people, places and the planet. The Company is committed to helping its customers win and creating greater value for all of its stakeholders through its strategic focus on buildings. The Company is a global leader in engineering, manufacturing and commissioning building products and systems, including residential and commercial HVAC equipment, industrial refrigeration systems, controls, security systems, fire-detection systems and fire-suppression solutions. The Company further serves customers by providing technical services, including maintenance, management, repair, retrofit and replacement of equipment (in the HVAC, industrial refrigeration, security and fire-protection space), energy-management consulting and data-driven "smart building" services and solutions powered by its OpenBlue software platform and related digital capabilities. The Company partners with customers by leveraging its broad product portfolio and digital capabilities powered by OpenBlue, together with its direct channel service and solutions 39 --------------------------------------------------------------------------------
capabilities, to deliver results-based solutions throughout a building’s life cycle that meet customers’ needs for improved energy efficiency and reduced greenhouse gas emissions.
The following information should be read in conjunction with the
September 30, 2021consolidated financial statements and notes thereto, along with management's discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended September 30, 2021filed with the SECon November 15, 2021. References in the following discussion and analysis to "Three Months" (or similar language) refer to the three months ended December 31, 2021compared to the three months ended December 31, 2020. Macroeconomic Trends Much of the demand for installation of the Company's products and solutions is driven by commercial and residential construction and industrial facility expansion and maintenance projects. Commercial and residential construction projects are heavily dependent on general economic conditions, localized demand for commercial and residential real estate and availability of credit. Positive or negative fluctuations in commercial and residential construction, industrial facility expansion and maintenance projects and other capital investments in buildings could have a corresponding impact on the Company's financial condition, results of operations and cash flows. As a result of the Company's global presence, a significant portion of its revenues and expenses is denominated in currencies other than the U.S.dollar. The Company is therefore subject to non- U.S.currency risks and non- U.S.exchange exposure. While the Company employs financial instruments to hedge some of its transactional foreign exchange exposure, these activities do not insulate it completely from those exposures. Exchange rates can be volatile and a substantial weakening or strengthening of foreign currencies against the U.S.dollar could increase or reduce the Company's profit margin in various locations outside of the U.S.and impact the comparability of results from period to period. The Company continues to observe trends demonstrating increased interest and demand for safe, efficient and sustainable buildings, and seeks to capitalize on these trends to drive growth by developing and delivering technologies and solutions to create smart and healthy buildings. In 2020, the Company launched its software platform, OpenBlue, enabling enterprises to manage all aspects of their physical spaces delivering sustainability, new occupant experiences, and safety and security by combining the Company's building expertise with cutting-edge technology, including AI-powered service solutions such as remote diagnostics, predictive maintenance, compliance monitoring and advanced risk assessments. The Company continues to leverage its install base, together with data-driven products and services to offer outcome-based solutions to customers with a focus on generating accelerated growth in services and recurring revenue for the Company. The Company has committed to investing in new product research and development in climate-related innovation to develop sustainable products and services. The Company has experienced, and expects to continue to experience, increased input material cost inflation and component shortages, as well as disruptions and delays in its supply chain, as a result of global macroeconomic trends (including increased global demand), government-mandated actions in response to COVID-19 and labor shortages. Actions taken by the Company to mitigate supply chain disruptions and inflation, including expanding and redistributing its supplier network, supplier financing, price increases and productivity improvements, have generally been successful in offsetting some, but not all, of the impact of these trends. These trends have continued to negatively impact the Company's revenue and margins during the first quarter of fiscal year 2022, and it is expected these trends will continue to be a headwind for the remainder of fiscal 2022. Therefore, the Company could experience further disruptions, shortages and price increases in the future, the effect of which will depend on the Company's ability to successfully mitigate and offset the impact of these events. Impact of COVID-19 pandemic
The global outbreak of COVID-19 has severely restricted the level of economic activity around the world and caused a significant contraction in the global economy.
The Company's affiliates, employees, suppliers, customers and others have been and may continue to be restricted or prevented from conducting normal business activities, including as a result of shutdowns, travel restrictions and other actions that may be requested or mandated by governmental authorities. Although shutdown orders and similar restrictions have been lifted in many jurisdictions in conjunction with the global distribution of vaccines, challenges in achieving sufficient vaccination levels and the spread of new variants of COVID-19 have caused some governments to extend or reinstitute restrictions in impacted areas. During the first quarter of fiscal 2022, the Company's facilities generally operated at normal levels. 40 -------------------------------------------------------------------------------- The Company continues to focus its efforts on preserving the health and safety of its employees and customers, as well as maintaining the continuity of its operations. The Company modified its business practices in response to the COVID-19 outbreak, including restricting non-essential employee travel, implementing remote work protocols, and limiting physical participation in meetings, events and conferences. The Company also instituted preventive measures at its facilities, including enhanced health and safety protocols, temperature screening, requiring face coverings for all unvaccinated employees and encouraging employees to follow similar protocols when away from work. The Company has adopted and implemented a multifaceted framework to guide its decision making as it reopens its offices and facilities to employees, and will continue to monitor and audit its facilities to ensure that they are in compliance with the Company's COVID-19 safety requirements. The Company has experienced increases in both demand and volumes as governments have distributed vaccines and lifted COVID-19-related restrictions, leading to increases in retrofit activity and, to a lesser extent, commercial building construction. The global pandemic has also provided the Company with the opportunity to help its customers by delivering solutions and support that enhance the safety and increase the efficiency of their operations. As a result of the pandemic, the Company has seen an increase in demand for its products and solutions that promote building health and optimize customers' infrastructure. However, the Company continues to be influenced by COVID-19-related trends impacting site access and the labor force, which have and may continue to negatively impact the Company's revenues and margins. Challenges in reaching sufficient vaccination levels and the introduction of new variants of COVID-19 have caused some governments to extend or reinstitute lockdowns and similar restrictive measures, which, in some cases, have limited the Company's ability to access customer sites to install and maintain its products and deliver services. In addition, the Company has experienced and continues to experience labor shortages at certain facilities as the Company expands its production capacity to meet increased customer demand. Although the Company is mitigating these shortages through focused recruitment efforts and competitive compensation packages, the Company could continue to experience such shortages in the future. Recently, the
U.S. Governmenthas promulgated orders mandating vaccinations or regular COVID-19 testing for large employers and federal contractors. Similar mandates have also been imposed by local governments and certain of the Company's customers. The Company's efforts to comply with these mandates, including requiring that some or all of its employees be fully vaccinated against COVID-19, could result in increased labor attrition or disruption, and could adversely impact the Company's ability to deliver services to its customers. The extent to which the COVID-19 pandemic continues to impact the Company's results of operations and financial condition will depend on future developments that are highly uncertain and cannot be predicted, including the resurgence of COVID-19 and its variants in regions recovering from the impacts of the pandemic, the effectiveness of COVID-19 vaccines and the speed at which populations are vaccinated around the globe, the impact of COVID-19 on economic activity, and regulatory actions taken to contain its impact on public health and the global economy. See Part I, Item 1A, of the Company's Annual Report on Form 10-K for the year ended September 30, 2021for an additional discussion of risks related to COVID-19.
Restructuring and cost optimization initiatives
To better align its resources with its growth strategies and reduce the cost structure of its global operations in certain underlying markets, the Company has committed to various restructuring plans. In fiscal 2021, the Company announced its plans to optimize its cost structure through broad-based SG&A actions focused on simplification, standardization and centralization, with the intent to deliver annualized savings of
$300 millionby fiscal 2023. Additionally, the Company announced cost of sales actions to drive $250 millionin annual run rate savings by fiscal 2023. The Company believes it is on track to deliver the productivity savings by fiscal 2023. For more information on the Company's restructuring plans, see "Liquidity and Capital Resources-Restructuring." 41 --------------------------------------------------------------------------------
Net SalesThree Months Ended December 31, (in millions) 2021 2020 Change Net sales $ 5,862 $ 5,34110 % The increase in consolidated net sales for the three months ended December 31, 2021was due to higher organic sales ( $440 million) and incremental sales from acquisitions ( $128 million), partially offset by the unfavorable impact of foreign currency translation ( $45 million) and lower sales due to business divestitures ( $2 million). Excluding the impact of foreign currency translation and business acquisitions and divestitures, consolidated net sales increased 8% as compared to the prior year, attributable to higher volumes and increased pricing in response to inflation pressures. Refer to the "Segment Analysis" below within this Item 2 for a discussion of net sales by segment.
Cost of Sales / Gross Profit
Three Months Ended December 31, (in millions) 2021 2020 Change Cost of sales
$ 3,971 $ 3,61310 % Gross profit 1,891 1,728 9 % % of sales 32.3 % 32.4 % Cost of sales and gross profit increased for the three-month period ended December 31, 2021, and gross profit as a percentage of sales decreased by 10 basis points. Gross profit increased due to organic sales growth, business acquisitions, favorable foreign currency translation ( $34 million) and the favorable year-over-year impact of net mark-to-market adjustments on pension plans ( $9 million). Gross profit as a percentage of sales decreased slightly as the benefit of volume leverage was more than offset by supply chain inefficiencies and price/cost pressures. Refer to the "Segment Analysis" below within this Item 2 for a discussion of segment earnings before interest, taxes and amortization ("EBITA").
Selling, general and administrative expenses
Three Months Ended December 31, (in millions) 2021 2020 Change Selling, general and administrative expenses
$ 1,369 $ 1,2946 % % of sales 23.4 % 24.2 % Selling, general and administrative expenses ("SG&A") for the three-month period ended December 31, 2021increased $75 million, and SG&A as a percentage of sales decreased by 80 basis points. The increase in SG&A was primarily due to the absence of certain one-time cost mitigation actions, incremental sales investments and current year business acquisitions, partially offset by the favorable year-over-year impact of net mark-to-market adjustments on pension plans ( $34 million). Foreign currency translation had a favorable impact on SG&A of $10 million. Refer to the "Segment Analysis" below within this Item 2 for a discussion of segment EBITA. 42 --------------------------------------------------------------------------------
Restructuring and impairment costs
Three Months Ended December 31, (in millions) 2021 2020 Change Restructuring and impairment costs
$ 49$ - * * Measure not meaningful Refer to Note 17, "Significant Restructuring and Impairment Costs," of the notes to consolidated financial statements and "Restructuring" below within this Item 2 for further disclosure related to the Company's restructuring plans and impairment costs. Net Financing Charges Three Months Ended December 31, (in millions) 2021 2020 Change Net financing charges $ 53 $ 59-10 %
Refer to Note 10, “Debt and Financing Arrangements”, in the Notes to the Consolidated Financial Statements for more information on the Company’s net finance costs.
Equity Income Three Months Ended December 31, (in millions) 2021 2020 Change Equity income
$ 70 $ 5821 % The increase in equity income for the three months ended December 31, 2021was primarily due to higher income at certain partially-owned affiliates of the Johnson Controls- Hitachi joint venture and within the Building Solutions EMEA/LAsegment. Refer to the "Segment Analysis" below within this Item 2 for a discussion of segment EBITA by segment. Income Tax Provision Three Months Ended December 31, (in millions) 2021 2020 Change Income tax provision $ 71 $ 6116 % Effective tax rate 14.5 % 14.1 % In calculating the provision for income taxes, the Company uses an estimate of the annual effective tax rate based upon the facts and circumstances known at each interim period. On a quarterly basis, the actual effective tax rate is adjusted, as appropriate, based upon changed facts and circumstances, if any, as compared to those forecasted at the beginning of the fiscal year and each interim period thereafter. The statutory tax rate in Irelandis being used as a comparison since the Company is domiciled in Ireland. For the three months ended December 31, 2021, the Company's effective tax rate for continuing operations was 14.5% and was higher than the statutory tax rate of 12.5% primarily due to the income tax effects of mark-to-market adjustments and tax rate differentials, partially offset by the benefits of continuing global tax planning initiatives. For the three months ended December 31, 2020, the Company's effective tax rate for continuing operations was 14.1% and was higher than the statutory tax rate of 12.5% primarily 43 -------------------------------------------------------------------------------- due to tax rate differentials, partially offset by the benefits of continuing global tax planning initiatives. Refer to Note 19, "Income Taxes," of the notes to consolidated financial statements for further detail.
Income from discontinued operations, net of tax
Three Months Ended December 31, (in millions) 2021 2020 Change Income from discontinued operations, net of tax $ -
$ 124* * Measure not meaningful
Refer to Note 4, “Discontinued Operations”, in the Notes to the Consolidated Financial Statements for further information regarding the Company’s discontinued operations.
Income attributable to non-controlling interests
Three Months Ended December 31, (in millions) 2021 2020 Change Income from continuing operations attributable to noncontrolling interests $ 38
$ 45-16 %
Lower earnings from continuing operations attributable to non-controlling interests for the three months ended
Net income attributable to
Three Months Ended December 31, (in millions) 2021 2020 Change Net income attributable to Johnson Controls
The decrease in net income attributable to
Johnson Controlsfor the three months ended December 31, 2021was primarily due to the prior year income from discontinued operations, higher SG&A and higher restructuring and impairment costs, partially offset by higher gross profit. Diluted earnings per share attributable to Johnson Controlsfor the three months ended December 31, 2021was $0.54compared to $0.62for the three months ended December 31, 2020.
Comprehensive income attributable to
Three Months Ended December 31, (in millions) 2021 2020 Change Comprehensive income attributable to Johnson Controls
$ 468 $ 723-35 % The decrease in comprehensive income attributable to Johnson Controlsfor the three months ended December 31, 2021was due to a decrease in other comprehensive income attributable to Johnson Controls( $185 million) resulting primarily from 44 -------------------------------------------------------------------------------- currency translation adjustments and lower net income attributable to Johnson Controls( $70 million). The year-over-year unfavorable foreign currency translation adjustments were primarily driven by the strengthening of the Brazilian real, British pound, euro and Mexican peso against the U.S.dollar in the prior year. Segment Analysis Management evaluates the performance of its business units based primarily on segment EBITA, which represents income from continuing operations before income taxes and noncontrolling interests, excluding general corporate expenses, intangible asset amortization, net financing charges, restructuring and impairment costs, and net mark-to-market adjustments related to pension and postretirement plans and restricted asbestos investments. Effective October 1, 2021, the Company's marine businesses previously included in Building Solutions Asia Pacificand Global Products reportable segments are now part of Building Solutions EMEA/LAreportable segment. Historical information has been re-cast to present the comparative periods on a consistent basis. This change was not material to the segment presentation. Refer to Note 20, "Segment Information," of the notes to consolidated financial statements for further information. Beginning on October 1, 2021, the Company began reporting certain retrofit projects in Building Solutions EMEA/LAand Building Solutions Asia Pacificas products and systems revenue on a prospective basis as they have evolved to be more aligned with other install offerings. Net SalesThree Months Ended December 31, (in millions) 2021 2020 Change
North American Building Solutions
959 948 1 % Building Solutions Asia Pacific 675 604 12 % Global Products 2,076 1,755 18 %
$ 5,862 $ 5,34110 % •The increase in Building Solutions North Americawas due to higher volumes and prices ( $107 million), the favorable impact of foreign currency translation ( $6 million) and incremental sales related to business acquisitions ( $5 million). The sales increase was led by growth in service and HVAC & Controls. •The increase in Building Solutions EMEA/LAwas due to higher prices ( $26 million) and incremental sales related to business acquisitions ( $8 million), partially offset by the unfavorable impact of foreign currency translation ( $22 million) and business divestitures ( $1 million). The increase in sales is driven by balanced growth in both project installations and service activity, led by strength in Fire & Security. By region, sales growth outperformed in Europeand Latin America, partially offset by continued weakness in the Middle East. •The increase in Building Solutions Asia Pacificwas due to higher volumes and prices ( $69 million) and incremental sales related to business acquisitions ( $9 million), partially offset by the unfavorable impact of foreign currency translation ( $6 million) and business divestitures ( $1 million). The increase in sales was led by growth in project installations, driven by strong growth in Commercial Applied HVAC & Controls. Chinaremains the primary source of growth, with growth stabilizing across the rest of the region. •The increase in Global Products was due to higher volumes and prices ( $238 million) and incremental sales related to business acquisitions ( $106 million), partially offset by the unfavorable impact of foreign currency translation ( $23 million). Sales growth was driven by broad-based strength across Commercial and Residential HVAC and Fire & Security products. 45 --------------------------------------------------------------------------------
Segment EBITA Three Months Ended December 31, (in millions) 2021 2020 Change Building Solutions North America
$ 250 $ 255-2
Building Solutions EMEA/LA 104 98 6
Building Solutions Asia Pacific 68 77 -12 % Global Products 301 212 42 %
$ 723 $ 64213 % •The decrease in Building Solutions North Americawas primarily due to supply chain disruptions and labor constraints, partially offset by favorable volumes, productivity savings and foreign currency translation. •The increase in Building Solutions EMEA/LAwas primarily due to favorable pricing and productivity savings, partially offset by unfavorable mix and the unfavorable impact of foreign currency translation.
• The decrease in
•The increase in Global Products was primarily due to favorable volumes and mix, productivity savings, higher equity income driven primarily by certain partially-owned affiliates of the
Johnson Controls- Hitachi joint venture and the favorable impact of foreign currency translation, partially offset by unfavorable price/cost and supply chain disruptions.
The Company's backlog is applicable to its sales of systems and services. At
December 31, 2021, the backlog was $10.9 billion, of which $10.5 billionwas attributable to the field business. The backlog amount outstanding at any given time is not necessarily indicative of the amount of revenue to be earned in the upcoming fiscal year.
•Remaining performance obligations include large, multi-purpose contracts to construct hospitals, schools and other governmental buildings, which are services to be performed over the building's lifetime with initial contract terms of 25 to 35 years for the entire term of the contract versus backlog which includes only the lifecycle period of these contracts which approximates five years; •The Company has elected to exclude from remaining performance obligations certain contracts with customers with a term of one year or less or contracts that are cancelable without substantial penalty while these contracts are included within backlog; and •Remaining performance obligations include the full remaining term of service contracts with substantial termination penalties versus backlog which includes one year for all outstanding service contracts.
The Company will continue to report order backlog as it believes it is a useful measure to assess the Company’s operating performance and its relationship to total orders.
Cash and capital resources
Working Capital December 31, September 30, (in millions) 2021 2021 Change Current assets
$ 10,353 $ 9,998Current liabilities (9,987) (9,098) 366 900 -59 % Less: Cash and cash equivalents (1,207)
Add: Short-term debt 392 8 Add: Current portion of long-term debt 220 226 Working capital (as defined)
$ (229)$ (202) 13 % Accounts receivable - net $ 5,671 $ 5,6131 % Inventories 2,425 2,057 18 % Accounts payable 4,083 3,746 9 % •The Company defines working capital as current assets less current liabilities, excluding cash, short-term debt, the current portion of long-term debt, and the current portions of assets and liabilities held for sale. Management believes that this measure of working capital, which excludes financing-related items and businesses to be divested, provides a more useful measurement of the Company's operating performance. •The decrease in working capital at December 31, 2021as compared to September 30, 2021, was primarily due to an increase in accounts payable and deferred revenue, partially offset by an increase in inventory due to supply chain disruptions and a decrease in accrued compensation and benefits liabilities. •The Company's days sales in accounts receivable at December 31, 2021and September 30, 2021were 62 days and 58 days, respectively. There has been no significant adverse changes in the level of overdue receivables or significant changes in revenue recognition methods.
• The company’s inventory turnover for the three months ended
• Days in accounts payable to
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