JOHNSON CONTROLS INTERNATIONAL PLC Cautionary Statements for Forward-Looking Information
Unless otherwise indicated, 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 regardingJohnson Controls' future financial position, sales, costs, earnings, cash flows, other measures of results of operations, synergies and integration opportunities, capital expenditures and debt levels 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.Johnson Controls cautions that these statements are subject to numerous important risks, uncertainties, assumptions and other factors, some of which are beyondJohnson Controls' control, that could causeJohnson Controls' actual results to differ materially from those expressed or implied by such forward-looking statements, including, among others, risks related to:Johnson Controls' ability to manage general economic, business, capital market and geopolitical conditions, including the impacts of natural disasters, pandemics and outbreaks of contagious diseases and other adverse public health developments, such as the COVID-19 pandemic; the strength of theU.S. or other economies; changes or uncertainty in laws, regulations, rates, policies or interpretations that impactJohnson Controls' business operations or tax status; the ability to develop or acquire new products and technologies that achieve market acceptance; changes to laws or policies governing foreign trade, including increased tariffs or trade restrictions; maintaining the capacity, reliability and security ofJohnson Controls' enterprise and product information technology infrastructure; the risk of infringement or expiration of intellectual property rights; any delay or inability ofJohnson Controls to realize the expected benefits and synergies of recent portfolio transactions such as its merger with Tyco and the disposition of the Power Solutions business; the outcome of litigation and governmental proceedings; the ability to hire and retain key senior management; the tax treatment of recent portfolio transactions; significant transaction costs and/or unknown liabilities associated with such transactions; the availability of raw materials and component products; fluctuations in currency exchange rates; 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 toJohnson Controls' business is included in the section entitled "Risk Factors" inJohnson Controls' Annual Report on Form 10-K for the year endedSeptember 30, 2020 filed with theUnited States Securities and Exchange Commission ("SEC") onNovember 16, 2020 , which is available at www.sec.gov and www.johnsoncontrols.com under the "Investors" tab. 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 Controls assumes no obligation, and disclaims any obligation, to update such statements to reflect events or circumstances occurring after the date of this document. OverviewJohnson Controls International plc , headquartered inCork, Ireland , is a global diversified technology and multi industrial leader serving a wide range of customers in more than 150 countries. The Company's products and solutions enable smart, energy efficient, sustainable buildings that work seamlessly together to advance the safety, comfort and intelligence of spaces to power its customers' mission. The Company is committed to helping its customers win and creating greater value for all of its stakeholders through its strategic focus on buildings.Johnson Controls was originally incorporated in the state ofWisconsin in 1885 asJohnson Electric Service Company to manufacture, install and service automatic temperature regulation systems for buildings. The Company was renamed toJohnson Controls, Inc. in 1974. In 2005, the Company acquiredYork International , a global supplier of heating, ventilating, air-conditioning ("HVAC") and refrigeration equipment and services. In 2014, the Company acquiredAir Distribution Technologies, Inc. , one of the largest independent providers of air distribution and ventilation products inNorth America . In 2015, the Company formed a joint venture with Hitachi to expand its building related product offerings. In 2016,Johnson Controls, Inc. and Tyco completed their combination (the "Merger"), combiningJohnson Controls portfolio of building efficiency solutions with Tyco's portfolio of fire and security solutions. Following the Merger, Tyco changed its name to "Johnson Controls International plc ." 39 -------------------------------------------------------------------------------- In 2016,Johnson Controls completed the spin-off of its automotive business into Adient plc, an independent, publicly traded company. In 2019, the Company sold its Power Solutions business toBCP Acquisitions LLC , an entity controlled by investment funds managed byBrookfield Capital Partners LLC , completing the Company's transformation into a pure-play building technologies and solutions provider. 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, repair, retrofit and replacement of equipment (in the HVAC, security and fire-protection space), energy-management consulting and data-driven "smart building" services and solutions powered by its digital platforms and capabilities. 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 delivering technologies and solutions to create healthy buildings. In 2020, the Company launched OpenBlue, a digitally driven suite of connected solutions that delivers impactful sustainability, new occupant experiences, and respectful 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 following information should be read in conjunction with theSeptember 30, 2020 consolidated 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 endedSeptember 30, 2020 filed with theSEC onNovember 16, 2020 . References in the following discussion and analysis to "Three Months" (or similar language) refer to the three months endedDecember 31, 2020 compared to the three months endedDecember 31, 2019 . 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. In response to this outbreak, the governments of many countries, states, cities and other geographic regions have taken and continue to take preventative or protective actions, such as imposing restrictions on travel and business operations. 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 some governments have lifted shutdown orders and similar restrictions, resurgences in the spread of COVID-19 have caused the reinstitution of such restrictions in certain jurisdictions and similar restrictions could be reinstituted elsewhere in response to further outbreaks. While a substantial portion of the Company's businesses have been classified as an essential business in jurisdictions in which facility closures have been mandated, some of its facilities have nevertheless been ordered to close, and we can give no assurance that there will not be additional closures in the future or that the Company's businesses will be classified as essential in each of the jurisdictions in which it operates. In response to the challenges presented by COVID-19, the Company has focused its efforts on preserving the health and safety of its employees and customers, as well as maintaining the continuity of its operations. The Company has modified its business practices in response to the COVID-19 outbreak, including restricting non-essential employee travel, implementation of remote work protocols, and cancellation of physical participation in meetings, events and conferences. The Company has also instituted preventive measures at its facilities, including enhanced health and safety protocols, temperature screening, requiring face coverings for all employees and encouraging employees to follow similar protocols when away from work. The Company has adopted a multifaceted framework to guide its decision making when evaluating the readiness of its facilities to safely reopen and operate, and will continue to monitor and audit its facilities to ensure that they are in compliance with the Company's COVID-19 safety requirements. During portions of fiscal 2020, the Company experienced temporary reductions of its manufacturing and operating capacity inChina ,India andMexico . Currently, the Company's facilities have been operating at normal levels. The Company has experienced, and may continue to experience, disruptions or delays in its supply chain as a result of government-mandated actions, which has resulted in higher supply chain costs to the Company in order to maintain the supply of materials and components for its products. While actions taken by the Company to mitigate manufacturing and supply chain disruptions, 40 -------------------------------------------------------------------------------- including redistributing manufacturing capacity, expanding supplier diversity, government outreach and supplier financing, have generally been successful, a continued resurgence of COVID-19 could lead to further disruptions. The Company experienced a decline in demand and volumes in its global businesses as a result of the impact of efforts to contain the spread of COVID-19. Specifically, the Company experienced lower demand due to restricted access to customer sites to perform service and installation work as well as reduced discretionary capital spending by the Company's customers. Although the Company has experienced increases in demand and volumes as governments have lifted COVID-19-related restrictions, the reinstitution of lockdowns or other restrictive measures by governments could cause a decrease in economic activity and demand for the Company's products and services. The global pandemic has also provided the Company with the opportunity to help its customers prepare to re-open by delivering solutions and support that enhance the safety and increase the efficiency of their operations. The Company has seen an increase in demand for its products and solutions that promote building health and optimize customers' infrastructure, including thermal cameras, indoor air quality, location-based services for contact tracing and touchless access control. In fiscal 2020, the Company executed temporary and permanent cost mitigation actions to offset a portion of the impact of COVID-19 on the demand for its products and services. As a result of these and other permanent cost mitigation actions, including the Company's 2020 restructuring plan, the Company experienced a positive impact on its results of operations for the three months endedDecember 31, 2020 . Although the Company has largely ceased temporary cost mitigation actions initiated in fiscal 2020, the necessity of future cost mitigation actions will depend on the continued impact of COVID-19, which is highly uncertain. During fiscal 2020, the Company determined that it had triggering events requiring assessment of impairment for certain of its indefinite-lived intangible assets due to declines in revenue directly attributable to the COVID-19 pandemic and for certain of its indefinite-lived intangible assets, long-lived assets and goodwill due to declines in revenue and further declines in forecasted cash flows in its North America Retail reporting unit. As a result, the Company recorded an impairment charge of$62 million related primarily to the Company's retail business indefinite-lived intangible assets and an impairment charge of$424 million related to the Company'sNorth America Retail reporting unit's goodwill. There were no triggering events requiring that an impairment assessment be conducted in the first quarter of fiscal 2021. However, it is possible that future changes in circumstances, including a more prolonged and/or severe COVID-19 pandemic, would require the Company to record additional non-cash impairment charges. The Company continues to actively monitor its liquidity position and working capital needs. The Company believes that, following its implementation of liquidity and cost mitigation actions in fiscal 2020, it remains in a solid overall capital resources and liquidity position that is adequate to meet its projected needs. The extent to which the COVID-19 outbreak continues to impact the Company's results of operations and financial condition will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity and longevity of COVID-19, the resurgence of COVID-19 in regions that have begun to recover from the initial impact of the pandemic, the impact of COVID-19 on economic activity, and the actions to contain its impact on public health and the global economy See Part I, Item 1A, of the Company's Annual Report on Form 10-K for the year endedSeptember 30, 2020 for an additional discussion of risks related to COVID-19. 41 --------------------------------------------------------------------------------
Net Sales Three Months Ended December 31, (in millions) 2020 2019 Change Net sales$ 5,341 $ 5,576 -4 % The decrease in consolidated net sales for the three months endedDecember 31, 2020 was due to lower organic sales ($260 million ) and lower sales due to business divestitures ($73 million ), partially offset by the favorable impact of foreign currency translation ($89 million ) and incremental sales from acquisitions ($9 million ). Excluding the impact of foreign currency translation and business acquisitions and divestitures, consolidated net sales decreased 5% as compared to the prior year primarily due to the unfavorable impact of the COVID-19 pandemic on demand and volumes. 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) 2020 2019 Change
Cost of sales $ 3,613 $ 3,773 -4 %
Gross profit 1,728 1,803 -4 %
% of sales 32.4 % 32.3 %
Cost of sales and gross profit decreased for the three month period ended
December 31, 2020 , and gross profit as a percentage of sales increased by 10
basis points. Gross profit decreased due to organic sales declines from the
unfavorable impact of the COVID-19 pandemic. Foreign currency translation had an
unfavorable impact on cost of sales of approximately $63 million . Refer to the
"Segment Analysis" below within this Item 2 for a discussion of segment earnings
before interest, taxes and amortization ("EBITA") by segment.
Selling, General and Administrative Expenses
Three Months Ended
December 31,
(in millions) 2020 2019 Change
Selling, general and administrative
expenses $ 1,294 $ 1,427 -9 %
% of sales 24.2 % 25.6 %
Selling, general and administrative expenses ("SG&A") for the three month period
ended December 31, 2020 decreased $133 million , and SG&A as a percentage of
sales decreased by 140 basis points. The decrease in SG&A was primarily due to a
favorable impact of cost mitigation actions and reduction in discretionary spend
in the current quarter and the favorable year-over-year impact of net
mark-to-market adjustments on restricted asbestos investments, partially offset
by an unfavorable impact of foreign currency translation. Foreign currency
translation had an unfavorable impact on SG&A of $20 million . Refer to the
"Segment Analysis" below within this Item 2 for a discussion of segment EBITA by
segment.
42
--------------------------------------------------------------------------------Restructuring and Impairment Costs
Three Months Ended
December 31,
(in millions) 2020 2019 Change
Restructuring and impairment costs $ - $ 111 *
* Measure not meaningful
Refer to Note 10, "Significant Restructuring and Impairment Costs," of the notes to consolidated financial statements for further disclosure related to the Company's restructuring plans and impairment costs.
Net Financing Charges
Three Months Ended
December 31,
(in millions) 2020 2019 Change
Net financing charges $ 59 $ 52 13 %
Refer to Note 13, "Debt and Financing Arrangements," of the notes to consolidated financial statements for further disclosure related to the Company's net financing charges.
Equity Income
Three Months Ended
December 31,
(in millions) 2020 2019 Change
Equity income $ 58 $ 43 35 %
The increase in equity income for the three months ended December 31, 2020 was
primarily due to higher income at certain partially-owned affiliates of the
Johnson Controls - Hitachi joint venture. Foreign currency translation had a
favorable impact on equity income of $3 million for the three months ended
December 31, 2020 . 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) 2020 2019 Change
Income tax provision $ 61 $ 65 -6 %
Effective tax rate 14 % 25 %
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 Ireland is being used as a comparison since the
Company is domiciled in Ireland . For the three months ended December 31, 2020 ,
the Company's effective tax rate for continuing operations was 14% and was
higher than the statutory tax rate of 12.5% primarily due to tax rate
differentials, partially offset by the benefits of continuing global tax
planning initiatives. For the three months ended December 31, 2019 , the
Company's effective tax rate for continuing operations was 25% and was higher
than the statutory tax rate of 12.5% primarily due to a discrete tax charge
related to the remeasurement
43
--------------------------------------------------------------------------------
of deferred tax assets and liabilities as a result of Swiss tax reform and tax
rate differentials, partially offset by the benefits of continuing global tax
planning initiatives. The effective tax rate for the three months ended
December 31, 2020 decreased as compared to the three months ended December 31,
2019 primarily due to the discrete tax items. Refer to Note 11, "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) 2020 2019 Change
Income from discontinued operations, net of tax $ 124 $
- *
* Measure not meaningful
Refer to Note 4, "Discontinued Operations," of the notes to consolidated financial statements for further information regarding the Company's discontinued operations.
Income Attributable to Noncontrolling Interests
Three Months Ended
December 31,
(in millions) 2020 2019 Change
Income from continuing operations attributable to
noncontrolling interests $ 45 $ 32 41 %
The increase in income from continuing operations attributable to noncontrolling
interests for the three months ended
Net Income Attributable to
Three Months Ended
December 31,
(in millions) 2020 2019 Change
Net income attributable to Johnson Controls $ 451 $ 159 *
* Measure not meaningful
The increase in net income attributable to Johnson Controls for the three months
ended December 31, 2020 was primarily due to lower SG&A, the current year income
from discontinued operations, and prior year restructuring and impairment
charges, partially offset by the unfavorable impact of the COVID-19 pandemic.
Diluted earnings per share attributable to Johnson Controls for the three months
ended December 31, 2020 was $0.62 compared to $0.21 for the three months ended
December 31, 2019 .
44
--------------------------------------------------------------------------------
Comprehensive Income (Loss) Attributable to
Three Months Ended
December 31,
(in millions) 2020 2019 Change
Comprehensive income attributable to Johnson
Controls $ 723 $ 414 75 %
The increase in comprehensive income attributable to Johnson Controls for the
three months ended December 31, 2020 was due to higher net income attributable
to Johnson Controls ($292 million ) and an increase in other comprehensive income
attributable to Johnson Controls ($17 million ) resulting primarily from
favorable currency translation adjustments. The year-over-year favorable foreign
currency translation adjustments were primarily driven by the strengthening of
the euro, Mexican peso and Canadian dollar against the U.S. dollar in the
current quarter.
Segment Analysis
Management evaluates the performance of its business units based primarily on segment EBITA, which represents income from continuing operations before income taxes and noncontrolling interests, excluding general corporate expenses, intangible asset amortization, net financing charges, restructuring and impairment costs, and net mark-to-market adjustments related to pension and postretirement plans and restricted asbestos investments.Net Sales Three Months Ended December 31, (in millions) 2020 2019 Change Building Solutions North America$ 2,034 $ 2,167 -6 % Building Solutions EMEA/LA 906 928 -2 % Building Solutions Asia Pacific 615 629 -2 % Global Products 1,786 1,852 -4 %$ 5,341 $ 5,576 -4 % •The decrease inBuilding Solutions North America was due to lower volumes ($136 million ), partially offset by the favorable impact of foreign currency translation ($3 million ). The decrease in volumes was primarily attributable to the unfavorable impact of the COVID-19 pandemic.
•The decrease in
•The decrease inBuilding Solutions Asia Pacific was due to lower volumes ($40 million ) and business divestitures ($2 million ), partially offset by the favorable impact of foreign currency translation ($28 million ). The decrease in volumes was primarily attributable to the unfavorable impact of the COVID-19 pandemic. •The decrease in Global Products was due to business divestitures ($71 million ) and lower volumes ($32 million ), partially offset by the favorable impact of foreign currency translation ($37 million ). The decrease in volumes was primarily attributable to the unfavorable impact of the COVID-19 pandemic. 45 -------------------------------------------------------------------------------- Segment EBITA Three Months Ended December 31, (in millions) 2020 2019 Change Building Solutions North America$ 255 $ 258 -1 % Building Solutions EMEA/LA 95 90 6 % Building Solutions Asia Pacific 79 72 10 % Global Products 213 203 5 %$ 642 $ 623 3 %
•The decrease in
•The increase in
•The increase inBuilding Solutions Asia Pacific was due to productivity savings and cost mitigation actions, net of unfavorable volumes ($4 million ) and the favorable impact of foreign currency translation ($3 million ). •The increase in Global Products was due to higher equity income ($10 million ) driven primarily by certain partially-owned affiliates of theJohnson Controls - Hitachi joint venture, the favorable impact of foreign currency translation ($6 million ) and prior year integration costs ($1 million ), partially offset by lower income due to business divestitures ($6 million ) and unfavorable volumes / mix, net of productivity savings and cost mitigation actions ($1 million ).
Backlog
The Company's backlog is applicable to its sales of systems and services. AtDecember 31, 2020 , the backlog was$9.8 billion , of which$9.5 billion was 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.
At
•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 backlog as it believes it is a useful measure of evaluating the Company's operational performance and relationship to total orders.
46
--------------------------------------------------------------------------------Liquidity and Capital Resources
Working Capital
December 31, September 30,
(in millions) 2020 2020 Change
Current assets $ 10,034 $ 10,053
Current liabilities (8,486) (8,248)
1,548 1,805 -14 %
Less: Cash (1,839) (1,951)
Add: Short-term debt 11 31
Add: Current portion of long-term debt 453 262
Working capital (as defined) $ 173 $ 147 18 %
Accounts receivable - net $ 5,177 $ 5,294 -2 %
Inventories 1,913 1,773 8 %
Accounts payable 3,210 3,120 3 %
•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 increase in working capital at December 31, 2020 as compared to
September 30, 2020 , was primarily due to the favorable resolution of certain
post-closing working capital and net debt adjustments related to Power Solutions
sale, an increase in inventory to meet anticipated customer demand, partially
offset by a decrease in accounts receivable and increase in accounts payable.
•The Company's days sales in accounts receivable at December 31, 2020 and
September 30, 2020 were 68 days and 63 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 turns for the three months ended
•Days in accounts payable at
47--------------------------------------------------------------------------------
© Edgar Online, source
