Few publicly listed companies like Johnson Controls International (JCI), present a pure smart buildings product and service offering. Since the 2016 merger with Tyco, and the 2019 sale of its Power Solutions business to BCP Acquisitions LLC for $13.2 billion, the firm is looking to capitalize on macro-trends including decarbonization, post-pandemic focus on healthier buildings, and digital technologies. JCI believes this is around a $250 billion incremental market revenue opportunity over the next decade.
In this research note, we examine the firm’s annual report and investor day presentation in what has been a challenging year for most companies across the world.
The company offers engineering, manufacturing, maintenance, and commissioning for building products and systems, including residential and commercial HVAC, refrigeration, controls, security systems, as well as fire detection and suppression solutions.
In its annual report, released this week, JCI confirmed net sales of almost $23.7 billion, a 6% increase on 2020 figures. This increase was a result of higher organic sales ($932m), the favorable impact of foreign currency translation ($447m) and incremental sales from acquisitions ($253m), partially offset by lower sales due to business divestitures ($275m) and the impact of nonrecurring purchase accounting adjustments ($6m). Excluding these factors, their consolidated net sales increased 4% as compared to the prior year, primarily attributable to the increased demand generated by the COVID-19 pandemic recovery. Gross profit for 2021 amounted to just over $8 billion, a 9% increase on the 2020 figure.
JCI 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, mainly during portions of fiscal 2020. There was lower demand due to restricted access to customer sites to perform service and installation work as well as reduced discretionary capital spending by customers. However, in 2021 the company saw increases in both demand and volumes, caused by increases in retrofit activity and, to a lesser extent, commercial building construction.
Furthermore, as a direct result of the pandemic, JCI saw an increase in demand for its products and solutions, including thermal cameras, indoor air quality, location-based services for contact tracing and touchless access control.
Johnson Controls segments its business units geographically: North America (NA); Europe, Middle East, Africa, and Latin America (EMEA/LA), Asia Pacific (APAC), and the Global Products division. The firm’s NA business recorded sales of $8.7 billion, a modest 1% increase on 2020 figures but still their largest segment. The majority of JCI’s growth came from the company’s activities in the rest of the world, the EMEA/LA region saw net sales of $3.7 billion (8% increase on 2020), the Asia Pacific region saw net sales of $2.7 billion (10% increase on 2020), and the Global Products division saw net sales of $8.6 billion (9% increase on 2020). Much of these increases can be attributed to favorable foreign currency translation and higher margins compared to pandemic disrupted 2020 figures.
Moving forwards, JCI leadership has outlined several main priorities. The firm plans to capitalize on key growth drivers, such as decarbonization, healthy indoor environments, and digital building technology.
They plan to accelerate development of high growth digital services, primarily by transforming their large service business with differentiated solutions and innovative deal structures through the OpenBlue platform launched in 2020.
Expenditure for research activities relating to product development and improvement in fiscal 2021 was $275 million (approx. 3.4% of gross profit), almost exactly the same as 2020 but not comparing favorably with 2019 where $319 million was spent.
In fiscal 2021, JCI also announced plans to optimize its cost structure through broad-based Selling, General & Administrative expenses (SG&A) with the intent to deliver annualized savings of $300 million by 2023. The company announced cost of sales actions that could drive $250 million in annual run-rate savings by fiscal 2023. The one-time pre-tax costs associated with these actions are estimated to be approximately $385 million across all segments. In the past year, JCI recorded $242 million of costs resulting from the 2021 restructuring plan, which is expected to be completed in 2023.
JCI acquisition activity in fiscal 2021 was relatively muted. In May 2021, they completed the acquisition of Silent-Aire, a provider of hyperscale data center cooling and modular critical infrastructure solutions, for approximately $755 million, of which $661 million being in cash. The Silent-Aire business will be reported within the Global Products segment. The press release notes that Silent-Aire revenue for fiscal year 2021 (May) was expected to be approximately $650 million.
Finally, the annual report notes that “During fiscal 2021, the Company completed certain additional acquisitions for a combined purchase price, net of cash acquired, of $81 million…”. The only other JCI acquisition we noted in 2021 was that of UK based Esotec in April, which is an integrator of security systems. This would suggest the annual report is referring to this deal, but it is not explicit, so cannot be confirmed at this time.