Johnson Controls is investing in digital and product capabilities to offer outcome-based solutions and generate recurring revenue. They have experienced increased demand and price increases to offset inflation, resulting in favorable revenue. However, supply chain disruptions and cost pressures have negatively impacted margins. JCI is mitigating these impacts, but the effect of future events is uncertain. They are investing in climate-related innovation to develop sustainable products and services, and are factoring in trends such as increased demand for smart, safe, efficient and sustainable buildings. They plan to capitalize on these trends by developing and delivering technologies and solutions to create smart, sustainable and healthy buildings.

Executive Summary

Financials

Revenue has grown steadily over the past three years, driven by increased demand for the Company's products and services, government tax incentives, and building performance standards. This has been partially offset by the unfavorable impact of foreign currency translation and net pension mark-to-market adjustments. Operating expenses increased by $236 million, primarily due to investments to support growth, one-time transaction and separation costs, and a loss associated with a fire at a leased warehouse facility. This was partially offset by non-recurring environmental remediation charges in the prior year and favorable foreign currency translation. The company's net income margin for the year ended September 30 was 8.7%, a slight improvement from the previous year. This is slightly higher than the industry average of 8.3%.

Management Discussion and Analysis

Management has invested in digital and product capabilities, such as OpenBlue, to offer outcome-based solutions and generate recurring revenue. They have also expanded and redistributed their supplier network, increased prices, and improved productivity to mitigate supply chain disruptions and inflation. These initiatives have generally been successful in offsetting some of the impact, resulting in increased demand and favorable revenue. Margins have improved as supply chain disruptions eased. Management assesses the company's competitive position in the industry by investing in new digital and product capabilities, leveraging its install base, and offering outcome-based solutions. They are highlighting increased global demand, geopolitical and economic tensions, labor shortages, and supply chain disruptions as potential market trends or disruptions. Management identified risks related to developing or acquiring new products and technologies, adapting to a changing technological and regulatory environment, and integrating emerging technologies. Strategies to mitigate these risks include investing resources in acquisitions and development, detecting and correcting defects, and developing adequate protection measures.

Key Performance Indicators (KPIs)

JCI has experienced increased material cost inflation and component shortages, as well as supply chain disruptions and delays. Despite this, revenue has increased due to increased demand and price increases, while margins have decreased due to cost pressures. However, margins improved in fiscal 2023 as supply chain disruptions eased. JCI is investing in digital and product capabilities to achieve sustainability goals. JCI has experienced increased demand and price increases to offset inflation, resulting in favorable revenue. However, supply chain disruptions and cost pressures have negatively impacted margins. JCI has taken steps to mitigate these impacts, but the effect of future events is uncertain. ROI is likely lower than cost of capital, but it is unclear if the company is generating value for shareholders. The Company has strong positions in attractive and growing end-markets, and is well-positioned to capitalize on emerging trends. It has three strategic priorities to expand its capabilities and increase market share. There are plans to invest in product development and partnerships to power innovation and offer differentiated solutions.

Risk Assessment

Economic downturns, rising interest rates, global supply chain disruptions, inflation, geopolitical tensions, and the strengthening of the U.S. dollar could adversely affect the company's revenues and financial performance. Additionally, the company must develop or acquire new products and technologies to achieve market acceptance and remain competitive. JCI deploys countermeasures such as identity and access controls, data protection, vulnerability assessments, product software designs, monitoring of IT networks and systems, and maintenance of backup and protective systems to deter, prevent, detect, respond to and mitigate cybersecurity threats. Yes, the company is subject to legal proceedings and commercial or contractual disputes. They are managing these risks by accruing for contingencies, recording receivables from third party insurers, and conducting environmental studies.

Corporate Governance and Sustainability

The board of directors is composed of nominees set forth in Johnson Controls' proxy statement for its annual meeting of shareholders to be held on March 13, 2024. Information about executive officers is included in Part I, Item 4 of this Annual Report on Form 10-K. No notable changes in leadership or independence are mentioned. The Company has implemented several measures to ensure accountabilities exist for fostering a diverse, equitable and inclusive environment. This includes diversity objectives for the CEO and other senior leaders, BRGs to attract diverse talent, and awards to honor employee contributions. The Company also engages BRGs to support the acquisition and development of diverse talent internally and externally. JCI commits to investing in climate-related innovation to develop sustainable products and services. It invests in digital product capabilities, energy efficient products, and low GWP refrigerants and technology. It also offers outcome-based solutions to customers with a focus on generating accelerated growth in services and recurring revenue.

Forward Guidance

The Company is investing in new digital and product capabilities to enable it to deliver sustainable, high-efficiency products and tailored services to customers. It is leveraging its install base and data-driven products to offer outcome-based solutions to drive organizational improvement and generate accelerated growth. JCI is factoring in trends such as increased demand for smart, safe, efficient and sustainable buildings, government tax incentives, building performance standards, and other regulations. It plans to capitalize on these trends by developing and delivering technologies and solutions to create smart, sustainable and healthy buildings. Yes, the company is investing in new digital and product capabilities, such as its OpenBlue platform, to enable it to deliver sustainable, high-efficiency products and services to customers. It is also leveraging its install base and data-driven products to offer outcome-based solutions.

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