Johnson Controls International plc (NYSE:JCI)

The period between 2018 and 2023 demonstrates a consistent pattern of negative economic profit. While net operating profit after taxes (NOPAT) and invested capital fluctuate, the cost of capital remains relatively stable, resulting in economic profit consistently below zero. A review of the individual components reveals some nuanced trends.

Net Operating Profit After Taxes (NOPAT)

NOPAT experienced a decline from US$2,175 million in 2018 to US$448 million in 2020, representing a substantial decrease. A recovery was observed in 2021, with NOPAT reaching US$2,084 million, but this was followed by a decrease to US$1,860 million in 2022. A slight increase to US$1,892 million occurred in 2023, but remained below the 2018 and 2021 levels. This suggests volatility in operational profitability over the analyzed period.

Cost of Capital

The cost of capital exhibited an increasing trend from 15.51% in 2018 to a peak of 17.66% in 2021. Subsequently, it decreased to 17.37% in 2022 and further to 16.90% in 2023. Despite these fluctuations, the cost of capital remained above 15% throughout the entire period, indicating a relatively high hurdle rate for investment returns.

Invested Capital

Invested capital generally decreased from US$35,173 million in 2018 to US$29,283 million in 2020. It remained relatively stable between 2020 and 2023, fluctuating within a narrow range of US$29,283 million to US$29,496 million. This suggests a period of capital reduction followed by stabilization in capital deployment.

Economic Profit

Economic profit remained negative throughout the period, ranging from -US$3,087 million to -US$4,320 million. The most significant negative economic profit was recorded in 2020, coinciding with the lowest NOPAT. While economic profit improved slightly in 2021 and 2023, it did not reach positive territory. The consistent negative economic profit indicates that the company’s returns on invested capital have not consistently exceeded its cost of capital.

In summary, the analysis reveals a consistent inability to generate returns exceeding the cost of capital. While NOPAT experienced some recovery after the decline in 2020, it was insufficient to offset the relatively high cost of capital and generate positive economic profit. The stability in invested capital in recent years does not appear to have translated into improved economic performance.

The analysis of the financial data over the six-year period reveals notable fluctuations in key profitability metrics.

Net Income Attributable to Johnson Controls

This metric demonstrates a pronounced volatility throughout the period. Starting at 2,162 million US$ in 2018, it rose sharply to 5,674 million US$ in 2019, representing significant growth. However, it then experienced a steep decline to 631 million US$ in 2020, indicating a substantial downturn. In the subsequent years, net income showed recovery, increasing to 1,637 million US$ in 2021, slightly decreasing to 1,532 million US$ in 2022, and rising again to 1,849 million US$ in 2023. The pattern suggests sensitivity to external factors or business conditions impacting profitability.

Net Operating Profit After Taxes (NOPAT)

NOPAT exhibits a somewhat different trend compared to net income. It begins at 2,175 million US$ in 2018, slightly declining to 2,126 million US$ in 2019. A significant drop occurs in 2020 to 448 million US$, mirroring the decline seen in net income. However, a strong rebound is evident in 2021 with NOPAT surging to 2,084 million US$. Afterward, it shows a moderate decline to 1,860 million US$ in 2022 followed by a slight increase to 1,892 million US$ in 2023. The data indicates operational recovery after 2020 albeit with some variability in subsequent years.

Overall, both profitability measures were adversely affected in 2020, likely due to extraordinary or industry-wide challenges in that year. There was a notable recovery starting from 2021, although no return to the peak levels observed in 2019 is evident by 2023. The persistent variability suggests ongoing influences affecting business performance that merit further investigation.

The financial data reveals fluctuating trends in the taxation-related items over the analyzed periods, indicating variations in both reported tax provisions and actual cash tax payments.

Income Tax Provision (Benefit)

The income tax provision exhibits considerable volatility. Initially, there is a provision of 518 million US dollars in 2018, followed by a significant tax benefit (negative provision) of -233 million in 2019. The figure then rises to 108 million in 2020 and sharply increases to 868 million in 2021, indicating a peak in tax expenses for that year. In 2022 and 2023, the provision returns to negative figures (-13 million and -323 million respectively), reflecting tax benefits or credits in these periods. This irregular pattern suggests fluctuations in taxable income or changes in tax rates, regulations, or one-time items impacting tax expense recognition.

Cash Operating Taxes

Cash operating taxes also demonstrate a volatile trend but follow a somewhat different pattern compared to the income tax provision. In 2018, cash taxes paid amount to 1,210 million US dollars, but in 2019, there is a substantial tax refund or cash inflow reflected by a negative value of -806 million. The cash taxes paid climb back to 675 million in 2020 and increase slightly further to 861 million in 2021. This is followed by a sharp decline in 2022 to 159 million before increasing again to 395 million in 2023. These fluctuations may be attributable to timing differences in tax payments, adjustments for prior years, changes in tax obligations, or the impact of cash tax planning strategies.

Overall, both income tax provision and cash operating taxes show significant year-to-year variability rather than steady growth or decline. The divergence between accounting provisions and actual cash taxes in some years highlights different timing and recognition impacts on reported and cash tax expenses. The data indicates a tax environment with complexities that may arise from shifting legislative factors, tax planning activities, or episodic events affecting taxable income and cash flow related to taxes.

Over the six-year period, the company's total reported debt and leases showed a variable trend. Initially, a significant reduction occurred from 12,091 million US dollars in 2018 to 8,304 million in 2019, indicating substantial debt repayment or restructuring. Following this decrease, the debt levels gradually increased each year, reaching 10,252 million US dollars by 2023. Despite the rise after 2019, the total debt at the end of 2023 remained below the 2018 figure, suggesting a net decrease over the longer term.

Shareholders’ equity attributable to the company displayed a continuous downward trend from 21,164 million US dollars in 2018 to 16,545 million in 2023. The decline was most pronounced during the first three years, dropping steadily to 17,447 million in 2020. After 2020, the equity levels stabilized somewhat but continued to decrease slightly through 2022 and 2023. This consistent reduction may reflect accumulated losses, dividend payments in excess of earnings, or other equity-reducing activities.

Invested capital mirrored the trends observed in equity but showed less volatility. It decreased from 35,173 million US dollars in 2018 to a low of 29,283 million in 2020, then remained relatively stable around the 29,400 million mark through 2023. This suggests limited new investment or expansion in capital assets, or possibly asset disposals, during the period. The overall contraction in invested capital aligns with the reduction in equity and fluctuating debt levels, indicating consolidation in the company’s capital structure.

In summary, the company experienced a notable reduction in debt in 2019 followed by a gradual increase toward prior levels. Equity consistently declined throughout the period, while invested capital showed a reduction followed by stabilization. These patterns may indicate a strategic refocus on managing liabilities and capital expenditure, alongside pressures on equity value.

The financial performance, as indicated by economic value added metrics, demonstrates a consistent pattern of negative economic profit over the observed period from 2018 to 2023. While invested capital has decreased overall, it has remained relatively stable in recent years. The economic spread ratio, a key indicator of profitability relative to the cost of capital, consistently reflects this underperformance.

Economic Profit

Economic profit exhibits negative values throughout the entire period. The most substantial negative economic profit occurred in 2020, reaching -4,320 US$ millions. While fluctuations are present, the figures generally range between -3,000 and -4,300 US$ millions, with 2023 showing a slight improvement to -3,087 US$ millions, though still negative.

Invested Capital

Invested capital decreased from 35,173 US$ millions in 2018 to 29,283 US$ millions in 2020. Following 2020, the decline in invested capital slowed considerably, with values stabilizing around 29,300 to 29,500 US$ millions for the subsequent three years. The final year, 2023, shows a minor decrease to 29,464 US$ millions.

Economic Spread Ratio

The economic spread ratio consistently registers negative percentages, indicating that the company’s return on invested capital is less than its cost of capital. The ratio worsened significantly in 2020, reaching -14.75%. A peak negative value was observed in 2020. From 2021 to 2023, the ratio has shown a slight improvement, moving from -10.56% to -10.48%, but remains negative. The ratio began at -9.33% in 2018 and has generally trended downward, with a recent stabilization in the last three years.

In summary, the company consistently fails to generate economic profit, as evidenced by the negative economic profit and economic spread ratio. While invested capital has decreased, the reduction has not been sufficient to offset the negative economic profit, and the economic spread ratio remains substantially negative. The slight improvements observed in 2022 and 2023 do not represent a significant shift in the overall trend.

The period between September 30, 2018, and September 30, 2023, demonstrates a consistent pattern of negative economic profit. While fluctuations occur year-to-year, the company has not generated positive economic profit during this timeframe. Adjusted net sales exhibit volatility, but generally trend upward over the period, contrasting with the consistently negative economic profit.

Economic Profit

Economic profit begins at negative $3,281 million in 2018 and fluctuates over the subsequent years. It reaches its lowest point at negative $4,320 million in 2020 before improving to negative $3,087 million in 2023. Despite the improvement from the 2020 low, economic profit remains negative throughout the entire period, indicating that the company’s returns are not exceeding its cost of capital.

Adjusted Net Sales

Adjusted net sales experience a decrease from $31,447 million in 2018 to $22,345 million in 2020. Following 2020, sales begin to recover, reaching $26,985 million in 2023. This represents an overall increase in sales from 2020 to 2023, but remains below the 2018 level. The increase in sales does not translate into positive economic profit.

Economic Profit Margin

The economic profit margin consistently registers as a negative percentage. It declines from -10.43% in 2018 to -19.33% in 2020, coinciding with the lowest economic profit value. The margin improves in subsequent years, reaching -11.44% in 2023. This improvement mirrors the recovery in adjusted net sales, but the margin remains negative, signifying that for every dollar of sales, the company is not generating sufficient economic profit to cover its cost of capital. The most substantial decline in the margin occurred between 2018 and 2020, and the subsequent recovery has been moderate.

In summary, the company demonstrates an inability to generate positive economic profit despite fluctuations and a general upward trend in adjusted net sales. The economic profit margin, while improving from its lowest point, remains negative, indicating continued underperformance relative to its cost of capital.