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 15.54% in 2018 to a peak of 17.70% in 2021. Subsequently, it decreased to 17.41% in 2022 and further to 16.93% in 2023. While fluctuations are present, the cost of capital generally remained above 15% throughout the period, indicating a relatively high hurdle rate for investment returns.

Invested Capital

Invested capital 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 entire period, ranging from a low of US$-4,330 million in 2020 to a high of US$-3,097 million in 2023. The magnitude of the negative economic profit appears to be correlated with both NOPAT and the cost of capital. The largest negative value in 2020 coincides with the lowest NOPAT and a relatively high cost of capital. While the negative economic profit lessened in the most recent year, it still indicates that the company’s returns are not exceeding its cost of capital.

In summary, the organization consistently failed to generate economic profit during the analyzed timeframe. The interplay between NOPAT, cost of capital, and invested capital suggests that improving operational profitability and/or optimizing capital allocation are key areas for potential improvement.

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 economic spread ratio demonstrates a consistently negative relationship with invested capital over the observed period. Economic profit remains negative throughout the six years, indicating the company’s returns are not exceeding its cost of capital.

Economic Spread Ratio

The economic spread ratio exhibits a generally declining trend from -9.36% in 2018 to -14.79% in 2020. This suggests a worsening in the difference between the company’s return on invested capital and its weighted average cost of capital. A subsequent improvement is noted in 2021, with the ratio moving to -10.59%, followed by -11.10% in 2022 and -10.51% in 2023. While these later figures represent a slight positive shift from the 2020 low, the ratio remains negative, signifying continued underperformance relative to the cost of capital.

Invested capital experienced a decrease from $35,173 million in 2018 to $29,283 million in 2020. It then stabilized, fluctuating between $29,338 million and $29,496 million from 2021 to 2023. This stabilization occurs alongside the slight improvement in the economic spread ratio, suggesting that maintaining capital levels may be contributing to a marginal increase in returns relative to cost.

Economic profit consistently reflects a substantial shortfall, ranging from approximately $3.1 billion to $4.3 billion in negative value. The magnitude of the negative economic profit aligns with the negative economic spread ratio, reinforcing the conclusion that the company is not generating sufficient returns to cover its cost of capital during this period.

The period between September 30, 2018, and September 30, 2023, demonstrates a consistent pattern of negative economic profit. While the magnitude fluctuates year-over-year, the company has not generated positive economic profit during this timeframe. Adjusted net sales exhibit volatility, impacting the economic profit margin.

Economic Profit

Economic profit consistently remains negative throughout the analyzed period, ranging from a least negative value of -3,097 million in 2023 to a most negative value of -4,330 million in 2020. The largest decrease in economic profit occurred between 2018 and 2020, while the most significant improvement was observed between 2020 and 2023. Despite the improvement, the company still experienced a substantial economic loss in the most recent year.

Adjusted Net Sales

Adjusted net sales decreased significantly from 2018 to 2019, falling from 31,447 million to 24,049 million. Sales continued to decline in 2020, reaching 22,345 million, representing the lowest value in the observed period. A recovery began in 2021, with sales increasing to 23,870 million, and this upward trend continued through 2023, reaching 26,985 million. The recovery in sales did not translate into positive economic profit.

Economic Profit Margin

The economic profit margin mirrors the trend in economic profit, remaining negative throughout the period. The margin deteriorated substantially from -10.47% in 2018 to -19.38% in 2020, coinciding with the lowest adjusted net sales and the largest economic loss. The margin improved from 2020 to 2023, moving from -19.38% to -11.48%, indicating a lessening of the economic loss relative to sales. However, the margin remains in negative territory, suggesting that the company’s cost of capital exceeds its returns.

The observed trends suggest a correlation between adjusted net sales and economic profit margin. While sales have begun to recover, the company continues to struggle with generating economic profit, indicating potential issues with cost management, capital efficiency, or pricing strategies.