Johnson Controls International plc (NYSE:JCI)

The total carrying value of goodwill and other intangible assets exhibited a general downward trend over the six-year period from 2018 to 2023, decreasing from US$ 25,821 million to US$ 22,824 million. This overall reduction is primarily driven by the steady amortization of definite-lived assets and fluctuations in goodwill levels.

Goodwill Trends

Goodwill remains the most significant component of the asset group. From a peak of US$ 19,473 million in 2018, the value declined to a low of US$ 17,328 million in 2022 before recovering to US$ 17,936 million in 2023. The overall volatility suggests periodic adjustments or the impact of divestitures offset by new acquisitions.

Analysis of Definite-Lived Intangible Assets

A divergence is observed between the gross carrying amount and the net value of definite-lived intangible assets. While the gross carrying amount grew from US$ 4,908 million in 2018 to US$ 5,511 million in 2023, the net value decreased from US$ 3,778 million to US$ 2,774 million. This decline is directly attributable to the acceleration of accumulated amortization, which increased from US$ 1,130 million to US$ 2,737 million over the period.

Indefinite-Lived Intangible Assets

Indefinite-lived assets, primarily consisting of trademarks and tradenames, showed a consistent downward trajectory. These assets decreased from US$ 2,570 million in 2018 to US$ 2,114 million in 2023, indicating a gradual reduction in the carrying value of these non-amortizable assets.

Specific Intangible Asset Categories

Technology-related assets demonstrated growth, rising from US$ 1,334 million in 2018 to US$ 1,575 million in 2023. Customer relationship assets experienced fluctuations, starting at US$ 3,078 million in 2018 and ending at US$ 3,047 million in 2023. Additionally, miscellaneous definite-lived assets showed a steady increase from US$ 496 million in 2018 to US$ 889 million in 2023.

An analysis of the financial position from 2018 to 2023 reveals a significant divergence between reported figures and those adjusted for the removal of goodwill and intangible assets. The consistent gap between reported and adjusted total assets indicates that a substantial portion of the balance sheet is comprised of non-physical, intangible valuations.

Asset Composition and Trends

Reported total assets declined from 48,797 million US$ in 2018 to 42,242 million US$ in 2023. When adjusted to remove goodwill and intangibles, total assets dropped to 24,306 million US$ by 2023. The magnitude of this adjustment suggests that intangible assets consistently represent approximately 40% to 43% of the total asset base throughout the analyzed period.

Impact on Shareholders' Equity

A critical shift is observed in the equity position. While reported shareholders' equity remained positive, decreasing from 21,164 million US$ in 2018 to 16,545 million US$ in 2023, the adjusted equity shows a precipitous decline. Adjusted shareholders' equity transitioned from a positive 1,691 million US$ in 2018 to a negative 1,391 million US$ by 2023. The equity became negative in 2020 and continued to deteriorate annually thereafter, indicating that the company's tangible assets are insufficient to cover its total liabilities.

Net Income Performance

Net income exhibits volatility, with a peak in 2019. A comparison between reported and adjusted net income shows that adjustments typically result in higher earnings figures, particularly from 2020 onward. For instance, in 2020, reported net income was 631 million US$, whereas adjusted net income rose to 1,055 million US$. This suggests that non-cash amortization charges related to intangible assets have consistently reduced reported profitability.

The transition to negative adjusted shareholders' equity highlights a growing reliance on intangible valuations to maintain a positive book value. While the company maintains positive reported net income, the eroding tangible equity base suggests a weakened financial position when viewed strictly through a tangible-asset lens.

The adjustment of financial ratios through the removal of goodwill and intangible assets reveals a significant discrepancy between reported performance and underlying operational efficiency. The systematic exclusion of these non-physical assets highlights a balance sheet heavily weighted toward intangibles, which materially suppresses efficiency ratios and alters the perception of profitability.

Profitability and Return on Assets

A consistent gap exists between reported and adjusted net profit margins, particularly from 2020 through 2023, where adjusted margins are higher. This trend is more pronounced in the Return on Assets (ROA), where the adjusted figure consistently outperforms the reported figure. For instance, by September 30, 2023, the adjusted ROA reached 8.36% compared to a reported 4.38%, indicating that the core tangible assets are generating returns at nearly double the rate of the total asset base.

Asset Utilization Efficiency

The most striking divergence is observed in the total asset turnover ratio. Reported turnover remained relatively stagnant, fluctuating between 0.55 and 0.64. In contrast, the adjusted turnover ratio remained significantly higher, ranging from 0.98 to 1.10. This indicates that the presence of goodwill and intangible assets creates a substantial drag on reported asset efficiency, masking a much higher operational velocity of the company's physical assets.

Financial Leverage and Equity Returns

The removal of intangible assets leads to an extreme amplification of leverage and return on equity (ROE) metrics. In the available adjusted data for 2018 and 2019, adjusted financial leverage was drastically higher than reported levels, reaching 17.34 and 15.18 respectively. Correspondingly, adjusted ROE surged to 127.85% and 357.30%. These figures suggest that a vast majority of the reported equity is comprised of goodwill and intangible assets, and that the returns relative to tangible equity are exceptionally high.

In summary, the adjusted ratios depict a company with high operational asset productivity and strong tangible returns, though this is accompanied by an extremely high degree of leverage when intangible assets are excluded from the equity base.

The financial performance from 2018 to 2023 is characterized by significant volatility in both net income and profit margins, with a notable anomaly in 2019 followed by a sharp contraction in 2020 and a subsequent steady recovery in adjusted metrics.

Profitability Volatility and Peak Performance

A substantial increase in profitability occurred in 2019, where both reported and adjusted net profit margins peaked at 23.67%, with net income reaching 5,674 million US$. This represents the highest point of profitability within the analyzed period. However, this peak was followed by a severe decline in 2020, with reported net income dropping to 631 million US$ and the reported net profit margin falling to 2.83%.

Divergence Between Reported and Adjusted Metrics

Starting in 2020, a consistent divergence is observed between reported and adjusted figures. In 2020, adjusted net income was 1,055 million US$ compared to a reported 631 million US$, resulting in an adjusted net profit margin of 4.73% versus a reported 2.83%. This gap persisted through 2023, indicating that non-recurring items or specific accounting adjustments consistently impacted the reported bottom line more severely than the adjusted operational results.

Recovery and Margin Expansion Trend

From 2021 to 2023, a positive trend in adjusted profitability is evident. The adjusted net profit margin rose steadily from 6.92% in 2021 to 7.28% in 2022, and finally to 7.59% in 2023. While the reported net profit margin fluctuated during this period—dropping to 6.06% in 2022 before returning to 6.90% in 2023—the adjusted margin demonstrates a consistent upward trajectory, suggesting an improvement in underlying operational efficiency.

An analysis of the balance sheet and asset utilization from 2018 to 2023 reveals a significant discrepancy between reported and adjusted total assets, indicating a substantial presence of goodwill and intangible assets. Both reported and adjusted asset bases experienced an initial decline before stabilizing and showing slight growth in the latter years of the period.

Asset Base Composition and Trends

Reported total assets decreased from 48,797 million USD in 2018 to 42,242 million USD in 2023. Simultaneously, adjusted total assets fell from 29,324 million USD to 24,306 million USD over the same period. The persistent gap between these two figures demonstrates that a large portion of the company's total assets consists of non-physical assets. This gap remained relatively stable between 2019 and 2023, suggesting a consistent level of goodwill and intangible assets on the balance sheet.

Reported Total Asset Turnover

The reported asset turnover ratio exhibited a U-shaped trajectory, starting at 0.64 in 2018, reaching a trough of 0.55 in 2020, and recovering to 0.63 by 2023. This trend suggests a period of reduced asset efficiency during the 2019-2020 window, followed by a steady recovery in the ability to generate revenue from the total asset base.

Adjusted Total Asset Turnover

The adjusted total asset turnover ratio consistently outperformed the reported ratio, remaining near or above 1.00 for most of the period. After a slight decline from 1.07 in 2018 to a low of 0.98 in 2020, the ratio climbed to 1.10 by 2023. This indicates that the company's core tangible assets are utilized significantly more efficiently than the reported figures suggest, as the removal of goodwill and intangibles provides a clearer view of operational asset productivity.

The convergence of the reported and adjusted turnover trends confirms a broader recovery in operational efficiency since 2020. The fact that the adjusted turnover exceeds the reported turnover by a wide margin highlights that the perceived lower efficiency in the reported metrics is primarily driven by the high valuation of intangible assets rather than a failure of physical asset utilization.

A comprehensive review of the financial position between September 30, 2018, and September 30, 2023, reveals a significant divergence between reported financial metrics and those adjusted for goodwill and intangible assets. While reported assets and equity show relative stability or gradual declines, the adjusted figures highlight a substantial erosion of tangible net worth.

Asset Composition and Trends

Reported total assets decreased from 48,797 million USD in 2018 to 42,242 million USD in 2023. During the same period, adjusted total assets fell from 29,324 million USD to 24,306 million USD. The persistent gap between reported and adjusted assets indicates that a significant portion of the balance sheet is comprised of intangible assets and goodwill, representing approximately 42% of total assets by 2023.

Equity Erosion

Reported shareholders' equity attributable to the company remained positive throughout the period, moving from 21,164 million USD in 2018 to 16,545 million USD in 2023. Conversely, adjusted shareholders' equity exhibited a severe downward trajectory, transitioning from a positive 1,691 million USD in 2018 to a deficit of 1,391 million USD by 2023. This transition into negative adjusted equity occurred in 2020, suggesting that the company's liabilities exceed its tangible assets.

Financial Leverage Comparison

Reported financial leverage showed a moderate upward trend, increasing from 2.31 in 2018 to 2.55 in 2023. However, adjusted financial leverage was markedly higher and more volatile. In 2018 and 2019, adjusted leverage stood at 17.34 and 15.18 respectively, reflecting a much higher risk profile when intangible assets are excluded. The absence of adjusted leverage ratios from 2020 onward coincides with the shift to negative adjusted equity, where the ratio ceases to be a meaningful measure of solvency.

The financial performance between 2018 and 2023 is characterized by significant volatility in net income and a consistent decline in reported shareholders' equity. Reported net income experienced a substantial peak in 2019, followed by a sharp contraction in 2020, before stabilizing and showing a gradual upward trajectory through 2023. Adjusted net income followed a similar pattern but demonstrated greater resilience in 2020 and a more consistent growth trend from 2021 to 2023, rising from 1,637 million US dollars to 2,033 million US dollars.

Reported Return on Equity (ROE) Trends

The reported ROE mirrored the fluctuations in net income, peaking at 28.71% in 2019 and dropping to a low of 3.62% in 2020. From 2021 onward, a steady recovery is observed, with the ratio improving from 9.32% to 11.18% by September 30, 2023. This recovery was driven by the combination of increasing reported net income and a reducing equity base, which fell from 21,164 million US dollars in 2018 to 16,545 million US dollars in 2023.

Adjusted Equity and Adjusted ROE Analysis

A critical divergence is noted in the adjusted shareholders' equity, which transitioned from a positive position of 1,691 million US dollars in 2018 to a negative position starting in 2020. This negative trend accelerated over the period, reaching negative 1,391 million US dollars by 2023. The limited size of the adjusted equity base in 2018 and 2019 resulted in disproportionately high adjusted ROE figures of 127.85% and 357.30%, respectively. The absence of adjusted ROE values from 2020 to 2023 is attributable to the adjusted shareholders' equity becoming negative, rendering the ratio mathematically non-meaningful for standard performance interpretation.

An analysis of financial performance from 2018 to 2023 reveals a consistent divergence between reported and adjusted metrics, primarily driven by the exclusion of goodwill and intangible assets from the adjusted asset base.

Asset Base Composition

Reported total assets remained relatively stable between 2019 and 2023, fluctuating within the range of $40.8 billion to $42.2 billion. In contrast, adjusted total assets were significantly lower, ranging from $22.8 billion to $29.3 billion. This substantial and persistent gap indicates a high concentration of intangible assets and goodwill on the balance sheet, which significantly inflates the reported asset base relative to the tangible operating base.

Net Income Trends

Adjusted net income experienced extreme volatility, characterized by a peak of $5,674 million in 2019 followed by a sharp decline to $1,055 million in 2020. Since 2020, a steady recovery trend has been observed, with adjusted net income increasing incrementally to reach $2,033 million by September 30, 2023. The divergence between reported and adjusted net income was most acute in 2020, suggesting the impact of significant one-time non-cash charges or impairments.

Adjusted vs. Reported ROA

The Adjusted ROA consistently exceeded the Reported ROA throughout the six-year period. While Reported ROA exhibited high volatility—peaking at 13.42% in 2019 and bottoming at 1.55% in 2020—the Adjusted ROA maintained a higher performance profile, peaking at 23.53% in 2019 and recovering to 8.36% in 2023. This disparity confirms that the inclusion of goodwill and intangible assets significantly suppresses the reported return on assets, whereas the adjusted metric provides a clearer view of operational efficiency.

The data indicates a trajectory of stabilization and gradual improvement in asset productivity following the 2020 trough. The growth of Adjusted ROA from 4.61% in 2020 to 8.36% in 2023 suggests an increasing ability to generate earnings from the core tangible asset base.