Johnson Controls International plc (NYSE:JCI)

An analysis of the economic value added indicates a persistent failure to generate returns exceeding the cost of capital over the six-year period ending September 30, 2023. Economic profit remained consistently negative throughout this timeframe, signifying that the company did not create economic value for its shareholders.

Net Operating Profit After Taxes (NOPAT)

NOPAT exhibited significant volatility, characterized by a severe contraction in 2020 when profit fell to 448 million from 2,126 million in the preceding year. Although a recovery was observed in 2021 with NOPAT rising to 2,084 million, the figures subsequently stabilized at a lower level, ending the period at 1,892 million in 2023.

Invested Capital and Cost of Capital

A reduction in invested capital occurred between 2018 and 2020, decreasing from 35,173 million to 29,283 million, after which the capital base remained relatively stagnant near 29,400 million. Simultaneously, the cost of capital remained high, fluctuating between 15.55% and 17.71%. The peak cost of capital in 2021 further constrained the ability to achieve a positive economic profit.

Economic Profit Trajectory

Economic profit remained in negative territory for all reported years, with the most significant deficit of -4,333 million occurring in 2020, coinciding with the sharp decline in NOPAT. Despite the reduction in the invested capital base, the economic profit has not trended toward zero, remaining largely stagnant between -3,100 million and -3,300 million from 2018 to 2023.

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 analysis of economic value added from 2018 to 2023 reveals a consistent failure to generate economic profit, indicating that the returns on invested capital remained below the cost of capital throughout the entire period.

Economic Profit Trends

Economic profit remained negative for six consecutive years, with values fluctuating between -3,100 million and -4,333 million. A significant deterioration was observed in 2020, where economic profit dropped to its lowest point of -4,333 million. Subsequent years showed a partial recovery, with the figure stabilizing between -3,100 million and -3,278 million from 2021 through 2023.

Invested Capital Dynamics

A downward trend in invested capital was evident between 2018 and 2020, decreasing from 35,173 million to 29,283 million. Following this contraction, the invested capital base entered a period of relative stability, maintaining a range between 29,338 million and 29,496 million from 2021 to 2023.

Economic Spread Ratio Analysis

The economic spread ratio remained consistently negative, confirming persistent value destruction. The ratio reached a peak negative value of -14.80% in 2020, mirroring the sharp decline in economic profit during that year. While the ratio improved to -10.52% by 2023, it remains deeply negative, suggesting that the spread between the return on invested capital and the cost of capital has not narrowed sufficiently to create value.

The financial performance from 2018 to 2023 is characterized by a persistent inability to generate positive economic profit, indicating that the company has consistently failed to cover its cost of capital. A significant period of instability peaked in 2020, followed by a gradual recovery in both revenue scale and margin efficiency.

Economic Profit Trends

Economic profit remained negative throughout the entire six-year period, fluctuating between -3,100 million and -4,333 million. The most substantial deficit was recorded on September 30, 2020, representing the peak of economic value destruction during the analyzed timeframe. Since 2021, the deficit has stabilized, with the 2023 figure of -3,100 million aligning closely with the levels observed in 2019 and 2021.

Adjusted Net Sales Performance

A marked contraction in adjusted net sales occurred between 2018 and 2020, where figures dropped from 31,447 million to a period low of 22,345 million. A consistent recovery trend emerged starting in 2021, with annual increases leading to a value of 26,985 million by September 30, 2023. Despite this three-year growth trajectory, sales volumes remain below the 2018 baseline.

Economic Profit Margin Analysis

The economic profit margin exhibited high correlation with net sales volatility, reaching a nadir of -19.39% in 2020. This deterioration suggests that the decline in sales significantly amplified the inability to generate returns above the cost of capital. From 2021 to 2023, the margin has steadily improved, narrowing from -13.03% to -11.49%, which indicates a gradual recovery in economic efficiency despite the continued negative status of the margin.