Johnson Controls International plc (NYSE:JCI)

An analysis of the economic profit from 2018 through 2023 reveals a persistent trend of economic value destruction, as the operating returns consistently failed to exceed the cost of the capital employed.

Net Operating Profit After Taxes (NOPAT)

Operating profitability exhibited significant volatility during the period. After remaining stable between 2018 and 2019, NOPAT experienced a sharp contraction in 2020, falling to 448 million US$. A strong recovery was observed in 2021, with profits returning to 2,084 million US$, before stabilizing between 1.86 billion and 1.89 billion US$ during 2022 and 2023.

Cost of Capital

The cost of capital remained consistently high, fluctuating within a range of 15.47% to 17.61%. A peak was reached in 2021 at 17.61%, followed by a gradual decline to 16.85% by September 30, 2023.

Invested Capital

A reduction in the capital base was observed from 2018 to 2020, as invested capital decreased from 35,173 million US$ to 29,283 million US$. Following this period of contraction, the invested capital reached a plateau, remaining virtually unchanged at approximately 29.4 billion US$ from 2021 through 2023.

Economic Profit Trends

Economic profit remained negative for every year of the analysis, signaling that the company did not generate sufficient NOPAT to cover its weighted average cost of capital. The maximum economic loss occurred in 2020, reaching 4,306 million US$, which correlates with the sharp decline in operating profit that year. Although the losses moderated in the subsequent years, they persisted at a level of approximately 3 billion US$ annually, indicating a sustained inability to create economic value for shareholders.

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.

An analysis of the financial performance from September 30, 2018, to September 30, 2023, reveals a consistent inability to generate economic value, characterized by persistent negative economic profit and negative economic spread ratios throughout the entire six-year period.

Economic Profit

Economic profit remained negative across all reported periods, indicating that the company failed to generate returns in excess of its cost of capital. The most significant erosion of value occurred in 2020, where economic profit dropped to its lowest point of -4,306 million US dollars. Following this trough, the figure stabilized, ending the period at -3,072 million US dollars in 2023, which represents a marginal improvement from the 2018 level of -3,265 million US dollars.

Invested Capital

A notable contraction in the capital base occurred between 2018 and 2020, with invested capital decreasing from 35,173 million US dollars to 29,283 million US dollars. From 2021 through 2023, the invested capital remained remarkably stable, fluctuating within a narrow range between 29,338 million and 29,496 million US dollars, suggesting a period of capital maintenance rather than expansion.

Economic Spread Ratio

The economic spread ratio confirms the trend of value destruction, remaining negative throughout the observation window. The ratio deteriorated from -9.28% in 2018 to a peak deficit of -14.71% in 2020, coinciding with the lowest economic profit. In the subsequent three years, the ratio fluctuated between -10.43% and -11.01%, demonstrating that the return on invested capital has consistently lagged behind the required cost of capital.

Overall, the data indicates a stagnant economic performance profile. Despite a reduction in the total invested capital base by approximately 16% between 2018 and 2023, the company has not been able to pivot toward a positive economic spread, maintaining a persistent gap between its operational returns and the cost of its financing.

The financial performance from 2018 to 2023 is characterized by a consistent failure to generate positive economic profit, indicating that the returns on invested capital remained below the company's cost of capital throughout the entire period. While a recovery trend is evident in sales and margins since 2020, the absolute economic loss has remained relatively stagnant.

Economic Profit Trends

Economic profit remained negative across all six fiscal years, fluctuating between a low of -US$4,306 million in 2020 and a high of -US$3,072 million in 2023. The significant spike in economic loss observed in 2020 represents the period of greatest value erosion, followed by a partial recovery that stabilized the loss around the -US$3 billion level from 2021 through 2023.

Adjusted Net Sales Performance

A notable V-shaped trajectory is observed in adjusted net sales. After a sharp decline from US$31,447 million in 2018 to a trough of US$22,345 million in 2020, sales entered a period of steady growth. By September 30, 2023, adjusted net sales recovered to US$26,985 million, although they remained below 2018 levels.

Economic Profit Margin Analysis

The economic profit margin mirrored the volatility of net sales and absolute economic profit. The margin deteriorated significantly, reaching its lowest point of -19.27% in 2020. Since that period, there has been a consistent improvement in the margin, which rose to -11.39% by 2023. This gradual upward trend suggests an improvement in operational efficiency or a better alignment of capital costs relative to revenue, even though the margin has not yet returned to the -10.38% level recorded in 2018.

Overall, the analysis reveals a period of financial instability peaking in 2020, followed by a gradual recovery in scale and margin efficiency. However, the persistence of negative economic profit indicates that the organization has not yet achieved a state of value creation for its shareholders over the analyzed timeframe.