Filing summary
Issuer and period: The supplied filing is Tyco International Ltd.’s unaudited Form 10-Q for the quarter ended December 30, 2011, not a Johnson Controls International plc filing. Comparisons are with the quarter ended December 24, 2010. The company cautions that interim results are not necessarily indicative of full-year results.
Financial results
| Metric | Quarter ended Dec. 30, 2011 | Comparable prior quarter |
|---|---|---|
| Net revenue | $4.208 billion | $4.379 billion |
| Operating income | $472 million | $706 million |
| Income from continuing operations | $334 million | $490 million |
| Net income attributable to Tyco common shareholders | $333 million | $659 million |
| Diluted EPS attributable to common shareholders | $0.71 | $1.34 |
| Cash from operating activities | $338 million | $246 million |
- Revenue fell 3.9%. Product sales declined to $2.295 billion from $2.508 billion; service revenue rose to $1.913 billion from $1.871 billion. The reported revenue decline primarily reflects the prior-year comparison with Electrical and Metal Products, which was sold in December 2010, and a $22 million adverse currency impact.
- Operating margin was approximately 11.2%, versus 16.1% reported in the prior period. Prior-year operating income included a $259 million gain on the Electrical and Metal Products transaction; excluding that gain, prior-period operating income was approximately $447 million and margin approximately 10.2%. Current-quarter results included $32 million of separation costs and $37 million of restructuring and asset impairment charges.
- Continuing-operations income attributable to common shareholders was $333 million, compared with $490 million. Prior-period net income also included $169 million from discontinued operations, so total net income comparisons include a nonrecurring prior-year contribution.
- Operating cash flow increased to $338 million from $246 million, although working capital reduced current-quarter operating cash flow by $470 million. Investing activities used $441 million, including $207 million of capital expenditures, $170 million for security customer contracts and $95 million for acquisitions. Financing activities used $271 million, including $200 million for share repurchases and $116 million for dividends.
- Cash and cash equivalents were $1.013 billion, down from $1.390 billion at September 30, 2011. Total debt was $4.174 billion, including $37 million current; long-term debt was $4.137 billion. The company reported $1.5 billion of committed revolving credit facilities with no borrowings, and a 23% total-debt-to-total-capital ratio.
- Current assets were $6.137 billion and current liabilities $3.985 billion. The effective tax rate was 18.9%, down from 25.0%, primarily reflecting a favorable non-U.S. audit resolution and the absence of a prior-period tax charge.
Segment performance and changes
- Tyco Security Solutions revenue rose 2.3% to $2.155 billion; operating income fell 2.3% to $339 million and margin was 15.7%, versus 16.5%. Recurring customer accounts reached 9.1 million; trailing attrition was 12.4%.
- Tyco Fire Protection revenue rose 2.8% to $1.130 billion. Operating income increased to $144 million from $88 million, and margin rose to 12.7% from 8.0%, supported by product sales, cost initiatives and a prior-year comparison with restructuring and divestiture charges.
- Tyco Flow Control revenue rose 11.7% to $923 million; operating income increased 14.0% to $114 million. Strength in Valves and Controls and Thermal Controls partly offset weakness in Water and Environmental Systems.
- Overall revenue and results were also affected by the disposal of Electrical and Metal Products, which contributed $347 million of prior-period revenue, and by foreign currency movements. Service revenue increased to approximately 45% of total revenue from 43%.
Outlook, transactions and risks
- Tyco planned to separate into three publicly traded companies: North American residential security, Flow Control, and commercial fire and security. Completion was expected by the end of the third calendar quarter of 2012, subject to board and shareholder approvals, tax opinions and rulings, SEC registration effectiveness, and any required financing.
- Management expected fiscal 2012 restructuring and related charges of approximately $125–$150 million, plus approximately $125 million associated with the separation. Fiscal 2012 capital expenditures were expected to exceed fiscal 2011 spending and depreciation expense.
- Backlog was $9.759 billion at December 30, 2011, up from $9.651 billion at September 30; approximately 87% was expected to be filled in the next 12 months. Management said cash, operating cash generation and available credit should cover foreseeable business needs, including capital spending, dividends, repurchases and separation costs.
- Tyco acquired Visonic for approximately $94 million, net of cash acquired, and acquired approximately 144,000 security-service customer contracts for $170 million during the quarter. Through January 30, 2012, it repurchased a further approximately 2 million shares for $100 million.
- Material uncertainties include ongoing IRS and other tax disputes under the legacy tax-sharing arrangements. Tyco recorded $437 million of tax-sharing guarantee liabilities and said ultimate resolution could materially affect results; it expected to litigate certain IRS matters. The company also disclosed a $34 million recorded estimate for compliance matters and continuing DOJ/SEC discussions concerning potential FCPA violations.
- Other disclosed exposures include asbestos claims (approximately 4,800 lawsuits and 5,900 estimated viable claims; recorded net liability $65 million), environmental remediation (best estimate $58 million within a $37–$87 million range), and an ERISA multi-employer pension withdrawal assessment of approximately $25 million that Tyco was contesting without an accrual.
- Management identified risks including economic and market conditions, currency and borrowing costs, tax and legal outcomes, raw-material prices, restructuring execution, goodwill or asset impairment, and the timing, costs, tax-free treatment and approvals of the proposed separation. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Key facts for investors to verify
- Confirm the issuer: this filing is for Tyco International Ltd., not Johnson Controls International plc.
- Review the separation’s approvals, financing, expected costs and progress against the stated 2012 timetable.
- Assess operating performance apart from the prior-year divestiture gain and discontinued-operations income.
- Track working-capital cash use, capital spending, repurchases, dividends, cash balances and debt.
- Follow developments in the IRS tax disputes and Tax Sharing Agreement, FCPA investigation, asbestos and environmental exposures, and ERISA arbitration.
- Compare subsequent reported results with the stated restructuring, capital expenditure and backlog expectations.