Filing and reporting period
Important identification discrepancy: The supplied document is Tyco International Ltd.’s Form 10-K, not a Johnson Controls International plc filing. It reports the fiscal year ended September 25, 2009; the filing provides quarterly data, including the fourth quarter, but is an annual report rather than a standalone Q4 filing. The summary below reflects Tyco’s filing and should not be attributed to Johnson Controls.
Tyco was a diversified global provider of electronic security, fire protection, flow-control, electrical and metal, and safety products and services. Its five reporting segments were ADT Worldwide, Flow Control, Fire Protection Services, Electrical and Metal Products, and Safety Products. Following the 2007 spin-offs of Covidien and Tyco Electronics, the filing presents those former businesses as discontinued operations. Tyco changed its incorporation from Bermuda to Switzerland in March 2009.
Financial performance and position
Amounts are U.S. dollars; annual comparisons are fiscal 2009 versus fiscal 2008 unless otherwise noted.
| Metric | FY 2009 | FY 2008 |
|---|---|---|
| Net revenue | $17.237 billion | $20.199 billion |
| Operating income (loss) | $(1.487) billion | $1.941 billion |
| Continuing operations income (loss) | $(1.833) billion | $1.095 billion |
| Net income (loss) | $(1.798) billion | $1.553 billion |
| Diluted EPS | $(3.80) | $3.19 |
| Cash from operating activities | $2.429 billion | $(872) million |
| Capital expenditures | $709 million | $734 million |
| Cash and cash equivalents, year-end | $2.354 billion | $1.519 billion |
| Total debt, year-end | $4.274 billion | $4.264 billion |
| Shareholders’ equity, year-end | $12.941 billion | $15.494 billion |
Revenue comprised $10.482 billion of product sales and $6.755 billion of service revenue. Services rose to 39% of revenue from 35% in 2008. The filing does not provide a meaningful consolidated operating margin for 2009 given the large impairment charges. At year-end, current assets were $7.967 billion and current liabilities were $4.716 billion.
Operating cash flow included substantial noncash add-backs, notably $2.705 billion of goodwill and intangible impairments. Working capital contributed $142 million to operating cash flow. Cash flow less reported capital expenditures was approximately $1.720 billion, calculated from the filing’s figures; this is not a company-reported free-cash-flow measure.
Annual revenue by segment: ADT Worldwide $7.015 billion; Flow Control $3.850 billion; Fire Protection Services $3.428 billion; Electrical and Metal Products $1.392 billion; and Safety Products $1.552 billion. Segment operating income (loss) was respectively $233 million, $518 million, $68 million, $(940) million, and $(789) million. The filing says 2009 margins are not meaningful for certain segments.
Fourth-quarter data: FY 2009 Q4 revenue was $4.421 billion, gross profit $1.607 billion, continuing-operations income $207 million, and net income $205 million. FY 2008 Q4 comparatives were $5.284 billion, $1.867 billion, $264 million, and $434 million, respectively.
Material changes versus the prior comparable period
- Revenue declined $2.962 billion, or 14.7%. Management attributed approximately half the decline to the stronger U.S. dollar (a $1.5 billion revenue impact); lower volumes and weaker markets accounted for much of the remainder.
- Operating results swung from $1.941 billion of income to a $1.487 billion loss, principally due to $2.705 billion of goodwill and intangible impairment charges. Other pressures included $251 million of restructuring, asset-impairment and divestiture charges and $125 million of legacy legal charges.
- Electrical and Metal Products revenue fell 38.7%, and the segment recorded a $935 million goodwill impairment. Safety Products revenue fell 19.8%; its operating loss included $955 million of goodwill and intangible impairments. ADT and Fire Protection also recorded impairments.
- Operating cash flow improved from a use of $872 million to provision of $2.429 billion, while cash increased by $835 million. The comparison is affected by large noncash charges and prior-year class-action settlement cash flows.
- Total debt was broadly stable, while debt as a percentage of debt plus equity increased to 25% from 22%, as equity declined. Backlog decreased 6.5% to $8.961 billion from $9.585 billion.
Outlook, commentary, risks, contingencies, and unusual items
- Management expected $100–$150 million of restructuring charges in fiscal 2010 and said 2010 capital expenditures were expected to exceed fiscal 2009 spending and depreciation. It planned to pursue cost savings, portfolio refinement, selective acquisitions, investment in core businesses, and growth in emerging markets. No revenue or earnings guidance was provided.
- Management cited continued service and recurring-security revenue as comparatively predictable: recurring revenue was about 55% of ADT revenue, up from about 50% in 2008. ADT customer attrition nevertheless rose to 13.4% from 12.9% in 2008 and 12.3% in 2007.
- Management said cash, operating cash flow, and available credit were expected to cover foreseeable operating and debt-service needs. At year-end, $2.354 billion of cash was available, $1.690 billion of revolving credit commitments were undrawn, and $200 million of commercial paper was outstanding. A $750 million, 8.5% note issuance in January 2009 and a subsequent $500 million, 4.125% note issuance on September 30, 2009 are disclosed; the latter occurred after fiscal year-end.
- Key risks include economic and construction-market weakness, foreign exchange, commodity prices (especially steel and copper), customer attrition, competition, credit-market access, and the possibility of further goodwill or intangible impairments. Remaining goodwill was $8.791 billion; management considered it recoverable but noted forecast and valuation uncertainty.
- Significant contingencies include ongoing DOJ and SEC inquiries into possible improper payments and FCPA compliance, an ongoing German antitrust investigation, securities litigation, asbestos claims, tax audits and shared pre-separation tax obligations. The company could not estimate potential losses for some compliance matters. Environmental remediation was estimated at $40 million (within a $31–$85 million range); asbestos liabilities of $240 million were offset by $191 million of estimated insurance recoveries.
- Other unusual matters: legacy securities settlements included $271 million of aggregate settlements in the second half of 2009, with Tyco’s allocated share about $73 million; a reserve had already been recorded. The company reported that a material weakness in income-tax accounting controls identified in earlier years was remediated by September 25, 2009; management and the auditor concluded internal control over financial reporting was effective at year-end.
Most important facts for an investor to verify
- Confirm the issuer and filing before relying on these figures: the source is Tyco International Ltd., not Johnson Controls International plc.
- Review the full financial statements and notes for the $2.705 billion impairment, the quality and sustainability of operating cash flow, and assumptions supporting remaining goodwill and intangible assets.
- Track fiscal 2010 restructuring costs, capital spending, and whether service and recurring revenues offset continued weakness in product sales and installations.
- Assess ADT attrition trends and the effect of currency movements, commercial-market demand, and steel and copper prices on segment performance.
- Monitor the resolution and cash impact of FCPA, antitrust, securities, asbestos, tax-sharing, and other legal contingencies; estimates may differ from ultimate outcomes.
- Check debt maturities, the 2019 notes’ 2014 holder put, liquidity and covenant headroom, and the impact of the post-year-end $500 million note issuance.