Johnson Controls International Plc quarterly report, Q3 FY2014

Business context and reporting period

The supplied filing is Tyco International Ltd.’s unaudited Form 10-Q, not a Johnson Controls International plc filing. It covers the fiscal quarter and nine months ended June 27, 2014; comparative periods ended June 28, 2013. Tyco operated through North America Installation & Services, Rest of World Installation & Services, and Global Products.

Financial performance and liquidity

Net income includes discontinued-operations income of $1.016 billion for the quarter and $1.057 billion for the nine months, principally reflecting the ADT Korea sale; it is not representative of recurring continuing-operations earnings. Continuing-operations revenue grew across the segments in the quarter, led by Global Products, whose revenue increased 15.5% and operating income rose to $136 million. For nine months, Global Products revenue increased 8.8%; its operating income rose to $329 million. North America revenue was nearly flat for the quarter and down 1.1% year to date, while ROW revenue grew 3.1% and 1.9%, respectively.

Cash and cash equivalents were $1.912 billion at June 27, 2014, versus $563 million at September 27, 2013. Total debt was unchanged at $1.463 billion, including $1.443 billion long-term; cash exceeded debt by approximately $449 million. Current assets were $5.719 billion and current liabilities $3.259 billion. Shareholders’ equity was $6.002 billion, up from $5.098 billion. Nine-month investing cash use was $83 million and financing cash provided was $920 million; cash flow benefited from discontinued-operation proceeds and transfers, while Tyco repurchased $806 million of shares and paid $231 million in dividends. Working-capital movements reduced operating cash flow by $500 million.

Changes versus prior comparable periods

• Quarterly operating income rose 82.7%, and nine-month operating income rose 89.2%; reported improvement included lower restructuring charges and significant legal, insurance, divestiture, and prior-year environmental items.
• Quarterly continuing-operations income attributable to shareholders increased from $112 million to $434 million; nine-month income increased from $308 million to $870 million.
• Nine-month revenue growth included $169 million from acquisitions, partly offset by $82 million of unfavorable currency effects and $87 million from divestitures.
• Nine-month operating cash flow improved to $520 million from $360 million, despite substantial working-capital outflows.

Outlook, commentary, risks, and unusual items

• Management expected fiscal 2014 capital expenditures to exceed fiscal 2013 spending and depreciation. It said cash, operating cash flow, credit facilities, and commercial-paper capacity should meet foreseeable business needs.
• Tyco expected $50–75 million of fiscal 2014 restructuring and restructuring-related charges, excluding repositioning. MD&A separately cited approximately $75–100 million of combined restructuring and repositioning charges; repositioning charges were $28 million year to date.
• Backlog was $5.029 billion, up 4.5% from September 2013. The measure includes recurring revenue in force and deferred revenue, not solely unfilled orders.
• Tyco sold ADT Korea on May 22 for $1.93 billion, subject to customary adjustments, and recognized a net gain of about $1.0 billion after a $212 million charge related to tax indemnification. It also received $250 million for redemption of its Atkore stake and recorded a $216 million net gain, reflected in equity-method earnings.
• The proposed merger into newly formed Irish parent Tyco International plc was subject to conditions including shareholder approval expected in September 2014. Shareholders were expected to receive one Irish-parent share for each Tyco share.
• Material contingencies include an IRS dispute over historical intercompany debt: asserted tax deficiencies of $883.3 million plus $154 million penalties, and an additional approximately $30 million partnership adjustment, excluding interest. Tyco contests the claims; the filing warns of potentially material effects, including possible denial of deductions relating to another $6.6 billion of debt in later periods.
• Environmental remediation liabilities were estimated at $46 million, with a $33–82 million estimated range; the Marinette facility’s best estimate was $33 million. Asbestos liabilities net of insurance were estimated at $148 million, based on uncertain claims, costs, and insurance recoveries. Yarway’s Chapter 11 reorganization remained unresolved.
• Other notable items include the $92 million reversal of a former-CEO compensation liability, a $16 million gain on the CIT tax-dispute settlement, and a $21 million China-related insurance recovery. These items, together with the Atkore and ADT Korea transactions and prior-year $100 million environmental charge, materially affect comparisons.

Important facts for investors to verify

• Confirm the issuer and filing match the intended company: this source is Tyco International Ltd., despite the request metadata naming Johnson Controls International plc.
• Separate recurring continuing-operations earnings from ADT Korea discontinued-operation gains and other unusual legal, tax, insurance, and investment items.
• Review the status and potential exposure of the IRS tax case and related tax-sharing guarantees.
• Check actual fiscal 2014 restructuring, repositioning, capital spending, cash generation, and share-repurchase outcomes against management’s stated expectations.
• Track completion of the proposed Irish merger, planned ROW business divestitures, environmental remediation, and Yarway asbestos proceedings.