Filing summary
Reporting entity: The supplied filing is Tyco International plc’s Form 10-Q, not a Johnson Controls International plc filing. It covers the fiscal quarter and nine months ended June 26, 2015, with comparisons to June 27, 2014. Amounts are in U.S. dollars.
Financial performance
| Metric | Quarter | Nine months |
|---|---|---|
| Net revenue | $2.489 billion, down 6.4% | $7.397 billion, down 3.0% |
| Organic revenue | Down 1.1% | Up 1.2% |
| Operating income / margin | $253 million / 10.2%, versus $297 million / 11.2% | $673 million / 9.1%, versus $899 million / 11.8% |
| Continuing-operations income attributable to ordinary shareholders | $188 million, versus $435 million | $535 million, versus $872 million |
| Diluted EPS from continuing operations | $0.44, versus $0.93 | $1.25, versus $1.86 |
| Net income attributable to ordinary shareholders | $156 million, versus $1.450 billion | $485 million, versus $1.927 billion |
| Operating cash flow | Not separately stated for the quarter | $511 million, versus $518 million |
Prior-year net income was substantially boosted by discontinued-operation gains on disposals: $1.015 billion for the quarter and $1.055 billion year to date, compared with losses of $32 million and $50 million in 2015, respectively. Prior-year results also included $215 million of quarterly and $206 million of nine-month equity income from Atkore.
Segments and material changes
- North America Installation & Services: Quarterly revenue grew 0.4% and operating income rose to $160 million from $117 million. Nine-month revenue was nearly flat; operating income increased to $384 million from $333 million.
- Rest of World Installation & Services: Quarterly revenue declined 15.7% to $842 million and operating income fell to $57 million from $102 million. Nine-month revenue declined 10.2% and operating income fell to $187 million from $310 million. Currency translation was a major revenue headwind; weaker oil-and-gas and mining activity also pressured organic sales.
- Global Products: Quarterly revenue declined 2.6% to $675 million and operating income fell to $108 million from $136 million. Nine-month revenue rose 3.3%, including acquisition contributions, while operating income declined to $316 million from $329 million.
For the quarter, foreign exchange reduced revenue by $183 million; acquisitions added $63 million. For the nine months, foreign exchange reduced revenue by $421 million, divestitures by $34 million, and acquisitions added $133 million. The nine-month operating-income comparison was also affected by prior-year gains, including a $92 million reversal of a former-management compensation reserve, a $21 million insurance recovery, and a $16 million CIT settlement gain. Restructuring and repositioning charges increased to $169 million for the nine months from $55 million.
Financial position and liquidity
- Cash and cash equivalents were $531 million at June 26, 2015, down from $892 million at September 26, 2014.
- Total debt was $2.021 billion, up from $1.463 billion; $277 million was current, including $258 million of notes due October 2015. Debt was 32.0% of total capital, versus 23.9% at fiscal year-end.
- Current assets were $4.133 billion and current liabilities $3.426 billion. The company had a $1 billion undrawn revolving credit facility and no commercial paper outstanding.
- Nine-month investing cash outflow was $752 million, including $525 million for acquisitions and $183 million of capital expenditures. Financing cash outflow was $102 million; dividends paid were $237 million and share repurchases $417 million.
- Management said cash, operating cash generation and available borrowing capacity should cover foreseeable operating and capital needs. Backlog was $4.709 billion, down 3.0% from September 2014, with currency and divestitures contributing to the decline.
Outlook, contingencies and unusual items
- Management expected the strong U.S. dollar to continue weighing on fiscal 2015 revenue and operating income. It also expected oil-price-related spending weakness to pressure revenue tied to oil-and-gas markets.
- Tyco expected approximately $225 million of fiscal 2015 restructuring and repositioning charges, including about $125 million of restructuring and restructuring-related charges. Capital expenditures and dealer investments were expected to run at 3%–3.5% of revenue; fiscal 2015 capital spending was expected to be in line with fiscal 2014.
- Near- to mid-term funding needs included an expected $325 million contribution to a Yarway asbestos trust, repayment of $258 million of notes due October 2015, dividends, capital spending and possible tax payments. The trust plan had been affirmed by a district court; its effective date was expected in August 2015.
- The IRS asserted tax deficiencies of $883.3 million plus $154 million of penalties, and about $30 million of additional partnership tax deficiencies, excluding interest. Tyco disputed the claims; a Tax Court trial was set for October 2016. The company warned the outcome could materially affect financial condition, results and cash flows; potential later-period interest-deduction disallowances were also described.
- Asbestos liabilities and related assets involved significant estimation uncertainty. The company reported a $331 million net asbestos liability and approximately 3,400 pending claims excluding Yarway claims. Environmental remediation liabilities were estimated at $33 million, with a possible range of $29 million to $72 million.
- Tyco ceased selling certain firefighting foam products during a Navy inquiry; three products were removed from the Navy’s qualified list. The company said material fines, injunctions, penalties or private litigation were possible, though the government had stated suspension or debarment was not warranted.
- After quarter-end, on July 20, 2015, Tyco acquired FootFall for approximately $60 million. The company also completed the sale of several ROW businesses during the quarter, recording a $29 million loss on discontinued-operation sales for the quarter.
Investor verification priorities
- Confirm the issuer: this filing is Tyco International plc, rather than Johnson Controls International plc.
- Assess underlying performance apart from currency effects, acquisitions, divestitures and large prior-period gains; pay particular attention to ROW margins and oil-and-gas exposure.
- Review cash conversion, working-capital movements, upcoming debt maturity, the planned asbestos-trust funding and remaining share-repurchase authorization.
- Track the IRS tax dispute and tax-sharing obligations, asbestos claims and insurance recoveries, environmental estimates, and the Navy foam-product inquiry.
- Evaluate whether restructuring and cost-saving plans deliver the expected benefits and how backlog trends translate into future revenue.