Johnson Controls International Plc quarterly report, Q1 FY2016

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Filing identity and reporting period

The supplied filing is Tyco International plc’s unaudited Form 10-Q for its fiscal first quarter ended December 25, 2015—not a Johnson Controls International plc filing. Both comparative quarters comprised 13 weeks. Tyco disclosed on January 24, 2016, that it had agreed to combine with Johnson Controls, subject to approvals and other closing conditions.

Financial performance and liquidity

  • Revenue: $2.376 billion, down 4.1% from $2.478 billion. Organic revenue growth was 0.1%; foreign exchange reduced revenue by $152 million, divestitures by $23 million, and acquisitions added $71 million.
  • Operating results: Operating income was $293 million versus $199 million; operating margin was 12.3% versus 8.0%. Segment operating income, excluding restructuring and repositioning charges, was $362 million versus $323 million. These results included a $111 million gain on Tyco’s previously held UAE joint-venture interest and $52 million of net divestiture charges.
  • Net income and EPS: Net income attributable to Tyco shareholders was $76 million versus $162 million. Diluted EPS was $0.18 versus $0.38; diluted continuing-operations EPS was $0.17 versus $0.38.
  • Cash flow: Operating cash flow was $189 million versus $95 million. Investing activities used $211 million, including $138 million for acquisitions and $68 million of capital expenditures. Financing activities used $1.069 billion, largely reflecting debt repayments and dividends.
  • Cash and debt: Cash and equivalents were $301 million, down from $1.401 billion at fiscal year-end. Total debt was $2.298 billion versus $3.146 billion; debt to total capital was 36.4% versus 43.8%. Tyco had an undrawn $1.5 billion revolving credit facility and $151 million of commercial paper outstanding.
  • Balance sheet: Current assets were $3.665 billion and current liabilities $3.211 billion. Total assets were $11.431 billion; shareholders’ equity was $4.009 billion.
  • Dividends and backlog: The quarter included $87 million of dividends paid. Backlog was $4.650 billion at December 25, up 1.9% from September 25.

Changes versus the prior comparable quarter

  • Reported revenue declined, principally due to currency movements; organic performance was nearly flat. North America organic revenue grew 1.6%, while ROW declined 1.1% and Global Products declined 0.5%.
  • ROW revenue fell 11.4% reported, substantially reflecting currency and divestitures. ROW operating income rose to $133 million from $89 million, but included the $111 million UAE investment gain and $54 million of divestiture charges.
  • Global Products revenue was $611 million in both periods, while operating income declined to $97 million from $105 million. North America revenue was nearly unchanged at $953 million, and operating income increased to $132 million from $129 million.
  • Operating income improved, but comparisons were affected by lower restructuring and repositioning charges ($18 million versus $75 million) and the UAE gain. Net income was lower, in part because other expense included a $168 million loss on extinguishment of debt.

Outlook, commentary, and material items

  • Management expected fiscal 2016 restructuring and repositioning charges of $75 million to $100 million; separately, it expected restructuring and restructuring-related charges of $50 million to $75 million. Capital expenditures and dealer investments were expected to be approximately 3% to 3.5% of revenue, with fiscal 2016 capital expenditures expected to exceed fiscal 2015 and depreciation.
  • Management expected weakness in high-hazard, heavy-industrial markets to continue during fiscal 2016, citing oil-price volatility and reduced customer capital spending. A strong U.S. dollar was also pressuring revenue and operating income.
  • Tyco said available cash, operating cash flow, commercial paper capacity, and its credit facility should fund foreseeable business needs. This outlook preceded the announced Johnson Controls transaction.
  • Proposed merger: Under the January 24 agreement, Johnson Controls shareholders could elect cash of $34.88 per share or one share of the combined company, subject to proration and an aggregate cash consideration of approximately $3.864 billion. Tyco expected to obtain up to $4 billion in debt financing. Closing depended on shareholder, regulatory, financing, and other conditions.
  • Tax contingency: Tyco reported tentative IRS settlement stipulations, contingent on further steps, with a total payment estimated at $475 million to $525 million, including interest and penalties, shared with former affiliates. Tyco said it did not expect an additional charge if finalized because reserves had been recorded; payment was expected within six months.
  • Other contingencies: Tyco recorded environmental remediation costs of $32 million, with a disclosed probable range of $22 million to $71 million. Its estimated asbestos net liability was $27 million, based on $508 million of liabilities and $481 million of related assets; outcomes could differ materially from estimates.
  • The Australian fire protection business was classified as held for sale, with a $57 million write-down recorded; its sale closed in the second quarter of fiscal 2016. The filing also noted a $17 million gain in discontinued operations related to a former Flow Control joint-venture interest.

Important facts for investors to verify

  1. Confirm the issuer: this is Tyco International plc’s 10-Q, not Johnson Controls’ filing, and review the later merger filings for final terms, financing, approvals, and closing status.
  2. Assess underlying earnings apart from the $111 million UAE gain, divestiture charges, restructuring and repositioning costs, and the $168 million debt-extinguishment loss.
  3. Track liquidity after the substantial debt repayments and cash decline, including funding needs and any debt raised for the proposed merger.
  4. Follow the status and final cash impact of the IRS settlement and related tax-sharing arrangements.
  5. Review assumptions and developments affecting asbestos and environmental liabilities, and the performance of the divested or held-for-sale businesses.