Filing summary
Entity and period: The supplied filing is Tyco International plc’s Form 10-Q for the quarter ended March 27, 2015, not a Johnson Controls International plc filing. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise. Fiscal 2015 is a 52-week year.
Financial performance and position
| Metric | Quarter ended March 27, 2015 | Prior-year quarter | Six months ended March 27, 2015 | Prior-year six months |
|---|---|---|---|---|
| Net revenue | $2,430 | $2,480 | $4,908 | $4,969 |
| Operating income | $221 | $259 | $420 | $602 |
| Operating margin | 9.1% | 10.4% | 8.6% | 12.1% |
| Income from continuing operations attributable to ordinary shareholders | $183 | $192 | $347 | $437 |
| Net income attributable to ordinary shareholders | $167 | $207 | $329 | $477 |
| Diluted EPS, continuing operations | $0.43 | $0.41 | $0.81 | $0.93 |
| Diluted EPS, total | $0.39 | $0.44 | $0.77 | $1.01 |
- Revenue and mix: Reported revenue declined 2.0% in the quarter and 1.2% for the half year. Organic revenue grew 2.3% and 2.4%, respectively, but currency translation reduced revenue by $149 million and $238 million. Quarter revenue included $41 million from acquisitions; half-year revenue included $70 million from acquisitions and a $13 million divestiture impact.
- Segment trends: In the quarter, NA Installation & Services revenue rose 0.5% and operating income rose to $119 million. ROW Installation & Services revenue fell 9.5% and operating income fell to $60 million, with currency and a $22 million expected joint-venture disposal loss among the factors. Global Products revenue rose 5.6% and operating income rose to $110 million.
- Cash flow: Six-month operating cash flow was $262 million, versus $366 million a year earlier. Investing used $703 million, primarily reflecting $525 million of business acquisitions; financing used $3 million. Cash decreased by $460 million to $432 million. Capital expenditures were $123 million.
- Debt and liquidity: Total debt was $2.010 billion, up from $1.463 billion at fiscal year-end; $278 million was current, including $258 million of notes due October 2015. Cash was $432 million, and debt-to-capital was 32.5%, versus 23.9%. The company issued €500 million of 1.375% notes due 2025, with net proceeds of approximately $563 million. It reported no commercial paper outstanding and no borrowings under its $1 billion revolving credit facility. Management said cash, operating cash flow and available facilities should cover foreseeable needs.
- Balance sheet: Total assets were $11.695 billion and total equity $4.230 billion, compared with $11.809 billion and $4.670 billion at September 26, 2014. Backlog was $4.715 billion, down 2.9% from fiscal year-end, including a $226 million adverse currency impact.
Changes, outlook and management commentary
- Operating income fell year over year: the half-year comparison was affected by prior-year gains of $92 million from a legacy management matter and $16 million from a CIT settlement. Current-period restructuring and repositioning charges, divestiture losses and foreign exchange also weighed on results. The quarter comparison included a prior-year $21 million China insurance recovery.
- The effective tax rate declined to 9.0% for the quarter and 9.7% for the half year, from 16.5% and 19.6%, respectively. Management attributed the change primarily to lower valuation allowances, tax-law changes in a non-U.S. jurisdiction and, for the half-year comparison, prior-year tax effects of the legacy management matter.
- Management expected approximately $150 million of restructuring and repositioning charges in fiscal 2015. Separately, it forecast $75 million to $100 million of restructuring and restructuring-related charges, excluding repositioning charges. Capital expenditures were expected to be in line with fiscal 2014.
- Management expected the stronger U.S. dollar to continue adversely affecting revenue and operating income in the second half. It also expected lower oil prices to negatively affect revenue tied to oil, gas and petrochemical customers during fiscal 2015.
- The company completed its change of incorporation from Switzerland to Ireland in November 2014. It also acquired Industrial Safety Technologies for approximately $327 million during the quarter and classified certain ROW businesses as held for sale, with sales expected during fiscal 2015.
Risks, contingencies and unusual items
- Asbestos: The recorded net liability, including Yarway, was $319 million, based on $846 million of liabilities and $527 million of separate assets. The company transferred approximately $278 million of cash and other assets to a dedicated structure for historic Grinnell liabilities. A Yarway Chapter 11 plan had been confirmed by the bankruptcy court but was awaiting district court affirmation; upon effectiveness, Tyco and Yarway expected to contribute approximately $325 million to a trust. The timing and ultimate costs remain subject to uncertainty.
- Tax dispute: The IRS asserted deficiencies of $883.3 million plus $154 million in penalties for 1997–2000, as well as approximately $30 million relating to partnerships; amounts exclude interest. The dispute concerns intercompany debt and approximately $2.9 billion of deductions. Tyco contests the proposed adjustments; trial was scheduled for February 2016. The company warned of potentially material effects and cited an additional approximately $6.6 billion of later-period interest deductions at issue if the IRS prevails.
- Environmental: Probable remediation costs were estimated at $29 million to $72 million, with a best estimate of $33 million. The Marinette, Wisconsin site accounted for a $22 million best estimate within a $19 million to $46 million range; actual costs may differ.
- Navy foam products: Following government inquiries into certain AFFF concentrates, Tyco stopped selling certain products; three were removed from the Navy’s Qualified Products List. The company said it could not predict further action and disclosed potential fines, restrictions, penalties or private litigation that could be material.
- Other matters: Tyco agreed in principle to settle prevailing-wage lawsuits for approximately $14 million; $17 million of related charges had been recorded through the first quarter. Environmental, asbestos, tax-sharing and other litigation outcomes could affect future cash flows and results.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the issuer: this is Tyco International plc’s filing, despite the Johnson Controls company name in the request metadata.
- Track organic growth against reported results, particularly foreign-exchange exposure and performance in ROW Installation & Services.
- Assess cash conversion, acquisition spending, the October 2015 debt maturity and the effect of planned asbestos-trust funding on liquidity.
- Monitor the Yarway plan’s final approval and implementation, asbestos liability and insurance-asset estimates, and the status and potential exposure of the IRS dispute.
- Compare actual fiscal 2015 restructuring and repositioning charges, oil-and-gas-related demand and divestiture proceeds with management’s stated expectations.