SEC filing summary
Issuer identity warning: The supplied filing is Tyco International Ltd.’s Form 10-Q, not a Johnson Controls International plc filing. It covers the fiscal quarter and nine months ended June 29, 2012. Amounts are in U.S. dollars; financial statements are unaudited.
Business context and reporting period
Tyco reported three segments: Commercial Fire and Security, ADT North American Residential, and Flow Control. It was preparing to separate ADT and Flow Control from the continuing Commercial Fire and Security business; the Flow Control separation was to be followed by an all-stock merger with Pentair. Completion depended on shareholder and regulatory approvals and customary closing conditions. Segment reporting was reorganized in fiscal Q2, with prior periods recast.
Financial performance and liquidity
- Revenue: Q3 net revenue was $4.460 billion, up 3.9% year over year; nine-month revenue was $13.021 billion, up 2.8%. Foreign exchange reduced revenue by $153 million in the quarter and $200 million year to date. Service revenue was $1.980 billion for the quarter and $5.841 billion for nine months.
- Profit: Q3 operating income was $367 million versus $475 million; income from continuing operations was $252 million versus $362 million; net income attributable to Tyco shareholders was $242 million versus $359 million. Diluted EPS was $0.51 versus $0.76. For nine months, operating income was $1.323 billion versus $1.618 billion, continuing-operations income was $920 million versus $1.172 billion, and diluted EPS was $1.92 versus $2.77.
- Margins: Consolidated operating margin was approximately 8.2% in Q3 versus 11.1% a year earlier, and 10.2% for nine months versus 12.8%. Segment Q3 operating margins were 11.6% for Commercial Fire and Security, 24.9% for ADT, and 11.4% for Flow Control.
- Cash flow: Nine-month operating cash flow was $1.830 billion, up from $1.620 billion. Investing used $1.359 billion, including $694 million of capital expenditures, $512 million for security customer accounts, and $217 million for acquisitions. Financing used $732 million, including $500 million of share repurchases and $346 million of dividends. Cash declined $272 million to $1.118 billion.
- Debt and liquidity: Total debt was $4.165 billion, including $16 million current; cash was $1.118 billion. Undrawn committed revolving facilities totaled $1.75 billion, including $250 million available under ADT’s facility before separation. Current assets of $6.646 billion and current liabilities of $4.335 billion imply a current ratio of about 1.53. Debt to total capital was 22%, versus 23% at fiscal year-end.
- Segments: Q3 revenue grew in all three segments: Commercial Fire and Security $2.664 billion (+3.2%), ADT $815 million (+4.2%), and Flow Control $981 million (+5.7%). Segment operating income rose year over year in each segment.
Material changes versus prior comparable period
- Revenue increased, but operating income and earnings declined, reflecting materially higher asbestos and separation costs and the absence of the prior-year divestiture gain in the nine-month comparison.
- Q3 included a $114 million net asbestos charge, compared with $11 million in the prior-year quarter. Tyco changed its asbestos estimation periods, using three years of historical claims data rather than five and projecting claims over 15 years rather than seven.
- Nine-month 2011 results included a $227 million net gain on divestitures, primarily from the Electrical and Metal Products sale; 2012 included a $17 million net divestiture loss.
- Nine-month working-capital changes consumed $447 million of operating cash, although this was less than the $621 million use in the prior year.
- ADT customer accounts rose to 6.447 million from 6.360 million a year earlier, while annualized attrition increased to 13.5% from 12.9%. Average revenue per customer increased to $38.36 from $37.01.
Outlook, management commentary, risks, and unusual items
- Management stated that cash, available credit, and operating cash flow should be adequate for foreseeable operating and business needs. Capital spending in fiscal 2012 was expected to exceed fiscal 2011 and depreciation expense.
- Tyco expected $75–$100 million of fiscal 2012 restructuring and restructuring-related charges, plus an additional $75–$100 million in connection with the separation.
- Backlog was $10.185 billion, up 5.5% from September 30, 2011; approximately 87% was expected to be filled within 12 months.
- After quarter-end, ADT issued $2.5 billion of notes. Tyco redeemed $2.127 billion of its notes in July and notified holders of another $473 million for redemption in August. Tyco expected an approximately $450 million loss on extinguishment of debt from these transactions.
- Key contingencies include unresolved IRS matters relating to pre-2007 tax years and a recorded $406 million liability under the tax-sharing arrangements; asbestos claims and insurance recoveries; ongoing FCPA discussions with the DOJ and SEC; and various litigation matters. The company warned that final outcomes could differ materially from recorded estimates.
- An adverse arbitration outcome led to a $28.5 million charge for an ERISA withdrawal-liability settlement; $22 million had been paid by June 29, with $6.5 million expected to be paid in Q4. The filing also reports a $50 million reversal of a liability related to former executive Mark Swartz.
- Management reported disclosure controls were effective as of June 29, 2012, with no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Confirm the issuer: this is a Tyco International Ltd. filing, not a Johnson Controls filing.
- Review separation and Pentair merger approvals, completion timing, tax treatment, and the allocation of debt, guarantees, and liabilities among the resulting companies.
- Assess the basis and sensitivity of the $114 million asbestos charge, revised claim-estimation periods, insurance recovery assumptions, and the $97 million insurer settlement agreement in principle.
- Track the actual debt-redemption costs against the expected approximately $450 million extinguishment loss and the post-separation debt and liquidity structure.
- Monitor the IRS and tax-sharing matters, FCPA investigation, and other litigation for outcomes beyond recorded reserves.
- Evaluate ADT’s customer growth against rising attrition, and verify that backlog converts to revenue as management expects.