Filing identity and reporting period
Important source mismatch: The supplied filing is Tyco International Ltd.’s Form 10-Q, not a Johnson Controls International plc filing. It reports the fiscal quarter ended December 25, 2009, compared with the quarter ended December 26, 2008. The financial statements are unaudited; amounts below are in U.S. dollars.
Financial results and liquidity
- Revenue: $4.246 billion, down 4.1% from $4.426 billion. Product sales fell to $2.528 billion from $2.768 billion; service revenue increased to $1.718 billion from $1.658 billion.
- Profit: Operating income was $414 million, essentially unchanged from $413 million. Operating margin was approximately 9.8%, versus 9.3%. Income from continuing operations was $303 million, up from $272 million; net income attributable to Tyco shareholders was $302 million, versus $277 million. Diluted EPS was $0.63, versus $0.58.
- Taxes and interest: Income tax expense was $53 million, compared with $84 million; the effective tax rate fell to 14.9% from 23.6%, principally due to enacted tax-law changes affecting deferred taxes and a non-recurring tax benefit. Interest expense rose to $76 million from $73 million.
- Cash flow: Operating cash flow was $379 million, versus $56 million. The filing attributes the improvement in part to less adverse working-capital movements; working capital reduced operating cash flow by $283 million, versus $555 million in the prior-year quarter. Investing activities used $417 million, including $165 million of capital expenditures, $143 million for acquisitions and $150 million for ADT customer accounts. Financing activities provided $159 million. Cash increased by $119 million to $2.473 billion.
- Debt and liquidity: Total debt was $4.523 billion, up from $4.274 billion; cash exceeded current debt, with $17 million of current maturities. The company had $1.69 billion available under revolving credit facilities, with none drawn. Debt was 26% of total capitalization, versus 25% at September 25, 2009.
- Balance sheet: Current assets were $7.973 billion and current liabilities $4.047 billion; total assets were $25.601 billion and total equity $13.202 billion. Backlog was $8.928 billion, down slightly from $8.959 billion; management expected approximately 86% to be filled within 12 months.
Material changes versus the prior-year quarter
- Revenue declined mainly due to lower steel-product pricing, reduced Flow Control volume, and weakness in commercial markets affecting ADT Worldwide and Safety Products. Favorable currency movements added $264 million to revenue and $34 million to operating income.
- ADT Worldwide revenue rose 1.3% and operating income rose 14.1%; recurring monitoring and maintenance revenue increased 9.4%, while installation, product sales and other service revenue declined 7.5%.
- Flow Control revenue fell 3.8% and operating income fell 18.2%. Electrical and Metal Products revenue fell 28.6%, largely from lower steel prices and volumes. Safety Products revenue fell 10.7% and operating income fell 32.5% amid weaker fire-suppression and retail-security demand.
- Fire Protection Services revenue fell 0.7%, while operating income increased 14.3%, supported by cost savings and lower legal costs. The company reported $11 million of restructuring, impairment and divestiture charges, versus $4 million.
- Prior-period segment results were recast following business realignments. The company also disclosed a prior-period classification issue: $77 million of fiscal 2009 first-quarter electronic-tag and label revenue had been classified as service rather than product revenue; net revenue and profit were unaffected.
Outlook, risks and unusual items
- Management expected fiscal 2010 restructuring and related charges of approximately $100 million to $150 million, with the program substantially completed by fiscal year-end. Cumulative charges under the 2009 program were $241 million at quarter-end.
- Management stated that cash, operating cash flows and available credit were expected to cover foreseeable operational and business needs. Fiscal 2010 capital expenditures were expected to exceed fiscal 2009 levels. The company also intended to pursue strategic acquisitions, portfolio refinements, dividends and share repurchases.
- After quarter-end, Tyco agreed to acquire Broadview Security for approximately $2.0 billion, funded with no more than approximately $585 million in cash plus Tyco shares. Closing was expected in the second half of fiscal 2010, subject to customary conditions. The board recommended a $0.84 annual dividend, a 5% increase, for shareholder approval.
- Significant exposures include ongoing DOJ and SEC discussions following a company-wide FCPA compliance review; potential penalties could be material, and the company could not estimate a loss range. German antitrust proceedings also remained unresolved with potential material exposure.
- Other contingencies include asbestos claims (estimated net liability $58 million, after $177 million of insurance recoveries), environmental remediation (best estimate $37 million within a $28 million–$84 million range), legacy litigation, and an approximately $25 million multiemployer pension withdrawal assessment being contested in arbitration. The company recorded no provision for the withdrawal assessment.
- Goodwill of $8.8 billion was assessed as recoverable, but management cautioned that economic weakness and valuation assumptions could lead to future impairment, particularly for certain ADT Worldwide and Safety Products reporting units.
- Tax-sharing obligations under the separation agreements and related guarantees are substantial; the balance-sheet liability was $554 million. Tax audits and uncertain tax positions could result in materially different outcomes.
Important facts for investors to verify
- Confirm the intended issuer: this source is Tyco International Ltd., not Johnson Controls International plc.
- Review the complete filing for segment trends, the drivers and sustainability of improved operating cash flow, and the effect of working-capital movements.
- Track Broadview acquisition completion, financing, share issuance, integration plans and expected effects on ADT Worldwide.
- Monitor outcomes of the FCPA and antitrust matters, asbestos and legacy litigation, and tax-sharing and audit exposures.
- Assess the assumptions supporting goodwill recoverability, restructuring savings and the stated liquidity outlook.