Business context and reporting period
This is Tyco International plc’s unaudited Form 10-Q for the fiscal quarter ended June 24, 2016, and the nine months ended that date. The quarter and year-to-date periods each comprised 13 and 39 weeks, respectively. The filing is not yet a Johnson Controls International plc filing: Tyco’s proposed merger with Johnson Controls was pending, and Tyco expected to adopt the Johnson Controls International name upon completion.
Tyco operated through North America Integrated Solutions & Services, Rest of World Integrated Solutions & Services, and Global Products. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Financial results and position
| Metric | Quarter ended June 24, 2016 | Quarter ended June 26, 2015 | Nine months ended June 24, 2016 | Nine months ended June 26, 2015 |
|---|---|---|---|---|
| Net revenue | $2,449 | $2,489 | $7,156 | $7,397 |
| Operating income | $236 | $253 | $754 | $673 |
| Operating margin | 9.6% | 10.2% | 10.5% | 9.1% |
| Net income attributable to Tyco shareholders | $239 | $156 | $461 | $485 |
| Diluted earnings per share | $0.56 | $0.37 | $1.08 | $1.14 |
- Revenue and organic growth: Reported revenue fell 1.6% in the quarter and 3.3% year to date. Organic revenue, a company-defined non-GAAP measure, grew 1.5% in the quarter and 0.2% year to date. Currency reduced revenue by $63 million and $316 million, respectively; divestitures reduced it by $84 million and $172 million. Acquisitions added $70 million and $231 million.
- Segment performance: Quarterly revenue / operating income: North America $1,004 / $148; ROW $794 / $36; Global Products $651 / $115. ROW’s quarterly operating income fell from $97 million, including the impact of divestiture charges. Year-to-date segment operating income was $411 million in North America, $226 million in ROW, and $313 million in Global Products.
- Cash flow: Nine-month operating cash flow was $504 million, versus $511 million. Investing used $511 million, including $209 million of capital expenditures and $320 million for acquisitions; financing used $1,041 million. Cash fell by $1,056 million, from $1,401 million at fiscal year-end to $345 million.
- Debt and liquidity: Total debt was $2,506 million, including $341 million of commercial paper, versus $3,146 million at September 25, 2015. Cash was $345 million; shareholders’ equity was $4,351 million; debt was 36.5% of total capital. The existing $1.5 billion revolving facility was undrawn. Management said available cash, operating cash flow, commercial paper and credit availability should meet foreseeable needs.
- Other balance-sheet data: Total assets were $11,614 million and total liabilities $7,228 million. Current assets were $3,822 million and current liabilities $3,116 million.
Material changes versus prior comparable periods
- Quarterly operating income decreased 6.7%, mainly due to higher divestiture charges, $19 million of merger costs and adverse currency effects, partly offset by $52 million less in restructuring and repositioning charges.
- Nine-month operating income increased 12.0% despite lower revenue. The comparison included a $111 million gain on Tyco’s previously held UAE joint-venture interest, reduced restructuring and repositioning charges, and productivity benefits; these were partly offset by divestiture losses and $45 million of merger costs.
- Quarterly net income attributable to Tyco shareholders rose to $239 million from $156 million, while nine-month income declined to $461 million from $485 million. Nine-month diluted EPS declined to $1.08 from $1.14.
- The ROW segment was particularly affected by currency and divestitures; Global Products’ nine-month organic revenue declined 1.3%. North America’s nine-month organic revenue grew 1.5%.
Outlook, commentary, risks and unusual items
- Merger: The proposed combination required shareholder and regulatory approvals and financing conditions. In a July 21, 2016 subsequent-event announcement, Tyco said it expected to close on September 2, subject to approvals; special shareholder meetings were scheduled for August 17. Johnson Controls shareholders were to receive shares or cash, subject to proration, with aggregate cash consideration of approximately $3.9 billion. A $4 billion term loan and a new $1 billion revolving facility were conditional on closing; neither was available for ordinary liquidity before the merger.
- Restructuring and investment: Tyco expected $35–$50 million of fiscal 2016 restructuring and restructuring-related charges, excluding repositioning charges. Management expected annual capital expenditures and dealer investments of approximately 3%–3.5% of revenue.
- Unusual items: Nine-month results included a $168 million loss on extinguishment of debt, $107 million net divestiture losses, a $111 million UAE remeasurement gain, and a $54 million gain from reducing tax-sharing liabilities. The Australian fire-protection sale produced a $74 million loss; a planned ROW business sale led to a $59 million write-down. Merger costs were $19 million for the quarter and $45 million year to date.
- Tax and litigation: The IRS intercompany-debt dispute for audit years 1997–2007 was resolved; Tyco reported payments of $120 million to TE Connectivity and $2 million to Covidien in connection with the settlement, plus other shared-tax payments. Tax-sharing obligations remain. Two putative class actions sought to enjoin the merger; Tyco said it believed the claims were invalid.
- Contingencies: Environmental remediation costs were estimated at $20–$69 million, with a best estimate of $31 million. Approximately 3,000 asbestos claims were pending; recorded asbestos liabilities of $492 million were largely offset by $474 million of separate assets, for a reported net liability of $18 million. Actual costs or recoveries could differ materially from estimates.
- Market and operating risks: Management cited a strong U.S. dollar and continuing weakness in high-hazard, heavy-industrial markets amid oil-price volatility. Other stated risks include merger completion and integration, financing and refinancing, tax matters, litigation, foreign exchange, demand, and achieving cost savings.
Investor verification points
- Confirm the merger’s actual closing date, approvals, final financing and resulting share/cash consideration; the September 2 date was an expectation, not a completed transaction in this filing.
- Assess recurring operating performance separately from the UAE gain, tax-sharing release, debt-extinguishment loss, merger costs and divestiture charges.
- Track cash conversion and working-capital movements: Tyco reported a $479 million working-capital cash outflow for the nine-month period.
- Review ROW profitability and exposure to currency movements, divestitures and heavy-industrial demand, and monitor whether organic growth continues.
- Evaluate the assumptions and funding behind tax-sharing, asbestos and environmental liabilities, including potential changes in estimates or recoveries.