Filing summary
Entity discrepancy: The request identifies Johnson Controls International Plc, but the supplied filing is Tyco International Ltd.’s Form 10-K. The summary below reflects the filing, not Johnson Controls.
Business context and reporting period
Tyco reported for the fiscal year ended September 30, 2011, a 53-week year, with comparisons to fiscal 2010, which ended September 24 and comprised 52 weeks. Its three principal segments were Security Solutions, Fire Protection and Flow Control. The filing also reports the Electrical and Metal Products business through its December 2010 majority-interest sale.
Financial performance and position
| Metric | FY2011 | FY2010 |
|---|---|---|
| Net revenue | $17.355 billion | $17.016 billion |
| Operating income | $2.119 billion | $1.598 billion |
| Income from continuing operations attributable to common shareholders | $1.565 billion | $1.125 billion |
| Net income attributable to common shareholders | $1.733 billion | $1.132 billion |
| Diluted EPS, continuing operations / total | $3.27 / $3.62 | $2.31 / $2.32 |
| Cash from operating activities | $2.437 billion | $2.630 billion |
| Cash and cash equivalents at year-end | $1.390 billion | $1.775 billion |
| Total debt at year-end | $4.148 billion | $4.188 billion |
Operating margin was approximately 12.2%, up from 9.4%; gross margin was approximately 38.1%, compared with 37.0%. The effective tax rate was 17.2%, versus 10.9%. Working-capital changes used $584 million of operating cash, a major factor in the year-over-year decline in operating cash flow. The company spent $788 million on capital expenditures, $614 million acquiring security customer contracts, $656 million on acquisitions, $1.3 billion repurchasing shares and $458 million paying dividends. Investing activities used $1.325 billion and financing activities used $1.481 billion.
At September 30, 2011, total assets were $26.777 billion, total liabilities $12.497 billion and shareholders’ equity $14.182 billion. The company reported $1.5 billion of undrawn revolving credit facilities and a 23% total-debt-to-total-capital ratio. Current assets were $6.433 billion and current liabilities $4.330 billion.
Changes versus prior comparable periods
- Revenue rose 2.0%; management attributed increases to segment growth and favorable currency effects, partly offset by the Electrical and Metal Products divestiture. The extra fiscal week contributed an estimated $143 million of revenue; favorable currency contributed $503 million.
- Operating income increased 33%. FY2011 included a $230 million net divestiture gain, mainly from the Electrical and Metal Products transaction, and lower restructuring and impairment charges than FY2010.
- Security Solutions revenue increased 11.5% to $8.626 billion, with operating income up 24.9% to $1.361 billion. Recurring revenue reached 57% of the segment’s revenue; reported customer-account attrition eased to 12.6% from 12.8%.
- Fire Protection revenue increased 5.2% to $4.743 billion and operating income rose 16.1% to $534 million. Flow Control revenue grew 7.9% to $3.639 billion, but operating income was nearly flat at $413 million and margin fell to 11.3% from 12.2%.
- Fourth-quarter unaudited revenue was $4.691 billion, versus $4.493 billion in FY2010 Q4. Continuing-operations income attributable to common shareholders was $392 million, versus $273 million; net income attributable to shareholders was $400 million, versus $266 million. Q4 diluted EPS was $0.83 from continuing operations and $0.85 total, compared with $0.55 and $0.53, respectively.
Outlook, management commentary, risks and unusual items
- The board approved a proposed separation into three publicly traded companies: North American residential security, Flow Control, and commercial fire and security. Completion was targeted by the end of the third calendar quarter of 2012, subject to approvals, tax rulings, registration statements and financing. Estimated separation costs were approximately $700 million.
- Management expected FY2012 capital expenditures to exceed FY2011 spending and depreciation expense, and projected $125–$150 million of restructuring and related charges. Minimum required 2012 pension contributions were estimated at $104 million.
- Key risks include economic and construction-market cyclicality; competition and customer attrition; foreign-exchange and commodity volatility; execution, cost and tax risks of the proposed separation; litigation and asbestos exposure; legacy tax matters; and ongoing U.S. Department of Justice and SEC investigations concerning possible Foreign Corrupt Practices Act violations.
- Environmental remediation reserves were $60 million, within an estimated probable range of $38–$86 million. Asbestos liabilities of $306 million were reported separately from $224 million of estimated insurance recoveries, for a net liability of $82 million. The company recorded a $34 million aggregate probable loss for compliance matters. The Flow Control subsidiaries in the Milan investigation were acquitted during FY2011; DOJ/SEC discussions remained ongoing.
- The annual results include material nonrecurring effects: $248 million net gain associated with the Electrical and Metal Products sale; $168 million income from discontinued operations, primarily reflecting the European water-business sale; and elevated FY2010 comparability effects from a $2.705 billion goodwill and intangible-asset impairment charge in FY2009.
Important facts for investors to verify
- Confirm the issuer: the supplied 10-K is Tyco International Ltd. (NYSE: TYC), not Johnson Controls International Plc.
- Review the proposed separation’s conditions, estimated $700 million cost, tax treatment and financing requirements.
- Assess the quality and sustainability of earnings growth after the divestiture gain, extra fiscal week and currency effects.
- Check operating cash conversion, particularly the working-capital outflow, and planned capital spending and shareholder returns.
- Monitor resolution and potential payments for DOJ/SEC compliance investigations, legacy tax audits, asbestos claims and other contingencies.
- Evaluate Flow Control’s weaker margin and limited goodwill headroom in its Water and Environmental Systems reporting unit; its fair value exceeded carrying value by 6.9%.