Filing identity and reporting period
Important mismatch: The supplied filing is Tyco International Ltd.’s Form 10-Q, not a Johnson Controls International Plc filing. It covers fiscal first quarter ended December 24, 2010, with comparisons to the quarter ended December 25, 2009. Amounts are in U.S. dollars unless noted.
Business context
Tyco reported three core businesses—Tyco Security Solutions, Tyco Fire Protection and Tyco Flow Control—and also reported Electrical and Metal Products during the quarter. It realigned its segments and sold a 51% interest in Electrical and Metal Products; prior-period segment figures were recast.
Financial performance
| Metric | Quarter ended Dec. 24, 2010 | Prior comparable quarter |
|---|---|---|
| Net revenue | $4.379 billion | $4.155 billion |
| Operating income | $706 million | $405 million |
| Income from continuing operations | $490 million | $297 million |
| Net income attributable to Tyco shareholders | $659 million | $302 million |
| Diluted EPS | $1.34 | $0.63 |
| Operating cash flow | $246 million | $375 million |
- Revenue increased 5.4%; product sales were $2.508 billion and service revenue was $1.871 billion. Service revenue represented about 43% of revenue, versus 41% a year earlier.
- Reported operating margin was about 16.1%, versus 9.7%. The current quarter included a $259 million gain on the sale of a majority interest in Electrical and Metal Products, so reported operating income and margin include a substantial unusual gain.
- Income tax expense was $163 million and the effective tax rate was 25.0%, versus 14.7%. Management attributed the higher rate mainly to tax on the Electrical and Metal Products transaction and a one-time benefit in the prior period.
- Operating cash flow declined $129 million year over year. Working-capital changes reduced operating cash flow by $526 million, mainly reflecting decreases in accrued liabilities and accounts payable and increased inventory.
- Capital expenditures were $179 million. Investing activities provided $389 million, including $710 million of divestiture proceeds in continuing operations; discontinued investing activities provided a further $265 million.
- Cash and cash equivalents were $2.062 billion, up from $1.775 billion at September 24, 2010. Total debt was $4.153 billion, including $519 million current; long-term debt was $3.634 billion. The company had $1.69 billion in undrawn committed revolving facilities. Debt-to-total-capital was 23%.
- Current assets were $6.820 billion and current liabilities $4.511 billion. Total shareholders’ equity was $14.196 billion.
Material changes and segment results
- Tyco Security Solutions revenue rose 10.1% to $2.107 billion; operating income increased 29.5% to $347 million and margin improved to 16.5% from 14.0%. Growth included Broadview Security, acquired in May 2010; customer accounts reached 8.9 million, while average revenue per customer declined 1.7%.
- Tyco Flow Control revenue decreased 0.7% to $826 million; operating income was $100 million versus $102 million. Management cited weak markets in Valves and Controls and a $5 million loss provision on a long-term construction project.
- Tyco Fire Protection revenue decreased 1.2% to $1.099 billion; operating income fell 19.3% to $88 million and margin declined to 8.0% from 9.8%. Restructuring and divestiture charges weighed on results.
- Electrical and Metal Products revenue increased 16.8% to $347 million, but operating income fell to $7 million from $23 million, reflecting lower steel-product spreads amid higher raw-material costs.
- The company received about $713 million from the sale of a majority interest in Electrical and Metal Products and retained an equity-method interest valued at $137 million. It also reported a $173 million pretax gain in discontinued operations from the September 2010 sale of its European water business. Discontinued operations contributed $169 million to current-quarter net income.
- Tyco repurchased about 13 million shares for $500 million and paid $113 million in dividends during the quarter.
Outlook, risks and contingencies
- Management expected fiscal 2011 restructuring and related charges of approximately $200 million; $32 million of restructuring charges were incurred in the quarter. It expected fiscal 2011 capital spending to exceed both fiscal 2010 spending and depreciation.
- Management said cash, available credit and operating cash generation should be sufficient for foreseeable operating and business needs. It planned to use cash for investment, acquisitions, productivity initiatives, dividends and repurchases. Backlog was $9.5 billion, with approximately 86% expected to be filled within 12 months.
- In January 2011, Tyco’s finance subsidiary issued $500 million of notes due 2018 and 2023; proceeds and other funds were intended to repay $516 million of 6.75% notes maturing in February 2011. Through January 26, the company had repurchased a further 6.7 million shares for $293 million.
- Significant unresolved risks include active DOJ and SEC discussions concerning potential FCPA violations; the company could not estimate potential losses or penalties and acknowledged that material fines, a compliance monitor, injunctions or other consequences were possible. A German competition investigation also had an unestimable potential loss.
- Tax-sharing and related guarantee liabilities totaled $554 million. The company said certain IRS audit matters remained uncertain and could materially affect future results; it estimated $16 million to $145 million of unrecognized tax benefits could be resolved within 12 months. Proposed civil fraud penalties were estimated at $30 million to $50 million.
- Asbestos-related liabilities were $314 million, offset by $213 million of estimated insurance recoveries, for a net liability of $101 million; actual amounts could differ materially from estimates. Environmental remediation costs were estimated at $23 million to $80 million, with a best estimate of $30 million.
- Other matters include an approximately $25 million pension withdrawal assessment under arbitration (no accrual recorded), former-management litigation, and general legal and product-liability claims. Management reported no significant change in the risk factors disclosed in its prior annual report.
Most important facts for investors to verify
- Confirm the issuer: the supplied 10-Q is for Tyco International Ltd., not Johnson Controls International Plc.
- Assess underlying operating performance separately from the $259 million divestiture gain and other restructuring and divestiture items.
- Review the decline in operating cash flow and the working-capital outflow, alongside proceeds from asset sales and ongoing shareholder returns.
- Monitor the February 2011 debt maturity and refinancing, and subsequent share repurchases under the remaining authorization.
- Track outcomes and potential financial exposure from FCPA and tax matters, including the $554 million tax-sharing guarantee liability.