Business context and reporting period
Entity discrepancy: 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 25, 2010; comparisons are with periods ended June 26, 2009.
Tyco reported five segments: ADT Worldwide, Flow Control, Fire Protection Services, Electrical and Metal Products, and Safety Products. The filing is unaudited.
Financial performance and position
| Metric | Quarter ended June 25, 2010 | Nine months ended June 25, 2010 |
|---|---|---|
| Net revenue | $4.274 billion; up 2.9% | $12.523 billion; down 0.3% |
| Operating income | $375 million; prior year $334 million | $1.205 billion; prior year loss of $1.815 billion |
| Operating margin | 8.8%, versus 8.0% in prior-year quarter | 9.6%; prior-year comparison is distorted by impairment charges |
| Net income attributable to Tyco common shareholders | $254 million, versus $287 million | $866 million, versus a loss of $2.003 billion |
| Diluted EPS attributable to common shareholders | $0.51, versus $0.60 | $1.79, versus a loss of $4.23 |
| Operating cash flow | $660 million | $1.667 billion, versus $1.423 billion |
For the nine months, investing cash outflow was $1.444 billion and financing cash outflow was $741 million. Capital expenditures were $512 million. Cash and equivalents fell $531 million to $1.823 billion from September 25, 2009. Total debt was $4.168 billion, compared with $4.274 billion; shareholders’ equity was $14.141 billion. Tyco had $1.69 billion of undrawn committed revolving credit facilities. Current assets were $7.329 billion and current liabilities $4.959 billion.
Quarterly revenue growth reflected ADT recurring revenue and higher steel and armored-cable prices, partly offset by lower Flow Control valve volumes and continued commercial-market weakness. Foreign exchange added $102 million to quarterly revenue and $627 million to nine-month revenue. Service revenue was 41% of total revenue in both periods.
Material changes versus comparable periods
- Nine-month 2010 operating results compare favorably with 2009, which included $2.705 billion of goodwill and intangible impairment charges and legacy legal charges. The improvement therefore does not represent a like-for-like operating trend.
- Quarterly common-shareholder net income and diluted EPS declined year over year despite higher revenue and operating income. The quarter included an $87 million debt-extinguishment loss and a $52 million net asbestos charge.
- Flow Control nine-month revenue fell 3.1% and operating income fell 18.6%, primarily on reduced valve volumes and less project work. ADT Worldwide recurring revenue grew 9.5% for the nine months; its customer base reached about 8.9 million accounts, including acquired Broadview accounts.
- Cash declined amid acquisition spending, customer-account purchases, capital expenditures, dividends, share repurchases, and net debt repayments.
Outlook, commentary, risks and unusual items
- Management forecast approximately $100 million of fiscal 2010 restructuring and restructuring-related charges; $69 million was incurred in the first nine months under the 2009 program. Actions were expected to be substantially completed by fiscal year-end.
- Management expected fiscal 2010 capital expenditures to exceed fiscal 2009 spending and depreciation. It said cash, operating cash flow, and available credit should meet foreseeable operating and business needs. No specific earnings or revenue guidance was provided.
- Tyco acquired Brink’s Home Security (Broadview) on May 14 for approximately $1.974 billion in cash and stock. It contributed $54 million of revenue and a $26 million loss from continuing operations after acquisition; acquisition and integration costs were also recorded. Management anticipated integration synergies, which were not reflected in pro forma results.
- The company expected to complete a tax-free spin-off of Electrical and Metal Products in the first half of fiscal 2011, subject to approvals. It agreed to sell its European water business for approximately $245 million; completion depended on approvals, and a gain was expected upon closing. The filing reports a definitive sale agreement entered July 29, 2010.
- Backlog was $9.382 billion, up 5.3% from September 2009; management expected about 87% to be filled within 12 months. ADT’s backlog includes recurring revenue-in-force and deferred revenue, so it is not solely unfilled product orders.
- Key uncertainties include ongoing DOJ and SEC discussions concerning potential FCPA issues, an ongoing German antitrust investigation, tax audits and tax-sharing obligations, asbestos claims, and legacy litigation. The potential FCPA and German antitrust outcomes could not be estimated and could be material. The asbestos net liability was $104 million, up from $49 million at fiscal year-end, after the quarter’s charge.
- Goodwill was $9.388 billion. Management concluded it was recoverable at June 25, but noted sensitivity to economic recovery, forecasts, and market assumptions and the possibility of future impairment.
Important facts for investors to verify
- Confirm the intended issuer: this filing is for Tyco International Ltd., not Johnson Controls International plc.
- Assess underlying operating trends apart from 2009 impairment charges, foreign-exchange effects, divestiture gains, acquisition effects, and restructuring costs.
- Track Broadview integration, acquisition-related costs, recurring-revenue growth, customer attrition, and realization of anticipated synergies.
- Verify completion and proceeds of the European water sale and the status, approvals, and expected terms of the Electrical and Metal Products spin-off.
- Monitor cash use, debt maturities and refinancing, capital spending, buybacks, dividends, and the remaining revolving-credit availability.
- Review developments in asbestos estimates, FCPA and antitrust matters, tax contingencies, and the related potential financial exposure.