Filing summary
Issuer and period discrepancy: The supplied filing is Tyco International Ltd.’s Form 10-K, not a Johnson Controls International plc filing. It covers the fiscal year ended September 24, 2010; fiscal fourth-quarter figures are included in the filing’s unaudited quarterly data.
Business context and reporting period
Tyco was a diversified global provider of security, fire protection, flow control, electrical and metal products, and safety products. Its five reported segments were ADT Worldwide, Flow Control, Fire Protection Services, Electrical and Metal Products, and Safety Products. Financial statements are in U.S. dollars and prepared under U.S. GAAP.
Financial performance and liquidity
Unless otherwise indicated, amounts are in millions of U.S. dollars. Fiscal years 2010 and 2009 each contained 52 weeks.
| Metric | FY2010 | FY2009 |
|---|---|---|
| Revenue | $17,016 | $16,882 |
| Operating income (loss) | $1,598 | $(1,506) |
| Income (loss) from continuing operations attributable to common shareholders | $1,125 | $(1,845) |
| Net income (loss) attributable to common shareholders | $1,132 | $(1,798) |
| Diluted EPS | $2.32 | $(3.80) |
| Cash from operating activities | $2,630 | $2,387 |
| Cash and cash equivalents at year-end | $1,775 | $2,354 |
| Total debt | $4,188 | $4,274 |
- Revenue grew 0.8%; favorable foreign-exchange effects contributed $624 million, while lower volume in Flow Control and Fire Protection Services offset part of the increase. Service revenue was 41% of revenue, up from 40%.
- Operating margin was approximately 9.4% in FY2010. FY2009 operating results included $2.705 billion of goodwill and intangible-asset impairments; the FY2010 earnings rebound should therefore be read in light of this comparison.
- Operating cash flow increased to $2.63 billion. Investing activities used $1.775 billion, including $718 million of capital expenditures, $600 million for acquisitions net of cash acquired, and $559 million for ADT customer-account purchases. Financing activities used $1.441 billion, including $900 million of share repurchases and $416 million of dividends.
- Year-end current assets were $7.353 billion and current liabilities $5.268 billion. Tyco reported $1.69 billion of revolving credit facilities, none drawn; debt-to-total-capital was 23%.
- Segment revenue and operating income: ADT Worldwide $7.376 billion and $1.056 billion; Flow Control $3.373 billion and $410 million; Fire Protection Services $3.355 billion and $272 million; Electrical and Metal Products $1.399 billion and $100 million; Safety Products $1.513 billion and $221 million.
- Fiscal Q4 2010 revenue was $4.493 billion, gross profit $1.669 billion, continuing-operations income attributable to common shareholders $273 million, net income attributable to common shareholders $266 million, and diluted EPS $0.53. Continuing-operations diluted EPS was $0.55.
Material changes versus prior comparable period
- Revenue rose modestly from FY2009, but remained below FY2008’s $19.733 billion. Product revenue declined to $9.990 billion from $10.134 billion; service revenue increased to $7.026 billion from $6.748 billion.
- ADT revenue increased 4.4%, reflecting Broadview Security and growth in recurring monitoring revenue. Recurring revenue reached approximately $4.3 billion, 58% of ADT revenue; reported customer attrition declined to 12.8% from 13.3%.
- Flow Control revenue fell 3.5% and operating income fell 17.3%; management cited lower valve volumes and an approximately $18 million loss on a long-term construction project. Fire Protection revenue declined 1.6%, while operating income improved largely because FY2009 included a $180 million goodwill impairment.
- Tyco acquired Broadview Security in May 2010 for approximately $1.974 billion in cash, shares, and replacement awards. It contributed an estimated $193 million of revenue and a $25 million continuing-operations loss after acquisition; acquisition and integration costs totaled $35 million.
- The European water business was classified as discontinued operations and sold on September 30, 2010 for net proceeds of approximately $267 million; Tyco expected a gain. A November 2010 agreement to sell a 51% interest in Electrical and Metal Products for approximately $720 million was a subsequent event, expected to close in the first half of FY2011.
Outlook, risks, contingencies, and unusual items
- No specific FY2011 revenue or earnings guidance is provided. Management expected FY2011 capital expenditures to exceed FY2010 spending and depreciation, and forecast approximately $150 million of restructuring and related charges. It stated that cash, operating cash flow, and available credit should cover foreseeable needs.
- Management planned a segment realignment in the first quarter of FY2011, creating Tyco Security Solutions and Tyco Fire Protection, alongside Flow Control. The planned Electrical and Metal Products transaction would further change the portfolio.
- Key business risks included weak commercial construction and other cyclical markets, competition, foreign-exchange and commodity-price volatility, and possible customer attrition. Tyco generated 51% of revenue outside the United States.
- DOJ and SEC discussions concerning potential FCPA violations remained ongoing; the company could not estimate potential loss and disclosed possible material fines, injunctions, or a compliance monitor. German antitrust proceedings and an Italian improper-payment matter also remained unresolved.
- Tax exposures include open IRS matters for 1997–2004, a recorded $554 million Tax Sharing Agreement liability, and a potential $156 million payment within 12 months. Asbestos reserves were $309 million gross, offset by $203 million of estimated insurance recoveries; the net liability was $106 million, after a $52 million FY2010 charge. Environmental remediation accrual was $34 million, within an estimated probable range of $27–$85 million.
- Other unusual items include an $87 million debt-extinguishment charge, a $40 million net gain on divestitures, and the prior-year impairment charges. Tyco reported no impairment in its FY2010 annual goodwill test. Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Confirm the issuer: this source is Tyco International Ltd., not Johnson Controls International plc, and confirm the intended reporting period.
- Review FY2010 earnings quality, particularly the impact of the large FY2009 impairment comparison, foreign exchange, divestiture gains, and nonrecurring tax benefits.
- Track Broadview integration, recurring-revenue growth, customer attrition, and realization of anticipated synergies.
- Verify completion and proceeds of the Electrical and Metal Products transaction, and the effects of the planned segment realignment.
- Monitor FCPA, antitrust, tax, asbestos, and other legal exposures, including potential cash payments and insurance recoverability.
- Assess planned FY2011 capital spending and restructuring costs against operating cash flow, debt maturities, and shareholder returns.