Business context and reporting period
This is Tyco International plc’s Form 10-Q for the quarter and six months ended March 25, 2016 (fiscal Q2 2016). The filing is by Tyco, not Johnson Controls International plc; the proposed merger with Johnson Controls had been announced but was not yet completed. Tyco provides fire, security and life-safety products and services through North America Integrated Solutions & Services, Rest of World Integrated Solutions & Services, and Global Products.
Financial performance
Amounts are in U.S. dollars; financial results below compare with the corresponding 2015 periods.
| Metric | Quarter | Six months |
|---|---|---|
| Net revenue | $2.331bn, down 4.1%; organic decline 1.0% | $4.707bn, down 4.1%; organic decline 0.4% |
| Operating income / margin | $225m / 9.7%, versus $221m / 9.1% | $518m / 11.0%, versus $420m / 8.6% |
| Net income attributable to Tyco shareholders | $146m, versus $167m | $222m, versus $329m |
| Diluted EPS | $0.34, versus $0.39 | $0.52, versus $0.77 |
| Cash from operations | Not separately reported in the supplied filing text | $313m, versus $262m |
| Capital expenditures | Not separately reported in the supplied filing text | $143m, versus $123m |
Six-month operating cash flow less capital expenditures was approximately $170m, versus $139m. Cash and cash equivalents fell to $345m from $1.401bn at fiscal year-end. Total debt was $2.559bn, including $400m of commercial paper; long-term debt was $2.159bn. Net debt was approximately $2.214bn. Tyco reported $1.5bn available under its existing revolving facility, with no amounts drawn.
Material changes versus prior period
- Quarterly revenue declines reflected adverse foreign exchange ($101m) and divestitures ($65m), partly offset by acquisitions ($90m). For the six months, foreign exchange reduced revenue by $253m, divestitures by $88m, while acquisitions added $161m.
- North America revenue was broadly stable and organic growth was positive. ROW revenue fell 9.3% for the quarter, with currency and divestitures significant factors; Global Products revenue fell 3.6%, including a 3.0% organic decline.
- Quarter operating income rose modestly despite lower revenue, helped by lower restructuring/repositioning charges and legacy legal gains, partly offset by $26m of merger costs and currency headwinds. Six-month operating income benefited from a $111m gain on remeasurement of Tyco’s previously held UAE joint-venture interest and lower restructuring/repositioning charges.
- Six-month continuing income was lower year over year despite higher operating income, reflecting $168m of debt-extinguishment loss and higher income tax expense. The effective tax rate was 31.4%, versus 9.7%.
- Tyco completed the sale of its Australian fire protection business, recording a $75m pretax loss for the six months. It also acquired ShopperTrak for approximately $176m and increased its Tyco UAE investment, consolidating the joint venture.
Outlook, risks and unusual items
- Management expected fiscal 2016 restructuring charges of $35m–$50m, excluding repositioning; combined restructuring and repositioning charges were expected to be $70m–$85m. Expected capital expenditures and dealer investments were approximately 3%–3.5% of annual revenue. Management said available cash, operating cash flow, commercial paper and credit facilities should meet foreseeable needs.
- Management expected continued weakness in the high-hazard, heavy-industrial market during fiscal 2016, citing reduced customer spending associated with oil-price volatility. A strong U.S. dollar was also weighing on revenue and operating income.
- The proposed Johnson Controls merger contemplated approximately $3.9bn aggregate cash consideration, financed in part by a conditional $4bn term loan; closing depended on shareholder, regulatory and other approvals. A shareholder lawsuit sought to enjoin the transaction. The merger agreement included potential termination fees and the transaction could fail or be delayed.
- A tentative IRS settlement remained contingent on further IRS processes. If finalized, the total payment was expected to be $475m–$525m, shared among Tyco, Covidien and TE Connectivity; Tyco made $122m of related payments in the quarter. The company said existing reserves were sufficient, but ultimate resolution remained uncertain.
- Other exposures include asbestos claims (approximately 3,100 pending claims; $24m recorded net liability against $500m of liabilities and $476m of related assets) and environmental remediation (best estimate $31m; estimated range $21m–$70m). Actual costs or insurance recoveries could differ materially.
- The filing reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the reporting entity and merger status: this filing is Tyco’s, and the Johnson Controls combination was still proposed as of March 25, 2016.
- Assess the quality and repeatability of earnings: isolate the $111m UAE investment gain, $168m debt-extinguishment loss, divestiture losses, legal gains and merger costs.
- Review cash and near-term liquidity after the substantial decline in cash, alongside commercial-paper borrowings, debt maturities and merger-dependent financing.
- Track the IRS settlement’s final terms and Tyco’s allocated share, including implications under the tax-sharing agreements.
- Evaluate merger closing conditions, litigation, potential termination fees, financing availability and integration risks.
- Monitor currency exposure, industrial-market weakness, restructuring execution, asbestos liabilities and environmental remediation estimates.