Filing identity and reporting period
Important entity mismatch: The supplied filing is Tyco International Ltd.’s Form 10-Q, not a Johnson Controls International plc filing. It covers the quarter and six months ended March 26, 2010; comparisons are to March 27, 2009. Financial amounts below are in U.S. dollars unless noted.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Net revenue | $4.169 billion, up 0.5% | $8.415 billion, down 1.9% |
| Operating income | $427 million; 10.2% margin | $841 million; 10.0% margin |
| Income from continuing operations | $312 million | $615 million |
| Net income attributable to Tyco shareholders | $310 million; diluted EPS $0.65 | $612 million; diluted EPS $1.28 |
| Operating cash flow | Not clearly stated for the quarter in the cash flow statement | $1.011 billion, versus $782 million |
- Quarterly product revenue declined to $2.469 billion from $2.518 billion; service revenue rose to $1.700 billion from $1.632 billion. Service revenue was 41% of total revenue.
- For the six months, product revenue was $4.997 billion and service revenue $3.418 billion. Management attributed revenue weakness mainly to lower Flow Control volumes, lower steel selling prices, and soft commercial markets; currency movements partly offset declines.
- Quarterly operating income comparisons are heavily affected by the prior-year $2.705 billion goodwill and intangible impairment charge and approximately $102 million of legacy legal charges. In 2010, restructuring and asset impairment charges were $21 million for the quarter and $32 million for six months; divestiture gains were $45 million and $44 million, respectively.
- Segment trends: ADT Worldwide revenue rose 3.6% in the quarter, with recurring revenue up 9.2%; Flow Control revenue fell 3.0% and operating income fell 30.1%; Fire Protection Services revenue fell 0.7%; Electrical and Metal Products revenue rose 1.8% for the quarter but fell 15.1% for six months; Safety Products revenue fell 4.0% for the quarter and 7.5% for six months.
Balance sheet, debt and liquidity
- At March 26, 2010: cash and cash equivalents were $2.733 billion; current assets $7.997 billion; current liabilities $4.755 billion; total debt $4.531 billion, including $536 million current and $3.995 billion long-term. Cash exceeded total debt by approximately $1.798 billion.
- Cash increased $379 million from fiscal year-end, primarily reflecting operating cash flow and $498 million in long-term debt proceeds, partly offset by capital spending, acquisitions, ADT account purchases, and short-term debt repayments.
- Six-month investing cash outflow was $695 million, including $335 million of capital expenditures, $266 million for ADT customer contracts, and $152 million for acquisitions. Financing cash flow was $62 million; dividends paid were $214 million.
- The company reported $1.69 billion of committed revolving credit facilities with no amounts drawn, and no commercial paper outstanding. Management said available cash, credit and operating cash flow should cover foreseeable needs.
- Debt to total capitalization was 26%, versus 25% at September 25, 2009. Standard & Poor’s raised the long-term debt rating to A- from BBB+ on April 12, 2010.
Outlook, developments and risks
- Management expected fiscal 2010 restructuring and related charges of approximately $100 million to $150 million, with the 2009 restructuring program substantially completed by fiscal year-end. Capital expenditures were expected to exceed fiscal 2009 levels and depreciation.
- Tyco had agreed to acquire Broadview Security (formerly Brink’s Home Security) for approximately $2.0 billion, expected to be funded with up to $600 million cash and Tyco shares. Closing was expected after the May 12, 2010 shareholder meeting, subject to closing conditions; the deal was not yet completed at the reporting date.
- ADT had approximately 7.4 million customer accounts; trailing 12-month attrition was 13.1%. Backlog was approximately $9.0 billion, with about 86% expected to be filled within 12 months.
- After quarter-end, the board approved pursuing a tax-free spin-off of Electrical and Metal Products, targeted for the first half of fiscal 2011, subject to approvals and other conditions. Tyco also expected to resume share repurchases under its existing program, depending on market and cash-flow conditions.
- Significant unresolved exposures include ongoing DOJ and SEC discussions following a company-wide FCPA review, for which potential losses or penalties could not be estimated; a German antitrust investigation; legacy litigation; tax audits and tax-sharing obligations; and asbestos claims. The company reported about 4,400 asbestos lawsuits and estimated a $51 million net asbestos liability after insurance recoveries.
- Management warned that weak commercial and retail markets, economic and currency movements, steel and copper prices, acquisition execution, potential asset impairments, litigation and regulatory matters, and pension funding needs could affect results. No formal earnings or revenue guidance was provided.
Key facts for investors to verify
- Confirm the intended issuer: this source is Tyco International Ltd., not Johnson Controls International plc.
- Review the Broadview acquisition’s final consideration, financing mix, closing conditions and integration outcome.
- Assess whether recurring-service growth can offset continued weakness in product, commercial and construction markets, particularly Flow Control and Safety Products.
- Track operating cash conversion and working-capital movements, as six-month working capital reduced operating cash flow by $242 million.
- Monitor the amount and timing of any FCPA, antitrust, tax-sharing, legacy litigation, asbestos or pension-related cash costs.
- Verify progress and conditions for the proposed Electrical and Metal Products spin-off, restructuring savings, and planned capital returns.