Filing summary
Company identification: The supplied filing is for Tyco International Ltd., not Johnson Controls International Plc. It is an unaudited Form 10-Q for the fiscal quarter ended June 26, 2009, and covers the first nine months of fiscal 2009.
Business context and reporting period
Tyco reported continuing operations across ADT Worldwide, Flow Control, Fire Protection Services, Electrical and Metal Products, and Safety Products. On March 17, 2009, it changed its jurisdiction of incorporation from Bermuda to Switzerland. Segment comparisons reflect certain realignments and exclude discontinued operations.
Key financial metrics
| Metric | Quarter ended June 26, 2009 | Nine months ended June 26, 2009 |
|---|---|---|
| Net revenue | $4.240 billion, down 18.7% year over year | $12.816 billion, down 14.1% |
| Operating income (loss) | $339 million, versus $577 million | $(1.802) billion, versus $1.512 billion |
| Net income (loss) | $287 million, versus $476 million | $(2.003) billion, versus $1.119 billion |
| Continuing-operations EPS | $0.51 basic and diluted, versus $0.41 | $(4.31) basic and diluted, versus $1.71 basic and $1.70 diluted |
| Operating cash flow | $662 million | $1.444 billion, versus cash used of $1.908 billion |
- Quarterly operating margin was approximately 8.0%, versus 11.1% a year earlier. Nine-month operating margin was negative due principally to impairment charges.
- Nine-month operating cash flow included $2.705 billion of noncash goodwill and intangible-asset impairment add-backs. Capital expenditures were $500 million; cash spent on ADT dealer contracts was $361 million.
- At June 26, cash was $1.779 billion; total debt was $4.245 billion, including $200 million of commercial paper. Long-term debt was $4.226 billion. Cash less total debt was approximately $2.466 billion net debt.
- Current assets were $7.790 billion and current liabilities $4.651 billion. Shareholders’ equity was $12.595 billion, down from $15.494 billion at September 26, 2008.
- Tyco had $1.69 billion of available revolving credit commitments, including $200 million supporting commercial paper; no revolving-facility borrowings were outstanding. Management said available cash and expected operating cash flows should fund foreseeable capital and liquidity needs, including dividends.
Material changes versus the prior comparable period
- Revenue fell across all segments. The stronger U.S. dollar reduced revenue by $407 million in the quarter and $1.3 billion for the nine-month period. Weak commercial and retail markets, lower steel-product volumes, and reduced selling prices also weighed on results.
- Tyco recorded $2.641 billion of goodwill impairment and $64 million of intangible-asset impairment in the second quarter, primarily affecting Electrical and Metal Products, ADT Worldwide, Fire Protection Services, and Safety Products. The company concluded remaining goodwill was recoverable at quarter-end but warned further impairment was possible if forecasts were not achieved.
- Electrical and Metal Products revenue declined 50.9% for the quarter; the segment reported a $17 million operating loss, versus $141 million operating income. Safety Products revenue declined 25.6%, and Fire Protection Services revenue declined 13.7%.
- Operating cash flow improved from an outflow in the prior-year nine-month period, when cash flows included a large class-action settlement escrow payment. Cash increased by $260 million from fiscal year-end.
- Tyco issued $750 million of 8.5% notes due 2019, repaid $686 million drawn on revolving credit facilities, and repaid notes that matured in 2008 and 2009.
Outlook, management commentary, risks, and unusual items
- Management expected approximately $200 million of restructuring and restructuring-related charges in fiscal 2009; $142 million of restructuring charges had been recorded in the first nine months. It cited cost containment, efficiency, working-capital management, and selective bolt-on acquisitions as priorities.
- Management expected fiscal 2009 capital expenditures to approximate fiscal 2008 levels and exceed depreciation. It anticipated a voluntary U.S. pension contribution of up to $20 million in the fourth quarter.
- Backlog was $8.935 billion, down 7.9% from September 2008; management expected approximately 85% to be filled within 12 months. ADT’s account base grew 1.8% to 7.3 million, while customer attrition increased year over year to 13.4%.
- Legacy securities and ERISA matters remained a significant contingency. Tyco had recorded a $375 million gross reserve for unresolved claims, subject to sharing arrangements with Covidien and Tyco Electronics. During the quarter, it agreed to settlements totaling $269 million; these did not trigger additional expense because reserves had been established.
- Other disclosed exposures included tax audits and tax-sharing obligations, investigations involving potential improper payments and FCPA compliance, German antitrust allegations, environmental remediation (best estimate $43 million within a $36–$77 million range), and approximately 4,700 pending asbestos cases. The company stated that some outcomes could materially affect results, and that certain potential losses could not be estimated.
- Disclosure controls and procedures were judged ineffective as of June 26, 2009 because of a material weakness in internal controls over income-tax accounting. Management described remediation efforts but had not yet concluded that the controls were effective and sustainable.
- The $2.975 billion securities class-action settlement from 2007 was final, and Tyco reported no further liability under that settlement. Separately, the sale of the remaining China Infrastructure Services assets closed July 2, 2009 for $24 million, after quarter-end.
Important facts for investors to verify
- Confirm the issuer: this filing is Tyco International Ltd., not Johnson Controls International Plc.
- Review the impairment assumptions and sensitivity, particularly the cash-flow forecasts and discount rates, and monitor for further goodwill or intangible-asset charges.
- Assess the sustainability of operating cash flow and the effects of declining sales, foreign-exchange movements, working-capital needs, dealer-contract purchases, and restructuring cash costs.
- Track the resolution and allocation of legacy litigation, tax-sharing liabilities, government investigations, and other contingencies, including any amounts beyond recorded reserves.
- Monitor progress in remediating the material weakness in tax-accounting controls and the company’s ability to maintain liquidity, credit ratings, and dividend payments.