Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 27, 2009, and the six months ended March 27, 2009, for Tyco International Ltd. (Note: The input metadata references Johnson Controls, but the filing text is for Tyco International Ltd.). Effective March 17, 2009, the Company changed its domicile from Bermuda to Switzerland. The Company operates through five segments: ADT Worldwide, Flow Control, Fire Protection Services, Electrical and Metal Products, and Safety Products.
Key Financial Metrics
| Metric | Quarter Ended Mar 27, 2009 | Six Months Ended Mar 27, 2009 |
|---|---|---|
| Net Revenue | $4,150 million | $8,576 million |
| Operating (Loss) Income | $(2,554) million | $(2,141) million |
| Net (Loss) Income | $(2,567) million | $(2,290) million |
| Diluted EPS (Net Loss) | $(5.42) | $(4.84) |
| Cash and Cash Equivalents | $1,419 million | $1,419 million (Balance Sheet) |
| Net Cash Provided by Operating Activities | $726 million (Quarter) | $782 million (Six Months) |
| Total Debt | $4,242 million | $4,242 million (Balance Sheet) |
| Shareholders' Equity | $11,883 million | $11,883 million (Balance Sheet) |
Material Changes Versus Prior Period
- Revenue Decline: Net revenue decreased 14.7% for the quarter and 11.6% for the six months compared to the prior year. This was driven primarily by unfavorable foreign currency exchange rates (impacting revenue by $494 million for the quarter and $917 million for six months) and lower sales volumes, particularly in Electrical and Metal Products and the retailer end market for ADT and Safety Products.
- Significant Impairments: The Company recorded a non-cash goodwill and intangible asset impairment charge of $2.7 billion ($2.6 billion goodwill, $64 million intangibles) for both the quarter and six months ended March 27, 2009. This was triggered by economic downturns, downward revisions to forecasts, and weaker industry outlooks affecting six reporting units.
- Legal Settlements: The Company recorded a charge of $101 million related to unresolved legacy securities matters and settled two opt-out class action lawsuits for $61 million (Company's share $16 million).
- Restructuring: Restructuring, asset impairment, and divestiture charges totaled $84 million for the quarter and $88 million for the six months. Management expects to incur approximately $200 million in restructuring charges for fiscal 2009.
- Operating Loss: Operating income swung from a profit of $442 million in the prior year quarter to a loss of $2,554 million, primarily due to the impairments and legal charges.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management expects to continue cost containment and restructuring activities. Capital expenditures are expected to exceed depreciation in fiscal 2009. The Company plans to use cash for core business investments, selective acquisitions, and returning excess cash to shareholders via dividends and share repurchases.
- Dividends: Shareholders approved an annual dividend of CHF 0.93 per share, to be paid in quarterly installments. The first installment of CHF 0.23 per share was declared in March 2009.
- Risks:
- Economic Conditions: Continued weakness in global economies and specific industries (construction, retail) poses a risk to demand.
- Further Impairments: Given the economic environment, additional goodwill or asset impairments may be required if forecasts are not met.
- Legal and Regulatory: Ongoing investigations regarding the Foreign Corrupt Practices Act (FCPA), legacy securities litigation, and tax audits (including potential IRS fraud penalties of $30-$50 million) present significant uncertainty.
- Internal Controls: The Company disclosed a material weakness in internal controls over financial reporting related to accounting for income taxes, which has not yet been fully remediated.
- Unusual Items: The $2.7 billion impairment charge and the $101 million legal reserve are non-recurring items that significantly distorted operating results for the period.
Investor Verification Checklist
- Verify the sustainability of the $2.7 billion goodwill impairment charge and assess the risk of further impairments in future quarters given the economic outlook.
- Review the status of the material weakness in internal controls over income tax accounting and the progress of the remediation plan.
- Monitor the resolution of legacy securities litigation and the potential impact of the $375 million reserve for probable losses.
- Assess the impact of the Change of Domicile to Switzerland on the Company's tax structure and future dividend policies.
- Track the outcome of ongoing FCPA investigations and potential fines or penalties.
- Confirm the Company's ability to maintain liquidity and meet debt covenants amidst reduced operating cash flows from core segments.