Johnson Controls International Plc quarterly report, Q2 FY2012

Business context and reporting period

Important issuer discrepancy: 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 30, 2012, Tyco fiscal Q2 2012. Tyco reported Commercial Fire and Security, ADT North American Residential, and Flow Control segments.

Financial results and liquidity

Amounts are in USD millions, except per-share data.

• Quarter revenue rose 9.1%; operating income rose 10.8%. Six-month revenue rose 2.3%, while operating income fell 16.4%.
• Quarter service revenue was $1,948 million, about 45% of revenue. Recurring ADT residential revenue rose 5.0% for the quarter; ending customer accounts were 6.432 million and attrition was 13.2%.
• Quarter segment operating income and margins: Commercial Fire and Security, $286 million and 11.2% (prior 10.9%); ADT Residential, $194 million and 24.0% (prior 24.3%); Flow Control, $111 million and 11.1% (prior 10.7%).
• Cash and equivalents were $1,086 million, down from $1,390 million at September 30, 2011. Total debt was $4,140 million, including $3 million current; net debt was approximately $3.1 billion. Shareholders’ equity was $14,562 million.
• Current assets were $6,463 million and current liabilities $4,286 million. Tyco had $1.5 billion of revolving credit commitments with none drawn; one facility was extended to September 30, 2012, with commitments reduced from $750 million to $654 million.
• Six-month investing cash use was $909 million, including $431 million capital expenditures, $336 million of customer-account purchases, and $205 million for acquisitions. Financing cash use was $464 million, including $300 million of share repurchases and $231 million of dividends.

Material changes versus prior comparable periods

• Quarter revenue growth reflected higher product sales and improved volumes across segments, acquisitions, and ADT customer-account and average-revenue growth. Foreign exchange reduced quarter revenue by $25 million.
• Six-month operating income and net income were lower largely because the prior-year period included a $233 million net divestiture gain, principally tied to the Electrical and Metal Products business, and $165 million income from discontinued operations. Current-period discontinued operations recorded a $7 million loss.
• Tyco incurred separation costs of $66 million in the quarter and $98 million in six months; none were recorded in the comparable prior-year periods. Six-month restructuring and asset impairment charges were $53 million.
• Operating cash flow increased to $1,054 million from $912 million despite lower reported six-month earnings. Working capital reduced current-period operating cash flow by $542 million, mainly due to decreases in accrued liabilities and higher inventories.
• The company reorganized segment reporting in anticipation of the planned separations; prior segment results were recast, but the filing cautions that recast figures are not stand-alone historical financial statements for the businesses to be separated.

Outlook, management commentary, risks, and unusual items

• Management said cash, operating cash generation, and available credit should be adequate for foreseeable operating and business needs. Fiscal 2012 capital spending was expected to exceed fiscal 2011 and depreciation expense.
• Management expected restructuring and restructuring-related charges of approximately $125–$150 million in fiscal 2012, plus a further approximately $125 million related to the separation.
• Backlog was $10.25 billion at March 30, 2012, up 6.2% from September 30, 2011; approximately 87% was expected to be filled within 12 months.
• Tyco planned tax-free distributions of ADT North American Residential and Flow Control; Flow Control was to merge with Pentair after its distribution. Completion was subject to shareholder and regulatory approvals and customary conditions. Tyco shareholders were expected to own approximately 52.5% of the combined Flow Control/Pentair company. The filing cited an expected completion by the end of Q3 2012, while warning of delay, failure, transaction-cost, execution, and tax risks.
• Significant contingencies include disputed pre-2007 separation tax matters and IRS audits. Tyco recorded $411 million of related guarantee liabilities; it warned resolution could materially affect future results, cash flows, or tax rates. Proposed IRS civil fraud penalties were estimated at $30–$50 million and were within the tax-sharing arrangements.
• Other notable exposures include ongoing FCPA discussions with the DOJ and SEC, asbestos claims (about 5,000 lawsuits and 6,100 estimated viable claims; $52 million net recorded liability), environmental remediation reserves of $57 million, and a disputed pension withdrawal assessment of about $25 million. Management also disclosed ADT robocall class actions for which no loss estimate was recorded.
• Unusual favorable item: Tyco reversed a $50 million liability for former executive Mark Swartz after the relevant statutes of limitation expired. A $30 million legacy-legal income item partly offset separation-related corporate expense in the quarter.

Most important facts for an investor to verify

1. Confirm the issuer: the supplied filing is for Tyco International Ltd., not Johnson Controls International Plc.
2. Review the separation and Pentair merger documents, closing conditions, expected timing, transaction costs, and tax-free status assumptions.
3. Assess the $411 million legacy tax-sharing liability, IRS disputes, proposed penalties, and potential obligations under the planned separation tax-sharing agreement.
4. Reconcile the six-month earnings decline to the prior-year divestiture and discontinued-operation gains; assess ongoing segment margins and separation costs.
5. Monitor working-capital requirements, elevated capital spending, customer-account acquisition spending, cash balances, debt maturities, and revolving-credit availability.
6. Track FCPA, asbestos, environmental, pension, and ADT litigation developments, including matters with no recorded loss estimate.