The

Tyco

(TYC)

turnaround story continues apace.

Not long removed from a series of stock-crushing scandals, the big conglomerate once again cruised past Wall Street's expectations Tuesday with a stronger-than-expected third quarter. The company also pleased investors by boosting full-year financial guidance.

For its third quarter ended June 30, the Pembroke, Bermuda, company earned $923 million, or 43 cents a share. That's up from the year-ago $567 million, or 27 cents a share. Revenue surged to $10.5 billion from $9.4 billion a year earlier. The results were stronger than Wall Street expected: The Thomson First Call analyst consensus estimate had called for a 42-cent profit on sales of $10.33 billion.

"Our results in the third quarter demonstrate Tyco's continued operational progress," said CEO Ed Breen. "We're growing the top line, expanding operating margins, generating strong cash flow and strengthening our balance sheet, all of which continue to solidify our foundation for the future."

Cash flow from operating activities totaled $1.1 billion. The company had free cash flow of $1.3 billion in the quarter, up from $844 million in last year's third quarter. This quarter's cash flow from operating activities and free cash flow were reduced by $173 million for voluntary pension contributions.

Organic revenue, excluding the impact of foreign currency, acquisitions and divestitures, rose 6%, driven by strengthening end markets for Electronics and Engineered Products & Services. Meanwhile, the company's operating margin improved 180 basis points year-over-year to 14.6%, due in part to continued success in the company's strategic sourcing and Six Sigma programs.

The company also guided to a slightly stronger-than-expected year. Tyco said it expects to earn 41 to 43 cents a share for the fourth quarter, in line with estimates, and is raising its full-year EPS guidance to a range of $1.61 to $1.63. This EPS outlook excludes the impact from the restructuring and divestiture programs announced in November 2003 and any charges relating to early retirement of debt. The company is also changing its full-year guidance for cash flow from operating activities to $5.2 billion and is raising its free cash flow guidance to $4.7 billion.

Up till now, Tyco has kept its 2004 guidance range below the consensus estimate. It also had maintained its $4 billion annual free cash flow target.

After tripling off its past lows to hit a two-year peak of $33.26 in late June, Tyco's stock has drifted lower ahead of this week's earnings report. However, it did recover some ground by climbing 1.3% to $31.40 on Monday afternoon.

Last week, analysts blamed recent weakness in the stock on overblown concerns about sales growth in Tyco's electronics division. The unit caters to technology and automotive customers that are vulnerable to a slowdown.

On Tuesday, Tyco said electronics revenue rose 13% in the latest period to $3.06 billion, with organic growth of 10%. Organic revenue for connectors and cable assemblies rose 16%, driven by strength in the automotive, industrial, communications, computer and consumer electronics markets. Revenue growth in connectors and cable assemblies was partially offset by weakness in sales of power systems in North America and commercial electronic services.

Operating income rose 14% to $464 million and the operating margin improved to 15.2% due to higher sales and better operating efficiencies. The operating margin in the quarter was hit by higher metals costs (80 basis points), primarily copper and gold.

Fire and safety revenue rose 4%, 1% organically, to $2.98 billion, as growth at Worldwide Security and Tyco Safety Products was offset by weakness in the Worldwide Fire Services business. Tyco Safety Products had strong revenue growth, led by increased demand for breathing systems, video surveillance and access control equipment. Worldwide Security continued to benefit from stronger sales to retailers.