Tyco International (

TYC

)

Q1 2011 Earnings Call

April 28, 2011 8:00 am ET

Executives

Antonella Franzen - VP, IR

Ed Breen - CEO

Frank Sklarsky - CFO

Analysts

Steve Tusa - JPMorgan

Steve Winoker - Sanford Bernstein

Jeff Sprague - Vertical Research

Nigel Coe - Deutsche Bank

John Inch - Bank of America Merrill Lynch

Gautam Khanna - Cowen & Co.

Presentation

Operator

Welcome to the Tyco second quarter earnings conference call. (Operator Instructions)

I will now turn the call over to Antonella Franzen, the Vice President of Investor Relations.

Antonella Franzen

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Good morning and thank you for joining our conference call to discuss Tyco's second quarter results for fiscal year 2011 and the press release issued earlier this morning.

With me today are Tyco's Chairman and Chief Executive Officer, Ed Breen, and our Chief Financial Officer, Frank Sklarsky.

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As you are aware, there have been recent reports speculating about the possibility of a transaction involving Tyco International. I would like to take this opportunity to make clear that it is Tyco's policy not to respond to enquiries from the news media or others regarding rumors or speculation on transactions, which may involve the company. We do not intend to make any further comment about this matter today.

I would also like to remind you that during the course of the call, we would be providing certain forward-looking information. We ask that you look at today's press release and read through the forward-looking cautionary informational statements that we've included there.

In addition, we will use certain non-GAAP measures in our discussions, and we ask you to read through the sections of our press release that address the use of these items. The press release issued this morning and all related tables, as well as the conference call slides can be found on the Investor Relations portion of our website at tyco.com.

Please also note that we will be filing our quarterly SEC Form 10-Q later today. In discussing our segment operations, when we refer to changes in average revenue per user, backlog, and order activity, these figures exclude the impact of foreign currency.

Additionally, references to our operating margins during the call exclude special items, and this metric is a non-GAAP measure. Again, these non-GAAP measures are reconciled in the schedules attached to our press release.

Now let me quickly recap this quarter's results.

Revenue in the quarter of $4.0 billion was up 6% year-over-year, excluding the impact of electrical and metal products. And organic revenue grew by 3%. The benefit of foreign currency contributed 2 percentage points to our overall revenue growth.

Earnings per share from continuing operations attributable to Tyco common shareholders was $0.67. Earnings per share from continuing operations before special items was $0.73, representing a 26% increase year-over-year.

Now let me turn the call over to Ed for some opening comments.

Ed Breen

This was a good quarter for Tyco on a number of fronts. We continue to strengthen our competitive capabilities in our three core platforms of security, fire, and flow control. We returned excess cash to shareholders, and operationally, we saw strong operating margin improvement year-over-year.

Service revenue, which includes recurring revenue represented over 45% of our total revenue and continues to grow nicely in the quarter. More importantly, systems installation and product revenue, which represents about 55% of our total revenue, continued to see improved year-over-year order flow.

If we take a look back, orders first turned positive on a year-over-year basis in the third quarter of 2010, and since then have continued to trend upwards. Year-over-year orders improved 3% in the fourth quarter of fiscal 2010, 6% in the first quarter, and now 7% in the second quarter.

Although we are still early into the third quarter, April orders are off to a good start, coming in with year-over-year improvement of about 10%. We are very encouraged by this continued improvement in our lifecycle businesses and expect this trend to fuel our growth in the latter part of this year and into 2012.

Before we jump into each of the businesses, let me start with a few general comments.

From a capital allocation perspective, organic investments will continue to be utmost priority. The investments we made in our businesses throughout the economic downturn have not only benefited our operating margins, but have also positioned us well for the recovery in our lifecycle end markets.

Year-to-date, our capital spending levels have increased 7% on a year-over-year basis with a high percentage of our capital directed towards growth investments. We also continue to fund engineering and product development, increasing our year-to-date spend by 15%, mainly in our emerging market R&D centers.

As we move into the second half of the year, we plan to further increase our R&D efforts around the globe and ramp up our investments in sales and marketing, particularly in our ADT North America Residential Business.

As I had previously mentioned, we plan to supplement our organic growth initiatives with strategic bolt-on acquisitions. During the quarter, we announced two acquisitions, one in security and one in flow control that strengthen our leadership position in key markets and provide incremental returns to our shareholders.

Frank will walk you through the details of these two deals in a few minutes. From a balance sheet perspective, our cash balance was about $1.8 billion at the end of the quarter, $500 million of which will be used for previously announced acquisitions.

As you know, our free cash flow generation is historically much stronger in the second half of the year, which provides us the flexibility to fund growth investments, as well restructuring any efficiency initiatives. Additionally, we are evaluating a few other bolt-on acquisitions that will utilize an additional $500 million over the next twelve months. After funding these actions, we will still be in a strong position to continue return of cash to shareholders through dividends and share repurchase.

Over the last twelve months, we had repurchased about 10% of our outstanding shares for $1.9 billion at an average price of $39.35 a share. And this morning, we announced a new $1 billion share repurchase program.

Now let me give you a quick overview of our results for each of our businesses, and then Frank will provide you with more details.

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