Tyco International Q2 2010 Earnings Call Transcript

Tyco International Q2 2010 Earnings Call Transcript
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Tyco International (UIS)

Q2 2010 Earnings Call

April 27, 2010 12:00 pm ET

Executives

Christopher Coughlin - Chief Financial Officer and Executive Vice President

Edward Breen - Chairman and Chief Executive Officer

Edward Arditte - Senior Vice President of Strategy & Investor Relations

Analysts

Scott Davis - Morgan Stanley

Nigel Coe - Deutsche Bank AG

John Inch - BofA Merrill Lynch

Gautam Khanna - Cowen and Company, LLC

Jeffrey T. Sprague - Citigroup

Robert Cornell - Barclays Capital

C. Stephen Tusa - JP Morgan Chase & Co

Steven Winoker - Sanford C. Bernstein & Co., Inc.

Presentation

Operator

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Welcome to the Tyco First Quarter Earnings Conference Call. [Operator Instructions] I'll now turn the call over to Mr. Ed Arditte, Senior Vice President, Strategy and Investor Relations. Sir, you may begin.

Edward Arditte

Thank you. Good morning, and thanks to everybody for joining our conference call to discuss Tyco's second quarter results for fiscal year 2010 and the press release that we issued early this morning. With me on today's call are Tyco's Chairman and Chief Executive Officer, Ed Breen; and our Chief Financial Officer, Chris Coughlin.

Let me start by reminding you that during the course of the call, we will be providing certain forward-looking information. We ask you to 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.

Also, with regard to the pending Broadview acquisition, the discussion during today's conference call do not constitute an offer to sell or the solicitation of an offer to buy any securities or solicitation of any vote or approval. The subject matter discussed today related to the Broadview acquisition is addressed in the registration statement on Form S-4, containing a proxy statement and prospectus, which is publicly available and has been filed by Tyco with the SEC. We urge you to read it.

Now let me quickly recap this quarter's results. Revenue in the quarter of $4.2 billion, was up slightly year-over-year, with an organic revenue decline of 5.8%. Earnings per share from continuing operations attributable to Tyco common shareholders was $0.65 per share and included income of $0.06 per share from special items. Before special items, earnings per share was $0.59, and this compared to our guidance of $0.50 to $0.52 per share.

Before I turn the call over to Ed, let me quickly touch on the Broadview acquisition. We expect the transaction to close on May 14, pending the Brinks shareholder vote on May 12. We'll provide a detailed financial update on the acquisition in our next quarterly call.

And with that, let me turn the call over to Ed Breen.

Edward Breen

Thanks, Ed, and good morning, everyone. The second quarter was a good quarter for Tyco on a number of fronts. And importantly, we exited the quarter, feeling encouraged by both our performance and an improving tone in some of our end markets.

Our results for the quarter continued to be driven by our cost-containment efforts, coupled with the continued growth of our recurring revenue and service activities. In addition to our operating performance, the quarter also saw a number of other positive developments including: first, our agreement to acquire Broadview Security and combine it with ADT; second, the sale of our French Security business, which was a meaningful step in repositioning our ADT business in Europe; third, an increase in our annual dividend; and lastly, an upgrade in our debt rating from Standard & Poor's to A-.

Let me start off with a few overall operational comments and then a few thoughts on what we are seeing in each of our businesses. First, our teams continue to execute well on our cost-reduction and restructuring programs, and our restructuring actions will ramp up in the second half of the year. As you all know, we expect our organic revenue to be modestly negative in 2010, lower in the first half of the year, with improvement in the second half of the year. And managing our cost structure to match up with our revenue outlook has been a major focus for us. These efforts continue to pay off and are reflected in our operating margin performance, which was up nicely year-over-year.

We are also doing a nice job from an asset-management perspective. Our working capital performance continues to be solid, and we are in a strong position with respect to both receivables and inventory. In addition, our free cash flow generation continues to be strong, and we are almost $200 million ahead of the last year's number through the first half of the fiscal year. On a full year basis, we continue to expect free cash flow to approximate net income.

We are also continuing to fully fund our organic growth investment activities in Security, Fire and Flow Control. Year-to-date, our capital spending levels have grown modestly on a year-over-year basis, with a high percentage of our capital going to growth investments. We also continued the fund increases in R&D, particularly in our emerging-market R&D centers, and our R&D expense increased about 4% year-over-year.

From a balance sheet perspective, our cash balance was about $2.7 billion at the end of the quarter, and we expect to use some of this to fund the Broadview acquisition. We are also contemplating bolt-on acquisitions that would use up to an additional $500 million. Even with these cash uses, we will still be in a strong cash position. So we expect to resume repurchasing shares soon after we close the Broadview acquisition.

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