With clear irritation and a dash of sarcasm,
said Thursday that it is "shattering its one-quarter streak" of charge-free earnings reports.
The far-flung conglomerate blamed its newest charges, which are expected to sap 10 cents from 2003 earnings, on a fire and safety division that has burned investors in the past. CEO Ed Breen portrayed the division's culture as "horrible" and announced that he had fired five division leaders -- including division president Jerry Boggess -- in a crackdown this week.
"Our goal this year is to get this thing cleaned up and get rid of the crap," Breen said in his first personal appearance before investors since he took over for ousted CEO Dennis Kozlowski, whose former management team stands accused of looting Tyco of $600 million.
"Hopefully, there are not a lot of other things out there. But I cannot commit that to you."
Investors were clearly rattled. They listened to Tyco's turnaround plan, including the upcoming shutdown of 300 plants, and they immediately heard warning bells. The stock plunged 11.9% to $12.37 -- its lowest level in months -- after Breen's latest pronouncement of a bright outlook for the future failed to provide the usual reassurance.
Fierce and Pounce
Tyco critics immediately pounced on the new charges -- triggered by up to $325 million in accounting mistakes -- as evidence that a recent forensic audit was less than thorough. The audit, led by high-profile attorney David Boies, did turn up hundreds of millions of dollars in accounting problems but cleared Tyco of any widespread fraud.
Tyco blamed the latest mistakes, some of which went undetected for up to six years, on a "lack of adherence to company policies in a number of countries." Specifically, the company mentioned problems with bad debt, inventory reserves and excessive amortization periods outside the U.S.
Prior to discovering the mistakes, Tyco had promised to deliver 2003 earnings of $1.50 to $1.75 a share, although it had warned in January that profits would probably fall at the lower end of that range. The company now expects full-year earnings of $1.30 to $1.40 a share, hurt by the 10-cent charge and a recent slowdown in business.
Even after slashing their guidance in recent months, analysts were projecting full-year profits of $1.49 ahead of Thursday's conference.
Tyco did offer up one morsel of good news. The company expressed building confidence in its full-year projections for free cash flow. It boosted the low end of its guidance from $2.5 billion to $2.6 billion, while leaving the high-end target of $3 billion intact.
But the company also announced a much-demanded change in its definition of free cash flow that will nearly cut those figures in half. Under its new definition -- which subtracts acquisition costs in its security division -- Tyco expects to generate full-year free cash flow of around $1.65 billion.
Tyco also lowered its second-quarter earnings guidance by a penny or two to between 31 cents and 34 cents a share. It's depending on an expected ramp-up in earnings -- fueled by better margins in fire and security, savings from the restructuring of its Tycom electronics unit and sequential growth in health care -- to meet its full-year targets.
Been There, Done That
Short-sellers expressed no surprise at Tyco's slide. They have long maintained that even Breen, a respected former executive of Motorola, would be hard pressed to restore the troubled company.
"If the business is flawed, one man is unlikely to change it," one short-seller said. "Inevitably, gravity has its effect."
The short-seller went on to compare Tyco's situation to that of Conseco, the flailing finance company that tumbled into bankruptcy despite the efforts of "savior" CEO Gary Wendt.
"The only difference is we don't have Irwin Jacobs taking out ads to try to create a short squeeze," the short-seller said. "I don't think he has the money."
Tyco's current problems are not limited to accounting issues. During the past month, Tyco has seen business in its engineering and safety divisions noticeably soften because of the weakening economy.
Tyco critics have long viewed many of the company's businesses as second-rate, saying the only real growth came from Kozlowski's nonstop acquisition spree. But Breen insisted Thursday that Tyco's portfolio is an impressive one with strong potential for organic growth.
"If I could recreate a portfolio, I don't think I would do too many things differently," Breen said. "These are businesses that look pretty exciting over the next five years."
Breen described Tyco as a leader in most markets where it operates. And he confined most of the company's problems to the fire and safety division, which he expects to turn around under the leadership of former Motorola colleague David Robinson.
Kozlowski had expressed similar faith in Boggess when he first assumed control of the division in 1995. During the period of rapid growth that followed -- partly fueled by questionable acquisitions and accounting -- Boggess saw his compensation package swell.
At the time of his termination this week, Boggess ranked as one of Tyco's best-compensated managers, with annual paychecks of $8.55 million and $2.85 million in 2001 and 2002 respectively.
Boggess leaves behind a division that's immersed in massive internal audits that could turn up additional accounting problems down the road. The
Securities and Exchange Commission
is also digging through the company's books.
Tyco's regulatory challenges may not end there. The company mentioned on Thursday that it's attempting to resolve an Internal Revenue Service audit that's "just in the beginning stages."
Still, Tyco insists that after this critical turnaround year, the future looks much rosier. The company has promised to deliver double-digit profit growth, while doubling free cash flow under its new definition, over the next several years. And it plans to do so through a much more conservative strategy than the one Kozlowski used to build the Tyco empire in the first place.
"This is not an acquisition machine anymore," Breen said. "It's an operating company.
"This is the year to build the foundation, clean the ship up and get this thing moving down the road."