Tyco International, (TYC)

3Q F2010 Earnings Call

July 29, 2010 08:30 am ET

Executives

Antonella Franzen - Director of Investor Relations

Edward D. Breen - Chairman and Chief Executive Officer

Christopher J. Coughlin - Executive Vice President and Chief Financial Officer

Naren K. Gursahaney - President, ADT Worldwide

Analysts

Jeff Sprague - Vertical Research Partners

John Inch - BofA Merrill Lynch

Nigel Coe - Deutsche Bank

Steve Winoker - Sanford C. Bernstein & Company, Inc.

Steve Tusa - JPMorgan Chase & Co.

Bob Cornell - Barclays Capital

Gautam Khanna - Cowen and Company

Presentation

Operator

Welcome to the Tyco Third Quarter Earnings Conference Call. All participants have been placed on a listen-only mode. (Operator instructions). Today’s conference is being recorded. If you have any objections, please disconnect at this time.

I would now like to turn the call over to Antonella Franzen, Director of Investor Relations; you may begin.

Antonella Franzen

Thank you. Good morning and thanks for joining our conference call to discuss Tyco’s third quarter results for fiscal year 2010 and the press release issued earlier this morning.

With me today are Tyco’s Chairman and Chief Executive Officer, Ed Breen, our Chief Financial Officer, Chris Coughlin as well as Naren Gursahaney, President of ADT Worldwide.

Let me remind you that during the course of the call, we will be providing certain forward-looking information. We ask you to look at 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 is 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.

Now let me quickly recap this quarter’s results. Revenue in the quarter are 4.3 billion was up 3% year-over-year with flat organic revenue. Earnings per share from continuing operations attributable to Tyco common shareholders was $0.50 per share and included $0.22 per share related to special items. Before special items, earnings per share was $0.72 compared to our guidance of $0.60 to $0.62 per share. The $0.72 per share compares to the midpoint of our guidance of $0.61. The $0.11 difference consisted primarily of $0.7 of better operating results, $0.10 attributable to a lower tax rate offset by a net fixed end charge for a legal reserve and a benefit from certain pension plan changes.

Now let me turn the call over to Ed Breen for some opening comments. Ed will be followed by Naren who will discuss our ADT business and then Chris will review the results from our other businesses before we wrap up and take your questions.

Edward Breen

Thanks Antonella and good morning everyone. Overall, this was a good quarter for Tyco. From an operational perspective, we saw sequential improvement in revenue and operating margin across all business segments. Additionally, we completed the acquisition of Broadview Security and are well underway with the integration process and are very excited about the opportunities of joining the best of both ADT and Broadview.

From a capital perspective, we invested more to strengthen our businesses and returned excess cash to our shareholders through dividends and share repurchases. Let me start off with a few overall comments. First, the majority of our segments, including the service side of our fire business grew revenue organically year-over-year. The systems installation and service side of our ADT business turned positive after 6 consecutive quarters of organic revenue decline.

Operating margins improved both year-over-year and sequentially, driven by our close management efforts and a continued growth of our recurring revenue and service activities. Additionally, increased volume in our product and manufacturing businesses also contributed to the operating margin’s improvement. From an orders perspective, it’s important to keep in mind that our service and recurring revenue businesses have been growing and represent 40% of our total revenue. Orders for the remaining 60% of our portfolio, which is our product and systems installation revenue grew 5% year-over-year on a global basis with order growth and flow control, fire and safety products.

Second, our free cash flow generation continues to be strong and provides us with the financial flexibility to fund our organic growth investment activities, make selective acquisitions and return excess cash to our shareholders.

As we indicated last quarter, we resumed our share repurchase program and to date, we’ve purchased 15.8 million shares for $575 million. We expect to continue repurchasing shares during the fourth quarter and will likely utilize the remaining 325 million authorization under the program by our fiscal yearend. Now let me make a few quick comments or two about each of our businesses and then Naren and Chris will provide you with more details in a few minutes.

Starting with ADT, our recurring revenue continued to perform well with 4% organic revenue growth. Excluding Broadview, our account base and [indiscernible] both increased and our disconnect rate continued to improve. Additionally, the systems installation business has stabilized. Growth in the Asia Pacific and Latin American regions and improving conditions in North America offset the continued softness in Europe. We also saw continued improvement in our operating margin, both sequentially and year-over-year. Growth in our higher margin recurring revenue business, coupled with the benefits of restructuring activities and cost actions as well as improved productivity and mix in our systems installation business contributed nicely to the operating margin improvement.

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