Tyco International ( TYC)

F1Q11 Earnings Call

January 27, 2011 9:00 a.m. ET


Antonella Franzen - Director of Investor Relations

Edward D. Breen - Chairman and Chief Executive Officer

Frank Sklarsky - Chief Financial Officer


Steve Tusa - JPMorgan Chase & Co.

Jeff Sprague - Vertical Research Partners

Nigel Coe - Deutsche Bank

John Inch - Bank of America

Scott Davis - Morgan Stanley

Steve Winoker - Sanford C. Bernstein



Welcome to the Tyco First Quarter Earnings Conference Call. [Operator Instructions.] I will now turn the call over to Antonella Franzen, vice president of investor relations. You may begin.

Antonella Franzen

Good morning and thanks for joining our conference call to discuss Tyco’s first 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.

Just a reminder 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 is issued this morning and all related tables, as well as 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 are excluding special items, which is a non-GAAP measure. Again, these non-GAAP measures are reconciled in the schedules attached to our press release.

Before discussing our operating results, I just want to remind you of the segment realignment we completed this quarter. We have created an integrated global fire segment which combines the fire suppression and life safety platforms of our former safety product segment into our fire protection segment. Additionally, the electronic security products platform within our former safety products segment was integrated into our security solutions segment, which includes ADT.

Now let me quickly recap this quarter’s results. Revenue in the quarter of 4.4 billion was up 5% year-over-year with organic revenue growth of 4%, including a 1% point contribution from the electrical and metal products business.

Earnings per share from continuing operations attributable to Tyco common shareholders was $1.00 and included $0.25 of benefit from special items primarily related to the gain on the sale of a majority interest in the electrical and metal products business.

Earnings per share from continuing operations before special items was $0.75 compared to our previous guidance of $0.65 to $0.67, driven by strong operating growth in our security and fire businesses.

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

Edward Breen

Thanks Antonella, and good morning everyone. 2011 is off to a good start, with both improved top line growth and enhanced operating margin performance. Our results for the quarter were driven by improved market additions in most of our product and system installation businesses around the globe as well as the continued benefits from our restructuring and cost containment actions.

Additionally, the continued growth in our service and recurring revenue businesses, which represented 43% of our total revenue, also contributed nicely to our performance in the quarter.

Operating income before special items increased 19% and the operating margin improved 130 basis points year-over-year.

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 in a few minutes. Security had a strong start to the year. Organic revenue grew across all businesses and all geographies. Our key metrics continued their positive momentum and the synergies we expected from the Broadview acquisition are playing out as we planned.

On a global basis, security's operating margin improved 240 basis points year-over-year, driven by increased volume in our commercial and product businesses, growth in our higher margin recurring revenue business, and the continued benefit of restructuring and productivity initiatives.

Turning to fire, revenue was about what we had expected. The turnaround in order activity we saw over the last few quarters translated into positive organic revenue growth in SimplexGrinell, our North America service and contracting business. Additionally, our product businesses, which are fire protection and life safety, which comprise about 30% of fire's total revenue, continued to grow nicely. Fire exceeded our expectations.

The continued benefit of restructuring and cost containment initiatives, and the selectivity of project work, drove solid year-over-year operating margin improvement. In Flow Control, the organic revenue decline continued to moderate, and the order trends have been encouraging.

Valves and controls, which is by far the largest piece of the business, has seen positive year-over-year order activity for the last three quarters. As there is a six- to nine-month order-to-revenue conversion cycle for valves, we expect to see this part of the business return to positive organic revenue growth in the second half of the year. We have also seen our earlier cycle actuation and instrumentation orders grow significantly over the past few quarters, and this historically leads our valve business by six to nine months.

The operating margin performance in the quarter was impacted by a charge related to a project in a business that we retained as part of the 2008 divestiture of the Earth Tech business. Excluding this charge, the operating margin was about what we had expected.

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