Tyco International Management Discusses Q3 2012 Results - Earnings Call Transcript

Tyco International (TYC)

Q3 2012 Earnings Call

July 31, 2012 8:00 am ET

Executives

Antonella Franzen

Edward D. Breen - Chairman, Chief Executive Officer and Member of Special Committee

George R. Oliver - President of Tyco Fire Protection

Naren K. Gursahaney - President of Tyco Security Solutions

Patrick Decker - President of Flow Control

Frank S. Sklarsky - Chief Financial Officer and Executive Vice President

Analysts

Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division

Jeffrey T. Sprague - Vertical Research Partners Inc.

Ajay Kejriwal - FBR Capital Markets & Co., Research Division

Scott R. Davis - Barclays Capital, Research Division

Nigel Coe - Morgan Stanley, Research Division

Deane M. Dray - Citigroup Inc, Research Division

Gautam Khanna - Cowen and Company, LLC, Research Division

Charles Stephen Tusa - JP Morgan Chase & Co, Research Division

Shannon O'Callaghan - Nomura Securities Co. Ltd., Research Division

Presentation

Operator

Welcome to the Tyco Third Quarter Earnings Conference Call. [Operator Instructions] This call is being recorded. If you have any objections, please disconnect at this time. I will now turn the call over to Antonella Franzen, Vice President of Investor Relations. You may begin.

Antonella Franzen

Good morning, and thank you for joining our conference call to discuss Tyco's third quarter results for fiscal year 2012 and the press release issued earlier this morning.

With me today are Tyco's Chairman and Chief Executive Officer, Ed Breen; and Tyco's Chief Financial Officer, Frank Sklarsky. Also joining us for today's conference call are the presidents of Fire & Security, ADT and Flow Control, George Oliver, Naren Gursahaney and Patrick Decker, who will provide updates on their businesses and also participate in the Q&A session following our remarks.

I would like to remind you that during the course of today's call, we will 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 that you 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'll be filing our quarterly SEC Form 10-Q later today.

Certain items to be discussed during today's call, including those related to the company's proposed separation, are addressed in a proxy statement which has been filed with the Securities and Exchange Commission. Before making any voting decision, investors are urged to read the proxy statement regarding the proposed separation and other -- any other relevant documents carefully in their entirety because they contain important information about the proposed separation. Free copies of the proxy statement and other documents filed with the SEC by Tyco can be obtained through the SEC's website, as well as through Tyco's website.

I would also like to remind you that we are in a registration period due to the various filings related to the proposed separation and the announced merger of our Flow Control business with Pentair. As a result, we will not be able to answer questions related to those items and ask that you keep this in mind during the Q&A session.

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 these metrics are non-GAAP measures. 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 $4.5 billion increased 4% year-over-year, including a 4 percentage point decline related to foreign currency. Changes in foreign currency exchange rates were more of a headwind than we ever duly anticipated and cost us about 1 percentage point of revenue growth compared to our previous expectations. Organic revenue grew 5%. Earnings per share from continuing operations attributable to Tyco common shareholder was $0.54 and included charges of $0.47 related to special items. Earnings per share from continuing operations before special items was $1.01.

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

Edward D. Breen

Thanks, Antonella, and good morning, everyone. Overall, this was a very good quarter for Tyco, reflecting solid operational performance across Fire & Security, ADT and Flow Control. We had good top line growth, a 20% increase in operating income and strong operating margin expansion. Continued recurring revenue growth in ADT, volume leverage in our manufacturing businesses at Flow Control and Fire & Security, along with productivity, cost containment and restructuring initiatives, all contributed to our 190 basis points of operating margin expansion in the quarter. We delivered $1.01 in earnings per share before special items, marking the first time since the 2007 separation that we surpassed the $1 mark in quarterly earnings. This represents a 19% increase year-over-year.

Now let me give you a quick overview of our results for each of our businesses. Fire & Security had another strong quarter. Operating income before special items grew 4x as fast as revenue, highlighting the value of a nice mix of service, installation and product revenue. In ADT, recurring revenue, which represents almost 90% of ADT's total revenue, grew about 6% in the quarter with an increase in both the account base and average revenue per user. In Flow Control, increased volume in Valves, execution of Water projects and increased volume, along with the beneficial mix in the Thermal business, were the key drivers of the third quarter operating margin expansion. We surpassed the 13% operating margin we had expected to approach in the quarter and continue to be on track to achieve a 14% operating margin in the fourth quarter.

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