Tyco posts higher fiscal third-quarter earnings, but lowers guidance for fourth quarter, full-year 2005

By Rebecca Melvin

Princeton, N.J., Aug. 2 - Tyco International Ltd. reported higher fiscal third-quarter earnings that beat estimates by a penny, but the diversified conglomerate lowered guidance for its fourth quarter and full-year 2005, citing tough market conditions in some of its business segments and higher steel prices.

Lack of growth in its fire and security segment was blamed for part of the current woes. Sales for this segment were essentially flat at $2.853 billion for the third quarter ended June 30, compared to $2.858 billion for the year-earlier period.

The Pembroke, Bermuda-based diversified manufacturer said modest growth in North America in fire and security was offset by a decline of revenue in Europe.

In addition, a "decline in steel spreads" hampered the fiscal third quarter by $109 million and will impede the fourth quarter by $70 million, chairman and chief executive officer Ed Breen said Tuesday in a conference call after results were announced.

"The decline in the steel spreads will come down in size, but there will remain a negative impact from that in the next few quarters," Breen said.

Softness in some market segments including electronics and engineering and services will also hamper the next quarter. Breen also cited a higher tax rate in the fourth quarter for reduced guidance.

The company's disappointing outlook prompted investment rating downgrades from Banc of America, Wachovia Securities and Merrill Lynch.

For the quarter, Tyco reported earnings of $1.19 billion, or 56 cents a share, up from $923 million, or 43 cents, in the year-earlier period.

Excluding special items, which included a charge for convertible debt repurchases, earnings were 50 cents a share, against year-earlier charges of two cents.

The consensus estimate of analysts surveyed by Thomson First Call was for earnings of 49 cents per share.

Tyco buys back more convertibles

During the quarter, Tyco bought back $448 million of convertible debt. The repurchases followed on the heels of $932 million of convertible debt bought back in the second fiscal quarter, as announced in May.

Breen said that these repurchases will continue, with an additional $1.5 billion share repurchase program planned to combine with the buyback of $500 million more of convertibles over the next three quarters.

At the halfway mark of fiscal 2006, a re-evaluation of follow-on repurchases will be made, Breen said.

More divestitures seen

Operating-profit margins widened in four of Tyco's five main divisions: fire and security, electronics, health care, and engineered products and services. Margins narrowed in plastics and adhesives, Tyco's smallest unit as measured by revenue.

Breen said efforts to sell the plastics and adhesives division are going well and the company is considering other divestitures as well, which he would not name.

But the aim in divestitures is to focus on areas of positive performance while getting rid of under performing segments, he said.

"Overall earnings per share and cash flow were in line with our expectations. But we weren't satisfied with our progress in all areas," he said.

For one, operating income and margins dropped sharply in its electronics unit, and top line growth in fire and security was disappointing, and will continue to be softer in the fourth quarter, he said.

"In electronics, we're still nervous on the auto numbers. European auto will be down in the next few months and going into next year," Breen said, "and that accounts for 50% of our auto sales."

Aside from flat sales in fire and security, revenue rose 2% in the electronics business, gained 8% in health care and was higher by 4% in engineered products and services. Revenue also rose 6% at the plastics unit, but operating income there dropped sharply.

Cash flow from operating activities was $1.6 billion, while free cash flow was $1.25 billion.

The company used $620 million of cash to repurchase the $448 million of convertible debt in the latest quarter. The action reduced Tyco's fully diluted shares outstanding by about 20 million shares and generated a $179 million, or nine cents a share, charge.

In total its debt reduction program has reduced diluted shares outstanding by 96 million shares since the fiscal fourth quarter of 2004, when the repurchasing program began.

Tyco has lowered earnings and free cash flow guidance for the last two quarters and was questioned during the conference call about whether management felt more confident about the latest guidance being provided.

Breen said lack of growth in fire and security was partly to blame for the unexpected lowering this time, but he thinks its ADT Security business - long struggling because prior management allowed account sales to customers with poor credit - has turned a corner as North American new account sales in May and June outpaced customer attrition for the first time in several years.

Also spending should level off in segments like health care, he said, which saw the biggest revenue jump as a result of business outside the country that saw the benefits of an 800-person expansion in sales and marketing in the last two years.

For fiscal fourth quarter, Tyco now expects to earn 45 cents a share to 47 cents a share from continuing operations, excluding special items. The average of Thomson First Call analysts had called for earnings of 52 cents a share.

For fiscal 2005, Tyco expects to earn $1.85 a share to $1.87 a share from continuing operations and excluding special items. Analysts surveyed by First Call were looking for $1.90 a share.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.