PEMBROKE, Bermuda, Aug. 3 /PRNewswire-FirstCall/ -- Tyco International Ltd. today reported diluted GAAP earnings per share (EPS) from continuing operations of $0.43 for the third fiscal quarter of 2006. This included $0.03 per share for estimated costs to complete a pre-existing product replacement program in the company’s Engineered Products & Services segment, as well as $0.03 per share for costs related to the planned separation of Tyco into three publicly traded companies. Results also include a $0.01 per share charge related to the expensing of stock options, which is not reflected in the prior period. This compares to GAAP EPS from continuing operations of $0.51 in the third fiscal quarter of 2005.
Revenue in the quarter totaled $10.5 billion, with organic revenue growth of 5 percent. The company generated cash flow from operating activities of $1.5 billion and free cash flow of $1.1 billion in the quarter, which included $71 million in cash payments for the previously disclosed Securities and Exchange Commission (SEC) settlement and separation activities.
Tyco Chairman and Chief Executive Officer Ed Breen said, “This was another quarter of sequential progress for Tyco, with continued revenue growth, improved operating performance and solid cash flow. We are also making good progress with our separation activities and remain on track to complete the transactions by the end of the first calendar quarter of 2007.”
During the third quarter, Tyco used $1.1 billion in cash to buy back 41 million shares. In addition, Tyco spent $134 million to repurchase 5 million shares in early July. Since the start of the fiscal year, Tyco has repurchased 76 million shares, representing 3.5 percent of diluted shares outstanding.
As announced earlier this morning, Tyco has entered into a definitive agreement to divest its Tyco Printed Circuit Group (TPCG) business for $226 million. Beginning with this quarter, the TPCG business has been classified as a discontinued operation. As a result, TPCG’s financial performance is not reflected in Tyco’s revenue and income from continuing operations. TPCG, which is currently part of the company’s Electronics segment, had revenue of $103 million in the third quarter.
In July, Tyco announced that its Healthcare segment had entered into a definitive agreement to acquire Confluent Surgical, Inc. -- a developer and supplier of polymer-based technology used in sprayable surgical sealants and anti-adhesion products -- for $245 million. In addition, the company yesterday announced its intent to acquire a 37.25 percent share of Airox S.A. -- a European company in the home respiratory ventilation systems business -- for approximately $40 million. The initial share purchase will be followed by a mandatory tender offer for the remaining Airox shares. The Confluent and Airox acquisitions are part of Tyco Healthcare’s strategy to expand its product portfolio by purchasing complementary technologies that can be efficiently integrated into the segment’s core business.
In the third quarter, the company recorded a pre-tax charge of $100 million related to a pre-existing voluntary replacement program in its Engineered Products & Services segment. The program was originally launched in 2001 by Central Sprinkler -- a division of Tyco Engineered Products & Services -- to replace certain fire sprinkler heads manufactured from the mid-1970s to 2001. When the program was first launched, Tyco established a reserve of $370 million to reflect anticipated costs related to the program. The current charge reflects the company’s updated estimate of the additional costs necessary to bring the program to completion.
At the beginning of the fiscal year, Tyco adopted Statement of Financial Accounting Standards (SFAS) No. 123R, which requires the expensing of stock options; prior year results were not restated. Organic revenue growth, free cash flow, EPS from continuing operations excluding special items, income from continuing operations excluding special items, and operating income excluding stock option expense are non-GAAP financial measures and are described below. For a reconciliation of these non-GAAP measures, see the attached tables. To further assist in understanding the special items included in Tyco’s GAAP results for fiscal year 2006, the company has provided a summary schedule attached to this document. A set of detailed schedules can be found at http://www.tyco.com on the Investor Relations portion of Tyco’s website.
SEGMENT RESULTS
The financial results presented in the tables below are in accordance with GAAP unless otherwise indicated. All dollar amounts are pre-tax and stated in millions. All comparisons are to the quarter ended July 1, 2005 unless otherwise indicated.
Electronics Jun. 30, 2006 Jul. 1, 2005 $ Change % Change Revenue $3,319 $3,014 $305 10% Operating Income Excluding Stock Option Expense $486 $512 $(26) (5%) Stock Option Expense $(8) $0 $(8) Operating Income $478 $512 $(34) (7%) Operating Margin 14.4% 17.0%
Organic revenue growth was 10 percent, with strong growth across most end markets, including double-digit growth in the communications, computer, appliance, industrial machinery, consumer electronics and mobile phone end markets. Bookings were also strong during the quarter, resulting in a book-to-bill ratio of 1.05.
Operating income excluding stock option expense decreased by $26 million. Income from higher revenue, cost improvements and pricing actions was more than offset by $108 million in higher materials cost, primarily copper. On a quarter-sequential basis, operating income improved $15 million with higher volumes more than offsetting $55 million of increased metals costs.
Fire & Security Jun. 30, 2006 Jul. 1, 2005 $ Change % Change Revenue $2,925 $2,853 $72 3% Operating Income Excluding Stock Option Expense $323 $301 $22 7% Stock Option Expense $(8) $0 $(8) Operating Income $315 $301 $14 5% Operating Margin 10.8% 10.6%
Organic revenue growth was 3 percent, with continuing improvement in the Worldwide Fire Services business, especially in North America -- which had 11 percent growth. Worldwide Security grew 2 percent in the quarter.
Operating income excluding stock option expense increased by $22 million. The increase was largely due to higher volumes and the benefit of cost reduction initiatives in the Fire Services business.
Healthcare Jun. 30, 2006 Jul. 1, 2005 $ Change % Change Revenue $2,464 $2,440 $24 1% Operating Income Excluding Stock Option Expense $586 $678 $(92) (14%) Stock Option Expense $(10) $0 $(10) Operating Income $576 $678 $(102) (15%) Operating Margin 23.4% 27.8%
Organic revenue growth was 1 percent, with growth across most businesses partially offset by declines in Imaging and Respiratory, driven largely by the effects of previously announced voluntary product recalls. On a quarter-sequential basis, revenues increased $55 million.
Operating income excluding stock option expense decreased by $92 million. The decrease in operating income was primarily due to lower volume and higher costs in Respiratory and Imaging, as well as lower income in Retail. On a quarter-sequential basis, Healthcare operating income increased $44 million when excluding the prior quarter gain on a divestiture.
Engineered Products & Services Jun. 30, 2006 Jul. 1, 2005 $ Change % Change Revenue $1,796 $1,679 $117 7% Operating Income Excluding Stock Option Expense $103 $178 $(75) (42%) Stock Option Expense $(4) $0 ($4) Operating Income $99 $178 ($79) (44%) Operating Margin 5.5% 10.6%
Organic revenue growth was 7 percent, with continued strength in Flow Control, Fire & Building Products and Electrical & Metal Products - which together grew 10 percent.
Operating income of $103 million excluding stock option expense included a $100 million charge for estimated costs related to the voluntary replacement program for certain fire sprinkler heads. Excluding the charge and stock option expense, operating income improved by $25 million year-over-year, primarily due to higher volumes and better pricing.
OUTLOOK
For the fourth quarter of 2006, the company expects to achieve EPS from continuing operations, excluding special items, of $0.47 to $0.49 per share. For the full year, this would result in EPS from continuing operations, excluding special items, of $1.80 to $1.82 per share.
The company continues to expect that 2006 free cash flow, excluding the cash impact of previously disclosed legal items and separation costs, will exceed income from continuing operations excluding special items.
ABOUT TYCO INTERNATIONAL
Tyco International Ltd. is a global, diversified company that provides vital products and services to customers in four business segments: Electronics, Fire & Security, Healthcare and Engineered Products & Services. With 2005 revenue of $40 billion, Tyco employs approximately 250,000 people worldwide. More information on Tyco can be found at http://www.tyco.com.
CONFERENCE CALL AND WEBCAST
The company will hold a conference call for investors today beginning at 8:30 a.m. ET. The call can be accessed in three ways:
-- Web - Go to Tyco’s website at http://investors.tyco.com. A replay of the call will be available through August 18, 2006 at the same website. -- Telephone -- The telephone dial-in number in the United States is (888) 428-4480. The telephone dial-in number for participants outside the United States is (612) 234-9960. -- Audio replay -- The conference call will be available for replay beginning at 12:00 p.m. on August 3, 2006 and ending at 11:59 p.m. on August 10, 2006. The dial-in number for participants in the United States is (800) 475-6701. For participants outside the United States, the replay dial-in number is (320) 365-3844. The replay access code for all callers is 834630. NON-GAAP MEASURES
“EPS from continuing operations excluding special items,” “income from continuing operations excluding special items,” “free cash flow” (FCF), “organic revenue growth,” and “operating income excluding stock option expense” are non-GAAP measures and should not be considered replacements for GAAP results.
The company has forecast its EPS from continuing operations excluding special items and income from continuing operations excluding special items related to divestitures, acquisitions, early retirement of debt, transaction costs related to the separations, and other income or charges that may mask the underlying results and trends and make it difficult to give investors perspective on underlying business results. Because the company cannot predict the amount and timing of such items and the associated charges or gains that will be taken, it is difficult to include the impact of those items in the forecast. The company has forecast its cash flow results excluding any voluntary pension contributions because it has not yet made a determination about the amount and timing of any future such contributions. In addition, the company’s forecast excludes the impact of special items because the company cannot predict the amount and timing of such items.
FCF is a useful measure of the company’s cash which is free from any significant existing obligation. The difference between cash flows from operating activities (the most comparable GAAP measure) and FCF (the non-GAAP measure) consists mainly of significant cash outflows that the company believes are useful to identify. FCF permits management and investors to gain insight into the number that management employs to measure cash that is free from any significant existing obligation. It is also a significant component in the company’s incentive compensation plans. The difference reflects the impact from:
-- the sale of accounts receivable programs, -- net capital expenditures, -- acquisition of customer accounts (ADT dealer program), -- cash paid for purchase accounting and holdback liabilities, and -- voluntary pension contributions.
The impact from the sale of accounts receivable programs and voluntary pension contributions is added or subtracted from the GAAP measure because this activity is driven by economic financing decisions rather than operating activity. Capital expenditures and the ADT dealer program are subtracted because they represent long-term commitments. Cash paid for purchase accounting and holdback liabilities is subtracted from Cash Flow from Operating Activities because these cash outflows are not available for general corporate uses.
The limitation associated with using FCF is that it subtracts cash items that are ultimately within management’s and the Board of Directors’ discretion to direct and that therefore may imply that there is less or more cash that is available for the company’s programs than the most comparable GAAP measure. This limitation is best addressed by using FCF in combination with the GAAP cash flow numbers.
FCF as presented herein may not be comparable to similarly titled measures reported by other companies. The measure should be used in conjunction with other GAAP financial measures. Investors are urged to read the company’s financial statements as filed with the Securities and Exchange Commission, as well as the accompanying tables to this press release that show all the elements of the GAAP measures of Cash Flows from Operating Activities, Cash Flows from Investing Activities, Cash Flows from Financing Activities and a reconciliation of the company’s total cash and cash equivalents for the period. See the accompanying tables to this press release for a cash flow statement presented in accordance with GAAP and a reconciliation presenting the components of FCF.
Organic revenue growth is a useful measure used by the company to measure the underlying results and trends in the business. The difference between reported net revenue growth (the most comparable GAAP measure) and organic revenue growth (the non-GAAP measure) consists of the impact from foreign currency, acquisitions and divestitures, and other changes that do not reflect the underlying results and trends (for example, revenue reclassifications and changes to the fiscal year). Organic revenue growth is a useful measure of the company’s performance because it excludes items that: i) are not completely under management’s control, such as the impact of foreign currency exchange; or ii) do not reflect the underlying growth of the company, such as acquisition and divestiture activity. It is also a component of the company’s compensation programs. The limitation of this measure is that it excludes items that have an impact on the company’s revenue. This limitation is best addressed by using organic revenue growth in combination with the GAAP numbers. See the accompanying tables to this press release for the reconciliation presenting the components of organic revenue growth.
Operating income excluding stock option expense is a financial measure used by the company to evaluate the underlying results and operating performance of the businesses. The difference between operating income (the most comparable GAAP measure) and operating income excluding stock option expense (the non-GAAP measure) reflects the impact of SFAS 123R. The limitation of this measure is that it excludes items that impact the company’s operating income. This limitation is best addressed by using this measure in combination with operating income (the most comparable GAAP measure) because operating income excluding stock option expense does not reflect the impact of adopting SFAS 123R and may be lower than operating income (the most comparable GAAP measure). Management believes operating income excluding stock option expense is a useful measure that excludes items which may mask underlying trends and make it difficult to give investors perspective on underlying business results. See the tables contained in this press release for the reconciliation presenting the components of operating income excluding stock option expense.
FORWARD-LOOKING STATEMENTS
This release may contain certain “forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995. These statements are based on management’s current expectations and are subject to risks, uncertainty and changes in circumstances, which may cause actual results, performance or achievements to differ materially from anticipated results, performance or achievements. All statements contained herein that are not clearly historical in nature are forward-looking and the words “anticipate,” “believe,” “expect,” “estimate,” “plan,” and similar expressions are generally intended to identify forward-looking statements. The forward-looking statements in this release include statements addressing the following subjects: future financial condition and operating results. Economic, business, competitive and/or regulatory factors affecting Tyco’s businesses are examples of factors, among others, that could cause actual results to differ materially from those described in the forward-looking statements. Tyco is under no obligation to (and expressly disclaims any such obligation to) update or alter its forward-looking statements whether as a result of new information, future events or otherwise. More detailed information about these and other factors is set forth in Tyco’s Annual Report on Form 10-K for the fiscal year ended Sept. 30, 2005 and Quarterly Report on Form 10-Q for the quarterly period ended Mar. 31, 2006.
TYCO INTERNATIONAL LTD. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (in millions, except per share data) (Unaudited) Quarter Ended Nine Months Ended June 30, July 1, June 30, July 1, 2006 2005 2006 2005 Net revenue $10,504 $9,997 $30,200 $29,370 Cost of sales 7,057 6,470 20,115 19,016 Selling, general and administrative expenses 2,051 1,972 6,040 5,878 Restructuring and asset impairment charges, net 9 - 28 10 Separation costs 56 - 89 - Losses (gains) on divestitures 2 (301) (39) (284) Operating income 1,329 1,856 3,967 4,750 Interest income 25 24 95 92 Interest expense (167) (198) (545) (622) Other expense, net - (179) (3) (915) Income from continuing operations before income taxes and minority interest 1,187 1,503 3,514 3,305 Income taxes (289) (425) (719) (1,109) Minority interest (2) (2) (7) (6) Income from continuing operations 896 1,076 2,788 2,190 (Loss) gain from discontinued operations, net of income taxes (28) 117 (328) (96) Income before cumulative effect of accounting change 868 1,193 2,460 2,094 Cumulative effect of accounting change, net of income taxes - - - 21 Net income $868 $1,193 $2,460 $2,115 Basic earnings per common share: Income from continuing operations $0.44 $0.53 $1.38 $1.09 (Loss) gain from discontinued operations (0.01) 0.06 (0.16) (0.05) Cumulative effect of accounting change - - - 0.01 Net income $0.43 $0.59 $1.22 $1.05 Diluted earnings per common share: Income from continuing operations $0.43 $0.51 $1.34 $1.03 (Loss) gain from discontinued operations (0.01) 0.05 (0.15) (0.04) Cumulative effect of accounting change - - - 0.01 Net income $0.42 $0.56 $1.19 $1.00 Weighted-average number of shares outstanding: Basic 2,024 2,015 2,015 2,011 Diluted 2,072 2,149 2,097 2,179 Income Reconciliation for Diluted EPS: Income from continuing operations $896 $1,076 $2,788 $2,190 Add back of interest expense for convertible debt 4 16 26 61 Income from continuing operations, giving effect to dilutive adjustments 900 1,092 2,814 2,251 (Loss) gain from discontinued operations (28) 117 (328) (96) Cumulative effect of accounting change - - - 21 Net income, giving effect to dilutive adjustments $872 $1,209 $2,486 $2,176 NOTE: These financial statements should be read in conjunction with the Consolidated Financial Statements and accompanying notes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2005 and Quarterly Reports on Form 10-Q’s for the quarterly periods ended December 30, 2005 and March 31, 2006. TYCO INTERNATIONAL LTD. RESULTS OF SEGMENTS (in millions) (Unaudited) Quarter Ended June 30, July 1, 2006 2005 NET REVENUE Electronics $3,319 $3,014 Fire and Security 2,925 2,853 Healthcare 2,464 2,440 Engineered Products and Services 1,796 1,679 Corporate - 11 Total Net Revenue $10,504 $9,997 OPERATING INCOME AND MARGIN Electronics $478 14.4% $512 17.0% Fire and Security 315 10.8% 301 10.6% Healthcare 576 23.4% 678 27.8% Engineered Products and Services 99 5.5% 178 10.6% Corporate (1) (139) 187 Operating Income and Margin $1,329 12.7% $1,856 18.6% (1) The quarter and nine months ended June 30, 2006 include separation costs of $54 million and $85 million, respectively. The quarter and nine months ended July 1, 2005 include a gain on sale of the TGN of $307 million and $305 million, respectively. In addition, the quarter and nine months ended July 1, 2005 include operating losses of $14 million and $54 million, respectively, related to the TGN business. Nine Months Ended June 30, July 1, 2006 2005 NET REVENUE Electronics $9,361 $8,805 Fire and Security 8,591 8,609 Healthcare 7,160 7,128 Engineered Products and Services 5,088 4,799 Corporate - 29 Total Net Revenue $30,200 $29,370 OPERATING INCOME AND MARGIN Electronics $1,326 14.2% $1,421 16.1% Fire and Security 832 9.7% 895 10.4% Healthcare 1,694 23.7% 1,948 27.3% Engineered Products and Services 460 9.0% 515 10.7% Corporate (1) (345) (29) Operating Income and Margin $3,967 13.1% $4,750 16.2% (1) The quarter and nine months ended June 30, 2006 include separation costs of $54 million and $85 million, respectively. The quarter and nine months ended July 1, 2005 include a gain on sale of the TGN of $307 million and $305 million, respectively. In addition, the quarter and nine months ended July 1, 2005 include operating losses of $14 million and $54 million, respectively, related to the TGN business. TYCO INTERNATIONAL LTD. CONDENSED CONSOLIDATED BALANCE SHEETS (in millions) (Unaudited) June 30, March 31, September 30, 2006 2006 2005 Current Assets: Cash and cash equivalents $2,120 $2,396 $3,212 Accounts receivable, net 7,043 6,750 6,657 Inventories 4,825 4,586 4,144 Other current assets 3,371 3,271 3,081 Assets held for sale 257 299 1,568 Total current assets 17,616 17,302 18,662 Property, plant and equipment, net 9,183 9,058 9,092 Goodwill 24,705 24,538 24,557 Intangible assets, net 4,979 5,018 5,085 Other assets 5,209 5,140 5,225 Total Assets $61,692 $61,056 $62,621 Current Liabilities: Current maturities of long-term debt $1,491 $746 $1,930 Accounts payable 3,284 3,115 3,019 Accrued and other current liabilities 6,013 5,897 6,540 Liabilities held for sale 54 105 320 Total current liabilities 10,842 9,863 11,809 Long-term debt 8,554 9,242 10,599 Other liabilities 7,861 7,717 7,702 Total Liabilities 27,257 26,822 30,110 Minority interest 49 48 61 Shareholders’ equity 34,386 34,186 32,450 Total Liabilities and Shareholders’ Equity $61,692 $61,056 $62,621 NOTE: These financial statements should be read in conjunction with the Consolidated Financial Statements and accompanying notes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2005 and Quarterly Reports on Form 10-Q’s for the quarterly periods ended December 30, 2005 and March 31, 2006. TYCO INTERNATIONAL LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions) (Unaudited) Quarter Ended Nine Months Ended June 30, July 1, June 30, July 1, 2006 2005 2006 2005 Cash Flows from Operating Activities: Net income $868 $1,193 $2,460 $2,115 Loss (gain) from discontinued operations 28 (117) 328 96 Cumulative effect of accounting change - - - (21) Income from continuing operations 896 1,076 2,788 2,190 Adjustments to reconcile net cash provided by operating activities: Losses (gains) and impairments on divestitures 2 (294) (39) (281) Depreciation and amortization 514 518 1,539 1,561 Non-cash compensation expense 65 21 211 55 Deferred income taxes 28 30 79 102 Provision for losses on accounts receivable and inventory 35 61 127 187 Loss on the retirement of debt - 179 2 908 Other non-cash items 9 (1) 36 20 Changes in assets and liabilities, net of the effects of acquisitions and divestitures: Accounts receivable, net (146) (196) (254) (761) Inventories (209) 23 (721) (302) Accounts payable 113 74 228 211 Accrued and other liabilities 222 143 (659) 135 Other 20 (98) (144) 19 Net cash provided by operating activities 1,549 1,536 3,193 4,044 Net cash (used in) provided by discontinued operating activities (50) 82 (43) 4 Cash Flows from Investing Activities: Capital expenditures (394) (335) (1,118) (974) Proceeds from disposal of assets 11 15 28 67 Acquisition of businesses, net of cash acquired (21) (5) (155) (15) Acquisition of customer accounts (ADT dealer program) (97) (92) (266) (227) Purchase accounting and holdback liabilities (12) (6) (23) (29) Divestiture of businesses, net of cash retained (21) 121 933
