TYCO REPORTS THIRD QUARTER EARNINGS OF $0.43 PER SHARE, CONTINUED STRONG CASH FLOW
Cash Flow From Operating Activities of $1.1 Billion; Free Cash Flow of $1.3 Billion - Results Include Charges Totaling $0.02 Per Share From Early Retirement of Debt and Restructuring and Divestiture Programs - Company Raises Full-Year EPS and Free Cash Flow Guidance
PEMBROKE, Bermuda — August 3 — Tyco International Ltd. (NYSE: TYC; BSX: TYC) today reported diluted GAAP earnings per share (EPS) of $0.43 for the third quarter ended June 30, 2004, compared with EPS of $0.27 in the third quarter of 2003. Revenue grew 11 percent to $10.5 billion with organic revenue growth of 6 percent in the quarter. Net income increased 63 percent to $923 million. Included in EPS were charges totaling $0.02 per share consisting of a $38 million after-tax charge for early retirement of debt and $3 million of net after-tax charges from the restructuring and divestiture programs announced in November 2003.
Cash flow from operating activities totaled $1.1 billion. The company had free cash flow of $1.3 billion in the quarter, up from $844 million in last year's third quarter. This quarter's cash flow from operating activities and free cash flow were reduced by $173 million for voluntary pension contributions.
"Our results in the third quarter demonstrate Tyco's continued operational progress," said Tyco Chairman and Chief Executive Officer Ed Breen. "We're growing the top line, expanding operating margins, generating strong cash flow and strengthening our balance sheet, all of which continue to solidify our foundation for the future."
Organic revenue growth, free cash flow and net debt are non-GAAP financial measures and are described below. For a reconciliation of these non-GAAP measures, see the attached tables.
HIGHLIGHTS
Organic revenue growth was 6 percent, driven by strengthening end markets for Electronics and Engineered Products & Services.
The operating margin improved 180 basis points year-over-year to 14.6 percent, due in part to continued success in the company's strategic sourcing and Six Sigma programs.
Tyco achieved full investment grade status following debt-rating upgrades by Standard & Poor's, Moody's, and Fitch.
During the quarter the company reduced debt by $630 million to $17.1 billion. Net debt was reduced to $13.1 billion from $14.6 billion at the end of the second quarter.
RESTRUCTURING AND DIVESTITURE PROGRAMS
The company continued to make progress on the restructuring and divestiture programs announced in November 2003. Through June 2004, the company has announced the closure of 142 facilities and a staffing reduction of approximately 5,300 positions related to the restructuring program. The company has exited 17 businesses as part of the divestiture program.
Included in the third quarter results were $4 million of net charges ($3 million after-tax, noted above) related to the restructuring and divestiture programs. This consisted of $41 million of restructuring charges that were offset by $34 million of restructuring savings and $3 million of divestiture gains.
ACTIONS TO FURTHER STRENGTHEN BALANCE SHEET
In May 2004, Tyco announced plans to further strengthen its balance sheet by utilizing cash to reduce debt, including its accounts receivable securitization programs, subsidiary debt, and convertible debt securities. The company also announced that it would make voluntary contributions to its pension plans. During the third quarter the company utilized $1.1 billion of cash to take the following actions:
Reduced outstanding balances on its accounts receivable securitization programs by $461 million.
Purchased $304 million of subsidiary debt, generating a $38 million after-tax charge for early retirement of debt, as noted above.
Made $173 million of voluntary contributions to its pension plans.
Repaid $125 million of an outstanding revolving credit facility.
SEGMENT RESULTS
The financial results presented in the tables below are in accordance with GAAP. All dollar amounts are pretax and stated in millions. All comparisons are to the quarter ended June 30, 2003, unless otherwise indicated.
To further assist in summarizing and understanding the charges included in Tyco's GAAP results for fiscal 2003, the company has provided a detailed schedule on its website www.tyco.com/investor/investor_news.asp.
Fire & Security
Revenue increased $123 million, or 4 percent, with organic growth of 1 percent. Growth at Worldwide Security and Tyco Safety Products was offset by weakness in the Worldwide Fire Services business. Tyco Safety Products had strong revenue growth led by increased demand for breathing systems, video surveillance, and access control equipment. Worldwide Security continued to benefit from stronger sales to retailers.
Operating income increased $90 million from the prior year and the operating margin grew to 9.3 percent. Last year's third quarter was impacted by $62 million of charges related to certain reserve adjustments. This year, the segment experienced solid margin improvements at both Worldwide Security and Tyco Safety Products, driven by higher revenue and improved operating efficiencies.
Electronics
Revenue increased $353 million, or 13 percent, with organic growth of 10 percent. Organic revenue for connectors and cable assemblies grew 16 percent, driven by strength in the automotive, industrial, communications, computer and consumer electronics markets. Revenue growth in connectors and cable assemblies was partially offset by weakness in sales of power systems in North America and commercial electronic services.
Operating income grew 14 percent to $464 million and the operating margin improved to 15.2 percent due to higher sales and better operating efficiencies. The operating margin in the quarter was adversely impacted by higher metals costs (80 basis points), primarily copper and gold.
Healthcare
Revenue increased $86 million, or 4 percent, with organic growth of 2 percent. Solid growth in Medical and Surgical was partially offset by declines in Retail and Respiratory. Organic revenue growth is expected to be in the mid-single digit range in the fourth quarter.
Operating income increased 10 percent and the operating margin expanded 170 basis points due to increased volumes and continued operating efficiencies. Research and development spending increased by $15 million, or 39 percent.
Engineered Products & Services
Revenue increased $484 million, or 41 percent, with growth in all four business units. Organic growth was 20 percent led by strength in Electrical & Metal Products, Flow Control and Fire & Building Products. In addition, the inclusion of $181 million in revenue of certain subcontract costs previously treated as pass through to customers at Infrastructure Services added 15 percentage points to the overall growth rate. This reclassification, which was reported last quarter, had no impact on operating income.
All four business units contributed to the $134 million increase in operating income, with a majority of the improvement due to increased selling prices and higher volume, primarily in Electrical & Metal Products.
Plastics & Adhesives
Revenue was down $11 million, or 2 percent, with an organic revenue decline of 3 percent. Organic revenue growth in Plastics and Ludlow was more than offset by decreases in A&E Molded Plastics and Adhesives.
Operating income declined $22 million, or 41 percent, primarily due to tighter resin spreads and lower volume in A&E Molded Plastics and Adhesives.
OTHER ITEMS
The effective tax rate in the quarter was 27.9 percent, bringing the year-to-date tax rate to 26.6 percent. The company continues to anticipate a full-year tax rate of approximately 27 percent.
Interest expense was $224 million, down 22 percent from $288 million in the same period a year ago.
OUTLOOK
The company expects to achieve EPS of $0.41 to $0.43 for the fourth quarter of 2004 and is raising its full-year EPS guidance to a range of $1.61 to $1.63. This EPS outlook excludes the impact from the restructuring and divestiture programs announced in November 2003 and any charges relating to early retirement of debt. The company is also changing its full-year guidance for cash flow from operating activities to $5.2 billion and is raising its free cash flow guidance to $4.7 billion. Both cash flow estimates are before voluntary pension contributions.
EPS excluding charges and cash flow before voluntary pension contributions are non-GAAP measures and are described below.
Ed Breen concluded: "We're very pleased with the company's progress in the first nine months of the year. Much of the credit goes to our employees, who have remained focused on our growth and operating priorities and continue to build Tyco into a world-class operating company." |
