Tyco Offers Proof It Is Healthy, Yet It Faces a Huge Debt in 2003
By JOHN HECHINGER
Staff Reporter of THE WALL STREET JOURNAL
Tyco International Ltd., seeking to raise its credibility with investors, released detailed quarterly financial projections showing strong cash flow from its operations, enough money to pay its debts and a $2.15 billion cash balance at the end of 2002.
J. Brad McGee, a Tyco executive vice president, said the big industrial and financial-services concern took the unusual step to make a strong case it wasn't in financial distress. "We wanted to make sure questions about liquidity were off the table," he said.
Analysts noted, however, that Tyco still faces as much as $12 billion in debt coming due in 2003 and the company is under intense pressure to execute quickly a recently announced plan to break into four pieces.
Tyco disclosed its quarterly projections in a filing late Thursday with the Securities and Exchange Commission. As of 4 p.m. Friday, in New York Stock Exchange composite trading, Tyco's shares rose $1.83 to $29.88 each. But the shares remain 49% below where they started the year. Concern over Tyco's complicated accounting, which started the decline, has evolved into deeper scrutiny of its debts and liquidity.
"People said we need more data; they said 'Fine, we're happy to supply it,' " said Darcy MacLaren, director of equity research at Safeco Asset Management, which holds about one million Tyco shares. "As people gain comfort with the numbers, they'll step back from the panic and look at the cash flow and say, this thing is ridiculously cheap."
Tyco reversed its highly acquisitive strategy this past month and said it would break itself up in an effort to increase shareholder value and simplify its financial statements.
Stock and bondholders were spooked this past week when the company and its finance unit, Tyco Capital, borrowed $14.4 billion through backup bank credit lines because they feared they wouldn't be able to access their normal source of short-term credit in the commercial-paper market. Companies usually reserve such bank lines for emergencies. The company earlier borrowed $1.5 billion to tide it through the breakup plan. Standard & Poor's downgraded Tyco's debt this past week by three notches to triple-B from single-A. The latest rating remains investment grade.
The new financial projections, which excluded the company's big Tyco Capital finance unit, showed Tyco starting out the calendar year, the beginning of its current fiscal second quarter, with $1.87 billion in cash. The company expects to generate a hefty $4.6 billion in free cash flow -- which it defines as cash generated from operations, minus capital spending and dividends -- in the four quarters to the end of the calendar year.
Borrowings, repayments of short-term debt and $2.9 billion in anticipated expenditures on acquisitions -- some already agreed to, some not -- were also detailed in the filing, bringing the company to the $2.15 billion figure at Dec. 31 of this year.
But Tyco reported negative cash flow of $215 million its fiscal first quarter ended Dec. 31, 2001. Given that, and Tyco's recent acknowledgment of softness in its electronics business, Albert J. Meyer, an analyst with David W. Tice & Associates, called the cash-flow projections "very aggressive." The firm publishes a newsletter for institutional investors and also manages Prudent Bear Fund, which is short Tyco shares, meaning it is betting that the stock price will fall.
Tyco's Mr. McGee said the fiscal first-quarter cash flow tends to be weak because of bonuses and, calling the 2002 projections "conservative," said they take into account the electronics weakness.
Some analysts also said the picture looks far less rosy in 2003, when Tyco could face about $12 billion in debt payments coming due.
These analysts say that debt may be a reason why Tyco this week said it would accelerate the breakup plan. One of Tyco's bank lines, for $3.9 billion, must be paid back or renegotiated in February 2003. And Tyco may have to come up with about $5.9 billion in 2003 under a complex arrangement with its convertible bondholders. Of that amount, Tyco could be forced to come up with $3.6 billion in cash in November 2003. The rest could be repaid in stock.
But Mr. McGee and some analysts say those deadlines would become moot if Tyco manages to execute its breakup plan effectively. Under the plan, which calls for an early sale of Tyco Capital and the company's plastics business, Tyco would restructure its debt, paying down some $11 billion. Tyco bonds, which had fallen to distressed levels early last week after Tyco tapped its bank lines, had rallied sharply by week's end.
Glenn Reynolds, chief executive at CreditSights Inc., a New York bond-research firm, said investors aren't focused on 2003 because Tyco , having lost the market's confidence, has no choice but to pull off its breakup plan long before its other debts come due. "There is a timeline here," he said. "They have a gun aimed at their head. They have to execute."
Earlier this week, Tyco Chief Executive L. Dennis Kozlowski, said the electronics weakness and higher borrowing costs could cut 45 cents, or $900 million, from Tyco's previous estimate of the company's fiscal 2002 earnings of $7.4 billion or $3.70 a share.
Write to John Hechinger at john.hechinger@wsj.com
Updated February 11, 2002 |
