Tyco International Ltd (TYC) reported second quarter 2011 earnings per share from continuing operations of 66 cents, falling below the Zacks Consensus Estimate of 68 cents. Revenues were $4 billion slightly ahead of the Zacks Consensus Estimate of $3.98 billion.
Service revenue, which includes recurring revenue represented over 45% of total revenue and continues to grow. Systems installation and product revenue, which represents about 55% of total revenue, continued to see improved year-over-year order flow.
Segment Details
Security Solutions
Overall revenue for the quarter grew 12% to $2.1 billion with organic growth of 5.5%. Recurring revenue increased from 55% of security’s total revenue in the prior-year quarter to 58% in 2011, primarily due to the Broadview acquisition. Organic growth of 4.5% in recurring revenue was driven by North American residential and small business operations.
Growth in recurring revenue increased volume in the commercial business, and the continued benefits of restructuring and productivity initiatives drove the year-over-year operating margin improvement.
Fire Protection
Overall revenue in the quarter was $1.1 billion with organic revenue growth of 4%. Service and systems installation business, which is the largest portion of fire protection, reported total revenue of $804 million.
Organic revenue growth of 4% in Service was partially offset by a decline in systems installation revenue of 1.5% as a result of project selectivity. The remaining portion of fire protection business, Fire Products, which includes the manufacturing arm of the fire business reported revenue of $305 million in the quarter with organic revenue growth of 11%.
Flow Control
Flow Control revenue was $804 million in the quarter, representing an organic revenue decline of 5%. Valves, which comprises about 60% of Flow Control’s annualized revenue recovered from the trough and grew 1% organically in the quarter.
Severe weather conditions and flooding in Australia which persisted throughout the second quarter significantly impacted shipments to customers. In addition to the shipment impact, these external conditions also resulted in lost productivity in the Water business.
Overall, total Flow orders in the quarter increased 8% year-over-year; Valves were up 11%, Thermal increased 8% and Water orders remained flat. Order backlog of $1.65 billion increased 5% on a quarter sequential basis.
Balance Sheet
The company exited the quarter with $1.84 billion in cash and cash equivalents. Cash from operating activities was $667 million and free cash outflow of $30 million primarily related to restructuring activities.
Outlook
The company expects revenue for the third quarter to increase to approximately $4.2 billion, a 5% sequential increase over the second quarter of 2011. In terms of bottom-line results, improving business conditions are expected to result in a sequential improvement in third quarter operating results in all three businesses.
Acquisition
The company announced the acquisition of a 75% stake in Dubai-based KEF Holdings for $300 million. The Middle East is a key emerging market and this acquisition provides it with a strategic presence in this growing region.
KEF is the region’s only fully integrated valve business with local manufacturing. This will allow the company to better serve both local and global customers predominantly in the oil and gas industry.
Tyco fills a wide range of the diversified needs of businesses and governments, educational and medical institutions, and commercial industries, ranging from food to automobiles. It also boasts of leading brand names for products and services under Flow Control, Fire Protection Services, Safety Products and Electrical & Metal Products.
We are bullish on the company’s fortunes based on the relative stability of global security and fire markets, high and predictable cash generation, limited balance sheet risk, and easy cost-out opportunities. There is a potential catalyst in the company’s solid balance sheet and healthy liquidity position.
The company’s positive and high quality operating performance is commendable despite accelerating weakness in global non-residential construction and project-related end markets.
The company’s business strategy includes acquiring companies and making investments that complement its existing businesses. These acquisitions and investments could be unsuccessful or consume significant resources, which would adversely affect its operating results.
The company continues to be subject to a number of lawsuits stemming from the actions of its prior senior management. Adverse outcomes of these matters could impact its financial condition, results of operations or cash flows. Material adverse legal judgments, fines, penalties or settlements could adversely affect its financial health and prevent it from fulfilling obligations under its outstanding indebtedness.
Based in Pembroke, Bermuda, Tyco International Ltd. operates in 60 countries and manufactures security products and services, fire protection and detection products and services, valves and controls, and other industrial products. Major competitors of Tyco are General Electric Co. (GE), Honeywell International Inc. (HON) and United Technologies Corp. (UTX).
We currently have a Neutral recommendation on Tyco International Ltd.
GENL ELECTRIC (GE): Free Stock Analysis Report
HONEYWELL INTL (HON): Free Stock Analysis Report
TYCO INTL LTD (TYC): Free Stock Analysis Report
UTD TECHS CORP (UTX): Free Stock Analysis Report
Zacks Investment Research
