Tyco International Beats Estimates – Analyst Blog

Tyco International Ltd (TYC) reported earnings from continuing operations of 59 cents per share in the second quarter of FY10. This was higher than the Zacks Consensus Estimate of 54 cents. Revenue in the quarter was $4.1 billion.

 

In ADT Worldwide, recurring revenues continued to perform well. Good account growth, good ARPU and improvement in the disconnect rate translated into a 4% organic revenue growth. Revenue in the systems installation business continued to be soft in North America and Europe. There was a nice pick-up in activity in Asia-Pacific where organic revenue growth was 10% in the quarter. Worldwide order activity in systems installation business was flat sequentially but there was good growth in Asia-Pacific. The company is making margin progress in the European operations and exited the quarter with an operating margin of 6.5% as benefits of restructuring actions are taking hold.

 

In Flow Control, the second quarter results were impacted by a charge for a loss related to a project that it retained as part of the 2008 divestiture of its Earth Tech business. Backlog was flat on a sequential basis at $1.6 billion, and orders were up 3% year over year, excluding the impact of foreign currency.

 

In Fire Protection Services, the company did a nice job on cost reduction and margin expansion. Revenue of $807 million declined 1% in the quarter with an organic revenue decline of 7%. Service revenue was down 1% organically while installation revenue declined 12% driven by softness in the North America and EMEA regions. Backlog of $1.2 billion increased 1% on a sequential basis.

 

Next, Safety Products not only had a good quarter operationally, but also began to see an improvement in order activity. Orders grew 5% on a sequential basis and the tone of business has clearly improved. Revenue of $360 million declined 4% in the quarter with an organic revenue decline of 7%. Organic revenue growth of 1% in Electronic Security was more than offset by declines of 12% in Fire Suppression and 3% in Life Safety.

 

Finally, Electrical and Metal Products performed as expected in the quarter. Revenue of $336 million increased 2% in the quarter with an organic revenue decline of 3%. Although volume remained essentially flat year over year, lower average selling prices for steel products drove the organic revenue decline.

 

Cash from operating activities was $632 million and free cash flow was $349 million. These amounts included $48 million of cash outflows related to restructuring activities. Year to date, free cash flow was $428 million compared with free cash flow of $239 million in the comparable period in 2009. From a balance sheet perspective, cash balance was about $2.7 billion at the end of the quarter, and the company expects to use some of these to fund the Broadview acquisition.

 

Tyco expects to complete its acquisition of Brinks Home Security Holdings, operating as Broadview Security, on May 14, 2010, pending approval of the transaction by Brinks’ shareholders.

 

Tyco International Ltd. also announced that it plans to pursue a tax-free spinoff of its Electrical & Metal Products business. Tyco expects to file documents with the U.S. Securities & Exchange Commission (SEC) over the next few months and to complete the proposed transaction in the first half of fiscal 2011.

 

On April 12, 2010, Standard & Poor’s upgraded Tyco’s debt rating from BBB+ to A-. 

Tyco fills an incredibly wide range of the many 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 portfolios.

 

We are bullish on the company’s fortunes based on the relative stability of the 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. We expect that the company is likely to put its cash to work by resuming share buybacks and/or indulging in tag-along acquisitions over the next several months. The company’s positive and high quality operating performance is commendable, despite accelerating weakness in the global non-residential construction and project-related end markets.