Tyco International Ltd (TYC) reported results for the fourth quarter and fiscal year 2011. Earnings for the quarter grew 24% year over year to 92 cents per share, well above the Zacks Consensus Estimate of 86 cents.

For the full year, the company reported earnings of $3.24 per share, also above the Zacks Consensus Estimate of $3.18 a share.

Revenue for the quarter grew 14% year over year to $4.7 billion. Organic revenue growth (revenue excluding the impact of foreign exchange translation and acquisitions) was 6%, with currency adding another 5%. All three segments saw double-digit revenue growth.

Segment Details

Security Solutions

Revenue for the quarter increased 11% to $2.3 billion. Recurring revenue, which represented 57% of total revenue in the quarter, continued to perform well, with all geographic regions contributing.

Honeywell International Inc. (HON), the company’s primary competitor in the category, also posted a 14% growth in sales in its Automation and Control Solutions segment.

Continued ARPU (average revenue per user) expansion and account additions drove the 5% organic revenue growth in this category. The remaining 43% of revenue, which is non-recurring, grew 7% organically, driven by growth in every region.

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.

Operating income was $374 million and the operating margin improved 100 basis points year-over-year to 16.4%. Increased investments in sales and marketing and R&D were more than offset by growth in recurring revenue and the continued positive impact of restructuring and cost containment initiatives.

Fire Protection

Overall revenue in the quarter was $1.3 billion. Organic revenue grew 4%. Service revenue of $500 million grew 6% organically, as the company continued its focused efforts on expanding its service base, especially recurring service. Systems installation revenue of $460 million was down 1% on an organic basis as growth in Asia Pacific was more than offset by declines in North America and EMEA due to the continued softness in the non-residential construction market.

Operating income was $183 million in the quarter, while the operating margin was 13.7%, up 160 basis points year over year. Increased leverage from higher volume in the product businesses, a higher mix of service revenues across all regions, and gains from productivity and cost containment initiatives drove the operating margin improvement.

Flow Control

Flow Control revenue was $1.08 billion in the quarter, driven by strong sales in valves and continued benefits of customers accelerating the completion of installation work on some large thermal projects.Valves, which comprise about 60% of Flow Control’s annualized revenue, grew 13% organically in the quarter.

Orders for valve controls remained strong during the quarter with 15% growth year-over-year. Order activity was positive across all end markets, led by strong growth in oil and gas and power. In addition, during the quarter, the company entered into a five year agreement with Shell to provide certain value and aftermarket services on a global basis. This order is expected to begin by the end of fiscal 2011.

In thermal controls, organic revenue growth of 34% was driven by strong order activity over the last two quarters as thermal orders usually translate into revenue within 60 to 90 days. In water, organic revenue declined 18% as a result of the completion of the Australian flood project and soft order activity in water over the last few quarters.

The company’s primary competitor in this category is Danaher Corp’s. (DHR) Environmental segment, which reported revenue growth of 8.5%.

Overall, total Flow orders in the quarter increased 14% year-over-year; Valves were up 15%, Thermal increased 41% while Water declined 14%. Order backlog of $1.74 billion increased 4% sequentially.

Balance Sheet and Share Repurchase

For fiscal 2011, the company generated operating cash flow of $2.4 billion and free cash flow of $1.1 billion. The company has a long term debt of $4.1 billion and a debt to capitalization ratio of 29.2%.

For the year, the company purchased 30 million shares for $1.3 billion.

Guidance

Based on the strong performance for fiscal 2011, management provided guidance for the full year 2012 and also the first quarter. Tyco International expects revenue to be in the range of $17.5 billion to $17.7 billion for fiscal 2012. The guidance includes organic revenue growth of 4.5% to 5.5%. Operating income for the year is expected to be up 10% to 13%, with an operating margin expansion of 100 basis points.

Earnings for fiscal 2012 are expected to be in the range of $3.50 to $3.60 per share.

For the first quarter of fiscal 2012, overall revenue is expected to be $4.2 billion with an operating margin of 12%. Quarterly earnings are expected to be 77 cents a share.

For security solutions, the company expects overall organic revenue growth of approximately 4% year-over-year. The operating margin for the first quarter is expected to be flat year over year. For Fire Control, the company expects total revenue of approximately $1.1 billion with an operating margin of approximately 12%.

In the Flow control business, Tyco expects organic revenue growth of approximately 8% driven by the continued momentum in valve order activity. Overall, flow controls revenue is expected to approximate at $915 million, with an operating margin of 11%.

The company expects sequential operating margin expansion each quarter in fiscal 2012 and anticipates reaching a 14% margin in flow during the second half of the year as it continues to leverage the increased volume in valves and begins executing on water projects.

Tyco Split

In September 2011, Tyco International announced its plans to break out into three separate companies. The plan received the unanimous approval of Tyco’s Board of Directors. The trio to be formed includes the ADT North America residential security business, flow control products and services business and commercial fire and security business. Each company will have an independent existence and will be publicly traded.

Tyco believes the restructuring will enable each stand-alone unit to re-focus on its core business and provide improved services to its customers. The three companies will enjoy leading positions in the markets served by them, thus creating significant value for shareholders.

The transaction is expected to be completed within a year, subject to certain conditions including shareholder consent. The company estimates a one-time transaction cost of approximately $700 million, consisting of debt refinancing, separation and restructuring costs.

Summary

Tyco International performed well during fiscal 2011, both operationally and strategically. Moving ahead, we expect the positive sentiment of fiscal 2011 to continue into fiscal 2012 driven by its continued growth in large and stable base of service and recurring revenue, momentum in the late cycle businesses and the sustained benefits of productivity and restructuring initiatives.

Although, the company is very positive about the increase in order activity in the flow control division, the current market uncertainties increase the possibility of cancelations or push outs, which make us cautious about it. Furthermore, the Fire control division also faces some challenges due to the softness in the non-residential commercial market.

We maintain a Neutral rating on Tyco with a Zacks #3 Rank (short-term Hold recommendation).

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