Tyco Outperforms Estimate - Analyst Blog

Tyco International Ltd. (TYC) reported first quarter 2011 earnings per share from continuing operations of 75 cents, beating the Zacks Consensus Estimate of 68 cents. The company's earnings increased by 17% on a year-over-year basis, driven by continued improvement in Tyco's end markets.

Total revenue increased by 5% year over year to $4.4 billion. The revenue in the quarter included a 1 percentage point contribution from the Electrical & Metal Products business.

Segment Details

Revenue from Security Solutions segment was $2.1 billion, up 10% year over year and 6% organically. Fire Protection revenue was $1.1 billion, down 1%. Flow Control revenue was $826 million, down 1% and Electrical and Metal Products revenue was $347 million, up 17%.

The company has reorganized its reporting segment from the first quarter of 2011. Tyco has divided its Safety Products segment between its ADT Worldwide and former Fire Protection Services segments, thus forming two new segments Tyco Security Solutions segment and Safety Products segment.

Profit & Expenses

Operating income in the quarter was $706 million compared with $405 million in the prior-year quarter. SG&A expense was $1,137 million compared with $1,123 million. Corporate expense excluding special items was $97 million.

Security Solutions margin was 16.5% compared with 14.0% in the prior-year quarter, Flow Control margin was 12.1% compared with 12.3%, Fire Protection margin was 8.0% compared with 9.8% and Electrical and Metal Products margin was 2.0% compared with 7.7%.

The segments margin during the quarter included benefits derived by the company from its cost-containment and restructuring actions. However, margins of Fire Protection were affected by losses related to divestures and restructuring related cost. Margins in Flow Control were slightly impacted by a decline in volume. Electrical and Metal Products segment margin was negatively affected by by increased material costs.

Balance Sheet and Cash Flow

At the end of the quarter, the company had $2.1 billion in cash with long-term debt of $3.6 billion and shareholders equity in $14.2 billion.

Net cash from operating activities amounted to $246 million at the end of the quarter and free cash flow was $63 million.

In the quarter and till January 26, 2010, total shares repurchased by the company amounted to 19 million, valued at $793 million. The repurchase was done as per the company's $1 billion share repurchase program started in the fourth quarter of 2010.

Divesture

On December 22, 2010, Tyco concluded the sale of a major portion of the Electrical and Metal Products business to an affiliate of Clayton, Dubilier and Rice, LLC. The divesture brought cash proceeds of $713 million, amounting to a profit of $259 million which is reported in corporate and other segment. The business now operates under the name Atkore International.

Conclusion

Tyco fills a wide range of diversified needs of businesses and governments, educational and medical institutions, and commercial industries ranging from food to automobiles.

We are bullish on the company's fortunes based on the relative stability of the global security and fire markets, as well as 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.

However, 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 could adversely affect its operating results. Major competitors of Tyco are General Electric Co. (GE), Honeywell International Inc. (HON) and United Technologies Corp. (UTX).

Tyco International Ltd. emerged from the July 1997 acquisition of the Massachusetts corporation by ADT Limited, a public company organized under the laws of Bermuda. Further, ADT Limited changed its name to Tyco International Ltd.

On June 29, 2007, Tyco International Ltd. completed the spin-offs of Covidien and Tyco Electronics, formerly its Healthcare and Electronics businesses, respectively, into separate, publicly traded companies in the form of distribution to Tyco shareholders. Effective March 17, 2009, the company discontinued its existence as a Bermuda corporation, but remains a Swiss-domiciled entity. The management office of the company in the United States is located at Princeton, New Jersey.

We currently maintain our Neutral rating on Tyco, with a Zacks #3 Rank (short-term Hold recommendation) over the next one-to-three months.

 
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