江森自控 (JCI) 2001 Q2 法說會逐字稿

Ladies and Gentlemen, thank you for standing by and welcome to the second quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. The instructions will be given at that time. If you should require assistance at any point during this call, please press #0 followed by the * key on your touchtone phone. As a reminder, today's conference is being recorded. I would now like to turn the conference over to your host, Mr. Dennis Kozlowski, Chairman and Chief executive officer. Please go ahead, sir.

Good morning. During this call, we will be providing forward-looking information. I suggest that listeners refer to our earnings press release for questionary language concerning forward-looking statements. Having said that, let us talk about the quarter. This morning, we announced another quarter of strong organic growth, margin improvement, and excellent cash flow. Revenues increased 25% this quarter to $8.9 billion. Organic growth was 13%, excluding TyCom and Tyco product and security, lead this growth with 17% increase followed by a 15% gain at Tyco Electronics. Our operating margins, which I defined as EBIT plus the amortization expanded to 21.5% from 20.2% with improvements in all segments before the impact of acquisitions, and this has been a part of our concurrent margin improvement program that we have been undergoing for the last seven years. Diluted earnings per share went up 30% to 65% per share versus 50 cents in the same quarter of last year. Free cash flow, which is operating cash flow after cash spent on restructuring items, less capital expenditures and dividends was nearly $1.1 billion for the quarter and $1.6 billion for the first half of this year. Free cash flow as a percentage of income totalled 76% this year today versus 48% last year and our cash flow normally is strongest during the later part of the year, the second half of the year and this pattern will continue again in our fiscal year 2001. The $1.1 billion of free cash flow is before $440 million in constructions spending on the TyCom Global Network. I should note that the capital spending for the network is well below our initial projects due to extremely favorable requirements and back wall pricing. There is some silver lining to this electric slowdown. We will probably spend about $1.8 billion on the network this year, less than the plan of some $2.6 billion and next year at this time, we are projecting spending about $2.8 billion compared to about $3.5 billion, which is about $1.5 billion less for the build out of the network. Foreign exchange had a negative impact on the quarter as the US dollar remained strong. Our top line was negatively impacted by about $245 million, roughly 3%. The bottom line was negatively impacted by $50 million by currency translation effects. Additionally, transaction effects from products that we import from US to our overseas operations squeeze margins particularly in Healthcare were the predominance of our manufacturing within the US. Raw material pricing versus last year were down on all of our major commodities. Falling forward, we expect the pricing on these primary commodities, Steel and poly cotton to remain flat in the second quarter. Our outlook through the end of this year is that we remain comfortable with our earnings expectations of $2.75 per share for our fiscal year 2001. This will be up by a healthy 26% from our $2.18 last year. We also remain confident that we will achieve our free cash flow target of $4 billion. We expect roughly $0.68 of the earnings and approximately $1 billion of the cash flow to materialize during the third fiscal quarter. While much attention has been focussed recently on the slowing of the electronics industries and its potential impact on the Tyco Electronics, we should not lose site of the great diversities of our business mix including a large base of recovering economically resilient revenues. For example, recurring revenues that account for nearly 40% of Tyco sales and the base of the recurring revenues continues to expand at ADT, fire protection, and Earth Tech. Healthcare consumes another 24% of revenues and is growing at roughly 10%.

Following TyCom's backlog of third party sales is stronger than we have anticipated and the buildup of the TyCom Global Network is ahead of schedule. We do expect the trend of decelerating growth of electronics to continue because we do not know any better right now. Our 15% organic growth rate to the quarter was near the top end of the 13-15% range we suggested during the first quarter conference call, but it was slower than the 22% seen during the first quarter. Rather, visibility is somewhat limited and we expect the growth to slow in each of the next two quarters for electronics. Electronics accounted for less than half of this firm's organic growth during the past quarter and it will account for an even smaller portion to the remainder of the year. Yet we do remain comfortable that in spite of all that the total Tyco organic growth will remain above 10% for the year and we continue to see opportunities to expand margins at all of the businesses based on growth at high incremental margins, such as those in security monitoring as well as cost efficiencies. In regards to cost efficiencies, the weakness in parts of the electronics industry is allowing us to follow through on some of our original plan consolidations that we had planned for AMP, Raychem, and the Siemens acquisitions, but we could not accomplish when the industry was so overheated during the past 18 months. In fact, we are restating roughly $125 million of the reserves that were reversed last year, when the timing of the relieving actions became unclear, and economy rules forced us to reverse all those reserves. Note that these are not new or incremental to the acquisition charges that we originally announced to you and the expenses being all set by lower cost than anticipated in other areas either all set by lowering non-reoccurring cost than I anticipated in other areas, which were basically the same no doubt to one another. Finally, our comfort with our earnings target is bolstered by the likely contributions from recent acquisitions. During the quarter, we substantially completed the integration of Lucent Power Systems now known as Tyco Power Systems. We closed the acquisitions of Simplex Time Recorder, which will add an excellent source of recurring revenue to our Fire protection business and Mallinckrodt, which closed last fall, continues to meet or achieve our expectations. In addition, we remain very enthusiastic about our announced acquisition of the CIT group. The deal will enable us to pass the light on significant organic growth opportunities within each of Tyco's businesses as well as CIT itself. CIT gives us the ability to meet recurring and emerging financial needs of our customers, solidify customer relationships, and create a platform for future wealth. We are already in the process of creating the link between CIT and Tyco businesses and we see significant opportunities. CIT will report their results next week and today, they continue to perform inline with our internal expectations.

The acquisition process is proceeding faster than originally anticipated. We now expect CIT to hold its shareholder meeting on May 23, 2001 and look forward to closing the transaction around June 1st. On the acquisition track, a slowing economy has provided numerous opportunities. Additionally, potential acquisitions that require some levels beyond our strict financial criteria are looking more durable. Each of our businesses sees its position in the market such that select acquisitions can enhance our competitive position, delivering more of attractive cost structure to provide radio geographic reach for our products. The strength of our cash flow coupled with a strong balance sheet, provides us to resource it pursue acquisition opportunities to enhance shareholder value. Now we want to save as much time as possible for Q&A, so let me very briefly just give you some of the highlights from each of our business areas. Our electronics revenue was up 37% to over $3.2 billion with organic growth of 15%. Organic growth was driven by a number of factors including new products, particularly in high-speed connectors, wireless components, and radar sensors. In fact, during the quarter, we announced over 50 new product launches. Earnings were up to 49% at $850 million for the quarter and margins increased 200-basis points to 26.2%. This was achieved through our normal reluctance focus on cost and despite the inclusion of substantially lower margins generated by the Lucent Cara acquisition in January, whose margins are now improving. As I mentioned integration of Tyco Cara systems is progressing well with results exceeding our internal expectations. Growth was particularly strong in the wiring cable energy in European automotive markets. Regionally, European wealth was especially notable. Backlog at the end of the quarter was $2.03 billion, which is down a bit from the last quarter reflecting slower growth in some end markets. But the story of Tyco Electronics remains compelling. The business had substantially altered the competitive landscape in the electronics industry by shifting the basis of compensation in favor of larger integrated players.

This was not the case a year-and-half or two years ago, when the larger players in the market provided anemic performance. We see this everyday in our interaction with customers where the value we deliver is enormous. Low cost products, rapid product developmental flexibility to change in a very dynamic market place. We have not yet fully realized all over-the-year advantages of this fundamental change on our ability to sustain high rates of organic growth or on our margins. In telecommunications, TyCom reported their results this morning of $0.13 per share. The management team from TyCom will be discussing these results on our conference call along with me at 10:30 this morning. The highlights include TyCom's third-party revenue worth $566 million compared to $653 million last year. This decline of revenues is entirely due to the allocation of manufacturing in our shift assets to construction in our own TyCom Global Network. Development of network is on schedule and under budget. In addition, we announced a buyback of TyCom shares during the quarter. On a quarter basis, we brought back 751,000 shares and on a year-today basis we brought back over 12 million shares of TyCom stock; that is from the 72 million shares that were outstanding at the time we did our IPO back in July. We are financing this buyback to TyCom from the lower capital expenditure cost, which I talked about earlier in this call. Earnings in TyCom are $85 million reflecting a much more consistent earnings incurred in a year than originally anticipated. As you remember the original guidance for TyCom pointed to a very back-embodied year. This smoother trend of effects better than anticipated results in our third party business and will continue. Yesterday, TyCom announced an agreement to jointly develop a network in Pacific Ocean with FLAG. The agreement adds to TyCom's third party construction backlog and reduces TyCom's intermediate term capital requirements. The pipeline for a third party contracts remain strong. Adding the proposed SEACAN and Flag projects will raise the backlog to a record $4.5 billion of third party contracts.

In our Healthcare and Specialty products, second quarter revenue was up 40% to $2.2 billion with organic growth of 10%. Driving this organic growth was a strong performance in the Healthcare business particularly in the launch of new products and then sales of incontinence and endomechanical products. Regionally, wealth was fairly, evenly spread with Europe slightly higher than average and Japan slightly lower. Earnings were up 32% to $496 million with margins of 22.3%. This represented about 100-basis point improvement versus last quarter, but still about a 100-basis points lower than last year and the largest swing factor in both comparisons is Mallinckrodt, where margins were lower than our average, but are now rising sequentially as the operation is being integrated in to Tyco Healthcare. We anticipated this being 10% growth in the coming quarters particularly in light of the segments varied limit sensitivity to the economy. Over at Fire and Security, revenue was up 26% to $1.9 billion and organic revenue growth was 17%. New account generation and security increased penetration of fire protection services continues to drive recurring revenue. Regionally, growth was particularly strong in Asia and in Europe. The integration of Simplex Time Recorder and the expansion of our security dealer network worldwide will contribute to further increases in increasing revenue. Earnings were up 50% to $333 million. Continued focus on service, inspection, and monitoring increased not only our recurring revenue stream, but also contributed to high incremental margins to boost returns to 18% from 15% last year. The completion of the acquisition of Simplex Time Recorder will create additional opportunities in the future as we leverage our global presence to distribute simplex products globally and go to market with a stronger product line. Backlog in this segment also increased to $1.5 billion from $1.1 billion. Going forward to a very healthy backlog, new account generation, integration of simplex should sustain our projected 12-15% organic growth within this segment. At flow control, revenue was up to just over $1 billion with organic growth of 7% driven by strong product demand, demand in oil and gas, water and waste-water can power generation markets.

Earnings were up 8% to $193 million with margins of 19.1%. Our flow control business in particular its recurring revenue component continues to benefit from shares favoring preventive maintenance services and water and wastewater privatization. Earth Tech ranked first in contract operation and maintenance fees for the municipal plans during the year 2000 according to Public Works Financing magazine. Backlog in this segment increased to just under $2 billion from $1.8 billion last quarter. For the remainder of the year, the diversity of our end markets and flow control will allow this segment to continue to expand at ___00:15:43 in some industrial markets is offset by stress in other areas such as oil and gas, power, and water and wastewater, which will result in the continuation of about 7% organic growth rate. To recap here, earnings per share were $0.65, an increase of 30% from last year. Revenue was up 25% to $8.9 billion. Organic growth remained strong, Fire and Security up 17%, electronics up 15%, Healthcare up 10%, flow control up 7%, overall Tyco excluding TyCom, where we have a different business plan in the deployment of our own under undersea fiber optic cable system, but overall Tyco is up 13%. Free cash flow of $1.1 billion versus prior $535 million last year. Based upon the ___00:16 :35 trade which includes lower growth expectations in electronics, we remain confident in our ability to deliver a 20% increase in earnings to $2.75 per share despite a turbulent market for electronics based upon the diversity, strength of our recurring and economic resilient revenues. So as we are looking all this, now we feel that from everything we know now even with a softer electronics business, electronics business as we would project to be flat over the next couple of quarters. We bet that there is more upside here towards Tyco than there is downside though at this time. If we could just pretty quickly project ahead to next year, even if we had a flat electronics business last year, say some 5% growth and a 15% growth in our fire business, 10% in Healthcare, TyCom up about 15-17% of flow at 6-7%, then we would be looking at an overall organic revenue growth with Tyco still an excess of 10% next year, an earnings growth, that should be quite something in excessive 20% for us stepping off next year at this time. So, we feel good about the rest of the year from what we know right now, and we feel we are on track with our long-term plans here and for the next year and that is before putting to work our free cash flow for next year, which should be again excess at some $4 billion. With that, I would like to open this up for questions. I am here with Mark Swartz, our Executive Vice President, with Jack Flack Fox, Senior Vice President and also here with other key Tyco Executives including Bradley Gaid who has taken a more active role at CIT as well as other people from Tyco. So we are open and ready for your questions at this time.

Ladies and Gentlemen, if you would like to ask a question, please press the 1 on your touchtone phone. You will hear a tone indicating that you have been placed in queue and you may remove yourself from the queue at any time by pressing the pound key. If you are using a speakerphone, we ask that you please pick up your handset before pressing the numbers. Our first question comes from Jack Kelly with Goldman Sachs. Please go ahead.

Good morning. Dennis or may be Mark could you go through the deceleration which occurred in the electronics group in March, given the numbers that you have posted in January and February, you know, 18-20% and I just characterize it, may be by an market if you could on the model of technology and may be geographic, Europe versus US and the rush of cancellation at the end of March and just secondly where there any buybacks at Tyco parent?

Jack, if you could look at $13 billion in sales and break it out. Now, let us talk about, in the $13 billion, $2 billion that were printed circuit boards and all-line Tyco businesses, which bring us down to about a $11 billion and no sales have been healthy and good for ourselves. Of the $11 billion, about half of what we are doing is in Europe and low sales of $5.5 billion or so across various industries in Europe continued to be good. In US, of the other $5.5 billion, automotive has come back. Automotive has gotten healthier from where it was in December and January and that is about 25% of what we were doing and that leaves us with about $3.5 billion or so of sales of our $13 billion that now we are about to round a bit, but at risk. We did not get a big rush of cancellations or anything at the end of March. Now because our electronics business is in so many diverse businesses, in automotive, communications, industrial, computer, consumer applications, because it is so geographically dispersed and because we are not relying upon any one particular industry or customer and we service some of the bigger customers that are having difficulties, but we are also seeing some turn around on the automotive side. We do not see one big drop to offer anything like that in March. Now we did say, back about three months ago, that we did not expect our 22% growth rates still to continue, we projected something more like 13-15%, so we came in on the higher end of that scale, and we are saying going forward here that, you know, for lack of any other visibility, we will keep those revenues flat for our third and fourth quarter from where we warmed up in the second quarter and that sounds pretty well from our forecast in breaking down our business by customer and looking at us geographically. Mark, do you have somethings to add to that?

If we give little more conditional info on month by month, we had talked that January has done as said had started out somewhat slow and during February it had bounced back, where we saw about 18% organic growth that we had previously talked about. January was in the 11-12% range and then March fell back in to about the 12-13%, so overall getting into a 15% and really did not see any fall off, significantly in March area, but then as I said, we were just trying to point to consider given other things that were going out down into the market that we are reading about and give some perspective on our comfort level with the full year. In your question Jack on stock buybacks, we were active during the quarter and we purchased approximately $550 million worth of stock and we were able to do subsequent to the announcement of CIT.

Just Mark also, just on the receivables in the electronics market given what is happening, may be with some of your customers, any issues there and were any provisions increased in the quarter?

No, No nothing very different on our receivable basis and may be there is an opportunity to talk about cash flow overall right now, which was very strong at about $1.1 billion. Our working capital investment during the quarter was effectively flat. We did have an increase in both receivables and payables, specifically due to the Lucent Power Systems acquisition, where we did not acquire their existing receivables or payables, so as we have talked about previously, there would be an increase in those two areas. But looking at the other components inventory, we have a couple of $100 million increase during the quarter related to our plant closures where are building up safety stock levels of inventory. During the quarter, we did pay taxes of approximately $316 million and that compares to our provision during the quarter of about $384 million and that as far as contracts in process, that was a use of about $100 million of cash during the quarter, so when you look overall at the strength of the $1.1 billion in free cash flow, it came across all of our operating segments and we expect as we mentioned in our earlier remarks that the second half of the year, we will even be stronger related to our cash flows.

Thanks.

Our next question is from John Ends with Bernstein. Please go ahead.

Good morning. Were there gains and charges that occurred during the quarter and if so, what were they for?

There were some non-recurring gains, not actually gains, but reversals of prior charges that had been put up previously, that ended up being settled for less and at the same time, as we talked about, we did end up taking a restructuring charge during the quarter related to the electronics business and given the kind of environment that we have, John, many years the rationalizations that we have talked about at the time of AMP acquisition and then also during Raychem and Siemens that we had previously not been able to bring about and accordingly ended up reversing the charges provided for those. Because of the timing, we did go ahead during this quarter and are going to move ahead with those rationalizations and taking out the cost within the electronics group to continue to allow us to focus on the margins within the business and increase them and as the sales do end up coming back in the future, we will end up having much more positive contribution drop through on those sales with us being in a position now to lower our fixed cost base within those business.

Mark, could you just give us a recap on plants in Tyco Electronics? How many plants we started out with the acquisitions and then how many you have closed? And in this new charge, how many plants you plan to close with that?

We both did not ask for your last line. Now, there are hundreds of plants all over the world and we do not have that information that is occurring except right now.

Okay. Thank you.

Our next question comes in from Folli Young with Merrill Lynch. Please go ahead.

Hi, good morning. Could you give us some color in terms of what you are seeing in Europe, now that the rest of us reading negative things about the outlook for Europe and just some color there to start please.

Sure. I have just returned from Europe two weeks ago and meeting with our business people there. Our business, forecast, and plans are still, you know, quite good. Our electronics business is strong on the automotive side. It has tapered off a bit on the communication side. It is good on the industrial side. Our Healthcare business is booming. Our Fire and Security business is going very strong for us and our flow control business continues to do well. So, I will say, as far as whole economics mix in Europe, about 80 or 85% of it is good to very good and of 15% of it, now related to some areas of telecommunications, electronics is not as robust as it was six months ago. We would expect the Fire and Security business to continue to go very strong in various economic scenarios, as we would expect our Healthcare business to be able to grow. There are areas of flow control such as maintenance and service you know, we continue to grow nicely in Europe and the automotive side of our electronics business will be good too. We have a lot more contact on the higher-end automobiles such as Mercedes, BMWs, Volkswagens and others coming our right now. So, even if linear production were to fall out, you will be seeing greater content from us and in some cases that content is 10-fold than over where it was a year ago, so you could paint a pretty pessimistic economic scenario for Europe and we could build a pretty strong case for continued good sales and earnings growth from us because of our strong focus on services, recurring revenue, Healthcare, and the sections are for the electronics that we are in. Now which is testimonial to the way we have been able to now show you a strong earnings growth and cash flow for this quarter here, we would expect that to continue even if Europe is faced with some more economic downturn.

Could you comment about the progress of Lucent Power Systems or Tyco Power Systems relative to your expectations today?

Our big thing as it goes Tyco Power Systems was a lot of cost reductions off the bag with the business. The business was unfortunately burdened with a lot of unforeseen growth, but unfortunately for them burdened without an awful lot of opportunity to take out substantial cost of the work force. The workforce is taking down by about 30%, while the administration cost is taken down by about 50%. We continue to see sales growth at Tyco Power System. We are expanding the product lines outside of the US, where this in power systems to the past at about 98% of their products sold in North America. We have handed that over to our electronics, power systems, sales forces, and have been able to expand it. So, in that sense while we are taking our costs, we have been gaining market share and even expanding sales force at the same time.

There has been a couple of quick questions, financial questions if I may goodwill was a little bit less than what we were looking for. Could you comment in terms of, I want a more supporting statement from Mark comment in terms of why were it so and what the outlook may be for that?

Yes, when you look at the balance of the year flow, we are looking at goodwill amortization for the full year of about $540 million. When you end up looking at the quarter and going through Q1 to Q2 and the proper evaluation some for the net assets of the businesses we acquired, we originally thought that there would be additional goodwill on both the simplex acquisition and the Lucent acquisition we ended up acquiring a greater amount of net assets which ends up lowering the amortization expectations that we have during that period.

Okay. And then on tax rate, I know you mentioned may be days ago that it would be lower in the current quarter, could you just remind us or mean what the reason for that was?

We would only say once. We won't come back.

Okay.

When you look at the earnings that we currently have in the growth and where it is happening we have the opportunity to continually to be able to recognize greater benefits from our tax position and the cash flows, if the greater amount of cash flows that were able to generate from each of our businesses gives us the opportunity to appropriately structure our standard entity organization and when you look at the balance of this year 25% tax rate where we had been last year. We had given some guidance this year a little higher, but we are comfortable at this point that we will continue to be able to maintain the 25% tax rate for the balance. And as you saw this quarter, we ended up paying out cash taxes about equal to our provision and for the balance of the year look at it being a similar type of relationship.

Okay. Thank you very much.

I just wanted to add it is good to hear your voice, since we have not seen you around for a long time.

I just came back to work from a four-month vacation.

Next question comes from Robert Cornell, Lehman Brothers. Please go ahead.

Hi, everybody. No four-month vacation here, only ex-Lehman Brother employees do that...a couple of clarifying comments. You were talking about flat electronics, going forward. Could you just expand what you mean? I think you are saying flat with the current report just reported did that account for its normal seasonality? Could you just expand on that comment, please?

That's correct. We are saying flat with the second quarter just reported. We are not putting any seasonality in this. Seasonality...would say...things should be going up, but we are not accounting for seasonality either. What we are trying to say here that we can take a pretty bad scenario, where it is pretty bad scenario for us in electronics, and if we see that and ask you to put it in your models...having settled that, we are still comfortable at $2.75 per share.

Okay: I get that. I think there is still a lot of questions in people's minds here...e-mails about the restructuring targets up at electronics and the offsets on the amounts, and where these numbers are appearing in the just reported financial results...if you could just take a minute and go into that a little more detail?

Sure. Mark, will you do that?

In looking at the quarter overall, on the restructuring line and non-recurring-type charges, it is approximately flat, but going through the individual details we did end up settling litigation that had previously been provided for, related to the HDI case for about $167 million less than was provided for and that was resolved during this current quarter. So that ended up being in net gain related to the charge. On the flip side however, we did end up providing in our electronics group for almost 20 different types of facilities - manufacturing, distribution, and sales offices - and the cost related to that ends up coming through during the quarter. We also related to our flow control business...also have a very small piece of about $20 million that we have provided for, with a similar number of facilities that we are looking at rationalizing over the next quarter. As you know, we have gone through a management change within flow control where we have brought together on a worldwide basis those organizations going to the market on a global basis, and it is providing us the opportunity now to take out cost, and that is why we believe also that you will see continued margin opportunity improvement within the flow control group as we go forward.

One other question on TyCom. As Dennis said, getting more earnings upfront because of the increased third party work and subsequently less in the way of anticipated circuit sales, I think that the TyCom is talking of no change in their annual results. Does that mean that our fourth quarter TyCom number is probably a little optimistic based on previously anticipated circuit sales?

That does not mean that the fourth quarter numbers are optimistic. I think TyCom on their conference call today will be giving some guiding support to their overall numbers.

When you look at the fourth quarter, what started is a very back-end loaded, where almost 90% of the income would be coming through during that fourth quarter. The first two quarters, we have seen very strong EBIT contribution. We expect that to continue during the third quarter because the strength of the third party business is very good. And on top of that, when you look at the fourth quarter, there is not as great a jump that was being looked at previously. The third party business continues very strong. And top of that demand for capacity, we continue to be very optimistic on. However, there has been a decline in sales prices out in the market and we have taken that into account in looking at the fourth quarter also. So, on a combination basis, third party systems and capacity sales in the fourth quarter we continue to be comfortable with, but it is no longer the hockey stick that existed previously because of the business that we have been able to generate on a quarterly basis.

One other point or two. If you were to go through our operating people, or you were going to roam around companies day-in and day-out who run our electronics business and are very close to it, they would argue that they are not going to be flat, they would argue that they are going to fight and give better than that. So, the tempering that is going on here, the conservatism that is coming in is probably us reacting to stuff here, in the media and the stuff you see in the newspapers, as we are trying to give the best guidance we possibly can for what we know we think is going to happen, but at the same time we have not being optimistic at all.

I think I get it, Dennis. Mark, I am going to ask for the details of the cash flow but, I am going to pass the time of the next questioner. Thanks.

Thanks.

Hi. The next question is from Wendy Cathleen with ING Barings. Please go ahead.

You talk a lot and have talked a lot about recurring revenues. Are there strategies for that to improve in the electronics segment at all?

Yes there are, Wendy. We are continuing to look for ways to continue our service business, to continue to build the maintenance business on the electronics side. Now that we are getting recurring revenues close to 40% of what we are doing here at Tyco, we have asked all of our businesses to go of to marketplace. At our M/A-Com business and our OpenSky business, also at the Lucent power system business, we have enormous opportunities for recurring revenues, both of which we were taking advantage of right now. As we are implementing our OpenSky in Pennsylvania and the new contract we just announced at Palm Beach, Florida yesterday, we are going to see a lot of opportunities for recurring revenues.

How much is that now of the segment roughly of sales?

Roughly now, of sales is probably about 5-8%, but we do think we can get it up to probably close to 20% over time.

Okay. And then flow control, that you mentioned the facility consolidation and some strategy shifts. The more favorable end markets seem to be driving the growth - the energy, the power, the wastewater. How much are those a percentage of business at this point and what are some of the less favorable end markets that we are serving and what do we expect strategically to do with those businesses?

The oil, gas, power generation business is just starting to pickup. We went from putting together packages to now closing on some work only recently, I would say late in the quarter, but we would expect that to continue and to become more robust as energy prices have increased a bit and there is quite n need for power generation. On the wastewater treatment side, we seem to be closing a new contract almost every week. On the Earth Tech side, we have a lot of opportunities there. I know that opportunities will accelerate with our CIT financing potential within this business. The slower part of the business has been the process side. Some of the process sides on the food and in chemicals have been down for the quarter-term - butterfly valves and similar type of products. Keeping in mind that we got all those businesses that catered to residential and nonresidential building and construction and housing about a year ago, we do anticipate it being less difficult in the business. So the real drivers will be power generation, energy, wastewater treatment - and we believe that there is a whole of lot of drivers there -with some slight downturns on the process sides of the business.

Thanks.

Our next question is from Walt Littak, McDonald Investments. Please go ahead.

Hi. Good morning guys. Could I get a couple of numbers, the accounts receivable, accounts payable, and inventory?

Sure. Our accounts receivable increased approximately $252 million, which, I mentioned earlier, is principally the sales we have going thorough from Lucent in creating receivables since we did not acquire that. Inventory is up about $235 million, and accounts payable and prepaids are down about $342 million.

Okay. And the corporate expenses were a little bit lower than...I guess unexpected. Is there something going on there that we should know about?

Yeah. Unfortunately, that is the function of our stock price. We end up having compensation that is paid out in the form of restricted stock, and that is valued on a basis related to the average stock price, and that came down during the quarter. Unfortunately, for the balance of the year we are looking at $95-100 million of corporate expenses that should come through.

Okay. And pricing in the connector industry. Are prices holding up at this point, how much your price is at this point?

Prices are holding up in the connector industry. We are the leader in the industry. In some areas, in products such as relays, there still is a scarcity of products, so we still cannot meet some customer demands and needs. So, it varies by product line and by market, but prices are holding up on the connector side.

Okay. Thank you.

You are welcome.

Our next question is from David Bluestone, with UBS Warburg. Please go ahead.

Good morning Dennis. Can you walk through the trends that you are seeing in April and across the product line?

April? You mean the last 10 days?

The last 10 days...or 15, if you can...

Yeah. The last 15 days, I would say it is more of the same. There has been no big deviation in selling price, our product security business is going very strong. Our healthcare has a lot of opportunities, probably some upside, some market share gain opportunities as well as things that we are doing in Mallinckrodt that we are talking to some new and larger customers with everything we do have available to us. TyCom you will hear from Neil Garvey, later on, is going great guns here. They are under budget and they had a plan on the buildup of their system and getting more third party work that any of us ever imagined possible. And on our flow control business under Steve McDonners restructuring and putting together all businesses is getting a lot of closed opportunities as well as some good strong business opportunities on water treatment, wastewater treatment with Iron fields business at a Earth Tech and some good opportunities on power generation side. As I said I just returned from, I spent a lot of time on the electronic side at Aragon Glomer and company, and they see a lot a of market share opportunities for us and if anything, if I were to gauge where the first 15 days of April are compared to say the first 15 days of January a quarter ago. People are more optimistic at this time than they were three months ago.

Okay; Terrific. And at TyCom, was third party business better than expected? What percentage of your revenues and profitability is expected to come from third party sales at TyCom in 2002?

In 2002, we are quickly looking at each on the care and trying to figure out now what we have been.

No. Given the contracts that we have been able to announce over the past quarter and the backlogs that we are looking out right now, 50-50 is a reasonable expectation to look at and that really is a credit to our business model that we talked about when we went out with IPO that we are getting meek in that market and we have the technology, manufacturing, and service as business that we now are able to also combine with offering capacity on the TyCom global network which will be coming online in this quarter and we are unique in that no one else can offer this full-service solution to customers and has manifesting itself and both at third party side and the capacity sales that we have been able to announce today.

Terrific. Thank you very much.

Our next question comes from Jeff Ray from Solomon Smith Burney. Please go ahead.

Hi. Good morning everyone. Just a few cleanup things. Dennis first. Could you comment on the likely trend in electronic margins as we move over the course of the year that kind of been at the same level over the last couple of quarters and I guess now moving forward, we are going to be balancing lower volumes with may be some benefits from restructuring. Should we expect margins to be able to hold here, or will they drift down a little bit?

Margins will hold Jeff, we are getting some cost reductions and doing some combinations and the cost reduction we are getting were those things that we announced a year ago or 18 months ago with the combination of AMP, Raychem and Siemens and some of the other acquisitions that we have done, but when that industry was growing at 40%, it was hard in an overheated environment to really do the right things, we needed to do cost wise, now we are process of doing those and all that will add or enhance to our margin capabilities. We still believe overall on a macro basis we roll on our way towards that 30% overall margin objective that we have set out now and that we have articulated over the last year. We continue to improve our overall operating margins and electronics will be a significant contribution to that.

And just on the restructuring, just piecing together some of what you had said Mark, so the reinstated restructuring for electronics in that quarter is something or near about a $150-160 million. Is that right?

Yes, I guess it is. So, we have got a net non-recurring of about $3.9 million during the quarter on a pretax basis.

Okay great. And could you also, Mark while you were there, the changes in the working capital items that you gave on a previous question were those dollar changes versus year ago or previous quarter?

Those would be during the quarter.

Okay.

And then that strips out the effects of acquisitions we made during the quarter as far as the acquired working capital. What it does not stripout is as I mentioned before is the Lucent business where we did not acquire those and so that ends up being a net capital investment for us.

You know that is really an important point. Because keeping in mind we did not require those receivables and sooner or later we have been fearing that somebody is going to write that receivables are up and not that we are just building that working capital for Lucent?

Sure.

Okay. And then also could you provide a little bit more color on Fire and Security, the strength of the organic growth, was it dominated by one leg or the other?

It was dominating. Our security business is very strong and it is really been dominated by our expansion into Asia and Europe. We think we mentioned that we are very nicely in North America, but we have a lot of opportunities throughout Europe and Asia to expand our regular programs and we have gone into Asia and Europe with those programs. So, it is a combination of new accounted generation and security. Some penetration of our protection services, but now, these are big service contracts, big national account marketing contracts that we have been pushing, and geographic presence in Asia and Europe. Well, the US is growing on a very robust basis to, and at the same time US is growing at a 15% rate. As you know the incremental margins there are very strong for us because we do have the infrastructure and the technology in the software are all in place to be able to have our virtual monitoring stations and to have one workstation to look through and see another and our Fire is very strong in the fire service side of the business.

Well if you look at the organic growth and we have got security north to 20 so to thinK?

I think the security is north to 20 and fire around 15.

Okay. Great! Thanks a lot.

Thanks.

Next question is from Mike Hogan with 00:49:14__________. Please go ahead.

Yeah. Two questions, Mark I am already mad and I am totally confused on the working capital issue. Could you just take every single working capital item and run through whether it is a positive or negative to cash flow truly you get to the what you said I guess it was flattish working capital, in the quarter?

Accounts receivable was a negative of $252 million.

Okay.

Inventory negative $234 million. Accounts payable and prepaid positive $342 million, and part of that those along with same lines as the Lucent receivable discussion because we did not acquire payables with that business.

Right.

And then taxes was a benefit of about $70 million.

A benefit of about $70 million?

Right.

Okay. And then on the $275 million guidance, what kind of tax rate does that incorporate? Is that a kind of 25% plus or minus and also does that include or exclude whatever contribution you get from CIT this year?

Yeah. The tax rate, Mike you are, exactly right on that the 25% is what we are looking out through the share.

And does that exclude any contribution from CIT for the year length?

Okay.

And in due course CIT in June, there will be some contribution.

Okay. Thanks.

Next question is from Heria Globlin with Deutsche Bank,. Please go ahead.

Good morning.

Hi, Heria.

On electronics, I know that you had some inventory that you got rid of during the quarter internally some that you have built in some for transition of the plants. But, how do you feel about inventories both at Tyco and about your products out in the chain?

I am sorry. You go ahead Mark.

Excuse me. We look at inventories on a constant basis, electronics obviously within the current market environment, making sure that the inventory levels are at the proper amount and that they are also valid and no recognition is used and we have gone through all that and we believe that the current inventory levels are appropriate. The build that we did end up experiencing in electronics, now talked about that on the last conference call was principally in the automotive area, where orders were canceled in the December time frame and ended up with greater amounts of inventory. We did end up eating in to that during the quarter. January continued to be weak with automotive and then we saw that come back in the February and March time frame and that really is a recognition on the parts of the large manufacturers that the volume growth, that people unit growth, that people were worried about in the December-January time frame, has not come about. So, on an inventory basis we do think we are at the right level that being said though we continue with all of our business to put in place in our new procedures, new distribution channels, information systems, to continue to bring down the amount of working capital of which the inventory is part of that we have invested in the businesses and we continue to look at seeing how we can maximize our free cash flow and limit the amount of working capital that is necessary in the business.

Great! In terms of built in some of that safety inventory as you do consolidate the plans going forward, could you give us an idea of about what dollar amount that might be?

As you look forward, there are a couple of things with the charges that we talked about related to electronics in a lesser extent flow control this quarter. There are additional items related to that, that do not get classified as restructuring charges, that will end up just being adjusted into your ongoing credit expense and we have already talked about the direction of margins we believe we can get to even given those one time cost that will end up coming through and on the inventory side as we look at the bills related to both these businesses, we are talking nowhere more than $50-60 million worth.

Great! Could you give us an idea of what the effects, impact was by segment, I know, you talked about it qualitatively, do you have the numbers handy?

Yeah. Let me see if I can find this, it was about $245 million for the quarter. It is worth saying also as you are looking at your models for the balance of the year given the fall off in the year over, that we have had and also at the end towards the end of March and into April, the average rates actually would end up being lower than they were doing our prior quarter which means that we are looking at a continued effect on the top line of about $225-250 million. If rates were to hold where they are currently versus a year ago, at the $225-250 million range and then on the bottom line somewhere around $45-50 million of impact, that is, baked into the guidance that we have already given at this point. But given the strength of the US dollar that is continuing to affect us. In looking at the foreign exchange by each of the areas, it is about $120 million for electronics, $30 million for Healthcare, $65 million for Fire and Safety, $25 million for flow control, and TyCom is only about a million, and electronics as you know was about $126 million. Looking at those foreign exchange rates, where the impact ended up coming from this quarter was Europe a little less that we had in the prior of our first quarter. However, Japan ended up affecting us greater which is why you see in Healthcare and electronics, a continued strong impact because we do have Japanese businesses in those two segments.

Great! And then finally, just to clarify the flow control. It sounds like you are taking additional action beyond the actions that have gotten you to the 19% margin you managed in the second quarter. Is that the right way to think about this?

That's right, what you think about us. As you know, it is nothing drastic now we are talking about $20 million or so, and some plan consolidations.

Great! It is still moving in the right direction.

Yeah.

Great! Thank you.

Good.

Our next question is from the line of Tom McDugles, with J. P. Morgan. Please go ahead.

Good morning everyone. Looks like a pretty good quarter here.

Better than I thought

Well, it is pretty doing good. Let us put it that way. On the large shift give us a little bit, we talked lot about electronics, but why don't we move over to Healthcare and look at the margin side of things on that business. You did mention that now and quarters in there that you have been somewhat affected by that. But if you exclude it now and ____56:08 would the margins still have been up on a year-to-year basis?

Oh! Yes. Margins would have been up higher than where they are right now on a year-to-year basis. Probably up of about 200-basis points.

And one thing that we have not talked about and we mentioned in the first quarter call and that continues into this quarter is divested share of ADT automotive which had higher margins in the segment average, you know, those are no longer a part of our numbers as far as we are reporting today, but on a comparison basis they are included and that effect has come to and then also we have had the impact of the facts that we talked about on the transaction basis where a good part of our manufacturing from the old surgical business is done in the US, we export that overseas, and it does end up impacting us on the EBIT relative to the strength of the US dollar.

What would the impact of resins be on the plastics business within that segment?

Year-over-year, we are somewhat lower, but I do not think it is greater than $10 million or so.

Okay. Shifting gears back to electronics, why don't you give us since 15% is a great number on the top line and it is going to be better than a lot of your peers and certainly a lot of the end markets that you are participating in. I wanted to get, if I could, your sense of what the underlying industry growth in the markets that you participate in and I guess what I am really trying to get to hear is what are your business leaders in that business telling you? What the market share gains are? So that if we come up with a number in the second half of your fiscal year for the industry, what it would you look like based on the fact that you cannot take some share here?

Yeah. There are number of things number dynamics ____00:57:59, one is greater product content now in some areas where there are just more content in the automotive side in a number of major accounts that we keep talking about. So, even with a flat growth, declining unit sale, we are receiving some growth within that business. If I was to guess, the overall market growth in a business, I would say it would be in the single-digit numbers, may be 6-7%. The rest of that is greater product content. It has been long-term projects; we have been working on our customer's words. It has been the opportunities we have had to turn our business from 18 months on our product development to six weeks on products. The 50 new products that we introduced in the last quarter. So, it is an aggressive approach of the market is working closely with the customers and is catching some share at the same time. So there is a lot of different dynamics and lot of tentacles to how we are being able to grow this business and how we are going after. If we were sitting here totally dependent upon half a dozen telecommunication, wireless customers it would be a completely different business for us, but we are so spread out geographically and product wise, everything from wheel chairs to automobiles to countless products here and then some of those markets are growing and continuing to grow.

Why not I ask you a question on TyCom here. The TyCom announced a $500 million buyback. You bought back 12 million shares, I guess, so far which is close to 15% I think of the outstanding. If you persuade that buyback to its entirety, it would come pretty close to wiping out the flow or at least a very good part of it. Is that your intention? Just wanted to get where your thinking is strategically on the value of having a publically traded security on TyCom?

We see TyCom when we announced our $500 million buyback as being a bargain. We found that the market price was pricing it where it is for what ever reasons. But it is secretive for us to be buying back those shares of stock we see a very healthy company with a very healthy short medium and long term outlook and a buying back of those stocks and continue to add to our ownership is just a right thing for us to do right now. Beyond that, we have no announcement intention of our plans, but I think we have taken our ownership from 86% up to about 89% right now and we will continue with the buyback program. The cash has become available since we are going to spend about $1.5 billion less on our capital expenditures over the next 20 months or so and we are going to continue to be buyers of the stock.

Final question Dennis. Just on acquisition appetite and I guess the willingness to could may be use your stock here, given the multiple, given the evaluation on TyCom, which looks very cheap to us, are you willing to use stock as a currency anywhere close to these levels, and secondarily even on cash transactions your traditional hurdle of looking at stock buybacks versus acquisitions and then the return hurdle with that has to deliver, where are you in Natal Dynamic?

Our stock is cheap to you as our acquisitions to you. Right now, we agree with you and in the use of the cash, there are considerable opportunities out there in the Healthcare business, a little bit in the electronic business, where pricing is lot more rational and some opportunities in the Fire and Security businesses. So, you will be hearing from us on acquisitions and I am certain you will hear a few things before our next conference call.

Thank you.

And they will meet our objectives of being experiencing worth more than two times buying back our stock even at these prices and we will have long-term standability and meet all of our hurdle race.

Thanks.

Thanks.

Our next question comes from Fred Willard with Buckingham Research. Please go ahead.

Good morning. Wonderful quarter. Just on the sort of sketchy outline for next year you traced through. If you would have to look at a flat electronics, I assume it to be your 5% electronics growth next year. There is a little acquisition carry over. Are you sort of suggesting you know sort of no organic growth as a possibility?

No that is in a long time, you know what I am trying to point out here is, you can take a pretty dismal economic scenario here and poke away on our numbers in different models and a reasonable person will come out with a pretty good year for us next year before putting to work here any of our cash flow for acquisitions or stock buybacks or anything else. What I am trying to point out is that we believe more we know right now there are very good opportunities for us not only to make our numbers this year now with some possible up sight, but next year also looks good for us too.

In so far what I would have summarized something different for electronics likely to come up with the different answer in terms of the earnings.

In fact, I will the leave the one on electronics and you hear that 5% number.

I do not need it.

As you know obviously before the cash flow contribution which would be certainly added to that number and I assume CIT is not included in that.

No. CIT is not included. As you know, we only have in ___ 01:03:58 calls.

The electronics flatness in the second half. Does that get us to a 12-15% organic growth for the year for that business? I am having a little trouble making that work.

No if I take recurrent sales base extend it for the rest of the year.

It just works to about 11-12% for the year.

Okay. Terrific, great quarter.

Thanks. And we have time for one more of one minute question here?.

The final question this morning comes from Robert Cornalis, with Lehman Brothers. Please go ahead.

I promised. I would get back to you on cash flow Mark. Could you take us through the summary cash flow that you usually give for you know appreciation and amortization, working capital, gross restructuring expenses and so forth and take us down that sequence of numbers?

Yes. We had this quarter $ 1.1 billion of income.

Right.

The appreciation was about $323 million, amortization of goodwill and other intangibles were about $214 million, and we have not talked about that but with the new proposed ____01:05:10 that is coming out. Our earnings this quarter would have been about 10% higher. People looked at us on a cash flow basis it works out to about 6 cents.

Right.

And then we also then end up going through below that how each of the individual working capital changes that we talked about previously.

One thing you did not say was the restructuring cash out.

Oh. I am sorry. Yes. That ended up being I believe $44 million during the quarter and for the balance of the year, and which what we announced today we think for the full year it will be about $175 million.

So, that brought the operating cash flow in the quarter to a billion one.

Operating cash flow was $ 1.619 billion and then we have capital expenditure of $ 459 million approximately.

Dividends 22?

I am sorry. Let me correct that I missed that. It is right over $510 million of capital expenditure.

And dividends 22?

Exactly. To get down to free cash flow of a billion and 84.

Then the cash out on the purchase acquisitions?

We ended up cash spending for the quarter I believe was $120 million. I am trying to find that right now for the quarter and it is right now on a $150 million.

Okay. And then the TyCom Global network spending was 4. You mentioned that was 4.

Yeah. $ 439 million.

Okay. We will put it together. Thanks everybody.

Thanks.

I appreciate the long call. Thanks very much.

Okay. It is a recap here. We are very pleased with our earnings increase of 30% from last year and our revenue growth of some 25%. Overall Tyco Organic growth is some 13% and free cash flow of $1.1 billion. We felt that it was a strong quarter. We anticipate a strong earning to the second half of our year and our outlook for next year at this time continues to be good in spite of the various economic conditions that are going on around the world. Thank you for your time and attention today. Have a good day.

Ladies and gentlemen this conference will be available for replay beginning today, Wednesday, April 18, 2001 at 12:30 PM Eastern time and will run through next Wednesday April 25, 2001 at midnight. You may access the AT&T executive playback system by dialing 1800-475-6701 or 320-365-3844, and for either number and to the access code 577-785. That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect