江森自控 (JCI) 2001 Q3 法說會逐字稿

Ladies and Gentlemen, thank you for standing by. Welcome to the Tyco third quarter financial results teleconference. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session with instructions will be given at that time. If you should require assistance during this call, please press 0 and then *, and the operator will assist you. As a reminder, this teleconference is being recorded. I would now like to turn the conference over to the Chairman and Chief executive officer, Mr. Dennis Kazlowski. Please go ahead, sir.

Good morning everybody. I am here today with members of the senior Tyco management team including Mark Swartz, Jack Blackstock, Michael Robinson, David Burton, Mark Belnick, and others and we will all be here to answer your questions once we get through our prepared remarks. I would also like to point out that during this call, we will be providing forward-looking information. I suggest that the listeners refer to our earnings press release for cautionary language concerning forward-looking statements. This morning, we announce that our earnings rose 24% during this fiscal third quarter to $0.72 per diluted share compared to $0.58 last year. Our results are a bit better than we had previously projected and more importantly demonstrates the benefit of out long standing strategy to expand our base of the coming service and non-typical revenues. During the past eight years, our management team has worked to increase the proportions of recurring revenues to nearly 40% of our total sales from less than 10% about eight years ago on a sharply increasing sales basis. Similarly, we have expanded our economically intended in sensitive health services such as the unaccounted have 25% of our revenues compares to less than 5% some seven or eight years ago. This strategy is now paying us and allowing us to deliver strong growth in a somewhat lousy economic environment. Revenues increased 25% versus last year to over $9.3 billion. Organic growth, excluding TyCom, was 6% for the combined company with a 17% increase at fire and security, and 8% increase at healthcare more than offsetting a 5% decline at electronics. Profit margins increased from 22.2% from 21.6% with improvement in all segments of our company, except electronics. Free cash flow, which is defined as operating cash flow after tax paid on restructuring items less capital expenditures and dividends rose $1.5 billion for the quarter compared to $907 million last year. During the first nine months, free cash flow totalled $3.1 billion representing 89% of net income, which compares to 72% last year. I would like to note that the $1.5 billion of free cash flow excludes the operating results of CIT and as before, $633 million of spending on the TyCom Global Network, keep in mind that we raised $2 billion in the public offering to pay for the TyCom Global Network, which we do not include to our free cash flow. The network remains ahead of schedule and is under budget. Foreign exchange negatively impacted both revenues and income. The top line was held back by about $240 million or nearly 3% due to the strong dollar and income was negatively impacted by about $48 million or roughly $0.02 a share, due to a very strong dollar. Our tax rate in the quarter was 23.4%. This brings our year to date cash rate to roughly 25%, which is comparable to the nine-month period last year. Our tax rate is declining due to a combination of the geographic source of income as well as our weakened equity issuance. Note that our cash tax rate is approximately 12-13% and remains over 10% below our accrual rate. Our net income of $0.67 for the quarter, which includes $0.05 of non-recurring items, is primarily to write off our equity in 360. It will also includes a gain in our TyCom’s staff to flag and some acquisition expenses related at fire, that is probably geographies I write off of our equity of 360, that we thought we are going to have a gain of a billion dollars a year ago at this time before the markets changed.

The outlook for continued growth at Tyco was excellent. Based on the business trends we see today, we remain comfortable with our previous guidance of 277 to 278 for fiscal year 2001, that is primarily because of the recurring revenue, healthcare, and service businesses that I emphasized earlier on. Looking out to 2002, while it may be too early to be precise, we believe that 345 estimates is quite reasonable. When we go of to free cash flow, our previous guidance of $4 million for 2001 now appears to be too conservative and I would point toward a higher $4.3 or 4.4 billion number. We are confident we can grow our free cash flow by 20% next year to exceed $5 million, and some of that is coming from some reduction in working capital specifically on the electronics side of the business. There appears to be a fair amount of uncertainty in the market regarding the orders for corporate earnings in general and especially for companies exposed to the electronics industry. Our confidence in our ability to grow earnings in cash flow next year is based on our mixture of businesses, continued cost reduction efforts, likely go through the recent acquisitions and our large amounts of free cash flow. Let me be a bit specific, in our business mix nearly 40% of our revenues now come from recurring and service operations such as AGT, fire contracting, and municipal water maintenance and operations. These businesses are generating organic cash flow of a robust 15-17%. Another 25% of our revenues come from the non-cyclical healthcare division where organic growth runs 8-9%. Cost reductions, when we commenced on scale will help us continue margin expansions next year. We are aggressively cutting costs in our electronic operations as we implement the planned consolidation and rationalization actions, which stem from our merger of AMP, Siemens, Reagan, Thomas and Betts, and others. At the same time, other units such as AGT have very high incremental margins, which compound a strong organic growth.

We have invested $0.18-0.23 per share of earnings accretion that we expect to materialize large from acquisitions we have already announced. Included in this number, is around $0.10-0.12 in CIT, $0.03 from security link, and incremental $0.02 from Simplex, and $0.02 to $0.03 for a number of smaller deals. Bard today had another $0.05 depending upon when the deal closes. In free cash flow, our current free cash flow was used solely to retire debt. We will add another $0.11 per share to earnings. We believe that these factors will more offset the likely decline in electronic revenues and profits over the next number of quarters. I also want to provide some sensitivity analysis here that run our 2002 earnings guidance because, our crystal ball for electronics is probably no better than that of our customers or our competitors. The $3.45 number for next year beginning October 1, 2001, assumes that our electronics revenues decline year-over-year at mid teens during the next the next three quarters with comparison moderating, against the first 2001 numbers at the end of next year. This equates to a 67% decline in 2002 electronics revenues. Were electronics revenues to decline at a sharper 15-16% rate, assuming rollouts remains equal, we believe that our earnings growth should be around 320-325 per share next year. However, on the other hand, with the electronics markets return somewhat positive during the March quarter, we see a comfortable amount of upside in our earnings to the 360-365 levels. So, what we are telling you is from all we know today is that we are most comfortable at the 345 levels if things get considerably worse we do have some downsize in the 320-325 side, as things get a tide better we do have some upside to the 360-365 levels. So, it is our very best estimate that we can come to you with, at this time.

Now turning to acquisitions, the only lining in the current economic melas is that some new opportunities are becoming evident, our pipeline of potential deals as well. And, results from recently completed deals such as CIT, SecurityLink, and Scott remain very, very much on track and we look forward to closing the C. A. Bard acquisition during the fourth calendar quarter. I want to leave as much time as possible for questions, so I will briefly highlight the business segments. First, as we indicated in previous conference calls, the flow control segment is no longer broken out separately. Instead flow results are split roughly two-thirds into fire and one-third into electronics. We are required to make this change in reporting to match the change in the way we manage the businesses. For what it is worth, organic growth at the whole flow business was roughly 9%, led by Earthtec 00:10:08 and energy and power markets. In electronics, revenue increased 8% to $3.2 billion as contributions from acquisitions offset a 5% organic decline in sales. The re-segmentation of the former poor-revenues into this segments had no meaningful impact on the comparisons. The North American market continued weak throughout the quarter. However, we saw the weakness spread to Europe late in the quarter as June results fell. From an end market stand point, Tel Com clearly remains the most depressed although there is a weakness in computers, consumer electronics, and some industrial markets. It is note worthy to point out that the automobile sector continues to post healthy growth. Earnings increased 8% primarily due to cost savings and consolidation benefits that are now materializing from actions taken early in the year. If you remember, we noticed the downturn last December and immediately took actions to reduce our cost at that time. We have had more actions in process that should allow us to continue to mitigate the effects of the revenue slow down on our margins. In addition, to cost cutting activities, we continue to drive new product launches aggressively including high-speed connectors for the TyCom market and Sensor systems for our automobiles. We believe that this is allowing us to gain market share and combined with the cost reduction that these are very, very well positioned to weather the downturn and benefit from the eventual, whenever it may come, rebound in demand.

In our healthcare specialty markets, revenue was up to 38%, which include the impact of Mallinckrodt. Organic growth was 80%. Revenue rose in virtually all products and geographic line led by surgical on the products side and sales outside the United States of America from a geographic standpoint. Remember, too that last year’s figures also included the $134 million of revenues from hotel options, which were sold off last year. Profit margins increased by 160 basis points sequentially and 50 basis points year-over-year to 23.9%, the continued integration and cost rationalization of Mallinckrodt was the key in this improvement. We remain on plans to reduce annual costs, at the yearend by over $300 million. Margins also benefit from lower raw material places. On the other hand, foreign exchange margins at this segments since it is very large exporter from the US. We expect this segment to sustain an 8-10% organic growth rate given its lack of economic sensitivity. This combines with the continued integration in Mallinckrodt and a planned acquisition of CR Bard, points to a very strong fiscal 2002 for this segment. In fire and securities, revenues rose to 27% to nearly $2.7 billion with organic growth at a robust 17%. The pace of new account growth and security was very brisk. Our base of monitoring accounts expanded 18% in the quarter, which rose very well for the pace of revenue growth in our upcoming quarter. Fire continues to enjoy an expanding market growth both here and all over the world. The integration of Simplex time recorder added to revenues and offers opportunity to expand our markets. Earnings increased 38% to $510 million. Margins increased to 19% from 17.4% last year due to the high incremental margins in the security monitoring business, they continue to shift the mix in the fire business toward more recurring service revenues and cost synergies from recent acquisitions. The second results included $686 million of revenue from former flow segment. On an apple-to-apple basis, excluding the flow business in traditional fire and securities business posted 17% organic growth as we spoke about.

And finally, you may have seen an article in the USA today regarding Central Sprinkler. The article contained some inaccuracies. We had commenced a voluntary replacement program with the CPSC, which began last February. This voluntary replacing program is not a CPSC recall of products. This program has been announced tomorrow in conjunction with the consumer product safety commission and they are helping to coordinate the program with us. The key facts of this; we discovered a problem in Central older holding design that may make the product require increased water pressure if certain situations arise. Those situations are corrosion of water in an environment, which can affect the old ring and as a result increase water pressure needed to release the old ring and allow water to flow. In the old Tyco products, we do not use old rings. We immediately shared our concerns with the authorities and we are planning on replacement of all of these heads. These are not defective heads and this deterioration takes place over a very long period of time. The cost of the replacement program is already provided for in our warranty reserves. So, we will have no impact on our earnings. We expect the program to consume about $40 million in cash per year over the next five years or so. On CIT, we are off to a fast start with CIT. CIT is somewhat different company today that it has been two months ago. The unit contributed about $0.02 per share to Tyco’s during the month that we winded in this quarter. We have already sold $2.6 billion of the $4.5 to 5 billion of non-strategic underperforming assets, which we outlined to you in the diligence process of CIT. $1.7 billion has been sold off for manufacturing housing, $600 million for the driller business in UK, and $300 million for the Canadian retail and inventory financing. The proceeds from these sales were in line to our expectations and reinforces our confidence that we will be able to exit remaining non-strategic assets as planned. We see more opportunity in each to eliminate duplicating costs and realize greater efficiency at CIT. When we first announced the acquisitions, we spoke of about $30 million of cost reduction. We now believe we can reduce annual cost by a $100 million and this program will be completed now within the next 30 days. We expect to see the savings to get materialize next quarter.

CIT has already committed to close to $300 million of Tyco customer-related financing and we see the opportunity to credit to expand very substantially. The transactions are high-credit quality including finance communications systems to municipalities, leasing healthcare products, and funding AGT Security Systems with many, many more opportunities to go. CIT management group is being supplemented by three key Tyco managers, who are working closely with our camper in this team in order to improve the CIT results. In addition, at the same time and importantly, CIT is getting more conservative from a balance sheet perspective. An average drop fell to 8.3 times equity and from 8.4 times in March and the loss reserve increased to 1.5% from 1.39% in March. The opportunity to reduce marked cost plus the incremental benefit we expect to gain from a more conservative balance sheet at CIT, make it desirable to us to increase our capital injunction in the unit. We have now spent $275 million of $300 million we originally estimate and we believe that there is a greater opportunity to continue to accelerate CIT’s balance sheet improvement with the injunction of another $400 million. Looking out to fiscal year 2002, we believe that CIT is likely to nicely exceed our original expectations of around $0.10 per share of accretion increasing in its first year with Tyco. However, note that these quarter results are somewhat of an anomaly given that CIT typically generates nearly half of its earnings, if you were to go back and track CIT’s earnings on a monthly basis by quarter, it typically generates nearly half of its earnings during the last month at any given quarter. CIT will be hosting a fixed income oriented conference call at 12:30 PM today to review its results in detail. Naturally, the call is open to all.

Our final segment, telecommunication, TyCom continues to be a positive standout in its sector. It is operating in a somewhat of a difficult neighborhood now, but are housing. It is certainly the most attractive on the street and is very much in order. The company reported earnings this morning at some $0.23 per share. TyCom will hold a conference call at 10:30 this morning to discuss the results in detail. However, let me give you some of the highlights. Results were $0.09 above expectations with roughly half the upside coming from operating results and some from a lower tax rate. The company led the Atlantic leg if its network a month early and already generated $35 million of capacity revenues. TyCom plans to its first upgrade over the Atlantic system early 2002 and is on schedule and under budget, so too the Pacific leg late this year. Third party revenues total $530 million down from $638 million last year as TyCom continues to evolve from a pure contractor into an owner operative Global Network. Manufacturing capacity continues to be allocated away on third party markets to continue constructing the TyCom Global Network. The outlook for third parties contracts however, remain strong including the can of hired projects, that backlog will total about $4 billion.

We expect to get both contracts finalized, during this quarter. So in summary, this is a very good quarter, despite a tough market in electronics. Earnings per share increased to 24%. Free cash flow per share increased 65%. Organic revenue growth was 6%. Based on what we see today, we are confident that we will meet our 277 and 278 earnings guidance for this fiscal year ended September 30, 2001, and we believe 345 is a reasonable estimate for our next fiscal year of 2002. With that, I would like to open up for any questions that you may have.

Thank you. Ladies and gentlemen, if you wish to ask a question, please press 1 on your touchtone phone. You will hear a tone indicating that you have been placed in queue and you may remove yourself from queue at anytime by pressing the pound key. If you are using a speakerphone, please pick up your handset before pressing the number. Once again, if you wish to ask a question, please press 1 at this time. The first question will come from Jack Kelly with Goldman Sachs. Please go ahead.

Good Morning Dennis, a nice quarter. Could you just double back on your comments about the sensitivity on electronics, what you are assuming in the 345 is a decline of 6-7% in revenues over the next three quarters. If you decline 15% over the next three quarters, I guess should get 323-325. What get you to the 360-365 Dennis, is that a kind of a flat year in electronics.

That is a kind of flat year, in the second half of the year that may be over 5% improvement, Jack.

Okay.

And 5% over where we are now, so we will get back what we gave in the last quarter.

And then just in chance of electronics in June, just to give us a feel, would it to be of 5% organically in June for this quarter, I should say, it sound like June might have to have been of about 30% bases on what my impression of April and May. Is that accurate?

Yes Jack, this is Mike. When you look at June versus the first two months of the quarter, there definitely was an accelerated softening not dissimilar from what we saw during our first fiscal quarter in North America where October, November, and then December we immediately saw, people are concerned and a reduction in sales. It is not quite to the extent that you are talking about, overall we were down around, it looks like 15% during that month.

And just finally, the organic growth in fire, you mentioned security I guess was up 18%, in terms of accounts, just kind of organic growth from fire separately and securities separately.

The organic growth in fire was 17% for the quarter and it’s probably two-thirds security and one-third fire.

Okay, so the organic growth in security they are both coming in line with one another, fire and security organic growth both in line with one another.

Pretty much like that.

Thanks.

Thank you. Next question will come from line of Harriet Baldwin from Deutsche Bank. Please go ahead.

Good morning. For the electronics, and the outlook for next year, could you talk about the margins assumptions? It sounds like there may be some additional cost saving opportunities. Is that built into the downside risk or is that assuming that you don’t get any additional cost risks or other.

We are planning on cost reductions. From back when we first purchased and for those of you who may remember this, where we came around the 5% reduction in sales over a couple of year period of time and we are going to cut the foot print of the business to do that. At the time, we never fully implemented those plans, because the markets surprisingly became considerably more robust than we did the acquisitions of Reagan and Thomas and Betts, and Siemens, and others. But we are looking at some capacity we are expected to take out costs. The margins could be down a little bit but they will be offset with further cost reductions. Right now, as we speak now we are doing some planned combinations and taking out some capacity. However, leading us comfortable room to be able to be in a position to grow and should be able to service to customers when this does turn around and pick up, because it will, we just don’t know when, if it is six months from now or 18 months from now. So that’s a kind of what we are looking at.

Right. And on the upside for electronics, is that assuming the benefit from higher volumes or is that assuming the end margin would be, whether it would be flat at 340 or 345.

It assumes that if the volumes went up a bit that would you give a little bit more absorption and we would pickup a little bit on the margin size.

Great thanks. And then on the healthcare side and you have mentioned that the growth outside the US was growing nicely geographically and also that you still have a lot of export out of the US. How do you feel about your manufacturing base geographically, is there something you are looking to do more in local manufacturing?

Yes, we continue to look to be able to pick up and increase our manufacturing base out side the North America. So, that we have some natural currency hedges. Just to say what we are likely to do in most of our other operating businesses?

Great, and then one more question Mark. In terms of the strong cash flow … it looks like that has continued to get down. What do you think interest might be for the fourth quarter and the outlook to 2002 for expense?

When you look at our interest for Q4 probably around $225 million or so and that’s up a little bit from this quarter given that we had the Cambridge acquisition of security link closing right at the beginning of July, which was not included in the prior quarter numbers.

Right, and then for 2002?

Right now, we have been looking at 2002 probably just under a billion. Actually, on a net basis, we have the receivable program that we include the interest for that, but on an overall basis around $800 million or so.

Great, thank you.

thank you. Your next question comes from the line of Terrene Kahana, with Wellington Management. Please go ahead.

Dennis, could you give us some color on the tax rate, you know, tax rate was lower. What your expectations are moving forward and also in terms of free cash flow, you know, if they are planned to kind of grow free cash flow in line with net income I did see the I guess the statement that free cash flow should be up 20% and where, I guess, are the sources of incremental cash flow as we look ahead.

I will have Mark talking about the tax rate Terrene.

Okay.

The tax rate this quarter here is little over 23% and year to date, it is 25% which is right in line with where we were a year ago at this point in time. As we mentioned on the last conference call, as a result of the earnings and where they are coming from within the various geographies within which we operate and also the increasing strength of our balance sheet we have had a ability to reduce our cash payments before taxes and also our accrual rate. As we look out for the balance of this year and into next year, we continue to see the opportunity for about another 100 basis points of improvement in the tax rate as we go forward. And just talking briefly, about TyCom where we also mentioned their tax rate was down and that had an effect on Tyco at the same time … it is the function of the capacity sales that TyCom began during this quarter and will continue into the fourth quarter and when you look at those capacity sales coming in and the percentage of earnings those are taxed at a lower rate given the location that we end up earning those revenues from and that TyCom benefit rose through into the Tyco results.

And the pre-cash flow was in excess of our net income, but some of that was coming from some reductions of working capital that you would expect as we manage our inventories tight and receivables tight in the electronics business, where the organic growth is down a bit.

Can I ask one followup question in the interest cost … you talked about for 800 million for next year. You know, if we do have further reductions in interest rates, is there a significant opportunity to refinance as you did earlier this year with Lions and some other financing that you did?

Yes, and we tried to work towards the 50-60 short and long ability to float and we would be able to see those benefits as rates were to come down.

That would definitely be a positive for us … some reduction there in interest rates.

Thank you very much.

Thank you. Our next question will come from the line of Brian Langenberg with First Union. Please go ahead.

Thank you … just a couple of _____00:30:40. 1. Clarify for us, Mark, when we talk about 100 basis points of improvement in the tax rate, I do want assume … is that off the 25% or is that off the 23.5% we had in the quarter. That’s the first question. 2. Can you talk about other equity investments you have in Tyco ventures, other parts of the company talk about fair market versus carry and if we are going to see any more write offs.

On the first question, related to taxes that would be looking at the ability to have up to a 100 basis points reduction in our tax rate on a cumulative fiscal 2001 year enrolling into 2002, and then as far as our venture business, we did end up having largest component which was 360 and that was extended as mentioned earlier that a year ago, at this time, we had over a billion dollars of unrealized gains. We did have a cost basis in excess $120 million that we did end up go ahead and of course rode down and rode off at the time that chapter 11 was filed up 360. The balance of the portfolio within Tyco is a couple of million dollars. The bulk of those that we have gone through have ended up marking them to markets, most of them are private and we got the best information we can, and the average investment size is around $10-12 million. We do believe at this point, the value that carrying them out in that we have built up the reserve and written down the carrying value is appropriate given the current market conditions. We also, prior to that, we have not been over the last six months putting additional money into the venture capital area and more just actively managing our existing investments, which are related to principally the healthcare area and also the electronics area.

And then just briefly, on your printed circuit group, you talked a little bit about price pressure on board and change in demand for that sub piece of electronics …

The demand is down a bit on the present circuit boards, within our higher end prototype boards, there is down a whole lot of pricing pressure Brian and we are still seeing customers in aerospace, customers in computers and others who are working closely with us in developing new products, but not developing as many as they had been in the past. In our present circuit board business, the quality of the product, the reliability of the product, quick turn around of the product is more important that the pricing side, because we are a bit more complex higher end boards.

Okay, thank you very much.

Thank you, and our next question will come from the line of Mike Coleman with _____00:33:43 Price, please go ahead.

Good morning, one clarification question, and then a second one … what are your expectations for the tax rate for 2001, Mark, and then the second bigger question is that could you talk about the purchase accounting charge that you took for the CIT deal and kind of quantify it and breakdown the components of it?

Sure, 2001, again Mike, were looking up to a 100 basis points on a year to date basis, which would mean that we would be somewhere between 24% and 25% in the tax rate and that is a sustainable reduction as we have been bringing it down over the past few years and we will continue into 2002 looking forward.

That’s an important point Mike … that’s a long term and sustainable rate. So, we would be going to that rate for a number of different benefits that we have here and we will be staying at that rate.

Okay, I just wanted to make sure, I get this clarified, it will be somewhat between the 24 and 25 for all of fiscal 2001 and then you could see some improvement form that in 2002?

That’s correct.

Okay, and then on CIT charge.

Correct, on the CIT charge, we had at the CIT level $54 million of Tyco acquisition deal costs, which are banking fees, legal, and other professional fees that you could expect related to an acquisition and then on top of that we ended up having approximately 148 million pretax or 92 million after tax and those costs were viewed during the month of April and May and it was related to the telecom market and the decision that was made at the time of ht Tyco acquisition when it was announced that CIT would be getting put of some of the under performing assets that Dennis spoke about earlier, and as part of doing that we ended up looking at the carrying value of the assets … both the equipment assets that were out there and also looking at the investment that had been made over the past few years. And then the other piece of what was reflected in the opening balance sheet when you go ahead and end up fair valuing the CIT balance sheet and I think its worth a bit of explanation in the CIT presentation, April and May is prepared under predecessor accounting which is a historical cost and then effective with the June 1 acquisition by Tyco, CIT was required to go ahead and fair value the assets and liabilities on the opening balance sheet and that includes going through all of the assets and also the liabilities including debt instruments ands also other accrued liabilities such as pension liability and marking those to markets, and the net result of that ended up being approximately $550 to 600 million.

Okay, and then thinking about at going forward for both the, I guess, the cost savings opportunity talked about as well as the sale of the rest of the underperforming assets. Will there be additional charges for that, accrued kind of in the quarter that has been done or those all in …

The bulk of those for the ones that we have talked about at this point in time, and have announced the sales on and also to extent when I mentioned the assets that we wrote down in the April-May time period, those include the future ones that will be sold, and there could continue to be under fared value or continue to refine the opening balance sheet some movement, but it would not be immaterial.

Okay, thanks.

You are welcome.

Our next question will come from the line of Michael Regan with CS First Boston. Please go ahead.

Thanks. Just looking for some more detail on free cash flow market. What was the capital spending at the investment TyCom network for the quarter?

May be, what I will do is just run through the reconciliation from net income down to free cash flow.

That could be even better.

Okay, we start with net income of 1216 and another explanation now that CIT is part of us and we did pick up CIT during the month of June as I mentioned. There was $71 million of net income, however, we do not include that in the free cash flow as CIT is a separate public _____ 00:38:45 due to the debt. So, $71 million reduction, depreciation was $298 million, amortization of $150 million, capital expenditures ex TyCom global network $457 million, dividends of $22.1 million, restructuring cash spending of $58 million, with chance of other working capital reductions in total were about $380 million. And we would just break that down a little bit. We did have - as we mentioned earlier - the difference between our tax accrual rate and our cash taxes paid, that was a $105 million of that networking capital …

So deferred tax provided $105 million?

Correct.

Got that.

Which leaves us at that point around $275 million of working capital reduction.

So, that’s kind of a core working capital reduction year-over-year?

Right.

And then, I know that we have got lot of questions about tax rate, but exCIT, which has an abnormally high tax rate … the ongoing operations of Tyco where taxes were down to 28%. Can you talk about taxes going forward excluding CIT because we are going to be able to see both of those?

Correct. And the effective differential that I am talking about as far as the additional reductions we have is Tyco as reported and also when you end up looking at the continued, realize CIT is a percentage of Tyco, continues to be a relatively small percentage less than 15%, so that 100 basis points improvement that we are expecting that as you roll it through into the Tyco side ends up being very similar, I mean it does not move more than 15 basis points.

So, it is still a sort of 100 basis points all sort of core Tyco exCIT?

Right.

That’s what you are describing?

Yes.

And what was the reason for the unusual drop from sort of the 25 rate we are at the 20% 20.8% in the quarter?

Two things. Originally at the beginning of the year, we were accruing at a higher than 25% rate, based on expectations in the forecast at that point, and also looking at goodwill amortization and the net effective rate that we will be reporting. As the year went on, and as we have talked about as we move forward, given where the earnings are coming from at this point, also the goodwill amortization number which as we look at, that’s the one area that as you do a forecast, we do assume acquisitions, because we are supposed to go with the assumed rate for the full year. And when you look at the actual goodwill amortization that we had for the year, that ended up giving us a benefit and then the third part of it is the TyCom effect where we did not end up factoring in the benefit that we end up getting on a tax rate for the circuit sales up until we began having circuit sales which did begin during the third quarter as talked abut earlier and will continue into the fourth quarter and become a larger percentage.

Got you so, catch up in the third quarter, is the abnormally low rate and then for the fourth quarter Tyco exCIT … somewhere 23.5 to 24, is that rate you are thinking about it?

Yeah, I think it would be right around the 23.5% or so.

Perfect. Thank you.

Thank you. Your next question will come from the line of Phua Young with Merrill Lynch. Please go ahead.

Good morning. Could you talk a little bit about the capital expenditure expectations for this year and next year?

Capital expenditure is for the balance of this year. We would expect Phua to probably see about another $450 million and then as you end up looking forward into next year, slightly in excess of $2 billion on the capital expenditure side. That does exclude the TyCom Global Network, which we had spoken to earlier for 2001 and then when you end up looking at 2002 we would end up looking at around $1.8 billion.

Okay, and then probably a different topic. I think that you mentioned as three people from Tyco at CIT now. One is Brad, who are the other two?

If remember, we have Richard Kashnow, who has done some work for us over here and we have a person over there who does some analysis on acquisitions on models and all that and other people are in and out coordinating things for Michael Robinson, who moved from our insurance group and they are all working with _____00:44:00 and Joe Leone and the senior management team. Are you interested in the job Phua?

May be.

Okay.

If you realize, that is not just not only three people who interface with the CIT management and divisional folks, that’s going on throughout the Tyco organization both from the customers side, where we are putting the financing in place and also just a overall integration and work over there we have going everywhere from the treasury side and their expertise on the CP side to other areas such as risk management and finance. So, there are many, many people throughout the organization who are working closely together.

And it has become a good blend of cultures and ideas and the integration is working exceedingly well and we have been working with a very open management tam over there and ideas have been traded back and forth and the net result is lower cost, accelerating the non-performing assets cutting a lot of business at Tyco and this gives a lot more opportunity in AGT and lot of other areas for us. So, we are ahead of any place we could possibly be at this time.

Okay, and switching over the electronics for a second, new product as percent of total sales this year, expectations for next year? I am just trying to get a sense of what that flow looks like?

Yeah, probably about 20% this year Phua and probably as much as 25%, next year or even 30%. There is some really exciting things coming off the boards for next year.

Assuming that contract _____00:45:44 speculation out there in terms how you get to your numbers that you are not getting back on R&D spending and things like that …

Absolutely not. I don’t know where that speculation comes from, but nothing could be more wrong, more than that. We are spending more on R&D and all of our businesses that share and you see the results in our healthcare business, our fire and security business and certainly in our electronics business. If you could you just detour the facilities I just came back from pretty extensive trip in Europe, we have seen some very, very exciting processes going on in automobile technology, 3G technology, and the telecommunications side, centered technologies, working closely with customers on new generations of relays and working closely with _____00:46:33 and BMW and others adding a lot more products to automobiles. We are definitely meeting the way we are stepping out and putting a lot of emphasis on product development throughout the company and we will be leading the way with new products and one thing has get better again in the market places, we will have the capacity and the _____00:46:58 to really do very, very well out there. I think, the point of the whole conference call today is to one take away is if things get down in electronics at that 5,6,7% level or high double-digit levels we are going to do okay … we are going to make our numbers. If they get a lot worse, there is some down size, but we will still have a good year compared to others. If they get a lot better, we are going to get a bang up here, and that’s the way, we develop this company, that is when we looked at it years ago, when we came out of recession, and said lets get a company that can give us sustainable growth through various economic scenarios, that can give superior growth, when things are really good. So, we wanted to be reliable and consistent with our earnings and that’s what we have and this management team has structured here.

Thank you and one final question. In the cash EPS, what that might add back?

Year-to-date, if we were under the new _____00:47:53 with goodwill amortization the rules for that, it would be incremental $0.22 through the nine months and this current quarter would have be an additional $0.08, when compared to the $0.72 reported than the $0.80 report in this quarter. So, it is right around $0.29-0.30 on a cumulative basis as we look forward.

If you are growing at about a calendar rise rate of $4 by 2002 numbers at this point in time.

That is correct.

Thank you.

Thanks a lot.

Thank you. Our next question will come from the line of Bob Cornell with Lehman Brothers. Please go ahead.

Good morning everybody. There has been lots of talk about the electronics business, but I wonder if you could just sequence us through, Dennis and Mark, you talked about, as Marki said, June was down 15% and then Dennis you talked about in the base case looking at mid teens declines for a while and then about 6 or 7% drop for a year in the base case. Could you just flush out that scenario a little bit and also I think someone asked about margins on that regard. So, give us a little more view on the base case … how we sequence going forward from here …

Look, what we said Bob is … if we would say the mid teen shop in the next two or three quarters until we got back, say 15-17% in the first quarter and second quarter, then we were flatter down 5% in the third quarter and then because the fourth quarter was already down somewhat and that would be up 5-11% through that fourth quarter. That’s far from stellar performance, I mean, that is operating at a pretty low rate, far lower than the industry is operated on since the industry _____00:49:48 industry. So, those are the numbers that we looked out there for that kind of really negative kind of case.

And how did margins tracks go down, sort of, double-digit for a couple of quarters, then track up possibly in the fourth quarter versus again as you compare with this fourth quarter.

Well, cost reductions offset some of those margins decline, you lose some on absorption, but you pick it up on the costs side.

So, you are looking for flat margins of electronics relative to the current quarterly performance or you are looking for _________00:50:22 quotation.

Slide it down to a 100 basis points. Overall flat that vary a little bit it is kind of mixes and things like that, and it is really lousy scenario that we pointed out here.

I know you guys were looking to talk about TyCom in a great detail before the conference call, but 35 million in circuit sales in the quarter … how does that match your expectation?

It probably exceeded our expectations on this quarter. We are bullish on that side of it … we see some good thing happening and I think the guys from TyCom will be able to improve on that, and we think that some really good things should be evolving over the next few weeks.

There is some good capacity sales in backlog that will be speaking of also which should people give comfort on the fourth quarter numbers in the increasing capacity sales that we have been talking about for the past year.

Okay, and just over these are some of the offsets marked the 360 write off, I think it is the gain on the sales subsidies to your security, what is on those offsets?

There are two things, one is the TyCom flag arrangement where we ended up selling TyCom shares and require to record the difference between the market value and the underlying cost basis as they gain and of course we treated that as a nonrecurring gain, and then the other aspect around $ 14 million is related to acquisition charges at the fire protection and security group. Principally, we ended up closing during the quarter, stock and when we announced stock we also announced that we would be closing a Tyco facility where manufacturing previously had taken place. With that given that it is a Tyco facility, and not an acquired facility it does not go into purchase accounting, but it is a non-recurring charge for and that’s where you see coming through and also a piece of that did end up going to cost of sales and the reason for that is under purchase accounting, you end up going ahead and valuing your inventory up to a level of that only that recognizing a small selling profit on that, but not the manufacturing profit and we require to do that at the time of acquisition.

Thank you everybody.

Thanks Bob. We have time here for one more question that to be asked. One last question please.

Thank you. Our last question will come from the line of David Bleustein with UBS Warburg. Please go ahead.

Good morning. Following up on Mike Coleman’s question, you mentioned a $550-600 million net adjustments at CIT, could you break that down between the adjustments to the assets side of the balance sheet and the liability side?

You know, I don’t have that with me unfortunately right now. I would say more than 50% ended up coming on the asset side of the fair evaluation and we will be able to work that through with Jack, Cathy, or Sherry can get to you that detailed information and we will also be talking about that later on today on the call.

Okay, and then what would CIT’s earnings have been if no adjustment if fair market value is made or where there has been no change.

It would have been a marginal difference. And as I think through right now for the month of June, it would have, I think the benefits that we ended up getting as far as taking care of some of the fair valuation issues was offset by the increased goodwill amortization that ended up being picked up as a result of our purchase and incremental goodwill versus what had been carried by CIT previously.

Okay terrific, thanks guys.

Thank you very much for your time today. In summary, I would like to reiterate once again that our earnings per share increased some 24%, free cash flow increased some 65%, we had a organic growth is 6% and I repeat one more time what we see today, we remain comfortable with the 277-278 for the year, and 345 is as reasonable number as we can come up with right now for our fiscal year 2002. Thanks very much for you’re time and attention today. And we look forward to speak to you in an individual basis if anybody has any other questions.

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