江森自控 (JCI) 2002 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the 3rd quarter earnings release conference call.

At this time, all participants are in a listen-only mode.

Later, there will be questions and answers.

Instructions will be given at that time.

If you should require assistance from an operator during the conference, please press 0 then the star.

As a reminder, the call has recorded.

I would now like to turn the conference over to Mr. John Fort.

Please go ahead sir.

Good morning and thank you all for joining us today.

Mark Swartz, our Chief Financial Officer is with me as always.

And as usual, we'll be giving some forward looking information during the call.

Please read the forward looking disclosure in the press release that was issued today.

I'd like to lead off on a brief overview of our 3rd quarter financial results, and then Mark's going to go over into more details on the financials.

After that, I'll make some comments on recent developments in near-term objectives of the company, and then we'll take your questions.

As we announced earlier this morning, for the quarter ending June 30th, we had revenues from continuing operations of $9.12 billion, up 5% from $8.68 billion, from the same quarter of last year, and from $8.66 billion in the 2nd quarter.

We achieved this very modest increase in revenues during a period when we did not make any significant acquisitions.

I think this shows the stability of our business in a time of uncertainty for Tyco and the overall economy and was a real achievement.

Diluted proforma earnings from our continuing operation, were 45 cents per share, compared to 73 cents in the same period last year.

And 48 cents per share in the 2nd quarter this year.

These proforma results exclude the discontinued the operation of CIT.

And before impairment, restructuring, and other unusual charges.

And, assume the companies year -to-date tax rate of 18.5%.

Assuming that 26.4% tax rate that was accrued for the quarter on earnings from continuing operations, earnings were 41 cents for share.

The difference between the accrued and proforma tax rate, reflects the classification of CIT as a discontinued operation.

And the need to provide for the company's expected full-year tax rate of 18.5.

And we believe this is going to be the full-year tax rate, 18.5.

Including the impairment, restructuring, and other unusual charges from continuing operations, the loss for the quarter from continuing operations was 4 cents a share.

These results are in line with the guidance we provided earlier this month.

And as we begin to put the events of the past few months behind us, we're focusing even more sharply on maximizing earnings from cash flow, and on building through internal growth, on the strong performances of our operating companies.

We have shown that we have real businesses making real money, and that we have a real future.

Now Mark will give you more detail on the quarter's financials.

Good morning.

As John indicated, sales have improved sequentially from Q2 to Q3 of this year, while operating earnings were relatively flat.

The businesses in this difficult environment do appear to stabilized.

We had proforma earnings from continuing operations from 45 cents this quarter.

If CIT were not treated as a discontinued operation, proforma earnings would have been 56 cents per share, versus our initially combined estimate of 58 cents.

The difference results from CIT's operating results being less than expected, given the effect of their impending IPO on the business, higher interest cost and other business issues during the quarter.

CIT will be hosting a call on their quarterly results at 11:00 today.

I'd like to review the key financials for each of our business segments, and then comment on charges this quarter, our free cash flow, and guidance for both 4th quarter this year, and fiscal 2003.

Starting with the segment review, for the quarter ended June 30th, 2002, as compared to the same quarter one year ago, revenues for Tyco's electronic businesses, excluding Tyco telecommunications or Tycom, decreased approximately 12%, to $2.51 billion.

Organically, electronic [INAUDIBLE] Tycom, revenues were down 15%.

And that compares to a decrease of 28% in the prior quarter.

Earnings at the electronics businesses, excluding Tycom, were $361.5 million, or a 14.4% margin for this quarter, as compared to $719 million, or 25% in the same quarter a year ago.

On the sequential quarterly basis, our revenues increased 8% from quarter to quarter, Q2 to Q3.

And more importantly, increasing each of our end markets that we sell into.

This is the first time we have seen this effect since calendar 2000.

Margins were down sequentially Q2 to Q3, as pricing continues to have a negative effect.

However, it's at a lower level of price declines than we've seen in prior quarters.

As we look to the 4th quarter, our core electronics businesses, excluding Tycom, we are expecting low-digit increase in revenues, while having a slight earnings decrease during the 4th quarter as the pricing effect continues.

Tycom, which continues to have less activity, is expected to have a reduction in sales of $90 million, with an earnings reduction of $60 million, as compared to the 3rd quarter.

The outlook for electronics end markets remains difficult for the telecommunications businesses and revenues, and as we mentioned, for that area is expected to be sequentially flat.

The remaining end markets should provide 2% to 5% growth, within their areas.

Book-to-bill ratios are improving for each of our end market, except telecommunications, and the division continues to focus on product innovation and customer service, with over 20% of our sales coming from new products.

We also have received recent awards from many of our customers, which speaks to the momentum we have in our electronics business in a difficult environment.

So once they gave us the partners and performance award, Aero-Electronics, we were awarded the fastest-growing supplier.

Honda Motor Company awarded us the Honda Quality and Performance Award.

And Maycom received a $33 million contract for it's open-sky network in Oakland County, Michigan, in support of Homeland Security.

As we look at our health care business, we saw revenues increasing 13% to$ 2.04 billion, or 4% sequentially, Q2 to Q3.

Within Tyco health care, the revenue increase was driven principally by the acquisition of Paragon trade brands, in January of 2002, but also by sales from new products at US Surgical and [INAUDIBLE] Labs, and increases in each of [INAUDIBLE]major product categories.

The international group continues its strong performance as well, particularly in Asia.

These increases were partially offset by declines in certain product lines as a result of competitive pressures, and the exiting of certain businesses.

Organically, sales increased 5% during Q3 as compared to a 4% increase during Q2, within the health care business.

Earnings were $452 million for the 3rd quarter of fiscal 2002, or flat for the prior year.

Margins decreased in the health businesses as compared to the prior year, as the benefits of ongoing cost reduction plans, and higher volumes were offset by margin debt Paragon, which are lower than segment averages.

Additionally, product mix and higher selling expenses in certain areas caused the year-over-year decline.

The outlook for health care, however, remains fundamentally strong and should continue to see increased revenues from recent new product launches, such as U.S.

Surgical [inaudible] products, [INAUDIBLE] labs ligature outlet instrument.

Additionally, the introduction of the Monoject Magellan safety needles, and also the Monoject prefill, which are prefilled syringes, have successfully been launched in recent quarters.

Also, wound care and incontint-incontinent contract win, also were providing additional credit penetration opportunities for us within health care.

Tyco plastics revenues increase 6% year over year, and 1% on a sequential basis to $484 million.

Revenue increases for both periods were due to acquisitions, as organic revenues declined 4% over the prior year, as a result of general market weakness.

Margins were down year over year in the group, as a result of the volume shortfalls and pricing issues.

Moving over to Tyco Fire and Security, we achieved revenue increases of 42% year over year, and 6% sequentially.

Year-over-year increases result of acquisition, such as sensormatic, Security Link and [INAUDIBLE], as well as strong performance from ADT National Accountant authorized dealer sales program, and strong performance by Fire Protection in Europe, and [INAUDIBLE] in the United States.

Sequentially. the U.S. security business is down slightly, as demand seen post-September 11th has declined.

Organic growth for the segment was 5% during the 3rd quarter, which is down from the 7% organic growth rate in the 2nd quarter.

While segment profits increased year over year, they were down sequentially and also down as a percentage of revenue for both periods, due to increased ammoritization and depreciation expenses that occurred here 3rd quarter in the security business, primarily sensormatic.

Additionally, losses on contracts in Northern Europe and our Australian fire protection business, as well as lower profitability in the U.S. security business as a result of a more difficult commercial market.

The Fire Protection and Securities Services Group, had a reduction in margin of 270 basis points, which was greater than we had initially expected. 110 basis points to the decrease is due to the final appraisals on sensormatic being received during the quarter, and the need for us to record accumulative depreciation and amoritization expenses during the quarter of $32 million.

The value of the acquired fixed assets and tangibles assets in sensormatic, came in higher than originally estimated.

As we go forward, instead of the $32 million quarterly depreciation and amoritization expense, the ongoing effect will be $11 million per quarter.

We also had $28 million in contract losses in the specific region during the quarter, which also will not continue to affect margins.

The balance of the decrease is due to the effect of September 11th on increased security spending, having had a more positive effect on sales and margins for Q1 and Q2 than we had originally thought.

As well as the more difficult pricing environment, given current economic conditions.

After giving adjustments for certain items discussed above, we are looking at a 4th quarter margin of Fires and Security, at a percentage in excess of 14%, as compared to the 12.9% we reported in the 3rd quarter.

While the results for the quarter of a disappointment, they do not reflect a material ongoing change to segment profitability.

However, given current economic conditions, organic growth is expected to continue at a lower level.

We remain focused within the Fire protection and Security business, on providing comprehensive solutions to our customers.

Among the new program launches in contracts awards recently are the following.

T-Dart, launched by ADTUS, is a new detection system for airports, utilizing optical tracking technology. [INAUDIBLE] an anti-shop-lifting solution, designed specifically for our small and midsized retailers.

ThunderStorm 1 by 3, from Ansel , a new foam fire suppression product, developed and sold exclusively for Williams Fire and Hazard.

And Homeland Security contracts, where we have won a number of contracts that cover airports, water, and [INAUDIBLE] facilities, as well as government locations that have been booked into backlog.

We have a national agreement with the number one pharmacy in America to provide life safety services by our simplex [inaudible] business, and also a win in Somerton, Australia, a power station which shows the benefits of the many products that we offer in that it includes products and services from many Tyco companies, including Tyco Fire and Security Australia, [INAUDIBLE] ADT, NRO, Donnel Griffin Water Technology business.

Moving on to our 4th segment, Tyco engineer products and services, where revenues increased by approximately 18% over the prior year, and 7% on a quarterly sequentially basis, resulting from a combination of small acquisitions, higher volumes and increased selling prices in certain sectors.

Segment profits were down year over year, primarily due to decreased royalties from divested businesses.

While there is weakness in certain of our markets that we serve, as well as worldwide competitive pressures, each of our businesses within the engineered products group, achieved a sequential increase in profits, due to measures in place to control costs.

Organic growth within engineered products and services, was a strong 10% for the quarter, as compared to 12% in the 2nd quarter.

Our diversification of sales that we have within the engineered products group to end markets, provides an opportunity for us to focus on broad customer solutions, making up this segment, we are selling 16% into water waste water. 12% piping tube. 16% electrical products. 10% fire products.

Engineering services, 7%. 8% thermal control.

And valve and controls, where we are the world leader, is 31%, which also has a diversified base of oil and gas, representing 20%.

Chemical and petro chemical 20%.

Power generation at 15.

Petro chemical, 10%.

And also commercial HBC and pulp and paper, which provides a very nice business and customer solutions for us.

Moving over to the impairments and charges recorded during our 3rd quarter, we had a total of $955 million pretax, or $898 million after tax, which represents 45 cents per share.

Of the total charge, $122 million are after-tax cash costs.

I want to run through right now the detail of these items.

The first is goodwill writeoffs.

We had noncash charges of $513 million or 26 sends per share, related to FAS 142, which I will address later.

Secondly, impairment of long-lived assets, noncash charge of $239 million pretax, or 10 cents per share after tax. $105 million of this relates to abandoning a software development project at ADT, that is in process-or was in process that we terminated during the quarter.

And $125 million relating to the impairment of intangible assets, associated with health care businesses that we have exited during the quarter.

We also had restructuring charges of $72 million, pretax.

Or 3 cents per share after tax.

This is a cash charge, principally related to severance and facility closings announced during our 3rd quarter.

These initiatives involve severing approximately 1300 employees, and closing four manufacturing plants, and 42 sales and distribution facilities.

These charges have a payback for us of less than one year.

The fourth item is other charges of approximately $118 million, pretax, or 6 cents per share after tax. 83% of this charge is cash-related, and principally due to charges associated with the termination of our breakup plan.

Also, John talked previously about taxes, which represented about 4 cents per share differential.

Our 3rd quarter is based on a proforma tax rate of 18.5%.

As we have talked about, the combined tax rate of Industrial, Tyco, and CIT, was 18.5% for the 2nd quarter.

With the separation of CIT as a discontinued operation, and to present our stand-alone continuing operation at a tax rate of 18.5% in the 3rd quarter, our actual provision is 26%.

On a restated basis, earnings from continuing operations this year, to reflect CIT as a discontinued [INAUDIBLE], was 60 cents in the 1st quarter -- 48 cents in the 2nd quarter, and 45 cents in our 3rd quarter.

Now, I'd like to move over and discuss our free cash flow.

We reported today that free cash flow came in at $650 million after TGN spending of approximately $184 million.

Our original forecast for the 3rd quarter was free cash flow of $900 million to $1.1 billion.

And as we reported earlier this month, we thought we might be up to a couple $100 million lower than the $900 million.

On a raw number basis before evaluating the $657 million, our earnings conversion before TGN into cash flow was a strong 93%, especially when considering we had a sequential increase in quarterly revenues from Q2 to Q3 of 5.3%.

Now, to speak to the reasons for the $657 million of free cash versus our $900 million expectation.

During our 2nd quarter, we saw payables decrease over $400 million dollars, due to liquidity questions and perception measures on the part of the suppliers.

At the end of the quarter, we forecasted $200 million of this amount of would be reflected in Q3.

And $200 million more would be recovered in Q4.

During the beginning of our 3rd quarter, we did see a recovery in liquidity concern issues with our suppliers, and that continued until we got to the corporate events of June.

And not only were we unable to recover the $200 million in advanced payments during this 3rd quarter, but we also signed incremental decrease, of an additional $136 million for the quarter, which results in a forecasted difference of $336 million versus what we expected, specifically related to payables.

We had hoped that post-CIT monization, we would have improved the liquidity question out there.

However, given the continuing media focus and uncertainty reported to suppliers, we are now not as[INAUDIBLE] in improvement in the $536 million reduction in payable, for the balance of this year.

Accordingly, our cash flow estimate for this year is now $2.5 billion after TGN spending.

Prior to TGN spending of $1.2 billion, pre-cash flow is estimated at $3.7 billion, or a 90% cash conversion of our earnings.

We continue to work with our vendors and suppliers, with the facts and strength of our financial position in working at overcoming the perception issues that have affected our payment terms.

However, for conservativeness, we are not forecasting an improvement in payables at this time.

On the positive side, however, our investment in working capital other than payable, continues to improve.

With receivable days down, inventories turns improving based on our continued focus on cash management.

Receivables in inventories provided $200 million of cash flow generation during the quarter.

While we remain disappointed by the effect of the over hanging corporate issues during the past six months, the actual free cash flow generation this quarter and for the year, and the environment in which we have been operating, speaks to the quality of our earnings generation.

Based on our performance this quarter, we have updated our cash flow and debt roll forward for the actual Q3 results and also the IPO of CIT.

This is the true indicator that improved financial position we are currently in.

As forecasted we finished the quarter with $2.8 billion in cash on hand, and total debt of $26 billion. proforma for the CIT-IPO, we begin this quarter with $7 billion in cash, and expect to increase our fiscal year with net debt less thatn 19 billion and a net debt to cap of 39%.

With our 52.5% bank covenant cap and debt to equity that we have spoken to, we have a cushion of greater than $10 billion in equity as we look to the outlying quaters.

However as a result of our stock price performance of late, the current environment in which we're operating, it's effect on our FAS 142 calculation this quarter did result in a goodwill impairment of $513 million, which is reflected in the numbers I just spoke to.

With the financial position we currently have in the strength, we are in the process of repurchasing our debt in the open market.

Over $300 million was repurchased before our blackout period began as a result of our earnings release today.

We consider the debt in extremely good value, and given our cash position, and maturity, it provides extremely confident cost--effective manner for us to retire debt.

We will resume the debt buy back subsequent to today's earnings release.

Included in our press-release package, we have provided an updated cash roll forward.

As presented, we have no impending requirement for refinancing with public debt or bank debt, until November of fiscal 2003. 16 months from right now.

As we talked previously, by such time, we will need to refinance or raise, through noncourt disposition, $1.5 billion.

This is not an immediate need.

Over this period, our net debt-to-cap is expected to continue to decline down to 30%.

With time, we hope that our ratings from the credit agencies will reflect the quantitative side and financial position of Tyco, as compared to the current qualitative rating, based on the past six months of corporate events and turmoil.

With revenues of $38 billion and net income in excess of $4.2 billion, this refinancing need is not burdensome, and speaks to the strength and financial resources of our businesses.

Additionally, in that roll forward, we have not assumed any disposition of noncore assets to go forward, but are in a position to do that.

And we continue to look at noncore businesses that we are in a position to sell.

The last item I'd like to speak to is guidance going forward.

Our outlook for the 4th quarter is 45 cents to 47 cents per share.

Two issues affect our 4th quarter results as compared to the 3rd quarter.

First, our Tycom loss as I mentioned earlier, is expected to increase by approximately $60 million dollars.

Additionally, our interest expense, due to higher borrowing cost for the full quarter, will increase $30 million dollars.

These items will offset improvements in operating earnings in the majority of our businesses, which include the previously announced cost reductions at corporate.

As we look at fiscal 2003, earnings for the year are expected at $210 to $225 per share.

Organic growth and health care is expected to increase back to 7%. 5% organic growth and Fire and Security, as well as 5% in engineered products and services, and a 4% organic growth rate in electronics without the effect of Tycom.

Overall, this provides an organic growth rate for Tyco, of 4%, which would translate into a sales rate of approximately $37.5 to $38 million next year, and earnings in excess of $4.2 billion.

Cash flow for fiscal '03 is anticipated in a range of $4 to $4.5 billion, which translates into a cash conversion rate of 95 to 100% of our expected fiscal '03 net income.

The results that we've spoken to today, and have reported, show the continued performance of our businesses, which have now been stabilized and have even shown sequential revenue improvements from Q2 to Q3.

This speaks to the businesses we have, and the strength of our operating managers, and their resilience in a difficult economy, and also a very difficult corporate environment.

John?

Thanks very much, Mark.

We are gratified by the strength of our businesses at this challenging time for all companies and for Tyco in particular.

And obviously we're focusing on improving our free cash flow.

And we'll be working with vendors to improve our credit terms as time goes on.

I'd like to also reiterate what Mark said, that with a completion of the CIT-IPO, we've placed our finances on an even more solid footing.

We are beginning a program of reducing our debt on attractive terms.

This is another important step towards securing our short and long-term financial help.

Let me emphasize also, that one of our most important goals, which we are now well on our way to achieving, I believe, is to improve our debt rating to [INAUDIBLE] solid investment grade.

Let me touch on the CEO search.

It is progressing.

We're talking to highly-qualified candidates, and we still expect to be on track to complete the search within our 3- to 6-month time frame.

We hope to be at the closer end of that time frame.

Of course, the board and I are determined to find the person best suited to leading a world-class, highly diversified, global organization like Tyco.

And we will not be making a final decision til we've found that person.

Meanwhile, we are actively reviewing every aspect of our governance.

And have already announced our intention to broad the leadership of our Board of Directors by adding new, independent Directors.

Today we're filing a proxy that will formally announce our intention to have a special meeting on September 5th.

At which shareholders will be asked to increase the number of Directors from 11 to 15.

We expect that one of these positions will be filled by the new Chairman and CEO, and that the remaining three will be independent Directors.

We expect that over time, we will reduce the size of the board back to about 11 members, and of course, the shareholders will have a chance to vote on the entire slate of Directors at the next annual meeting in March, 2003.

We expect that this step, together with other actions, will further help to restore trust and confidence in Tyco, as well as adding Directors who can provide a fresh perspective on the company.

As to candidates, we will be consulting with our major shareholders for their suggestions about qualifications and skills they feel are most appropriate for our new Directors.

As well as any recommendation to specific individuals they might make.

We welcome similar input from any investor.

Anyone who has a thought on this issue can write me at the company.

Our internal investigation of issues involving a former CEO and related matters is moving forward.

We still expect to be complete on its original timetable by the middle of August.

We have not set a firm deadline, because we need to ensure that the investigation is thorough and comprehensive.

Having said that, we do recognize that everyone is anxious to get the job done as soon as possible.

And we're working to do just that.

Based on what we've seen so far, we don't expect the findings of the investigation will have any material impact on our financial statements.

But we can't comment beyond that now.

And we will keep you informed of any developments.

As to the official investigations, the company is continuing to cooperate fully with the District Attorney of New York City, with the SEC and with other authorities.

As we previously said, the SEC has begun a formal investigation into the issues concerning our former CEO, that have already been made public and other issues that may arise from that investigation, The company is cooperating fully with the SEC.

And as far as we know, the issues do not pertain to other than these.

On another matter as you know, the SEC is requiring the CEO's and CFO's of certain U.S. public companies to sign off personally on reports filed with the SEC.

Although this requirement will not technically cover Tyco, we plan to meet it voluntarily.

Finally, we continue to be dedicated to the needs of our 260,000 employees, and millions of customers around the world.

I want to thank them for their continuing support and help during this challenging period.

Before we take your questions, I'd like to comment on the way we've chosen to deal with the many rumors and speculations involving Tyco that have found their way into the market place or the media recently.

I'm sure you understand that we can't -- simply cannot respond to every unfounded story that makes the rounds.

I know that can be frustrating for you and everyone with an interest in the company, but we don't think it's good policy to comment continually on every rumor.

Please be assured, though, that we'll make any appropriate announcements of all material [inaudible] and that we'll do our best to keep you informed.

Now Mark and I will be happy to take any questions you may have.

Ladies and gentlemen, we request that you please limit your number of questions today to one question.

Thank you.

If you would like to queue up with a question at this time, just press the number 1, on your touch tone phone.

If using a speaker phone, please pick up your handset before pressing the number.

You may remove your line from the queue at any time by pressing the pound key.

Our first question is from the line of Harriet Faldman with Deutsche Bank.

Please go ahead.

Good morning.

First on the corporate governances issues, should we expect when you do complete the internal investigation to have any update of any internal processes at this time?

Or is that more an organic thing that will develop also from bringing a new Chairman in, and that person deciding what if any additional control they want to impose.

I think it will be more of a matter of the second process, Harriet.

It's going to develop certainly between now and year end as new Directors are added and the CEO comes aboard.

Great.

And then, Mark, if you it could comment - I know you mentioned that electronic with [INAUDIBLE] are improving [INAUDIBLE] except for Telecom.

Could you give us an idea what the current levels of [INAUDIBLE] are and what the degree of improvement seems to be?

And whether any of that seems sustainable?

Or go bouncing around.

We're always hesitant on the electronics side to say "sustainable," given what we've seen over the last year and a half.

But given what we have now had a couple of quarters where the book to bill in those areas have been above 1, but anywhere from 101 to 105, is not significantly greater than that.

And we are seeing it across the board, which is the encouraging side as we sit right now and look at what's going on with electronic markets that we're participating in.

Great.

Now that I've asked twice as many questions as I was supposed to.

I'll shut up.

Our next question is from the line of Bob Cornell with Lehman Brothers.

Yeah, good morning everybody.

Just following up with Harriets second question there, Mark, when you gave guidance for electronics in the 4th quarter, I think you said revenues would be sequentially down.

What's the comment about margins, ex-Tycom.

Revenues actually would be up, sequentially, we do believe.

In the low single digits.

What we're seeing in the markets is anywhere from flat within the Telecom side, to up to 5% in one of the areas: And what I did say, however, is given the continuing pricing pressures, Bob, that we could see margins decline slightly, Q3 to Q4 which is the core electronic.

But [INAUDIBLE] they continue to improvement in hotline.

Okay.

Just one related question.

What have you guys done to change or alter if anything, the compensation budgets for, you know, the unit heads downs in the organization given the morale issues?,and so forth.

Any change in the way those people are going to be compensated for the year based on budget that were set a year ago.

And the results that have taken place in the last nine month.

Couple of ways to answer that.

One, as far as the morale side, the good news is these are individuals who are dealing within each of their own businesses, which all do have leading market positions, and are known by their brand name franchises.

So from the day-to-day business stand point, it's good.

But from a corporate standpoint and being part of Tyco, it's been a difficult environment..

From an earnings and compensation standpoint, we did relook for the operating people in the field as we got to the midyear level, as to the best way to incentivise them, and based on the current market conditions, we've not made an alteration to that, since that time, given that the performance is right in line with what our expectations were and what the business folks' expectations were also.

All right.

Thank you.

Our next question is from the line of -- one moment, please.

Lee Cooperman, Omega Advisors.

Thank you.

Not a question.

Just a suggestion.

I find it offensive that I keep reading about our Bermuda tax status.

And I understand we're keeping our heads low these days.

But correct me if I'm wrong, I believe in 1977, Tyco shareholders collectively paid the U.S.

Government $800 million in taxes, when we exited the U.S. tax system and did a merger with ADT.

Somehow I think the politicians should be aware of that, and I don't really read about that anywhere.

So I guess that's a suggestion, not a question.

The question I have, basically, are we still looking at $14 billion in net debt at the end of fiscal 2003?

And in the three- to six-month time table on a new CEO, where are we dating this time table from?

Thank you.

Well, we're dating the time table, taking the last one first, Lee, from about mid-June.

And then, Lee, as far as just your comment on the taxes we paid in 1977, shareholders did pay, we were ordered to move into, the whole Tyco shareholders into part of becoming the ADT business, which has been headquartered in Bermuda for quite some time.

As we look at our net debt roll forward, we both finished the year, or we currently have less than $19 billion in debt, and should be approaching the $18 billion level by the time we finish the year.

And as we go forward in looking at next year, with our free cash roll-forward offset by acquisition spending that we have forecasted over approximately $1 billion or so, that ends up getting you close to a net debt of approximately $15 billion.

And that's prior to, as we've talked about, no changes related to disposition of businesses.

We've not put that in there.

And the reason for the difference between the 14 and 15, is a function of the final IPO proceeds that we received on CIT, versus the initial expectation, and as you know, as we sit here today, we're very pleased that the IPO did come to market when it did, and are pleased that we have been able to move on and focus on the ongoing businesses.

Thank you.

And good luck.

Thanks.

David Bleustein, UBS Warburg.

Good morning.

In the acquisition business line you mentioned $396 million for the acquisition of dealer accounts.

Two questions: Is that a normal run rate for that business?

And Mark, could you help me to walk through what Heather accounted for after they're placed in the balance sheet again?

That is a higher amount.

And we would expect on a subsequent basis and also previously.

Part of that the dealer flow was much greater during the quarter than we had originally expected, and we do believe that it will get back to a more normalized run rate level at this point, based on everything we see.

How the dealer accounts are accounted for is, we end up paying a multiple of revenues, which typically approximate $1,000 for a dealer account.

That represents about three years of revenues that we get on those customer accounts, even though the average life continues to run for a much longer period of time.

That $1,000 ends up being amortized over the expected life of the customer.

And as we've talked about previously, we do get from the dealer a non-refundable fee of $200 per account that is purchased for reimbursement of our expenses, and that does not go through the revenue line, but is in a contra expense line that offsets the expenses we incur.

Ok Mark, what would a normal run rate be for that for that $396 million?

As we look at it right now, would be in the 2-250 range.

Ok.

Thanks a lot.

You're welcome.

Don McDougal, JP Morgan.

Good morning.

Mark, or John, I just want to be clear on the Fire and Security walk-through on margins.

I think you had said 110 basis points of the decline was related to, I guess, a reappraisal of -- was it sensormatic?

Is that something that we're going to see again?

Is that a one off?

And if we could get maybe some more detail on the contract losses that you mentioned.

Will we expect to see more of these, or is that something that will get better from here as well?

The two issues.

First, it's not a reappraisal of what happens when you do an acquisition.

There's an original estimate as to the value of the intangibles and the fixed assets.

And it's based on the function of the new diligence that is done.

The historical book values in the business.

We ended up receiving the appraisals during this quarter, and as a result of that, its ends up having to have the accumulative reporting of the depreciation averages of $32 million during the quarter.

On an ongoing basis, however, it would be $11 million of depreciation and amortization expense.

So about $21 million is a nonrecurring effect that ended up coming through during the quarter. sensormatic historically had minimal level of intangibles recorded on their balance sheet.

When we end up looking at the Pacific region -- and its Europe -- excuse me.

Singapore and also in Australia, there were some large jobs that ended up coming to completion, and during an ongoing, recurring review of those contracts and the close down of those contracts, we ended up having approximately $ 28 million come through.

In going through and looking at the other contracts that we have in place there, the current situation and how they're running, we also did not expect that to have a continuing effect go forward, which is why margins go forward, we believe, in looking at Q4, would be in the 14% or north of 14%, as compared to 12.9% this quarter.

Overall, though, just to be fair, we are looking at a lower margin rate than we saw in Q1 and Q2, and that's a function of two areas, one, the commercial construction environment, which continues to be difficult.

And then secondly, we did end up having the benefit of the post-September 11th security purchasing going on, and that has ended up declining in the 3rd quarter.

And it's not expected to increase once again.

Okay.

And if I could slip in one more, on Tycom, what is the loss assumption you have embedded in your 2003 forecast?

How much of that would be cash?

And I guess what's your appetite for enduring continued losses at Tycom?

We are currently, as we look at Tycom next year, would expect a loss in the 3 to 350 range from the business.

Couple hundred million dollars of that would be cash, with realizing that the network ends up getting put online right around the 2nd quarter.

And at that point, we're in a position to significantly reduce a lot of the operating costs that are in place right now, in supporting the buildout of that network.

So once we do get to the 2nd quarter time frame, we will be able to reduce, you know, the quarterly loss to a level of about $75 million.

That's being studied hard now, Don.

And that's a follow-up to your question of what is our appetite.

And of course, our appetite is not to sit by and continue to suffer those losses, but looking very closely at the business and doing everything we can to reduce the losses.

Next question, Bill Reed, Deutsche Bank

Yes, thank you, I'll ask three quick questions.

First, if you discuss the bank negotiations, and perhaps give some color on terms of what you're looking at with the bank, particularly as it relates to term and also timing of the bank negotiations.

Second, it just appears that you've dropped our acquisition assumption and just a brief comment on that.

It was a run rate of 400 and a quarter.

Now it's at 300.

Finally, real quick, you're showing in your cash roll forward for the 1st quarter, a prepaid debt number of $200 --I guess- I'm sorry. $2 billion prepaid debt.

And I want to make sure I understand that.

Is that a projection of what you think you might be able to do in terms of open market purchases.

Thanks.

Sorry for three questions.

I guess three quick questions equate to one question in the credit side of the house.

Thank you, Mark.

You're welcome.

The bank negotiations, as we talked about at the beginning of the month, as you can imagine, the banks are eager to get their money.

Amounts are not due until February.

We are going to be working with the bank, and paying them off.

Of course, and we've got the cash on hand to do that.

But we want to do it in an orderly fashion, and give the banks an opportunity to get an update on our current business position, the strength of our liquidity position, and we'll be doing that over the next three months.

The question as far as the prepaid debt, that is a function of going into the market in what we believe we will be in a position to buy back in the open market.

We did begin that early in the month, but did end up with the earnings release being in the blackout period.

And now we will be in a position to resume that, and given the spread levels that they have been trading at, given what we believe is unrealistic concerns, as to our liquidity, it does give us a real effective way to go ahead and buy that back.

On the acquisition side, as we have said, we don't need to do acquisitions here in order to have strong results, cash flows.

And in that regard, we have gone ahead at this point and have not made [INAUDIBLE]incremental acquisition spending in the outlying quarters, but will continue to remain focused on the organic growth that we have seen this past quarter, and we'll continue to focus on and go forward.

Ok.

Great.

And so just to clarify, the $2 billion is a projecting --or projection of possible open-market debt purchases.

That's right.

Thank you so much.

Sure.

And just want to add also on the acquisition side, that is a reduction also in the dealer account, for the same reason that we don't believe that we need that level to go forward also to have the organic growth numbers that we have talked about.

Great.

Thanks so much.

Next question from the line of Bryan Jacoby from JP Morgan.

Good morning.

Looks like Bill pretty much covered most of my questions.

But maybe you can give us an update on where you stand with the rating agencies in light of this quarter, what your'e calling for, and the next several quarters, and then just to take a step back, just looking at this from pure outsiders view, if you had never look said at Tyco before, and you see that you're going to generate $2.5 billion in free cash flow this year and next year, the goal is between $4 and $4.5.

One would say that seems somewhat overly optimistic, given that you're looking for a new CEO, don't you think that -- clearly there is some risk here, that the bar may be lowered, whoever takes that seat, just to put things perhaps in a more achievable fashion?

Can you give some color there?

Because there's some out there that are saying that the outlook is still somewhat doubtful, given the dramatic jump needed to get from $2, $2.5, to $4 and $4.5.

I appreciate the attitude of your question Bryan.

It that it gives us an opportunity to $2.5 billion in perspective.

The $2.5 billion is after Tycom spending of $1.2 billion this year.

And that's the incremental difference.

As we look at fiscal 2003, just taking our $2.5 billion, adding back the Tycom spending, gets you back to $3.7 billion.

And do realize that we did have that payable issue that ended up affecting us this year, and we also had a high level of restructuring spending this year.

But we actually, looking at the $4 billion, do believe that's conservative, and really is not taking into account any base organic growth in cash flow, which would be incremental.

But for all the reasons you specified, it's the reason why we are being conservative.

And as far as Tycom, as I mentioned, that will be placed in service, and the $1.2 billion portion is nonrecurring and adds to our cash flow.

We think Bryan, we should really set the bar as high as possible for the CEO also

Ok.

On the payables front, then, you're very confident that that situation is not going to persist for several more quarters?

You think you can put that to rest and alleviate any liquidity concerns at the supplier level fairly rapidly?

What the assumption is, is that next year, we aren't assuming that any of that comes back.

We are assuming that it doesn't get any worse, that it will be a really a repeat of this year, which one would not expect.

But we already, as I mentioned, have had the increase of $530 million in fiscal 2002.

We are not adding that back in getting at our fiscal 2003 estimate.

So you can almost look at that either as a cushion, if we are able to make sure that payables do not continue to decrease from here, or even if we are able to work with our vendors on getting much more market-based payment terms.

Okay.

And on a rating agency question.

I mean, have they commented to you on today's earnings?

I'm sure they've seen them before us.

But any color there that you can update us on?

We will be spending more time with them.

And as I've talked about and as they have also.

The rating is not based so much on the financial position we're, in or the earnings of the business, but due to some of the other issues that we have been going through, the corporate turmoil that I mentioned earlier.

And we are working with them at getting them comfortable on that side.

Many of the same issues that John has talked about already as far as the action plans that we're taking, the individual steps, and the hope is that the rating agency ends up over time, rating us, of course at investment grade, but also based on the financial position that we have right now.

And if you look at us on any term, weather -- whether it's the debt levels we have, debt to cap, cash flow generation, EBITDA coverage, would result in a significantly higher ratings that than we are currently getting from the agencies.

And we're committed to working on this as quickly as possible.

Our next question is from Jeff Sprague, Salomon Smith Barney.

Hi.

Good morning.

A couple of things.

First, I commend you on your willingness to step up on the swearing to the financial statements on the 14th.

I'm wondering if those somewhat coincidentally, that's when your internal investigation also winds down in the middle of August.

Are those two items in any way related?

Well, I think they might be, Jeff.

Until we have the final results of the internal investigation, and know if there are any restatements to proxies or any other materials.

I think that we probably are not going to be able to sign off, but we expect to be right in that neighborhood, and since it's voluntary, if it's a couple of days later, we may miss it because of the investigations.

Ok.

Great.

And then just a little bit more basic --

We want to be sure we've got everything out there before we attest to it.

Absolutely.

Some -- just to drill in on Fire and Security a little bit, can you give us a little bit of color on, you know, on the organic growth in fire, versus security and also it sounds like some of the -- the security weakness or slowdown is more commercial within security, if you could give us some color on the residential market versus the commercial.

When we look at the fire and security group currently in total, our revenues continue to be about evenly mixed.

It's about 48% fire, 52% security.

And that has bounced around, but always been fairly close to an even split between the two.

Within the security business, residential in U.S. is a more significant portion.

It's still less than half of our total security business.

But it's much more significant here than the UK, as an example, where our commercial security business is about almost 10 times the size of our residential.

What we're seeing right now in the residential business in the U.S., is continue to have very good order generation.

We have seen an uptick somewhat in our attrition level, it appears that as people have ended up trying to reign in their personal spending, we have ended up seeing somewhat of an uptick.

Not significant , but have seen that as a result of what's been going on in the economy.

The commercial business, which is approximately, in total, 70% of our security business.

That is where we have continued to see somewhat of a much more difficult pricing environment, and also lots of new customers coming on as many of the strip centers out there aren't getting filled at this point, or you end up seeing bankruptcies of some of the retail businesses that we have.

Organic growth and total, we were at 7% in Q2, looking at 5% in Q3.

Interestingly, both of them have trended commercial -- or fire and security have trended it in about the same direction.

However, security is a couple of basis points -- or couple percent higher in organic growth than the fire and security.

So as an example this quarter, we're about 7% on the security side growth, and about 3% organically on the fire side.

And those are both down sequentially about the same.

Great.

And can you -- your comment on the residential market?

Could you put that in a little bit more perspective, maybe in terms of net account ads, when you look at, kind of look at organic growth less kind of an attrition rate?

New accounts added in the quarter relative to what you've seen in the recent past?

On a total basis right now, the share number of customers that we have within our businesses is about 7.7 million customers, both on the residential and commercial side.

Our recurring revenue, which is our risk base that is the recurring revenue that we can count on is currently about $3.5 billion.

On a nets ad basis, we're looking at about $100 million -- or 100 -- 100,000 customers per month, that we're seeing on a net basis, net of attrition.

Next question is from the line of John Inch, Merrill Lynch.

Thank you.

Good morning.

Mark, It looks like if you go to fire securities -- I want to go back to that business.

If you take out this $28 million from the pacific, and this $11-$32 million to $11 million dollar difference, it accumulates depreciation of almost 2%.

What would your margins have been like if you excluded the acquisition of sensormatic and the others?

Does it get you back to the 16 to 17 you did last year?

Let me just -- I'm hesitating, just trying to think that through right now.

With the sensormatic margins still being less in the retail effects.

You know, I'm not sure.

I don't think we'd completely be there, but would be fairly close.

That's something we can work up in getting the actual numbers.

I don't have that in front of me right now.

But just walking through the [INAUDIBLE]and the fact is sensormatic, it would be fairly close.

Ok.

And just a clarification, was any of this write-down, attributable incentive to Tyco telecommunication, was that any of that due to Tycom?

I'm sorry.

It's all Tycom.

It's all Tycom?

Yes.

Last question, I mean everybody, you guys are talking about debt paydowns.

What about the prospect of an equity repurchase?

You know maybe selling some assets with repurchasing equity and these price levels, once you get over some of these legal acquitity issues in the market.

Thank you.

We currently don't have any plans to do that.

We -- I would categorically rule anything out.

But right now, we have no plans on equity repurchase.

Next question is from Luca Ebolito, Chesapeake Partners.

Yeah.

Just want to make absolutely sure I understood two things that were mention earlier.

One, Mr. Fort, you said you will certify on August 14th, the only thing is it may be a couple days late to make sure that your internal investigation is completed.

Yes, that's correct.

Okay.

We're beyond schedule after that.

We expect to be on schedule after that.

Ok.

Excellent.

And then, Mark, you said that you did begin to buy back debt in the open market.

You bought back 300 and could see yourself buying back up to $2 billion?

Yeah.

We've done over $300 million so far this quarter.

And what we have projected is potentially being able to buy a couple billion dollars back in the open market.

And that is a function of, of course, the market.

But we do believe that this is the best way for us to pay down the outstanding debt by going directly into the market and getting it that way.

Makes a lot of sense.

Okay.

Appreciate it.

Thank you.

Rita, we'll take one more question, please.

Thank you.

And your last question today is from the line of Leo Harmon, All State Insurance

Hi.

As I look at the electronics business year over year, it looks like revenues were down about $340 or so.

And looks like earnings were down about $360.

I was wondering if there is further restructuring that needs to go on in that business, given that you talk about organic growth being only about 4% in the quarterly-[INAUDIBLE]

Within the electronics business, we've been doing an awful lot of restructuring than in the past year and a half.

As you can see from this quarter, we really didn't have any incremental restructuring going on with in that business That's not to say there are continued improvements that we can bring about at reducing the cost.

But that's the normal course of what we do, in every one of our businesses.

But nothing unusual within electronics.

Tycom, however, we did talk about that we are looking at once that system is in place, going ahead and reducing the fixed cost base significantly, that would not be needed as we don't have a continuous bill as we look at that business on a regular basis.

Electronics, overall, as we had mentioned, we are encouraged with the trend with in the business year over year, where last quarter we were down organically 28%.

This quarter down 15%.

And we are seeing sequential improvements finally within those end markets.

So we will continue to work on improving the margins, as we focus on each of the businesses doing that.

But nothing unusual.

Okay.

Just one quick follow-up.

Earlier in the year, there was question about divestiture in Tyco Plastics business.

I was wondering, now that CIT is out of the way,is that divestiture still possibly on the table?

No.

We don't have any plans to divest plastics at this time.

And, thank you all for joining us today.

I think as the quarter's results and the outlook demonstrates, we're making real profits and producing good, free cash flow.

Tyco is a company made of good businesses, with hard assets and dedicated employees.

And again, each of our four major business divisions holds very strongly leadership positions in global markets, with thousands of brand-name products and a growing number of new product lines.

I've been in business for 37 years now.

And because of a confluence of important factors, a very difficult economic condition, increasingly competitive market places, the wide spread concern among investors, having such an impact on the stock market, and the heightened level of tension and scrutiny by the press and the public, this is certainly one of the most challenging business environments I've seen.

Even under these conditions, Tyco's performed well, and I believe that's a reflection of the underlying strength of our company.

Again.

Thank you all very much for joining us.

Bye.

Ladies and gentlemen, this conference will be available for replay after 1:45 p.m. today, July 23rd, until July 29th, at midnight.

That does conclude your teleconference for today.

Thank you for your participation.

You may now disconnect.