江森自控 (JCI) 2002 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Tyco International year end conference call.

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

Later we will have an opportunity for questions and answers with instructions given at that time.

If you should require assistance at anytime during the conference call please press zero followed by star.

As a reminder your conference call today is being recorded.

I would now like to turn the conference call over to your host, Chairman and Chief Executive Officer of Tyco International, Mr. Edward Breen.

Go ahead, sir.

Good morning, and thank you for joining us.

On the call with me today are Tyco's new CFO, Dave FitzPatrick, and David Boice, Tyco's outside counsel with the firm Boice, Schiller and Flexner.

Before we start, let me remind that you during the course of the call, we will be giving forward-looking information and we ask you to look at this morning's press release and to read through the forward-looking cautionary informational statement that we have included there.

Additionally, all information presented today will be for continuing operations only excluding results from CIT.

The primary task of our agenda today will be to present the review of Tyco's fourth quarter and year end results which were released this morning.

Dave FitzPatrick will discuss our operating results by segment and provide more details on our results, and David Boice will provide an update on the progress of the Phase 2 accounting review.

After that we will be happy to take your questions.

Let me start by saying I am extremely pleased with our fourth quarter cash flow and revenues, both of which exceeded the levels we discussed on our September 25th call.

Free cash flow for the quarter came in at approximately $1.3 billion, significantly above our previous estimate of 800 to $900 million, and free cash flow for the year was about $2.8 billion.

Fourth quarter cash flow was above our expectations because of the significant collection of receivables in September and I'd say particularly overdue receivables and lower-than-expected inventory levels.

Because of our cash flow performance, Tyco's cash position as of September 30th was approximately $6.5 billion.

Dave FitzPatrick and I have heard from some investors about Tyco's definition of free cash flow.

We are taking a look at this issue and will have more to say about it when we hold our investor meeting early next year.

The amounts reported today are under the company's current definition of free cash flow, which is operating cash flow less, capital expenditures, the TGN spending, dividends and excluding any increase or decrease of any sale of receivables.

Revenue for the quarter came in at $9.4 billion, compared to $9.1 billion last quarter.

This is the highest recorded quarterly sales figure for Tyco.

Sales increases were most notable in Fire and Security and engineered products and services with a modest increase in Healthcare and Specialty revenues offset with modest softness in electronics which was primarily from the TyCom network.

In a difficult economic environment, this is a good indication of our market position, the appeal of our products and services and the dedication and continuing hard work of our employees.

Operating earnings from continuing operations for the fourth quarter before impairment, restructuring and other unusual charges were 30 cents per share and $1.79 per share for fiscal 2002.

As I discussed on our last call, we incurred a charge this quarter of $2.2 billion pre-tax for our TyCom business.

Additionally, we also had restructuring and other unusual charges of $600 million pre-tax in a number of areas that Dave will discuss in more detail.

As a consequence of these charges, we had a net loss from continuing operations of $1.7 billion for the quarter and $2.8 billion for the year, again these amounts are from continuing operations only.

These are unaudited results but PricewaterhouseCoopers is working diligently to finish the audit and we are working very closely with them to get this audit completed as soon as possible.

As I noted in our September call, the tax rate for the year is running at approximately 22% instead of the previously projected 18.5% rate.

At a 22% tax rate, without the cumulative impact of the catch-up for earlier quarters, fourth quarter earnings would have been 36 cents.

The reason for the increase in the tax rate is lower intercompany debt and the company's capital structure which reduced the benefits of interest deductability for tax purposes.

I should also note that fourth quarter earnings were negatively impacted by the deferral of certain dealer fees received in our security business and other accounting adjustments that Dave will discuss in more detail in a moment.

Financing continues to be our top priority.

Dave and I have begun and have continued to meet with a number of banks to discuss new financing alternatives, and I remain confident that we'll be able to reach agreement on a revised financing package well in advance of our February maturities.

At the same time, we do intend to establish a capital structure that merits an investment grade rating.

Now we'd like to take you through the details of our fourth quarter and fiscal '02 results by segment.

Let me say before I turn it over to Dave FitzPatrick that I'm absolutely thrilled to have him as a senior member of our team at Tyco.

The few weeks he's been here, his efforts have been absolutely incredible.

And again, Dave, I'm thrilled to have you here.

Let me turn it over to you, Dave.

Thanks, Ed.

It's great to be here.

Before discussing the segments, I would like to comment on accounting matters that have an impact on the company's results.

First, our ADT unit has been recognizing income related to certain dealer fees received under the dealer program in the period that the fees are received.

That income has been recorded up front rather than being deferred and recognized over the estimated customer life which is generally 10 years.

Due to the growth of the dealer program and to reflect the accounting guidance of SAB 101, approximately $35 million of pre-tax income previously reported in each quarter of 2002 or about $135 million for the entire year has been deferred and will be recognized in future periods over the estimated customer life.

The fourth quarter of 2002 and full year results reflect this revised treatment.

Had the company deferred such income in 2000 and 2001, pre-tax earnings would have been reduced by about $150 million over the two-year period.

EPS would have been about 1% lower over this period.

This modified accounting treatment reflects management's best judgment and has been concurred with by our external auditors.

These matters were also raised in our SEC comment letter and are subject to final review with the commission.

We expect this review process will be completed prior to filing the company's 10-K.

We have also reviewed the dealer program amortization period and have concluded that the average estimated life is appropriate.

In the past, we have tooled such contracts for purposes of amortization.

Going forward, we plan to identify individual contracts and handle contract terminations on a contract-by-contract basis.

Additionally, the company incurred approximately $175 million of expenses across the business segments during the fourth quarter.

These were linked to the following issues.

Inventory valuations, accounts receivable reserves, and various account reconciliations.

These expenses are primarily of a non-cash nature and the following highlight the impact by segment.

The impact in electronics, approximately $70 million.

In Healthcare and Specialty, the impact was about $40 million this being primarily related to the plastics business in that segment.

At Fire and Security, about $45 million.

And engineered products, $20 million.

These charges were partially offset by favorable adjustments at Corporate, which relate primarily to reversals of certain accruals and totaled $25 million in the quarter.

Regarding earlier periods in 2002, the following adjustments have been reflected in the financial statements.

A reversal of intercompany sales and associated margin between engineered products and TyCom.

Consequently, revenue has been reduced by $101 million.

Margin on these sales previously reported has been reduced at the engineered products segment offset by the intercompany profit reserve at Corporate.

Adjustments, second item, adjustments to capitalized interest using a lower average interest rate resulting in a $30 million increase to interest expense, again offset by a decrease in corporate expenses.

And lastly a reduction of EBIT in the electronics segment of $42 million in the first quarter, offset by an equal reduction to corporate expense in the first quarter.

We will fully disclose these items in our 10-K.

Now for the segment results.

Electronics sales for the quarter were $2.56 billion, down 3% from the third quarter and down 8% from the fourth quarter of last year.

EBIT for the quarter was $234 million, resulting in operating margins of 9.1%.

Excluding TyCom, electronics sales for the quarter were $2.52 billion, which was about the same as the third quarter and down 3% from the fourth quarter of last year.

Excluding TyCom, margins decreased from 14.4% in the third quarter to 12.1% in Q4.

The lower margins were attributable to lower volumes and pricing pressures in electronics and markets which were most prevalent in telecommunications, power systems, computers and consumer electronics.

TyCom sales for the quarter were $41 million with a loss $72 million.

To address the continued weakness in the undersea fiber optics market we previously announced a strategic decision to realign the TyCom business.

We are now focusing on completing the TGN and maintenance of other third party systems.

We are consolidating a number of facilities and plan to operate at a reduced level based on current market conditions.

As noted previously, we have taken a charge related to this shift in focus of $2.2 billion pre-tax.

After the completion of the restructuring process at TyCom, and assuming no improvement in current market conditions, we continue to expect to reduce ongoing annual losses from the current run rate by more than half in the next 12-18 months with the same impact on cash spending.

Cash outflows estimated for Tyco in 2003 will consist of $200 million for the buildout of the TGN as well as an operational loss of $200 million.

Turning now to Healthcare and Specialty Products, sales for the quarter were $2.6 billion, up 3% from the third quarter, and 11% above the fourth quarter of last year.

EBIT for the quarter was $512 million with operating margins of 19.7%.

This compares with margins of 20.9% in the third quarter and 26% in the fourth quarter last year.

Excluding plastics, healthcare's margins in the quarter were 23.5%, up from the 22.3% in the third quarter, and compared with 27.2% in the fourth quarter of last year.

Healthcare performance continues to be driven by solid fundamentals, good international growth, as well as breadth of product.

The division continues to win significant multi-year contracts.

Our plastics business continues to be negatively impacted by rising resin prices as well as operating inefficiencies.

Additionally, we incurred approximately $40 million of charges primarily related to inventory obsolescence and receivables reserves.

With healthcare's strong leadership position in each of the markets it serves, and its planned increase in R&D spending in 2003, healthcare is expected to continue to present solid organic growth opportunities for the company.

Turning to Fire and Security, Tyco Fire and Security sales for the quarter were $2.89 billion up 6% from the third quarter and 27% above the fourth quarter of last year.

EBIT in the quarter was $323 million, with operating margins of 11.2%.

This compares with operating margins of 11.7% last quarter and 20.6% in the fourth quarter a year ago.

The decline in margins from the prior year reflects the acquisition of Sensormatic as well as pricing and competitive pressures in the contracting business worldwide particularly outside the U.S.

Tyco Engineered Products and Services sales for the quarter were $1.31 billion, up 9% from the third quarter and 16% from the fourth quarter of last year.

Revenues increased due to several large turnkey heat tracing projects as well as acquisitions partially offset by pricing pressure and market conditions.

EBIT for the quarter was $197 million with operating margins of 15%.

This compares to operating margins of 16.1% in the third quarter and 19.8% in the fourth quarter of last year.

Segment margins decreased due reduced royalty payments from divested businesses as well as market and competitive pressure on selling prices within the Flow Control and Fire and Building Products divisions.

For the quarter, we took restructuring and other charges of approximately $2.8 billion pre-tax reflecting $2.2 billion for the restructuring actions at TyCom and approximately $600 million in restructuring and other unusual charges within our other divisions.

These other charges include $109 million of additional goodwill write-offs within the Engineered Products and Services segment, $111 million of intangible impairments relating to cutbacks in ADT's dealer programs outside the US, $95 million relating to severance and other corporate restructuring activities and $285 million of restructuring impairments and other unusual charges primarily within the electronics business.

The cash-related charges associated with these programs approximate $600 million and will be substantially completed by the end of 2003.

The expected cash pay back is less than two years and the annualized run rate savings associated with the program is approximately $350 million.

Total goodwill impairment in the quarter was $745 million, leaving a goodwill balance at September 30th of $26 billion.

Looking ahead to the near term, we do not anticipate any major writedowns based on current levels of business performance.

Now moving to free cash flow for the quarter, free cash flow was $1.3 billion, and for the year our cash flow was $2.8 billion.

These results speak to the cash generating potential of our businesses.

The stronger-than-expected free cash flow during the quarter was primarily the result of strong accounts receivable collections with receivables decreasing approximately $275 million during the quarter.

Continued focus on inventory management resulted in a decrease in inventory of over $200 million.

Receivables and inventory improvements occurred in all segments.

Payables resulted in an $80 million cash outflow during the quarter which represents a market improvement over earlier quarters this year.

Capital expenditures for the quarter were $337 million, for the year the company spent $1.7 billion, approximately $275 million dollars above depreciation.

This ratio of CAPEX to depreciation should present us with opportunities to reduce CAPEX in 2003.

We currently have $6.5 billion of cash on hand and are well within our debt-to-cap limits in our covenants.

As of September 30th, we had a debt-to-cap ratio of 49.4%.

Together, with our cash on hand, this gives us a covenant cushion of approximately $8.5 billion.

In sum, Tyco's operations were solid this quarter and I'm optimistic about our prospects in the coming year.

Moving forward, Ed and I recognize that one of our biggest challenges is to earn investor confidence in Tyco and its numbers.

Obviously, the Phase 2 accounting review will contribute to that, but even more important, will be our quarter-by-quarter actions.

My philosophy is that financial reporting should be straightforward and clear.

By this I mean simplified disclosures with more clarity including a clear and unambiguous cash flow presentation broken down by business.

Additionally, going forward, the bar should be set quite high for any charge to be considered non-recurring.

In 2003, we intend to manage the business for cash first and EPS second.

Thank you, Dave.

Now I'd like David Boice to provide an update on the Phase 2 accounting review and give you a better idea of the progress we have made on this front.

David?

Thank you, Ed.

First, let me give you and review with you a little background concerning the scope and purpose of the accounting review.

When Ed Breen became CEO, he stated that one of his main priorities was to restore the credibility of Tyco with investors and regulators.

Accordingly, he directed that Boice, Schiller and Flexner as the company's outside counsel and forensic accountants retained by our firm perform this review in conjunction with the company's auditor PricewaterhouseCoopers.

In view of recent events at the company, this review is important if the company is to provide further assurances to shareholders and to regulators that accounting decisions are being made at Tyco appropriately and consistently with GAAP.

This review of Tyco's accounting begins with the fiscal year 1999 and extends through the fourth quarter of 2002.

The review includes a heavy emphasis on acquisition accounting.

We currently have more than 50 forensic accountants and more than 20 lawyers working on this project.

The information-gathering is taking place in more than 40 locations in the United States and abroad.

By the time we have finished, we will have reviewed hundreds of thousands of pages of documents, again with the focus on the major acquisitions during the period under review.

We have already conducted more than 100 interviews with Tyco personnel around the world.

We are working closely with PricewaterhouseCoopers and continue to keep the SEC and other authorities advised of our progress.

At this point, the review is approximately 60% complete.

Whenever you look closely at any company, particularly a company of Tyco's size and diversity, there will be instances where you find judgments that, while in accordance with GAAP, could have been treated differently.

Consequently, it is likely that some disclosures will be made in addition to what Dave discussed with you this morning.

However, without prejudging the final result, we have not found anything at this time that would meaningfully diminish current earnings.

And to the extent that any significant restatement of past results is required, that conclusion will, of course, be promptly disclosed.

Having said that, I emphasize again that the review is not over.

We have said that the accounting review would be complete by late fall and we continue to expect that that will be the case.

But I want to stress that what is most important to us is getting this right.

Thanks, David.

Now let me say a word about our expectations for the coming year.

Assuming current economic conditions, we are expecting earnings per share for 2002 to be more than $1.50 -- or excuse me, 2003, to be more than $1.50 but not to exceed $1.75.

With EPS for the first quarter at between 30 to 33 cents.

We do expect the first quarter to be our lowest quarter of the year.

We expect cash flow for 2003 to be in the range of $2.5 billion to $3 billion, and for the first quarter to be between breakeven and $300 million.

We have analyzed the tax rate for 2003 and currently expect the tax rate for the new fiscal year to be in the high 20s.

To further clarify, the fiscal '02 tax rate was reduced by approximately 2 .5 percentage points due to favorable tax adjustments in 2002 such as settling certain tax audits in various jurisdictions that will not recur in 2003.

The remainder of the rate increase in 2003 is primarily due to the full-year impact of lower benefits from interest deductions.

As we look out beyond 2003, and based on solid earnings and cash flow growth and assuming limited acquisitions and divestiture activity, we would expect to see a tax rate in the high 20s for the next several years.

Looking ahead, we believe there are three initial areas which we can work to improve operating performance.

We will begin putting the following initiatives into action this quarter.

As I had mentioned on our last call, we are implementing a Six Sigma program companywide.

I strongly believe in the potential of a uniform process improvement program with financial metrics that will be applied across Tyco.

Healthcare has already begun its Six Sigma program.

We will be carefully evaluating taking our manufacturing and facility footprint consolidation to the next step and by also capturing cross-segment cost savings opportunities.

Again, we will take our time on this but it will be a program we will be initiating during this year.

And thirdly, we will aggressively pursue additional supply chain integration across segments to realize further savings.

Let me wrap up by reinforcing that our two highest priorities are governance and liquidity.

On governance, our goal is to adhere to the highest standards by establishing processes and practices that promote and ensure integrity.

We are working to install a corporate governance infrastructure across the company including the Board, operating management, financial management, and employees.

Jack Crowell, the head of our governance and nominating committee, Bill Lytton, our new general counsel and Eric Pillmore, our Senior Vice President for corporate governance and their team are working hard on a wide range of initiatives that will establish Tyco as a company that follows best practices in corporate governance.

Our other priority is to create a capital structure that supports our long-term business objectives.

I am confident as I said that we will have cash flow and other financial resources to negotiate a more attractive financing package, and I have every expectation that we will address this issue as I have said well in advance of our February maturities.

That concludes our formal remarks.

Now I would be pleased to take any questions.

In addition, Dave FitzPatrick will be here for questions.

David Boice.

I also have with me our new general counsel, who I am also thrilled has joined us, has been here for a few weeks, Bill Lytton, and several of our other senior executives with us.

Operator, at this time, let's open up for questions.

Thank you.

Ladies and gentlemen, if you do have a question, please press the 1 on your touch-tone phone.

You'll hear a tone indicating you have been placed in queue and you may remove yourself from queue by pressing the pound key.

If you are using a speaker phone, we ask that you please pick up your handset before pressing any numbers.

Also, we would like you to limit yourself to one question per queue.

We'll first go to the line of Jack Kelly with Goldman Sachs.

Your line is open.

Good morning.

Dave, could you just share with us maybe some of the metrics in that free cash flow projection of 2.5 to $3 billion?

Obviously, we have the net income portion of it.

But maybe in terms of CAPEX, what you think working capital will -- you know, contribute, uhm to it?

You know, just some other key items.

And just a little bit of a follow-up on ADT.

Basically, what you did is didn't change, uhm, kind of the income or expense items, you just amortizing over a longer period of time that connection fee?

Could you just kind of elaborate a little on that deferral?

Thanks.

Sure.

Let me start, Jack, with your second piece first.

I mean, with respect to the ADT dealer program, you know, indeed, there is a portion of the connect fee which had been previously recognized up front that indeed we will be deferring and amortizing over the length of the agreement.

It's about half to be -- I mean, about half of the fee is going to be deferred and recognized over the life, you know, in this treatment.

Moving now to cash flow for '03, I mean, as we look at the operating earnings of the company, uhm, you know, in that range of 2.5 to $3 billion at the low end, CAPEX would be slightly above depreciation.

Ed and I continue to think that's an opportunity and we're working that through with the businesses.

There is no meaningful improvement in working capital.

You know, in those numbers.

Again, I think that is opportunity for the company.

There is reduced investment in TyCom of about $1.2 billion, I believe is the number in terms of lower spend there.

What's going against us is the $600 million of spend associated with restructuring.

So those are kind of the major items as you work from net income to our cash flow guidance.

Thanks.

Operator, next question.

Yes, sir.

That will be from the line of Chet Louie from Barclays Capital.

Please go ahead.

Good morning, gentlemen.

Just a quick one.

If you could just talk a little bit about how your (indiscernible) negotiations are coming along and also in relation to this can you comment on your conversations with the rating agencies with regards to today's results and charges?

Yeah.

Let me -- this is Ed.

I'll take the first part and Dave has been talking with the rating agencies lately so I'll let him take the second part.

Our bank -- by the way, bank conversations started to heat up, obviously, when I joined the company with our treasurer, Michael and I and others, and now that Dave has come on, Dave has been very involved in all the banking conversations that we have been having.

Our confidence level as I keep saying is very high that we will deal with it the way we want to deal with it before these February maturities.

And just to clarify, if it's not clarified, our goal, obviously, and our intent is that the February put will be taken care of in cash.

So just to make that clear.

To get into any details of what we're going to do and how we're going to do it I don't think would be appropriate at this time but we are honing in on a strategy of where we want to conclude and we are getting down to the detail with the banking group on how we want to proceed.

Dave you want to take the second part of that?

Yeah, in terms of rating agencies, you know, one of my goals obviously is to work very closely, you know, with the rating agencies.

Ed articulated our objective to achieve solid investment grade credit rating.

In terms of in terms of reviewing, you know, the results, those have been reviewed, you know, with the agencies and we look forward to continuing to have a close dialogue, you know, with the agencies in terms of the company's profit, cash flow and balance sheet position.

Let me also add, Dave said this in his prepared remarks but just to clarify because I know this has been out there.

We have analyzed our goodwill situation in detail and to clarify Dave's comment, we see no other major writedown in the goodwill category in the near future: Next question, please.

That will be from the line of Jeff Sprague with Salomon Smith Barney.

Go ahead, please.

Yes.

Thanks.

Just a couple of quick items.

I guess on the cash flow, if we could explore that a little bit further.

You know, we are looking at net income that's, you know, adjusted for charges reasonably similar in both years.

I think you had a fair amount of restructuring spending in '02 also.

So, you know, relative to not spending the $1.2 billion on TyCom, I'm a little surprised the number's not larger, maybe it's tax items.

Maybe you could elaborate on that a little bit more?

Jeff, let me just start out, uhm, look, we're obviously comfortable with the 2.5 to $3 billion cash target for next year.

Dave alluded -- we have quite a few items on our hit parade that we're going to be reviewing with the operations and have already begun reviewing with them.

Dave has already sat through a first round of intense reviews with all the businesses with me since he's been here.

And we know we have opportunity in our cash number for next year.

We are not prepared to commit to a different number at this point in time.

But just to highlight the one that Dave touched on, you know, the CAPEX was up around $1.8 billion with depreciation of a few hundred million lower.

This company did not underspend on CAPEX the last couple of years.

In fact, one of the numbers Dave and I both independently looked at was the level that it was at and we feel like we clearly have opportunity there.

And again, we've made no changes to really the working capital assumptions and there's huge leverage there in the company for improvement in that area.

And we are not world class in that area, so we're not dealing from a level we can't improve from.

So we know there's opportunity but I think it's premature for us to commit to a different range at this point in time.

And then a second question maybe for David Boice or whoever would like to respond to it, but the comment about, you know, judgment items and certainly this ADT change is a judgment item.

But the comment about if there's something material, it would be promptly disclosed.

I think was the way it was presented.

Is that how it was stated?

And does that in fact mean that there has not been something large and material at this point?

In other words, you're not saving something for the --

That is correct.

If we were to come across something that the company concluded required a material restatement, we would be obligated to make that public promptly.

With respect to the overall review and an analysis of best practices type issues and corporate governance and non-material items those are not being disclosed on a rolling basis.

Except where it's necessary in terms of effecting current year earnings, reports or something like that.

But the point that I was making was, if you did come across something that was a material restatement that would be something that we would not be holding back until the completion of the report.

Thanks, Jeff.

Next question?

As a reminder, ladies and gentlemen, please limit yourself to one question per queue.

We'll now go to the line of Lee Cooperman with Omega Advisors.

Go ahead, sir.

Asking me to limit my questions to one is like asking me to tell you which one is my most beautiful child. [ Laughter ] Anyway, you made a comment, Ed or Dave, either one, both of you actually that you want an investment grade rating capital structure.

And you also mentioned that you are going to handle the February put bond for cash where you have the option obviously of doing either stock or cash.

Does that implicitly say that you can achieve this investment grade rating capital structure without additional equity infusion into the company and just through improving operations and cash flow?

Yeah, uhm, Lee, let me -- I'm not hedging with this but I just want to be -- our investment grade rating is a process over a period of time.

So, you know, there's nothing I think there's events here when we do a financing that something just changes overnight so we're -- you know, Dave and I just have a philosophy that we have to be investment grade rating and we will earn that over an appropriate period of time with the steps that we take.

And I think we've clarified enough by saying, look, the February put is, you know, all along our goal has been I think before we joined the company we studied this, we knew that February put was going to be handled in cash.

And you know, I think that's enough to be said at this point.

And look, the good news is, our cash balance is sitting at $6.5 billion.

Everybody can extrapolate the gap that we would have even through all of next year in our funding.

And it is a gap that is, uhm, we have to work at, but it's very achievable for to us plug it in a way that is good for the company and good for our shareholders.

I see it, Lee, as a process.

It's a combination of operating results, cash flow and capital structure.

So I don't think we can to any single event.

I see it as a series of solid operating results with a capital structure that would indeed fit, you know, investment grade ratings.

Thanks, Lee.

And we have a question in queue from the line of Bob Cornell with Lehman Brothers.

Go ahead, please.

Good morning, everybody.

I think that sigh I hear what is a big sigh of relief across the street on the numbers you guys just reported. [ Laughter ] You know, I was wondering about the normal earnings power of the company.

You took what appears to be a lot of charges that you talked about, you know, that I didn't see in the press release and also the runoff of $200 million of inventory would tend to be -- tend to result in unabsorbed overhead in various factorys.

If you look at this company's operating profit, you know, what's going to be the adjusted operating profit margins?

Then maybe a comment on, you know, normal future margins in ordinary business conditions if that's possible?

Boy, Bob.

That's a lot! [ Laughter ] Let me answer at least I think the first part of your comment.

And just to highlight it, we did have additional charges here that Dave went into some excruciating detail on that went through normal operating results this quarter, which is the $175 million.

So please do take that into account.

I think that was what you were highlighting there.

We were still at the 30 cents of EPS with that.

So there was quite a bit in there that I would assume going forward the way we run this company, you know, hopefully we won't have numbers of that size and magnitude.

Look, we're going to get into a lot more detail, as I said in my prepared remarks, we're planning an investor/media conference in the first quarter, calendar quarter, of next year where by that time, Dave and I will be in a real position with the rest of the management team to talk you through what we think normalized margins are and growth over near term and longer term in the business.

But Dave, let me turn it over to you if you want to make any other comments.

I think I mean, Bob, we're not prepared to give you numbers by business.

But I think as we look at the company going forward, I mean, Ed and I are sizing up with the businesses, you know, margin improvement opportunities.

But as I look at margin -- as I look also at working capital, I mean, our model over time we are going to be improvements in those areas forever.

You know, we're not prepared to give you precise, you know, numbers in terms of goals or objectives today but I think sustained operating margin improvement and sustained year-over-year working capital turnover improvement is going to be at the heart of the operating excellence that we expect this company to achieve over time.

And clearly, we see the opportunity.

As we have sat through our rounds of ops meetings, it's a company that has performed well in the past but we see opportunity here.

There's no doubt about it.

So we can run this place much more efficiently, moving forward, and we will focus on that.

Thanks, Bob.

Next question.

Next question, operator?

Operator, next question.

Yes, sir that will come from the line of Bill Reed with Deutsche Bank.

Your line is open, sir.

Yes, thank you.

Couple of questions.

First, it seems to me your credit measures are investment grade already and your capital structure indeed is investment grade already.

If with a net debt to capital at 39%.

So the question is really are the banks treating you as an investment credit?

I understand you don't want to get involved in the specifics of the bank agreement, but can you comment as far as the negotiations?

Are you being considered by your bank group as an investment grade credit, as your credit measures and cash flows suggest and as specifically as that relates to pricing and covenant discussions.

Yeah, Bill.

Yes.

The answer is yes, to say it shortly.

I think -- we are viewed that way.

You know, we have a couple issues that we are dealing with.

The rating agency, the banks and by the way our investor base and that's governance and, right to your point, how we're going to deal with the short-term liquidity which we have many options.

So we obviously need to address those and I don't want to discount the fact that governance is important to everybody including our banking group.

They want confidence that this management team is making the right conservative moves going forward.

And it's one of the reasons I'm bringing in the type of team that I am bringing in to be at the top of this company.

So those are important issues that we have been addressing with them and having addressed those issues, they do view us in the light you just said as investment grade.

So from a pricing point of view, and from a covenant discussion point of view, you know, you at this point without getting too specific would expect that you would have a, uhm, an investment grade bank agreement at this point with -- which to me means the -- no security issues as far as banks being given security ahead of public debt holders?

Yeah.

Look, I don't want to get into the details on that again, we are going to leave all options open to us.

But I think you can tell by the leaning of how I answered that where we're headed.

But I'm not going to shut the door on any opportunities.

So I would like to leave it at that.

But you know -- you just gave the numbers.

Now how we should be rated and looked at, and obviously our banks know that, also.

And we'll next go to the line of Michael Reagan with Credit Suisse First Boston go ahead, please.

Thanks, good morning.

Mr. Boice, you in the earlier conference call referred to having looked at or conducted the forensic accounting sort of by previous acquisition by size.

Can you just update us on that?

You didn't sort of bring us up to date on that.

Can you just give us some sense of how the team has proceeded with the direction of the investigation relative to the 60% being complete?

Sure.

We are looking with some intensity at approximately 15 acquisitions.

Some of those were acquisitions that we had selected after initial review.

Some of those were acquisitions that regulators had suggested that we look at.

We have now completed some portion of the field review of 13 out of those 15 acquisitions including the five largest that are on the list.

I think that continuing work will be to undertake the field review for the two remaining acquisitions as well as to complete the field review for the acquisitions that we have already been undertaking.

I think that we also obviously as the review gets into the latter stages have to begin to complete the analytical work that is attendant to that.

I don't know if that responds completely to what you're asking.

But --

Well, you had implied in the earlier conference call that given you're 40% of the way through and that nothing meaningful had appeared to date or anything that required a meaningful restatement, that you had every confidence that that trend would continue.

Given the fact that we're further down the line and as you highlighted have looked through the biggest deals where the most controversy seemed to exist, was your original statement is that still fair?

I said that -- yeah, I said earlier today that we have not found anything at this time that would meaningfully diminish current earnings and I also made clear which I think everybody knows is that we would have an obligation to promptly disclose if we uncovered anything that required a significant restatement of past results.

So I think that as I indicated before, by inference, we have not discovered anything that would require a significant restatement of past results taking into account everything that's been gone over with you this morning.

And based on where we are now, we have not come across anything that would require a meaningful negative effect on current earnings.

Thank you.

Next question, please.

Yes, sir.

That will come from the line of Trey Ott of Nomira Securities.

Go ahead please.

Thank you.

All my questions have been answered.

Thanks.

Thank you.

For our next question, we'll go to the line of Harriet Baldwin with Deutsche Banc.

Please go ahead.

Good morning.

Dave, you had mentioned wanting to have additional clarity and more detail particularly on cash flow by segment and that combined with you and Ed's comments on CAPEX, is there any feeling that that could help drive better performance at the businesses?

And have you had a chance to review depreciation levels and think that those are in line as a measuring point from the opportunity on the CAPEX side?

Well, I mean, Harriet, as I look, you know, at the businesses, have I done any deep review of depreciation at this stage, the short answer is no.

But you're spot on in terms of an area we focus.

When I look at the cash flow generating power of our businesses, I think some of that transparency in terms of, you know, an investor look at the cash generating power by business, you know, is indeed helpful so stay tuned.

Will do.

I mean, I think that is a good healthy process.

Thanks, Harriet.

Thank you.

And as a reminder, ladies and gentlemen, if you do have any questions, please take this opportunity to press the 1 on your touch-tone phone.

We'll next go to the line of Wanda Kaplan with Wachovia Securities.

Go ahead, please.

It's Wendy Caplan from Wachovia Securities.

We knew that Wendy. [ Laughter ]

Could you address, please, your current pension plan return assumptions, the underfunding of the plan?

You know, historically, you had been at a pretty high level relative to your peers on both counts.

What do you expect going forward, please?

As we look at 2003, Wendy, we're look at an 8.5%, asset earnings assumption.

Other key assumptions we are looking at a 6.75% discount rate.

The underfunded situation, you know, was about $1.7 billion at year end.

And as a consequence, we had an additional charge to equity if you will in the OCI category of a little over $400 million.

We think those assumptions, you know, are in line with where we should be based on current market conditions.

And we have a question in queue from the line of Peter Jacobs with Wells Fargo.

Please go ahead.

Yes.

Good morning.

Could you please review the funding obligations through the end of calendar '04 just so we are brought to update on that please?

Through the first quarter of '04.

Okay.

Hang on.

Michael, do you want to just run through it?

Sure.

Go through the maturities.

With respect to first quarter there really is nothing from a debt standpoint.

That is again our quarter ended December 31st.

Our second quarter would have a total of just under $6 billion.

That would include the $3.9 billion bank debt that we have been talking about as well as the convertible bonds.

The third fiscal quarter into June, there is approximately $750 million, and with respect to that fourth quarter, it's nearly $1.1 billion.

The fiscal year '04 first quarter, as you know, there's a $3.6 billion obligation there.

And I don't have the numbers beyond that.

But if you would like more detail, you can always give us a call.

Great, thanks, Michael.

Next question.

That will come from the line of Jean Dendes of SAC Capital.

Please go ahead.

It's Jean Vendechy with SAC CApital.

It looks like your debt in this quarter went down by about $1.9 billion.

And I thought although maybe I'm wrong that you had about a billion of maturities coming due.

So did you repurchase other debt or am I just mistaken?

In the fourth quarter, we repurchased about $500 million in debt in addition to the scheduled maturity we had of just over $1 billion and the $300 million Japanese bond that you have heard us talk about before as well that was redeemed.

Okay.

And --

Let me also add, I know I think this was Lee Cooperman's question with me a few weeks ago or so that we do plan on selectively buying back some debt in the market during this quarter.

I'm not going to talk the size and all.

But we are expecting to do that where I had stated a few weeks ago being conservative we had put that -- stopped it and that when Dave came on, we would be reviewing that which we have and we will be going into the market selectively.

Okay.

So, uhm, the $500 million, what maturity was that?

It was an array of various debt instruments that would come due between now and November '04.

And we can give you those details at another time.

We have a question in queue from the line of Barry Baniste with Legg Mason.

Go ahead, please.

Barry Bannister.

Gentlemen, the capital structure and earnings power question seems to be lifting and the only real monster left to drive a stake through is this review.

Just at risk of beating a dead horse, I guess my question is for Mr. Boice, you know, as -- for example, in the Florida elections, when you have very large statistics sizes. [ Laughter ] The odds of deviating from even a small margin of error prove to be very small.

Very, very -- they diminished very rapidly.

So I'm asking this: You know, your firm and its hires have looked through hundreds of thousands of pages.

So statistically the sample size is enormous.

And I think it goes without saying is that the odds favor that no wrongful findings will be noted.

It's not the kind of thing in statistics where it deviates much when you get into size of a sample.

So I guess based on your experience, my question is: Do you feel that that is likely to be the outcome, given the sample size that you've already dealt with?

Let me break that down into two pieces.

First, I think that when we get through, the sample size that we will have used will give us a lot of confidence that we will have uncovered anything significant.

That is to say, we're obviously not reauditing the company and going through every, single accounting issue.

But the extent of what we are doing is such that when we are through, I think that you can have a lot of confidence that we have uncovered anything that was going to be major.

The second part of it, though, is: Can you extrapolate from what we have now done as to whether there is anything out there or not?

And with respect to that, I think that you've got to divide it into different categories.

Whenever you look at a company of Tyco's size and diversity, there are almost certainly going to be some instances in which you find things that looked at after the fact by a best practices analysis, you would conclude could have been done differently.

And there will undoubtedly be some additional disclosures in addition to what we have talked about today along that line.

On the other hand, if you're talking about things that are going to materially affect the current earnings projections or something that would require a major restatement of past results, under those circumstances, I think that is the kind of thing that you could reasonably expect on a statistical basis that we would have uncovered.

As I say, the company has an ongoing obligation if we come up with anything that requires a material restatement of past results to make that public and to do so promptly.

We're not sitting on anything.

If the question is are we sitting on anything like that, the answer is that we are not.

When I said earlier that we were not announcing sort of our findings on a piecemeal basis, that had to do with the kind of analysis that did not relate to something that would either materially cause a restatement of past results or a significantly diminished current earnings projections.

So I think that if you look at what we have done so far, you can sort of reach your own conclusion as to whether or not we will uncover in the remaining work anything that's particularly major.

But I think that I would have a lot of confidence, that once the work is done, we will have uncovered anything that would be particularly significant.

Operator, let's take one more question at this time.

Yes that will come from the line of John Inch with Merrill Lynch.

Go ahead, please.

Thank you.

And I just want to follow that up and maybe try and focus the question for David Boice one more time.

The market's concerned about about a large fraud given the misappropriations or alleged misappropriations by the previous management.

With 60% of the investigation complete, I'm wondering, how do you characterize what percent of the risk of a large fraud is behind us or has been tackled and would it be fair to say that as we move through November, in keeping with the late fall timing, if we haven't heard anything, what you're saying is there likely is no very large fraud here?

I think that is a very fair inference.

And while I tried, obviously, to avoid prejudging what we are going to find, if you focus on the existence of a very large fraud, and maybe this is something I shouldn't be, you know, talking about at this stage, but the fact of the matter is that I would be very, very surprised if we uncovered a very large fraud at this stage.

The work that we have done thus far I believe would have been sufficient to uncover any very large fraud that existed there.

I don't think that's there.

Thank you.

I hate to end on that question.

But everyone, thank you for joining us today and look forward to talking to everyone again in the near future.

Thanks.

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