江森自控 (JCI) 2003 Q1 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by and welcome to the Tyco International earnings release conference call.

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

Later, there will be an opportunity for questions and answers with instructions given at that time.

Should you require assistance during the call, please press 0 followed by star and a specialist will assist you offline.

As a reminder, today's conference call is being recorded.

I would now like to turn the call over to our host, Chief Executive Officer, Mr. Edward Breen.

Please go ahead.

Good morning and thank you for joining Dave FitzPatrick and me today.

Before we start, let me remind you that during the course of the call, we will be giving forward-looking information.

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.

Unless otherwise noted, all information discussed on the call will be presented in accordance with GAAP for fiscal year 2003 as opposed to pro forma for prior periods in fiscal 2002.

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

Dave will discuss our operating results by segment and provide more details on our performance and then after that, we would be happy to take your questions.

Let me start by saying our first quarter cash flow, revenues and earnings came in within our expectations.

Free cash flow for the quarter was $482 million.

Above our previous estimate of 0 to $300 million.

This compares to a negative cash outflow of $216 million in the first quarter of last year.

I should note, the cash flow for the quarter benefited from employee bonus payments of approximately $200 million being paid earlier this month.

Rather than in the first quarter, which is our customary practice.

I had decided to delay bonuses until after the filing of the 10-K and because of some of our businesses were unable to process the bonus checks by year end, a significant portion of these payments were not paid until this quarter.

Let me remind you that the amounts reported today are under the company's definition of free cash flow, which is operating cash flow less capital expenditures, TGN spending, dividends and excluding any increase or decrease under our receivables program.

As we discussed last quarter, we are reviewing a possible change in this definition and we will discuss that in greater detail at our investor meeting.

By the way, this investor meeting will be held in New York City on March 13.

We will get back in touch with you later on the time and location of the meeting.

Revenue for the quarter came in at $8.9 billion, compared to $9.3 billion last quarter and $8.6 billion from continuing operations for the same period last year.

Sales increases over the year ago quarter were most notable in health care and fire and security businesses.

Sequentially, the decline was primarily due to seasonality and commercial construction weakness in fire and security and engineered products.

Given the difficult economic climate, these year-over-year revenue results demonstrate the strength of our market position, the appeal of our products and services, and the continuing hard work of all of our employees.

Income for the first quarter was 32 cents per share, in line with our previously stated expectations of 30 to 33 cents for the quarter.

Overall, margins for the quarter were 13.3% compared to 12.9% in the previous quarter and 19.4% from continuing operations in the year ago quarter.

Margins for electronics components, engineered products and plastics showed sequential improvements.

Fire and security experienced a sequential decline due to weak contracting and commercial markets and health care saw a decline because of increased selling expense and reduced international volume.

Looking back over the past months, we have made major progress on the corporate governance front and refinanced our short-term debt lifting what I consider to be the two major clouds hanging over the company.

Regarding our liquidity situation, we completed a $4.5 billion convertible bond offering that, together with our current cash on hand and a commitment for a $1.5 billion credit facility, will give us the flexibility to meet our financial obligations.

With our financing now behind us, we can now focus our attention on building the value of the strong businesses that make up Tyco.

These businesses are leaders in their industries and are well-positioned to deliver solid results as the economy recovers.

As you will hear from Dave, working capital was unacceptable and as we turn our attention to our operating performance, we will be addressing this issue.

Dave will take you through more detail on these components of working capital.

Turning to our businesses, health care is a leader in one of the country's fastest growing and most attractive industries.

Long-term demographic trends and rapid scientific advances will drive growth in our health care companies and the products they make for some time.

We have raised health care R&D by $50,000 in fiscal 2003 in order to increase the pipeline of new products.

We have very specific programs targeted for this R&D, and the management team at Tyco Health Care is committed to maximizing the return on these investments.

Plastics and adhesives, um, I think as you know, is no longer part of the health care segment.

This business has a new president, Dave Robinson who reports to me, and he is evaluating how to build the value of these businesses.

The plastics industry is generally a needs business and Tyco plastics and adhesives has the leadership position in many of these segments.

We will have a disciplined focus on key customers and mining productivity improvements and new product development, procurement, manufacturing and asset managements.

At Tyco fire and security, I believe our businesses will be in the sweet spot for the next decade.

Growing worldwide concerns about safety continue to attract both consumer and commercial customers to our companies, which have some of the strongest brand names in the business.

At ADT, we have reduced acquisition spending on new dealer accounts and strength and standards for new accounts, which we believe will increase margins over time.

Despite short-term weakness in the commercial construction market, we are enthusiastic about long-term growth possibility in this business, given the size of the market that is still undeveloped.

Tyco engineered products and services is a market leader in many segments of a fragmented market.

Given the increasing focus on the environment and clean water, as well as the sustained demand for thermal-controlled products, we think this business is positioned for steady growth.

Our electronics businesses are also number one in many of their sectors.

The expected growth in demand for electronics and new devices and established products that continue to stimulate growth in these businesses.

In the telecommunication sector, we have cut back our investments to limit further exposure while positioning ourselves to take advantage of any upside that might occur if there is a turnaround in the undersea fiber-optic business.

Going forward, we will focus on organic growth and greater efficiency.

We are scrutinizing Cap Ex in order to bring spending to appropriate levels while ensuring that the high priority programs have the funding they need to contribute to long-term growth.

We're also now beginning to pursue supply-chain integration across segments, we are beginning to implement six sigma type systems that are designed to increase productivity and profitability in every part of the company and evaluating how to consolidate our manufacturing and facility footprint.

In short, with the events of the past six months now behind us, we can turn our full attention to growing revenues, increasing margins and improving return on capital in every one of our businesses.

Now, let me turn it over to Dave.

Thanks, Ed, and good morning, everyone.

I would like to take you through the details by segment of our first quarter results.

But first, let me make brief comments about our capital structure.

As Ed mentioned during the quarter, we solved our short-term liquid issues with the sale of $4.5 billion in convertible debentures, as well as commitments for a $1.5 billion bank facility.

The convertible deal was very well received by the financial community and was significantly oversubscribed.

We issued two series of securities.

Series A are convertables totaling $3 billion with conversion price of $22.78 per share, carrying a coupon rate of 2.75%, these securities carry 15-year terms with the first put date in 2008.

The Series B converts are 20 year securities with the first put date in 2015.

They total $1.5 billion with the conversion price of $21.75 per share and a coupon rate of $3 and 1/8.

We have already repaid the $3.855 billion credit facility that was set to expire in February and will be tendering in cash for the $1.8 billion in convertible debt also due in February.

Going forward, we're targeting a capital structure that merits a solid investment grade credit rating.

We believe that our capital structure and operating performance will allow us to achieve that target.

With these financings, cash on hand and expected 2003 cash flow, we should have no problem meeting our next significant payment of $3.5 billion in November of 2003.

And beyond that, we have no significant maturities of debt until 2006.

That means we have some time to strengthen the cash and capital structure of the company.

Of course, it's critical we deliver on our earnings and cash flow commitments, which we have done in this latest period.

Let me start the review of the first quarter by telling you what we liked and didn't like during this period.

While we reported nonrecurring items in the first quarter of fiscal year 2003, for purposes of this discussion EBIT margins from prior periods are pro forma to show operational trends.

Let's start with the positives.

We delivered on our commitments for earnings in cash flow during the quarter.

Second, we reported our numbers all in, reporting no nonrecurring items for the first time in years.

Included in the results were approximately $40 million of Phase II costs and $15 million in cost improvement actions primarily in engineered products and services.

These were primary -- I'm sorry, these were partially offset by a $20 million reimbursement from a former director and $3.5 million of reversals of prior-year restructuring actions.

Next significant positive, Cap Ex was below depreciation and well below a $1.8 billion annual run rate.

Finally, our debt-to-capital position improved to 48.3%.

Now, let's turn to the negatives.

Working capital performance was unacceptable during the period, particularly accounts payable.

We will be intensely focused on these areas and expect to see improvements going forward.

Next, quarterly sequential margins declined at fire and security and health care due in part to lower volumes.

The overall performance at fire and security was disappointing in both earnings and cash flow.

Corrective action plans are being implemented across ADT U.S. and fire protection businesses where particular weakness was noted.

Now, let's look at the businesses in more detail.

First, at Tyco electronic sales for the quarter were roughly $2.5 billion, about level with the fourth quarter and down 10% from the first quarter of last year.

EBIT was $293 million compared to $241 million in the fourth quarter and $526 million in the same period last year.

Operating margins for the quarter came in at $11.6% for the entire electronics division compared to margins of 18.7% for the first quarter of 2002 and 9.4% for the fourth quarter of last year.

Excluding TyCom, margins improved from 12.4% in the fourth quarter to 14.3%.

Year-over-year results were negatively effected by volume declines in the telecommunication-related business, including losses at TyCom.

Sequentially, these were offset by growth in our automotive business and cost savings.

Automotive revenues grow as we continue to win new business globally in the electronics portion of vehicles continued to increase.

Cost savings initiatives and restructuring programs announced last year accounted for sequential improvements in margins.

First quarter TyCom sales were $26 million compared to $43 million in the fourth quarter of last year and $405 million in the first quarter of the prior year.

In the current period, TyCom had operating losses of approximately $65 million compared to losses of $71 million in the fourth quarter and operating profit of $67 million in last year's first quarter.

As we have announced previously, we are continuing to realign the TyCom business and going forward we continue to expect to reduce ongoing annual losses from the current run rate of $260 million to an annual run rate of about $125 million by the end of the year.

At which point the cash outflow should approximate the net loss.

Our book-to-bill for this business was about 1-1 overall with commercial and industrial above 1.

At fire and security, sales were about $2.8 billion down from $2.9 billion in the fourth quarter and up from $2.5 billion in the first quarter of 2002.

EBIT was $271 million with operating margins of 9.8% compared to 11.1% in the fourth quarter and 16.5% in the first quarter of last year.

The lower EBIT and operating margins in fire and security were attributable to weaker commercial construction markets and higher bad debt expense in security.

As mentioned earlier, the results for fire and security were disappointing, particularly the decline in sequential margins and, again, corrective actions are being implemented.

Turning to our health care segment, sales for the quarter were approximately $2 billion, an improvement from last year's first quarter sales of $1.8 billion and slightly below sales of $2.1 billion reported in the fourth quarter of 2002.

The sequential decline is largely due to international sales and lower volumes in pharma and respiratory, while the year-over-year increases is the result of the Paragon acquisition and sales on our new contracts with Premier and Consorta as well as new product launches.

These results exclude Tyco plastics and adhesives from all periods, which as Ed said, are reported in their own segment.

EBIT for health care was $447 million with margins at 22.3%, compared with operating margins of 23.8% for the fourth quarter and 26.5% for the same period last year.

These declines were due to higher-selling expenses associated with new products and contracts and year-over-year increases in research and development.

Moving on to engineered products and services, sales were approximately $1.2 billion, up from $1.1 billion in the first quarter of last year and down from $1.3 billion in Q4.

EBIT in Q1 was $137 million with operating margins of 11.5%, an improvement from fourth quarter margins of 10% but below first quarter 2002 margins of 15.1%.

The erosion of profits and margins year over year was due primarily to lower volumes and selling pressure in the North American and European commercial construction market.

Sales for the plastics and adhesives segment were $451 million compared to $477 million in Q4 and $439 million in Q1 of 2002.

EBIT for the current quarter was $44 million, up from $15 million in Q4 and down from $94 million in the first quarter of 2002.

Higher sequential margins were attributable to the absence of nearly $40 million of cleanup costs in Q4, slightly offset by reduced volumes.

Turning back to Tyco as a whole, our tax rate was 28% in the quarter and is expected to remain at this level for the year.

This compares to a rate of 17.1% in the year-ago quarter.

Net interest expense for the quarter was $263 million, up from $189 million in the year-ago quarter reflecting a higher average debt balance as well as higher interest rates due to credit downgrades during fiscal year 2002.

We had $68 million in corporate expenses, which included approximately $40 million of Phase II and related costs, which were partially offset by a $20 million reimbursement from a former director.

Free cash flow for the quarter was $482 million, for comparisons sake for the first quarter last year, this cash flow number doesn't include about $200 million in employee bonuses that were paid out after the end of the quarter.

As mentioned earlier, working capital performance was poor.

Payables declined almost $475 million, our inventory grew by $108 million.

This was modestly offset by receivables which, excluding the impact from securitizations, decreased $97 million in the period.

These working capital outflows more than offset cash inflows from taxes.

Net Cap Ex for the first quarter was $314 million, approximately $50 million below depreciation for the period and down from $569 million in the year-ago quarter.

Our cash position on December 31st was $5.7 billion.

This excludes over $700 million in restricted cash and short-term cash invested for over 90 days.

At the end of the quarter, we had a debt-to-cap ratio of 48.3%.

The net debt-to-capitalization ratio was 36.9%.

In summary, I think the results for the period provide us with a good base to build from, and I am optimistic we can continue to build on that base over the remainder of the year.

We recognize that investor confidence must be earned, and we believe by meeting our targets we can begin to earn investor trust.

I will now turn it back over to Ed.

Thanks, Dave.

Looking ahead to the rest of the year, and assuming that current economic conditions continue, we expect earnings per share for 2003 to be at the lower end of our previously-announced $1.50 to $1.75, reflecting dilution associated with the refinancing of our debt and higher-pension expense.

For the second quarter, we expect earnings to be between 33 and 35 cents per share.

We still expect cash flow for 2003 to be in the range of $2.5 to $3 billion.

For the second quarter, we expect cash flow to be between $450 million and $750 million, which includes the impact of $200 million in bonus payments made this quarter.

This earnings guidance anticipates sequential revenue increases and margin improvements resulting from productivity gains and a results of the 2002 restructuring actions with the most notable improvements occurring in the second half of the year.

To wrap up, I want to emphasize that the new management team here is more convinced than ever that we have a strong foundation of high potential operating businesses at Tyco.

Obviously, however, the performance of those businesses is far from where it should be, and we know we have a lot of work to do to improve profitability, return on capital and build shareholder value.

As Dave pointed out, we're particularly significantly challenged at fire and security, although there are issues throughout the company that we need to tackle.

For the first several months we were here, this team had to concentrate on problems from the past.

We have now made much progress in getting those behind us.

We have created a new senior management team, recruited new directors, put new financing in place, and resolved our liquidity issues and undertaken a full review of our businesses.

So, as we move into the rest of the year, we are focused on the future and the goal of capitalizing on the underlying strengths of this company.

We are going to make all the tough decisions and take all the necessary actions to reach that objective.

That concludes our formal remarks.

Now, we will be pleased to take any questions, um, in addition to, by the way, David FitzPatrick with me, we have some of our other senior executives here.

Operator, if we could open for questions.

Ladies and gentlemen, if you do wish to ask a question, please press the one on your touch-tone phone.

You will hear a tone indicating have you been placed in queue and you may remove yourself from the queue at any time by pressing the pound key.

If you have already pressed the one, please press the one at this time again.

We will now take the first question from the line of Harriett Baldwin with Deutsche Banc.

Please go ahead.

Good morning.

I was wondering if you could give any details on the action plans that you mentioned both on working cap and on the security and fire margins.

Oh, on the on the working capital, Harriett, you saw the results this quarter, um, especially the payables.

It's unacceptable to all of us.

Dave and I are literally, in fact, I'm leaving today, we're beginning our meetings with the businesses and, you know, in detail now.

And we will put very strong metrics in place, um, with all the businesses.

I don't think there is any reason the payables picture shouldn't improve fairly quickly for us here, um, in this quarter, um, and finally, the biggest issue in the payables area was at fire and security, and I do think we can get an improvement in that area, but we'll just put strong metrics in place in our receivables area.

As you can see, by the way, from the working or from the Cap Ex spending, I think we have been beating that drum pretty heavy around the company.

It did come in about where Dave and I think it should run on a run-rate basis for the year, but we will also put metrics in place there by business, which we will just be doing over the next couple weeks.

So, to keep it at the lower rate, um, by the way in addition, one of the areas I have been most concerned about, um, is -- is, kind of, our operational efficiency and fire and security and specifically at ADT, and we did just institute our six sigma program.

It's beginning at ADT.

We launched it about two or three weeks ago, and so we put stringent metrics in place, and operational improvements that we're looking for that business.

I think over the next 60 days, I think we'll have our hands around where we can really squeeze this thing and improve the working capital, but, again, we're going to do it across the company.

And is the cash flow target for second quarter assuming some improvement in payables or would that be on top of the guidance?

No, we're assuming there is some improvement in payables, Harriett, there, and by the way, just highlighting again what I did say, it does includes the $200 million of bonus so with that this there, we're still saying we'll hit in the range of 450 to 750.

Great.

Thanks.

I'll let somebody else -

And if you add up the first and second quarter cash, 'cause I don't - I know the bonus could confuse people, I think when you add.

If we hit the midrange of the 450 to 750 and including the cash we generated in the first quarter, we will be ahead of our projections we had at our 10-K on our roll-forward as we hit the half-year point.

Great, thanks.

Thanks, Harriet.

Your next question will come from the line of Bob Cornell with Lehman Brothers.

Please go ahead.

Thank you.

Good morning, everybody.

You know, Ed and Dave, and if Jurgen is there too, this question could get directed to him, I mean, what sort of headway you guys have you made in electronics, you know, adjusting the footprint.

I mean, I think, you know, when you guys bought AMP a number of years ago, there was way too many plants in North America, and I think there Mr. Gromer is making some changes in regard to getting the footprint closer to customers in Asia.

So I would like to have a bit of an update there and then, you know, if these are trough margins, I mean, when you make the footprint adjustments and get that business squared away, I mean, what do you think that you know, we should expect in terms of normal margins in electronics, exTyCom?

Yeah, Bob, I guess one of the things for this year, um, we expect margins to trend up in electronics throughout the year.

We have baked in plans that do that, so we think we're going to see sequential improvement as we go through the year, and we did during this last quarter, and as you said, when you take TyCom out, the margins are a little above 14% --

Not bad.

Not bad.

Our feeling is that these margins should be in their 17 to 18% range, um, and that's where we can work our way to.

Um, one of the issues and it goes back to the first part of your question is: If -- and I'm just giving you a ballpark here -- the manufacturing footprint issue has been dealt with to some extent over the last 18 months, but if I gave you a percentage, I would say it's about a third or -- to 40% of where we would want it to be as far as taking the footprint from North America and doing two things, consolidating it some in North America into a few less facilities, but also then moving part of it overseas, so we're in that process, but there is a fair amount still to do there.

We're actually right now expanding into China and a little more into Mexico, but again, maybe we're halfway there.

That would be probably in the high-end.

We have a lot we can still do there.

Just one follow up question.

You mentioned the R&D increase in health care.

What would you consider the R&D effort in electronics relative to what it should be and are you going to make any changes there?

I think it's about okay, Bob.

When you break down the different businesses, I think you will see, and we'll hopefully do this in more detail, a lot more time at the analyst investor meeting in March, but the connector margins or R&D is sitting in the 4.2, 4.3% range, which is in the range of where those, um, that industry kind of competes on R&D, and maybe it can be a little higher but that's where it's at.

You take our MayCom business, we're running 17 to 18% R&D there, but a couple of businesses under 1%.

So you really got to take the mix.

When I look at the connector piece, a huge part of our electronics business, I think we're in the pack.

Okay, thanks, guys, I'll pass the baton.

Thanks, Bob.

Thanks, Bob.

We'll now go to the line of Don MacDougall with J.P. Morgan.

Please go ahead, your line is open.

Good morning, everyone.

Hi, Don.

I guess I think the market's probably looking at the guidance for the next quarter and then looking into the second half of the year and saying we have a pretty -- pretty healthy ramp to get to, um, the low end of the guidance range, let's say $1.50.

Looks like you have to do about 84 cents in the second half, and I'm wondering, you know, there are some obvious, um, things that drop in, lower pay, you know, no more payments on Phase 2, lower losses on TyCom, but I was hoping that we could maybe get more deliniation on that sequential run on earnings into the second half.

How much are you looking for, um, on the cost saves and some of the businesses you talked about earlier, um, seasonal trends, um, anything you could point us to there, I think, would be helpful.

Okay, let me, maybe Dave will want to jump in also.

We think -- and I think this is typical of our businesses that our revenue by and large will ramp as we go through the year quarter to quarter, so I think you saw our lowest quarter, um, on revenue in the first quarter.

And, again, I wouldn't deny there is probably was some push at the end of the year in our businesses, you know, to obviously ship as much as we could.

You're seeing a little bit of that there, but, again, if you look year over year on revenue, first quarter, first quarter, we did grow about 4% or so, um, and I think we'll trend up generally throughout the year, and obviously a big part of that increase drops to the bottom line.

Um, if you go kind of a little more specifically, um, we are clearly expecting health care to grow very nicely throughout the year, um, we do expect the margins, although we drop the 1 point sequentially in margins in health care, we do expect them to hold up in the range.

You kind of saw us report, um this, quarter, um.

The slight softness that we did see was a little bit on the international front, which we think recovers in health care, and we also saw a little bit of softness on our retail, diaper products, um, you know, so the rest of the business held very nice, and we think it will hold there.

But we expect nicer revenue growth so we get a nice bottom line drop on that business, um, if you heat plastics, I means, I think we're bringing in an operating management team to run this thing and it's been somewhat unfocused.

You're gonnal see us grow the revenue slightly in that business and you're gonna see operational performance improve the bottom line there just by the intense focus we're putting on it.

In electronics, and this is one of the bigger areas, that um, we're expecting a ramp as we go through the year.

We're not expecting much of a ramp on revenue in electronics, but we are expecting a decent build in our margins in electronics and it looks like as we exit the first quarter, we were on target for what we thought we would be after one quarter and appear to be target with our goals for the second quarter, so our confidence is, um, -- is building there.

Um, the -- the engineering products, um, again, we're going to have growth on the revenue line, um, and we expect bottom line growth throughout the year.

Although I would say lower than our health care business, um, but we'll grow as we go through the year.

And the one that, I think Dave and I, obviously got to spend a big bulk of our time on very quickly here is fire and security, um.

It is where we saw, you know, some of the bigger issues, I would say this quarter, um.

We are expecting slight ramp in revenue in that business, um, and we are expecting, though, larger bottom-line growth in the second half of the year there, but there are some corrective actions we have to put in place in fire and security to make sure we hit that, and one of those items would be some cost controls that we will take.

Okay, one more quick one for Dave, excuse me, if I could.

Deferred taxes, Dave, on the cash flow statement, I think it was up $360 million source, um, that would be bigger than I would have guessed in just looking at the deference between your book and your tax provision.

Could you maybe give us more clarity there and tell us what the trend will be on the cash flow statement for that going through the rest of year.

Sure, Don.

During the quarter, I mean you're right.

A big difference between book and cash taxes.

We did get a slight refund, um, in the first quarter and for the year, we expect to see cash taxes be pretty significantly below, you know, the 28%, um, book tax rate, you know, for the year.

So we aren't going to see, you know, the cash-in flows in future quarters, but we should see for the year a pretty significant differential as we stated, I believe, on the last call in terms of, even though the tax rate is higher from a book standpoint, we expect to see a differential similar to what we have seen in prior years in terms of the difference between cash and book taxes for 2003.

Thank you.

Thanks, Don.

Your next question will come from the line of Barry Banister with Legg Mason.

Please go ahead.

Hello, gentlemen.

Hi, Barry.

You know, if it had not been for the $200 million bonus deferral and underspending depreciation exTGN on Cap Ex and collecting $20 million from the former Director Walsh, you really would have been break even on free cash flow.

So would you talk about the sustainability of capital spending at this very low rate, ex the TGN?

Yeah.

I'll let Dave give you some more detail, Barry.

But look, one of the things, I view it as an opportunity for us moving forward, but as Dave mentioned in some detail, our working capital performance was not good.

Um, and we should be able to really work that and improve that, I mean, so despite the working capital performance, we did have the cash we had and, by the way, I would highlight, um, you know, the cash the company generated last year was about $2.8 billion, and we started last year in the first quarter with negative $216 million as the direct comparison.

You can look at this's few ways but we clearly, I think our performance improved absolutely, and that was despite the, um, atrocious working capital, which I think will improve significantly now as we go through the year.

Dave, another thing?

I think it's, Barry, touching on your Cap Ex point.

I certainly don't see starving of the businesses in terms of capital.

I think as we have said repeatedly, there is some opportunity to take down, you know, the Cap Ex, um, over the years.

So, you know, this was not, you know, a conscious push in terms of rejecting things that the businesses absolutely needed to have, so I don't want anyone to think we're under investing, you know, in the businesses.

But, you're right for the quarter, um, the depreciation was greater than Cap Ex and a source of cash.

I would call our cash performance, um, you know, for the quarter acceptable and a base that we can build upon, because I firmly believe that what we saw, if you look at working capital over the last two quarters, what we saw as a benefit in the fourth quarter left us in the first quarter, and I'm convinced we can improve, you know, our working capital performance during the remainder of the year.

And as a related issue on the working capital, when I look at the, um, fire and security, I'm curious as to whether it was fire or security that caused the sort of blowup on the payable side.

And then in addition to that, I'm curious as to why there was not more of a receivables problem given the highlighted issues you cited regarding municipal work where typically, when they go into trouble, they defer their payments as much as possible, so, could you just add more color to the fire and security working capital problem?

As we look at, you know, first on the payable side of things, um, I would state that the, you know, the payables decline was pretty much across the board, you know, in fire and security, but with the special, maybe emphasis on the security businesses primarily in the U.S.

With respect to the receivables side of things, no real issues or problems as to the, you know, the contracting in the municipality area that you referenced.

Thank you.

Barry, just as a point to add on the working capital, you know, despite this performance, one of the things we are not seeing is, um, on difficult terms from vendors, issues with customers, um, you know, if anything that has subsided for us, especially with the financing we just did.

If there was any, kind of, residual from that, it's kind of dissipated, so, we're not seeing any of that problem.

Even with that, we didn't improve our working capital.

I think the opportunity is there for us.

Thank you.

Okay.

We'll go to the line of John Inch with Merrill Lynch.

Please go ahead.

Thank you, good morning.

I just wanted to start with electronics ex telecom.

Could you maybe, if there is a way to just give us a little bit of a flavor as to how that business formed ex-telecom and maybe what your anticipations are for the telecom piece and then the rest of the businesses.

John, this is Ed.

X -- X telecom, Dave you may want to get the details on telecom to go through the numbers more here, but the electronics business revenues, if you take out telecom were virtually flat with the last quarter and virtually flat with the few quarters before that, running right about the $2.5 billion number.

As I think I said on the last call, John, my gut is just because of the trend we have now seen for quite a few quarters, where we really are bouncing along the bottom, um, but we are beginning to improve our margins in the electronics business.

Um, we did see additional softness, even keeping TyCom out a second, we saw some additional softness on the telecom side of the business, but we saw a pickup in the auto side of the business, um, and so they -- I think, you know, it's kind of high level, those two offset each other both revenue and bottom line.

Our goal is, as I mentioned a minute ago, the revenues, we're not planning much of a ramp during the year.

A slight ramp on the revenue line, but we are expecting more of a margin improvement as we sequentially go throughout the year in that business.

And part of that is, we have a restructuring in place, some in that business, cost containment in that business along with new key products coming out in the auto industry that should help those margins coming forward.

David, maybe go through some of the specifics on the TyCom.

As you can see year over year, that's the big swing.

Yes, when you look at TyCom, when you gook go back to the first quarters, you know, John a year ago, it was a -- a quarter was significant, you know, revenue and descent margins.

Obviously that shifted throughout the year.

And when you look at things on a quarterly sequential basis for TyCom, I guess I would say net-net, not a lot of change, a little bit of improvement, but with the restructuring we've announced for that business, we expect to see improvements throughout the remainder of the year, and therein lies some of the margins, certainly not all, but some of the margin improvement we expect electronics for the period.

We go back to the fourth quarter for the business, we saw improvements in a number of the businesses, we saw a little bit of weakness quarter-to-quarter sequentially and printed circuit board sales; however the good news is if we look at book-to-bill orders, we saw trends above one, um, in that area.

So, um, you know, that gives you a little more color, you know, in terms of, you know, the quarterly sequential trends.

Yeah.

Thanks and just as a follow-up, um, the prior management talked about, um, these distraction costs and a part of the derivative of that was just increased competitiveness, i.e; competitors looking to take share from Tyco as it was focused internally.

Could you maybe talk a little bit about the competitive dynamic in your businesses?

What you're seeing, maybe some areas where you think you have beaten back competitors or taken some share or where you think you're holding or maybe where you think you have given up some share.

Just high level, John, I think in health care, um, we have very solid position, and I think we have grown our position slightly during the year.

One of the key reasons is we -- we, um, had two major wins with the, um, consortium buying groups as Dave had mentioned.

And once you break into those, I think the flow of product has been very good.

We announced one of them four months ago, so we've had nice ramp in those and as we perform there, I think we'll see additional ramp in volume at those very significant buying consortiums.

So there, I feel very good, um, on the plastic side of the business, I think we lost some market share during the past year and I think, you know, the answer is the company tripped over itself on this one.

Um, you know, management changed a few times, it was up for sale, it was not for sale, it was not a pleasant situation that you would want to be in.

One of the reasons I wanted to split it up from health care, bring Dave in and just put stability and operating focus on to the business and an intense customer focus, but my gut is from what I have seen so far, we lost a few deals that we thought we would have had in the past and that hurt us some in that business.

Although I would say in that business, that's recoverable if we take the right steps this year.

I don't think that's permanent, but that happened.

On the fire and security side, I think we held our position, where we're at.

We're in very solid positions in both ends of that business, you know, you can gauge that one by the numbers, but I think we held there.

Engineering products, I think we had a good year marketshare wise.

And again, I think we'll do well marketshare wise this year, or again, organically growing in that business.

I would say in electronics, it was probably, um, my biggest concern when I joined the company because when I had first gotten here, literally on my first days, um, it was the one business I heard had some very key customers and you've heard me mention this before, that were very nervous about the liquidity and the financial health of the company.

Um, I -- my gut is we lost some medium to smaller deals in that business, but I don't think we lost any of the big contracts because we tracked them very closely, and I have personally looked at them with the electronics group.

I think that the pressure we had, which was a couple of our cell phone customers and auto customers has really totally subsided at this point in time with all the actions we have taken.

My gut is, I think our numbers probably show publicly from what I have seen that we held share if not gained a little.

But, I think you have to bifurcate that one a little in electronics and it's probably a little bit of a mixed bag.

Thank you.

Thanks.

Question now from the line of Brian Jakobe with Morgan Stanley.

Please go ahead.

Yes, good morning.

Just had a question with more on the capital structure.

Obviously looking out, you still have a $2 billion bank line and calendar first quarter of '06 and got some time there.

But clearly, eventually you will probably want to take that out prior to that maturity.

Can you give us any flavor for what the game plan is there?

Um, and perhaps maybe putting in a line, another line, um, with a five year maturity or a 3-year maturity?

Yes, Brian.

As we look at our capital structure- First, let me reiterate, our objective is to manage our business structure-wise and operationally to merit a solid investment grade credit rating.

In the path, um, toward that objective, you know, clearly, you know, the bank credit facilities will play a role.

But I think, you know, any discussion at this stage in terms of any renegotiations of the five year line is not really in our plans, you know, at this juncture.

Okay, so, um, you know, during the straight debt deal or replace that this year is probably not in the cards.

Well, you know, I mean hey, will we be looking within our overall capital structure as we look forward in terms of debt capital markets, you know, availability, but I wouldn't necessarily want to link any of that to the five-year revolver.

Okay.

And then one more, you know, debt question are respect to Moodys who obviously has you at the lower of the two agencies.

What kind of, um, internal conversations can you share with us, just what, exactly what perhaps what they need to see to, at least, change the outlook to positive and have it going in the right way, um, is there any specific you can share with us there?

Well, in terms of all the rating agencies, let me say that myself, as well as Martina Hund-Mejean with all of the agencies and as I look at an objective over time to attain a solid 6B credit rating, I think what we need to achieve is a number of quarters, and I don't want to quantify that.

But a number of quarters of solid operating and cash flow, um, performance, um, actions that underlie our words in terms of managing the capital structure for an investment grade credit rating and, um, we will continue discussions with the agencies and we think over time executing upon these objectives will, um, you know, yield the result we're looking for.

Okay.

Thank you.

We'll now go to the line of Jeff Sprague with Smith Barney.

Please go ahead.

Good morning, thanks, um, I guess first on fire and security, could you elaborate a little more, the magnitude of the bad debt expense and kind of the velocity there and how you see that playing out over the course of the year?

And is that an important part of kind of the margins improving over the course of the year, the -- kind of the extent of that winding down a bit.

We incurred, um, you know, bad debt expense, you know, largely in the security, you know, business and this was not just in the U.S., um, I believe it was U.S. and Europe.

In terms of getting a precise number for you and others, Jeff, I want to make sure we have the absolute, but clearly, you know, this is something, as you look at our allowance for bad debts, this is something that we plan to arrest and as part of, you know, the margin expansion opportunities going forward.

But would this item be the primary drop in the sequential margins or -- .

No, I would say it's a contributing factor.

When you look across the business, I mean as we mentioned, the weakness in commercial construction overall is impacting not just, you know, volumes but margins in that business, so if you look across our business, we saw about a point of margin decline in the fire, you know, side of the business and about a point in the security side.

The bad debt is a piece but, um, I would not say is the primary factor.

I would say overall lower gross margins and kind of equipment, both on fire and security is probably more significant than the bad debt expense, you know, as a single item.

Um, also I was wondering on the bonuses, is the, um, is the the $200 million the sum of what is being paid or did some get paid in the first quarter?

And, um, to follow up on, and I think what was said on the previous call and some of Ed's remarks on working capital, maybe you can address in a little bit more detail how people will be paid and what the key metrics might be in '03.

Jeff, um, I don't -- just to give you a comparison with the year before, I don't have the exact number but I do know bonus, I'd say bonus and commission, but mostly bonus is down from 2001 to 2002 but if you took the aggregate of 2002 on the bonus, um, payments, it's about $340 to $350 million.

Um, so $200 million of it slipping into payment in the quarter we're now in.

I will tell you, um, and you -- I think you heard me mention this before, um, that when I got here in the fourth quarter, the plan that was in place is not a plan, um, that I buy into.

It was a quarterly plan, um, that literally paid out quarterly, some of it, and some was held until the end of the year.

I don't think it creates the right habits and incentives in a company.

But I will say as another point, bonuses are extremely deep in this company.

I left in place, obviously, I got here, again, at the end of the year.

I was not going to change what was put in place, although I will tell you it was one of the reasons for the bonus delays.

We made quite a few adjustments to the calculated bonuses based on the final results of what we saw in the businesses, and they were downward revisions to bonuses.

Um, having said all of that, we are instituting a new bonus program for this fiscal year.

We're just rolling it out next week.

And I say that because we're already three months into the year, but I decided to take our time and get it right and roll out the proper program, even if it was a little bit late.

What we're rolling out is a yearly bonus plan based on the way I would say, probably Dave and I are used to it from our prior life.

It will be based on cash and EBIT of about 80%, and 20% of a person's will be the rollup of the total company of business for cash and EBIT.

Um, the other key is we're setting the targets obviously where the company as a whole has to meet, um, projections that we have given out publicly.

So we set the targets at the right level.

One of the things that occurred last year was because of the decline in a lot of the businesses, I would say the bar was not set may be appropriately during the quarters, um, and so that was another issue.

So we're having a fundamental change moving forward.

I can give you one number because I think it's important that I do know is accurate, we have calculated it, and that's that the senior management team of the company, um, this past year got paid out about $76 million in bonus and under the new plan that we're putting in place for 2003, if that management team, and that's hundreds of people, by the way, that management team hits its targets, that payment will be about $29 million.

So you can see the significant change that is occurring, which I think puts us in line with other, um, companies of our size and industry.

Um, one of the other key goals that we're looking at, we didn't actually get into the bonus metric but Dave and I will be focusing on with every business, and I think I said before we got the bonus plan at 80 to 90% where we want it.

But we will be putting in a working return on capital metric, but it will probably be in the hard bonus numbers as we go into 2004.

And just, um, one other follow-up item back to the earlier question about deferred taxes in the quarter, um, Dave were you suggesting then, that um, as we look out over the course of the year, um, I mean I guess that would still be a modest source, but you're suggesting we should not expect a significant source from that line-item over the course of the year?

That's correct, Jeff.

I mean, it will be a source but not to the degree we saw yet in the first quarter.

And actually just one other thing.

You also used the phrase "cleanup costs in plastics."

What did that refer to?

Was that restructuring reserves and receivables cleanup?

As we mentioned on our Q4 '02 call, that was for a variety of cleanup, allowance for doubtful accounts, inventory obsolescence, um, blocking and tackling reconciliation issues which we addressed, um, as we closed the books last year.

Okay, great.

Thank you --

For the Q4 '02 expense.

Thanks a lot.

Operator, we're going on about an hour, I suggest we'll take maybe one more question.

The next question will come from the line with Jean Vandice with SAC Capital.

Please go ahead.

Hi.

It's Jean [Indiscernible] with SAC Capital.

I don't know if I'm missing something, but when I look at your cash and cash equivalents, it went from $6.2 billion to $5.7 billion, so that's a change of $500 million.

Um, your free cash flow is $482 million, so basically when you add that back, the total change is $980 million. $300 of that was an increase and restricted cash.

I'm assuming about $300 was acquisition and purchase account spending but I don't think you mentioned it, and I'm wondering where the rest is or am I just missing something?

No, I think the remainder is in the, um, you know, restructuring, um, we'll get those numbers for Jean in just a second.

In terms of the -

Okay.

There was a roughly $248 million of, um, you know, acquisition, which was largely the dealer program.

Yes -- was that consistent with your guidance?

As well as we had, um, some cash invested for greater than 90 days as part of our cash management program in terms of the substantial cash balance, which would plug the difference for you.

Okay.

That amount would be roughly $400 million?

No, it's more in the area of a couple of hundred-million dollars.

Okay.

So, $300 million in restricted uses of cash, $300 million in restricted cash, um, $250 million in purchase account spending, so that's $550.

Another $200, sort of shifted from short-term to long-term, so that's $750.

And, um, it was almost a billion, though, so we're still missing $250 million.

And when I say a billion, the billion I came up with was your change in cash equivalents, um, which was $500 million and then the cash you generated, which was almost another $500 million.

I guess the remaining component, we can work with you offline to get all the specific numbers for you, Jean, but

Okay.

The other big piece is over $100 million of cash paid for, you know, purchase accounting as well as, um, you know, earn-out and hold-back liabilities from prior acquisitions.

Okay, so, sorry.

The $248 million was true acquisitions and --

correct.

And then another $100 million --

correct.

You can take that up to about $360 if you want to combine the two.

Okay, that's helpful.

Okay.

Great, thanks everyone, and we will shortly be getting more information out, as I said earlier, about our March 13th analyst investor meeting.

Thank you.

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