江森自控 (JCI) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Tyco International fourth quarter and year end earnings results conference call.

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

Later there will be a question and answer session and instructions will be given at that time.

If you do need assistance during the call today please press the star followed by the 0.

As a reminder today's call is being recorded.

At this time I would like to turn the conference over to Ed Arditte, please go ahead, sir.

Good morning thank you for joining our conference call to discuss Tyco's fourth quarter results and certain other items covered in the press release issued earlier this morning.

Joining us for today's call will be Tyco's Chairman and Chief Executive Officer Ed Breen and Chief Financial Officer David FitzPatrick.

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

We ask you to look at today's press release and to read through the forward-looking cautionary informational statement that we've included there.

Where we have used nonGAAP financial measures reconciliations to the most comparable GAAP measure are provided in the press release along with the disclosure on the usefulness of the GAAP measure.

To get us started this morning I will turn the call over to Ed Breen.

Thanks, Ed, and good morning to all of you.

Thanks for joining us this morning.

In addition to our financial results, we will be discussing the restructuring and divesture actions we described in our press release this morning.

Obviously these actions reflect the goals and plans that we have been discussing with you over the past year.

They are aimed at realizing the full potential of our businesses by improving our cost structure and focusing all of us on the operations that are most important to Tyco's future.

I am excited about the substantial progress we have begun to make in transforming Tyco into a company focused squarely on its operations and I believe these actions will accelerate our efforts in this area.

Let's start with an operational performance for the quarter, and then we will move on to these other actions that we announced today.

First, on a reported GAAP basis, Tyco reported a loss of 15 cents per share, including charges of 49 cents per share for special items.

Operationally, we had good results in healthcare and electronics and weaker results in Plastics & Adhesives and Engineered Products .

In fire and security, we are beginning to see improvement in certain important areas, although we are still contending with the issues in continental Europe.

Dave FitzPatrick will have additional comments on fire and security and our other other operations in a few minutes.

Secondly we have focused on cash flow generation over the past year and we continue to make meaningful progress.

As a result of this focus, we just concluded a very strong cash flow quarter and generated $1.8 billion of cash from operating activities and $1.4 billion of free cash flow and that is after making a $270 million voluntary pension contribution.

This provides Tyco obviously with financial flexibility as we move into '04.

Now, let me turn to a few of the other announcements contained in the release today.

As I said before, our core businesses are very strong and we continue to make steady progress in improving their operational intensity.

Critical to this ongoing transformation of Tyco are the extensive strategic reviews that we have conducted with each of our businesses.

These reviews, which we have previously discussed with you, have culminated in some of today's actions which we view as important steps in building the type of foundation we need to make Tyco high performing operating company.

The first announcement involves our decision to sell the Tyco Global Network, which is our undersea fiber optic telecommunications system.

The market for this type of network is challenged by significant overcapacity and severe pricing pressure and the industry is clearly in need of consolidation.

We don't believe that being a consolidator fits our strategy for Tyco and as a result, we have decided to seek a buyer for the Network.

The sales process will not affect the high quality of service that we will continue to provide to our TGN customers, and our intention is to retain ownership of the construction and maintenance portion of Tyco Telecommunications.

At this point in time, we don't know when a transaction will be concluded as we have just begun the process.

From a financial perspective we have written down our carrying value for the Network and this resulted in a fourth quarter charge of 664 million.

The Network will be treated in our financial statements as an asset held for sale.

In addition to the decision to sell the TGN, we are also announcing the start of a broader divesture program designed to increase the focus on our core operations by exiting certain operations that clearly don't fit within Tyco going forward.

Prior to the management changes at Tyco, this was a highly acquisitive company and quite honestly some of the acquired operations don't meet our criteria for either strategic fit or for financial returns.

To help you understand the magnitude of this disposition program, let me give you some broad parameters to describe the group of companies that are included in this program.

Excluding the Tyco Global Network, the program includes over 50 businesses that had combined revenue of approximately $2 billion and combined operating profit of 55 million in fiscal 2003.

Approximately half of the revenue is from non U.S. businesses.

Over half of the revenue is in fire and security and every segment other than plastics and adhesives will be involved in this program.

Only four of the units in this program have sales greater than 100 million and the largest is under 400 million.

Overall, this divesture program represents just under 6% of Tyco's annual revenue.

We are estimating that the proceeds, and again this excludes the proceeds from the Tyco Global Network, will be at least 400 million once the program is completed.

We expect to use these proceeds primarily for debt reduction.

These businesses do have significant book value, and despite the fact that these transactions will free up under performing capital, we expect the program to generate a book loss on sale of somewhere between 250 million to 750 million.

Let me also add that we don't think it's in the best interest of our stakeholders to specifically name the units that are included in this program, but we will keep you apprised of our progress from time to time.

Moving on to the next item, we are also announcing a restructuring program designed to improve our cost structure primarily in fire and security but also in Plastics & Adhesives and in engineered products.

We believe we have significant opportunity to improve these businesses and we have decided to move forward at this time with restructuring initiatives that have sort paybacks and better position the operational footprint of these segments.

Let me touch on fire and security first.

We are estimating the cost of these restructuring activities to be 240 million, of which approximately 200 million will be in cash.

We expect to achieve annualized savings of approximately $160 million.

We did incur 26 million of cost in the fourth quarter, and we expect to incur the majority of the cost throughout fiscal 2004.

While we expect meaningful savings in '04, this project isn't accretive to earnings until '05 due to the magnitude of the restructuring spend in 2004.

Overall, this program will involve the elimination of 184 facilities, of which 15 are manufacturing facilities, and will reduce the head count in the segment by approximately 5,000 worldwide.

We believe this program, when combined with the many other steps we have taken to improve this business segment, is important in achieving the 14 to 16% margin levels we have targeted for fire and security.

We expect to get to this range as a result of the business model changes we recently made at ADT, improvements in our cost structure with which these restructuring actions will obviously accelerate and ultimately by getting some improvement in the construction segment of the economy.

Turning to Plastics & Adhesives, we have started a restructuring program in this segment designed to shift from a loose confederation of independent companies to a lean integrated global plastics manufacturer.

This restructuring will cost 100 million of which 40 million will be cash.

The payback is less than three years and the program will generate 45 million in annual savings.

Most of the expenses will be incurred in '04.

We expect to reduce the number of manufacturing and distribution facilities in this segment by 30 facilities and expect to reduce the workforce by about 1900 worldwide.

Finally, in Engineered Products , we have embarked on a smaller restructuring program with a cost of 40 million, which is almost all cash.

Of this amount, 18 million was expensed in the fourth quarter, and the balance will be spent over the course of '04.

The restructuring is designed to also reduce footprint, mostly in North America and Europe.

As I said earlier, I believe these restructuring actions are important elements of building a stronger operating foundation at these segments and overall the restructuring programs we have announced today are estimated to cost approximately 400 million, 280 million which will be cash, but will produce annualized cost savings of approximately 230 million.

Now, to update you on each of the segment results and some other financial matters, let me turn the call over to Dave FitzPatrick.

Thanks, Ed, good morning.

Looking first at operating results for the quarter, revenue increased 1.1% to $9.5 billion.

Excluding the impact of foreign exchange, revenue decreased about 3%.

For the full year, revenue grew 3.4% to $36.8 billion on a reported basis but was essentially flat when we look at the revenue picture organically.

On the profitability side, we reported operating income of $173 million, which included the charges we took this quarter.

The weaker U.S. dollar, vis-a-vis the Euro and the yen, added $45 million to the EBIT line.

As Ed mentioned, we had truly outstanding cash flow this quarter and were quite pleased with the progress we have made.

I think this clearly shows that the cash flow focus has taken hold throughout our operations globally.

We made very good progress in both inventory and receivables and generated $370 million of cash from better management of these assets during the quarter.

Turning to our businesses, looking first at fire and security.

At fire and security revenue grew 1% in the quarter to $2.9 billion.

Excluding currency translation revenue, however, decreased 3.5%.

Reported EBIT was $133 million, which includes $101 million of impairment, restructuring and other charges.

Fire and security also had a very strong cash flow quarter, generating over $400 million of cash, underscoring the strong cash flow characteristics of this business.

As we did last quarter, we wanted to share a bit more detail with you on some of the business units within the fire and security segment so that you can get a better perspective for how we are doing.

Worldwide security, excluding continent Europe had a better quarter in comparison to our fiscal third quarter with an EBIT margin of 15.2%.

This business represented 47% of the segment's revenue for the quarter.

The continental European security business continued to struggle with business representing about 6% of revenue in the segment for the quarter.

The business had a loss of $37 million which is due to continued operational challenges as well as a $14 million charge associated with account cleanup, and I will come back to the account cleanup issue in a moment.

Worldwide fire services had a modestly better quarter with EBIT improving by approximately $11 million on slightly higher revenue, but the margins will improve, still need some work to get back to double-digit levels.

Part of our efforts to improve margins in this business will be on the cost side of the equation, but we also need the nonresidential construction market to pick up from current levels.

This business represented 37% of the segment's revenue in the fourth quarter.

Finally, Tyco's Safety Products, our manufacturing unit, which comprises 10% of total segment revenue had nice improvement in the quarter with an operating margin approaching the mid teens on 8% revenue growth.

Two other comments about fire and security for the quarter.

Dealer spending was $91 million, which is a meaningful reduction from the rate we were spending at last year.

This level reflects a much tougher quality screen that has resulted in our generating fewer but higher quality new accounts through this channel.

Secondly, we also did a lot of work in the quarter to clean up accounts receivable within the ADT system.

This resulted in an increase in our disconnect rate.

During the quarter we terminated 81,000 accounts which reduced a recurring revenue by $40 million annually.

Looking at our trailing 12-month disconnect rates for the quarter, and again we present these data on a 12 month trailing average, the U.S. average in the fourth quarter was 15.5%, an increase of 6/10 of a percentage point from 14.9% last quarter.

Outside the U.S, the rate increased to 17%, up 2.2 percentage points from the figure reported of 14.8% last quarter.

On a global basis, total fire and security disconnects were 15.9% this quarter, up 1 percentage point from 14.9% a quarter ago.

This 100 basis point increase in our disconnect rate is entirely attributable to the account cleanup I described.

Because these are trailing 12-month numbers, we expect to experience this higher level for the next three quarters.

Moving on now to our electronics segment, revenue increased 3.5% to $2.7 billion, driven entirely by foreign exchange.

Excluding currency, revenue fell about 1%, reflecting modest growth in our automotive, computer and customer and communications businesses, offset by continued weakness in our telecom infrastructure businesses.

EBIT, which includes the impairment charges for goodwill, and the writedown of the carrying value of the Tyco Global Network, was a loss of $560 million for the quarter.

Net charges included in EBIT totaled $923 million.

FX added approximately $20 million to EBIT in the segment.

The numbers I just gave you are for the entire electronic segment, looking at the components business, or in other words excluding TyCom, we had an operating margin of 14.7% for the quarter, essentially flat with the third quarter on relatively level volume.

From a market tone perspective, looking at the overall markets, we saw some modest improvement in our order rates with bookings for the quarter growing approximately $35 million.

The book to bill ratio for the quarter ended at 1.01.

Our connector business grew 6% in the fourth quarter on a reported basis or an increase of 1% excluding currency translation.

Sequentially, our connector business declined slightly during the quarter primarily due to the expected seasonality in our automotive business which has a strong position in higher end European automobiles.

As you know, the summer months in Europe are always the weakest volume months of the year due to the holiday related shut downs during the month of August.

Our competitive position remains very strong and we continue to win new business in our core markets.

Tyco electronics technology, geographic reach and scale provide us with a very strong foundation for this business.

Our R&D spending in 2003 was nearly $370 million, which is a very important factor in winning new business.

We believe the combination of our product capabilities and our cost advantages provides us the ability to strengthen our market leadership position over the next cycle.

Now turning to healthcare.

Tyco Healthcare had another strong quarter with continued revenue, growth and margin expansion.

Revenue growth for the quarter increased almost 5% to $2.2 billion with foreign exchange contributing a little over half of the revenue increase.

Revenue in North America grew nearly 7%, reflecting solid growth in our respiratory, pharmaceutical and surgical businesses.

Revenue in our international business fell 1% in the quarter or 9% excluding the impact of currency translation reflecting lower volumes in Germany, Italy and Japan, partially offset by stronger sales in Asia Pacific, excluding Japan, as well as Latin America.

EBIT grew 19% driven by higher volumes and productivity improvements.

Excluding the impact of foreign exchange, EBIT increased 16%.

Research and development spending increased approximately $12 million in the quarter.

As many of you know, we have plans in place to steadily increase our R&D spending in this segment to increase organic revenue growth.

In Engineered Products , we embarked on a restructuring program that had a cost of $18 million during the quarter.

This segment of Tyco will be the slowest to recover in an improving economy.

And while things appear to be firming up just a bit, our focus in this segment is in improving our cost structure in advance of any recovery in the important nonresidential construction market.

Revenue for the quarter in Engineered Products declined 8% to $1.2 billion, notwithstanding a foreign exchange benefit of $67 million.

Excluding charges in both 2002, which were $97 million, and 2003, $10 million on an all in basis, operating profit declined nearly 50%.

A number of factors contributed to this earnings decline, primarily lower volumes, and higher steel prices.

Turning to Plastics & Adhesives, the fourth quarter was a challenging quarter from both a volume and a profit perspective.

Raw material pricing continues to be an issue for us.

For the quarter, revenue was $469 million with $5 million of that attributable to foreign exchange.

EBIT grew $31 million due to charges in last year's fourth quarter.

Operationally, however, profits were down substantially due to lower volume and a tighter spread between selling prices and raw material costs.

Improving our cost structure and our material sourcing are important elements of enhancing our performance in this segment and the restructuring program Ed discussed is central to the effort.

Now, let me update you on where we ended up in our review of good will.

The decision to divest the Tyco Global Network caused the company to realign its reporting unit structure in the electronics segment which resulted in the creation of five separate reporting units within the segment.

These are core electronics, wireless, power systems, a printed circuit group and services.

The realignment triggered an additional assessment of the recoverability of good well at the new reporting unit.

The electronics segment goodwill was allocated among these five new reporting units based upon the relative fair value of each of these units.

This resulted in a significant portion of the historical goodwill balance from the other four operating units being shifted to core electronics, whose valuation was able to fully support the goodwill balance.

The valuation of the remaining units, after the reallocation of the existing goodwill, resulted in an impairment of $278 million, which was recorded in the fourth quarter.

As a result of the impairment charge, no goodwill remains on the books of either power systems or the printed circuit group.

Looking at other asset impairments and other charges, with regard to impairment, we have included that certain other assets are impaired and we adjusted the carrying value of these assets in the fourth quarter.

The company recorded $87 million of noncash asset impairment and other charges in fire and security and $47 million of charges at Tyco corporate.

The impairment at fire and security includes the writeoff of subscriber acquisition costs in Latin America and Europe and brand name impairments at Tyco safety products based on our decision to exit certain product lines in that business.

The charges at corporate are mostly driven by our decision to vacate the offices at 9 west 57th Street in Manhattan as well as writedowns in a small private equity portfolio and other restructuring and impairment matters.

Before I turn the call back to Ed Breen, let me finish with a quick update on three other financial matters of interest.

First, as we indicate in our third quarter earnings conference call, we elected to make a voluntary pension contribution of $207 million in the fourth quarter.

We will look at additional contributions to our pension plans over the next year, based on, in part, the overall strength of our cash flow.

The charges we took this quarter do not create any covenant issues related to our credit arrangements.

We continue to meet regularly with the banks and rating agencies to keep them apprised of our operating and financial progress.

A number of you have asked for assistance in understanding the results we reported for 2003.

We included a schedule in the press release we issued this morning that reconciles from what was originally reported to the restated results that were filed on July 29.

In addition, the schedule shows certain other adjustments that you may want to consider in your analysis and modeling of Tyco's full year results for 2003.

I want to point out that this schedule includes most of the items that we have culled out for for you in our filings, press releases and conference calls over the course of the year.

Additionally, we are putting supporting schedules for these numbers up on the investor relations section of the Tyco website for you to review.

Now let me turn the call back to Ed Breen for a quick wrapup.

Thanks, Dave.

Let me also say a few words about Tyco's performance for 2004.

Based on the current business outlook, in which we are seeing improvement in some of our end markets, we believe that Tyco can achieve earnings per share in the range of $1.42 per share to $1.52 per share.

This guidance assumes modest organic revenue growth, coupled with approximately 100 basis points of margin improvement.

I want to point out that this guidance excludes any impact from the divesture or restructuring programs we announced today.

From a cash flow perspective, 2004 will be another very strong year for our company.

Our full year '03 cash from operating activities was 5.4 billion and free cash flow was 3.2 billion, and we believe that free cash flow in 2004 will exceed the levels achieved in '03.

Our guidance is based upon a gradual improvement in economic activity over the course of 2004.

We are forecasting only a slight rebound in nonresidential construction markets, which impact both our fire protection business as well as approximately one half of the engineered product segment.

These parts of our business typically lag the rest of the business cycle and will be slower to feel the impact of a recovering economy.

Our first quarter earnings per share are projected to be in the range of 30 to 32 cents.

Although we expect net income to increase between 13 and 20%, we expect our EPS to grow 7% to 14% due to the shared dilution from the convertible bonds we issued earlier this year.

In addition, the guidance excludes in the first quarter the impact from the divestures and restructuring actions.

I know that many of you in the investment community have been seeking a better understanding of our businesses.

And to that end, Tyco is launching a series of investor meetings focused on each of our five business segments.

These half day meetings will be exclusively focused on one segment at a time and will begin with a review of Tyco electronics on the morning of December 10 in New York City.

For those of you who are unable to make it to New York on that date, we will also be webcasting the meeting.

Each of these meetings will be followed one to two-weeks later with a site visit to an important facility to give you a better feel for our products and services.

Ed Arditte will be sending out invitations to this first meeting shortly and we look forward to your active participation in these sessions.

In concluding the call this morning, I would like to highlight just how far this company and more importantly its employees have come during this past year.

Tyco, as we all know, faced an 11.3 billion liquidity brick wall a year ago.

We overcame it by reducing our debt burden by 3.2 billion during the year and restructuring our credit obligations.

Our focus on cash flow built momentum throughout the year resulting in 3.2 billion of free cash flow, and significantly, but I think for our creditability moving into '04, this compared to only 779 million in fiscal '02.

This is across every business, as Dave said, and globally across every business.

Also, we have already put in place throughout our many and diverse businesses the first systematic across the board program for operational excellence that Tyco has ever had.

As you know, our focus on 6 Sigma, strategic sourcing, rationalization of the real estate portfolio will begin to show benefits in '04.

In one of our largest global businesses, fire and security, we have taken major steps toward improving all aspects of its operations, including its senior management, customer base and cost cost structure, and we have thoroughly reviewed every one of our businesses and have begun to make the kind of strategic decisions that have led to the actions we have announced today.

I want to emphasize that these are just a few examples of the highlights of how much has been accomplished in a relatively short period of time in face of some unique challenges.

Today I am more convinced than ever that Tyco's core businesses are fundamentally strong and have excellent prospects for the future.

They are market leaders with powerful respected brand names and I believe in their potential to deliver solid returns.

The transformation of Tyco from an acquisition company into an operating company is an ongoing committment throughout the entire organization.

Tyco has come a long way in a year and we believe we are on the road to becoming a company that will build and deliver increasingly strong and importantly consistent performance.

Operator, let's now open up the lines for any questions.

Thank you.

Ladies and gentlemen, if you do wish to ask a question, please press the star followed by 1on your touchtone.

You will 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 speakerphone you may need to pick up your handset before pressing the star and then 1.

So once again if do you do wish to ask a question please press star and then 1 at this time.

Our first question comes from Don MacDougall with JP Morgan.

Please go ahead.

Good morning, everyone, I have three questions.

The first two are probably for Ed and then maybe the third would be for Dave.

On divestures, firstly, where do you think the 2.1 billion of divestures leaves us.

You have gone through the strategic review, you like everything else?

Or there are some other businesses that may be marginal but you would rather fix them first before you sold them?

The second question would be on restructuring, and what should we think about as a normal kind of restructuring expense beyond next year, obviously, $400 million is a pretty big number.

I wouldn't expect to see that going forward.

And then the third, long term I think my numbers, given the cash generation we expect, you end up next year with net debt of 14 billion give or take.

What is the right level of debt you get to before you start considering other alternatives for the cash?

Thanks, Don.

I will take the first couple and then turn it to Dave.

On the divesture front, look, I wouldn't say there wouldn't be any other actions down the road, although I will say, this is a big move for us, reviewed with our board.

I think you can tell with the number of businesses that are involved in this 2 billion, over 50 of them, we have our hands full, and we want to focus on exiting those businesses and do it in the right way and optimizing the cash that comes into the company.

So I would not expect any other announcements from us on the divesture front in the near future.

As far as restructuring goes, I think, Don, you can look at us or model us on kind of a normalized run rate basis.

And, by the way, we did have consistent restructuring throughout '03 in our numbers.

Somewhere, on an annual basis in the 100 to $150 million level.

Again, I think you can see by the amount of actions we're taking on the restructuring side, I would not expect that you would hear something from us again next quarter and some cull out, I think I alluded to this back in March, that if we could key up a restructuring that had very nice payback parameters to them, which these programs do, we would be very inclined to get it out of the way, make our footprint more efficient moving forward.

And that is exactly what we have announced here.

And I would also add we are in a cash position, we have the flexibility now to do exactly what we wanted to do and that's an important factor to that.

So on restructuring, beyond this, we should think about incremental changes as opposed to one offs?

Yes, Don, unless we find something very attractive that we could accelerate but that is not in our thinking right now, that's something else around the corn.

Dave do you want to take this?

Yes, Don, with respect to our debt levels and capital structures, as you look at our our balance sheet, we ended the year with about $21 billion in total debt, cash balances of a little over $4 billion.

As we look at our cash flow projections, and our capital structure targets, we are on a path to get first to solid investment grade, which I define as 6 B levels of credit.

Then we want to continue the journey overtime to get to a solid single A level.

And what is important there from our perspective is having full access to the A1 P1 commercial paper markets at that stage.

As you look at interest coverage ratios, cash generating operating performance, I think when we look at where we want to be, we want to target our ratios to be kind of right in the middle, overtime, of that solid single A credit rating.

So we would need on that basis debt to be a couple to several billion dollars below the $14 billion level you cited before we look at meaningfully redeploying cash to other uses.

Don, I would just add one point to what Dave said, I think important for our investor base, with the way we accelerated cash this year, and our forecast for next year to improve on that, it is just closer to the point in time where Tyco has its flexibility to use cash as Dave said for other purposes and for growth in the company.

It is going to happen, I think a lot faster than many of us would have thought just one year ago.

Just one quick followup on the divestures, are they going to be counted as discontinued operations and therefore excluded from your guidance for next year?

Most likely not, Don, with the numerous divestures that we are looking at, I think we're going to be at various stages throughout the process.

I think you will see those in our numbers and we'll help you discern the impact as businesses are sold throughout the year.

Thanks for for your help.

Thanks, Don.

Thank you.

We do have a question then from Jeff Sprague and he is with Smith Barney.

Please go ahead.

Thanks, good morning, a few items.

First on fire and security and ADT, could you update us on what the U.S. dealer attrition rate looks like?

I think you gave us that in the third quarter?

Yes.

Sure, Jeff.

I mean, to give you a little more color on the dealer component of the U.S. average.

The dealer program disconnect rate was 17.0% this quarter, 1/10 of a point down from the 17.1% we reported last quarter.

Encouraging.

And as you noted, the dealer spending has come in a lot lower than what you guided back in March.

You know this 90 million or so that you did in the fourth quarter, have you found your level there?

Should we be thinking of 3 to 400 million in next year?

Are you still kind of searching for the comfortable quality bottom that that number needs to be at?

Jeff, we are targeting kind of around the 400 million level.

We think that's appropriate to spend to get the right quality accounts that we want through the program.

We were a little under that.

But I think you can see we have it to about where we want to have it at.

Which is pretty consistent with the 500 million we talked about last March, because as you know, we have changed our accounting for the connect fee.

So we are now reporting those cash spend numbers on a net basis, so it's not any meaningful change from what we talked to you about in March.

Jeff, I would say key to that business, and this will take us some time to do, but as we kind of walk down the level of spend on the dealer side we are actively working to increase our internally generated sales group, and additionally, by the way the sales group that is now focused on the resale program on the dealer accounts, which you know as of a few months ago, we didn't even have.

So that will take us kind of through this next year to get that balance more where we want it but our goal would be to get more organic growth as we are exiting '04 from internally generated sales and start bringing that balance back up again.

I guess on the premise of changing the model a little bit and getting away from the zero down, I have seen firsthand or sometimes secondhand some of the 0 down programs being advertised, I think there was one even during the Florida-Georgia football game last week.

Can you address really where you are at in that transition and how long it takes to kind of get to where you want to be in terms of moving away from the zero down program?

Jim, we are about out, almost totally out of the zeros down program.

If you look at some of the different programs that are out there, one of the things we instituted a few months ago and by the way I think we are going to have some good benefits from this program, is where we will finance the deal for a resident.

We have the MBNA program through a financing piece, so, yes, it is zeroed down but there is a financing element to it which we think is very sticky for us from a attrition rate going forward because there is significant quote, skin the game, actually up front there is no money down.

So if you look and dig into some of the programs you're seeing advertised, we're migrating some of them over to where they are financed.

Just one other subset of questions, healthcare in Europe, I guess I am having a hard time understanding why that would have been so weak.

If you could provide some color on that and what we should think about in terms of the R&D ramp up that we might see over the course of '04?

Yes, the R&D ramp, as you saw we increased 12 million in this quarter.

We have funded in our business plan with healthcare approximately 50 to $60 million of incremental spend this year, and, Jeff, by the way that's against about 40 key programs that we are working on or on the drawing board, mostly in our higher end businesses at U.S.

Surgical and Mallinckrodt.

So that is kind of how that ramps throughout the year.

And we would anticipate even as we go into '05 increasing that more.

I do think, by the way, despite how well that business is doing we can get some more efficiency out of the business and offset the majority of the R&D actual spending increase that we are going to have.

With respect to the international sales trends at healthcare, first let me say that we are looking at good organic growth internationally in this business for 2004.

In the fourth quarter, we did see a little bit of weakness, as we mentioned, in Italy and Germany, as well as we also had, Jeff, the impact in the quarter of looking at a couple of our distributor arrangements in a couple of key markets in that region where we reversed some revenue during the period.

So there is a little bit of an accounting impact in that revenue performance for the fourth quarter in healthcare, which will be nonrecurring.

Okay, thank you.

Thanks, Jeff.

Thanks.

And we do have a question then from Lee Cooperman with Omega Advisors.

Please go ahead.

Hi, good morning.

Hello.

I guess what I am looking for is to try to put these moving parts together and update the financial model that you presented on March 13, '03, at your analyst meeting.

I think that model and today's results suggest that maybe making forecasts are not particularly productive.

It is kind of interesting your earnings guidance is lower by about 10% or or more, closer to 15% where it was yet your cash flow guidance is up by about 50%.

I am really particularly interested in earning power as opposed to near term earnings, quarterly earnings don't excite me though they seem to excite the market.

In kind of looking at over the next two or three years, if you relate back to this model that you gave on March 13, the actions you are taking, the results that you are seeing, how do you think you will track relative to the model that you laid out on March 13?

Are we behind, we are ahead cash flow wise, we are behind earnings wise but where do you see the convergence looking at over the next few years?

What do you think the steps you are taking are going to create in the way of recurring earning power for this enterprise, assuming a normal economic environment?

That would be question number 1.

Okay.

Lee, I'd say going back to our March meeting, I think the margins that we laid out by business are very doable for us over the next few years.

One of the things that did occur to us throughout '03 is that we did continue to see softness in industrial construction and, more importantly, in nonresidential construction, which really hit us hard in the services and fire and security and clearly in our Engineered Products business.

So, I think we can drive our margins back up, but we will obviously be counting on a little bit of wind behind our back on the economy and specifically that part of the market picking up, because that is what was softer then what we had anticipated.

If you walk through it by business, I think healthcare is clearly where we want it to be.

We need to continue top of line revenue growth there and maintain the nice margins we have in that business.

I think that is very doable, I think we are demonstrating we can do that.

I think we saw nice cost actions continue throughout the year in electronics.

We start getting a little wind behind our backs there I think we have the thing leveraged on a cost basis where we want it and we will see the pickup continue in that end of the business.

Again, note, as you exclude the TyCom Global Network as we dispose of it in that business, that had depressed earnings on a percentage basis throughout '03.

The businesses where is saw the softness again, fire and security, Engineered Products , we are taking more aggressive actions to restructure those businesses.

They will have significant impact on us moving forward.

I think you can ee, as Dave highlighted on ADT, we've seen the bottom on the kind of worldwide footprint, ex-continental Europe, and I think on a earnings basis you'll see steady improvement from us there and I think we saw that this quarter.

So a little wind behind our back on the economy, along with the cost actions we are taking aggressively here and what we've announced today I think should drive us towards the goal that we talked about at the March meeting.

You say qualitatively the '06 goal you would feel good about given all the things that you are seeing going on internally ?

Yes, again, we do need some pickup in the economy though.

Sure, I understand.

Absolutely.

Second, are you guys learning any more confidence in the litigation exposure?

Where is that in the total picture as you look at things?

Lee, really nothing new to report.

We obviously have a strategy internally here at the company.

We are working it on a weekly basis.

It is still out a little ways and there is really no update to it.

Okay.

Good luck and thank you very much.

Thank you, Lee.

Thanks and we do have a question then from Jack Kelly with Goldman Sachs.

Please go ahead.

Good morning.

Just a followup maybe on the cash flow numbers, Dave.

In terms of the 3.2 billion plus that you are talking about for '04, you gave us kind of the dealer spend there.

Can you give us your cap spending assumption there, as well as maybe guess in terms of what you think is going to happen to working capital.

And then secondly on the cost cutting side, Ed, you had mentioned 230 million by 2005.

Could you tell us how much of that actually falls into '04?

And then secondly on cost cutting, in the past, I think at your March meeting, you talked about $7 billion in goods and services that you will purchase.

What progress have you made in terms of cutting the costs on that $7 billion spend and is any of that incorporated into the '04 number?

Okay, Jack, this is Dave.

Let me take the first piece in terms of putting a little bit more color around the cash flow guidance.

As we look at CapEx for 2003, CapEx including spending for the Tyco Global Network was just under 1.3 billion.

For '04 our guidance has CapEx increasing a little bit.

But still as we look at CapEx relative to depreciation, we are kind of at 1 or slightly below 1 in terms of the overall cash impact there.

As we look at our key working capital, we should get, I think, continued benefits.

We had good progress in 2003 in both receivables and inventory.

That, as you probably noted, was largely offset by lower accounts payable during 2003.

We expect continued contribution from working capital in 2004.

Could that be as much as a couple hundred million dollars?

It could be, I think a couple hundred million dollar range is the appropriate way to look at it.

Jack, let me touch on the cost actions restructuring program.

The savings this year, if we hit along by quarter what we think we can achieve, the savings during fiscal '04 would be abut $135 million.

And then approaching as we get into '05 the run run rate we want of 225 to 230 annualized savings from there on from those actions.

Okay.

And then on the $7 billion number, is any of that incorporated?

I mean, it seems like 135 with the 230 is coming from reducing the manufacturing footprint, not necessarily from more efficient buying of goods and services.

Yes, Jack, that's correct.

Those actions are separate actions.

We have approximately, give or take $400 million baked into our plan in additional savings from strategic sourcing, and a 6 Sigma.

By the way I would be the first one to tell you that I think that is unacceptable for us to end there for this year as we start really ramping up these programs and getting traction.

One of the things that we have been offsetting kind of in the end of '03 and '04, just because of the economy, on savings is we have pricing pressure at our end too.

Although I think we have been managing that real well so there has been some offset there but we need to get well above the 400 million level on our savings across our programs and start getting good incremental savings to the bottom line.

We are focused on that and again we will drive that up as we go through the year.

Just to our sourcing, by the way, just to show you the power of the number, if we focus on it, our total spend, direct and indirect, in this company is about $15 billion.

So we have programs now that we started about four months ago that are also focused on the indirect spend categories of the company because again a lot times people don't focus there and there is a lot of money to be driven out of the system there and we will start to get that benefit through '04 also.

Just one final question.

Tax rate, what are you assuming?

Yes, we are assuming 28% in this guidance, Jack.

Great, thanks a lot.

Thanks, Jack.

Thank you.

We do have a question then from Michael Regan with CSFB.

Please go ahead.

Thanks, good morning, I have six questions, there's four subsets to those, three select clarification and a comment.

Michael?

If we could just focus on electronics.

If we go back to Juergen's presentation, and I think we have all accepted that Juergen is typically pretty bullish about his business.

He expected in '03 to get kind of a lot of margin improvements from internal things, kind of irrespective where volumes would end up for the year.

And net, I would call the performance kind of disappointing both for the year, but it seemed especially so in the fourth quarter.

I am just wondering if you can walk through kind of what happened this year and how we should think about getting to that kind of long-term goal of 17 to 19% margins?

Yes.

Michael, the biggest single factor in that is we continued to see in the business, although by the way, I do think this is abating a little bit as we exit the year, we have noticed some signs of what I am going to say.

But we had significant price pressure across this business during the year.

I think if you model out any--

Worse than the 4 to 5 that he was looking for?

Yes.

By the way, I think we probably did better than the market because a lot of the market was 9 to 10%.

I think we were probably in the 7% range, as we have looked at it for the year.

So we got hammered a little bit more there.

I do think by the way with a little bit of pickup we are seeing in some of the markets that hopefully that will subside some during '04 but clearly that was a factor that did not help during the year.

Okay, thank you.

Okay, thanks, Mike.

Thanks.

We do have a questions then from John Inch with Merrill Lynch.

Please go ahead.

Thank you, good morning.

Hey, the 49 cents of charges, just, I am trying to understand, to get an EPS this quarter, what was the tax rate back into the 49 cents and what was the share count you were using, was it the 2.2?

I am assuming that's what it is?

Yes, let's take the share count first, with the all in loss, there was no dilution, so you see the lower share count of about 1 billion 995, John, in calculating the 34 cents, or doing the the math, this gets you to the 34 cents.

The share count was about 2.207 billion shares, so the higher share count was used in that calculation.

The tax rate as you look at the run rate for the quarter was 27.8%.

So kind of the all in tax rate was on the order of negative 115.

We had a tax impact on an operating loss all in, when you factor in the taxes on the 1 billion 2 of charges.

To get to the 34 cents, you are saying it was 27.8?

Correct.

And then the other question I had was just ADT Europe.

This business is losing over $150 million a year.

I am wondering, what are your strategic plans for this business?

Why don't you just shut it down, for example, and perhaps that is part of your $1.42 to $1.52 expectation for next year, maybe if you could just provide a little color there?

Yes, John, look, we are making a lot of drastic, taking a lot of drastic actions there.

One of them, by the way, this was a dealer generated program, a 0-down type program.

By the way, just to show you how drastic the changes we have put in place, we are now taking new accounts with a minimum of $1500 down.

They get a lot of commercial accounts here also.

So a very drastic step there.

We know we have stopped the top-line growth of the business and we have taken a lot of other steps.

But just to give you an example of it.

And that should help turn the thing but it won't be at for at least a year here.

It is that I would just say, I don't want to get into what is out there that we would look at doing something with but we are looking at all opportunities on this business to see what we'd do with it.

We understand it is bleeding and we know it's going to bleed through '04 so we are looking at any other steps we can take here and I would just like to leave it at that at this point.

That's fair but are you assuming lower losses as next year's part of the guidance?

Not significantly.

Okay, just last question, if you ex-out Asia in electronics, because Asia has been pretty strong here for lots of the competitors and just strong in general, if you ex-out Asia did electronics actually weaken if you were to look at that business ex-Asia year over year and even sequentially?

I would have to take a look at that broken out.

But, I would say one of the things, we knew we wouldn't see much pickup.

Don't forget auto is a huge percentage part of our business and we knew just on the seasonality of the businesses, Dave FitzPatrick mentioned, we knew we weren't going to see any any uptick there just because of the summer holidays in Europe and we are very large in the European footprint, though, where we do see that picking up again this quarter.

So we knew we had a little bit of a drag there in a big part of our portfolio.

But let me not state that wrong.

We had an excellent year across the auto industry.

I'm in the business and expect the same in '04.

We will have to look and get back to you and look at breaking out the Asia piece.

No, that's fine.

Thanks, guys.

Thank you.

Our next question then comes from Chet Louis with Barclays.

Hi, good morning.

Just three quick ones here.

Just to be perfectly clear on the goodwill writedown for this quarter, it was $278 million and this relates largely to the printed circuit board and [inaudible] business?

This is accurate?

That is correct.

Do you guys expect any further goodwill writedowns?

No.

Also, congrats on the free cash flow number for the quarter.

Just to clarify, was most of this upside largely related to the better working capital management, because you guys gave a guidance of 2.2 to 2.5, and 700 million is upside there.

Yes.

If you guys have a breakdown of the areas.

Yes, it was in working capital.

As David highlighted it was in inventory and receivables.

The nice thing about it for us was it was across really the whole Tyco footprint, which I think just shows the focus has taken hold and the team is managing the things that it can.

It was pretty broad but a very nice improvement in working capital.

Okay.

Finally, can you talk a little bit about the S.E.C. investigation.

Do you expect this to be resolved soon?

You know, just to clarify, we kind of wrapped up on the court Fin side with the S.E.C, just to clarify--

This was under the enforcement division, right?

Look, we continued to cooperate with enforcement, we are holding kind if monthly meetings with them.

I don't know when it will resolve and I don't know the time line of that, but I would hope we make substantial progress during fiscal '04 here on that front.

Okay, great.

Thank you.

Thanks.

We do have a question then from Robert Cornell with Lehman Brothers.

Please go ahead.

Good morning, everybody.

Just back to the basics, you talking guidance of 142 to 152 so let's make sure we know what is in that number.

For example, I think Ed or Dave, you said that the divestures are not going to be in that program, in that guidance, we will see it as we get it and same thing with restructuring, right?

Right.

What about TyCom.

I think it says you're going to consider that as a disk OP so the TyCom losses will not be in the number, is that a fair statement?

It is not disk OPs per se, Bob, we're treating it as an asset held for sale so we will get some benefit in the operating results but not much from pre-sell, so it is not full disk OPs treatment.

What was the TyCom operating contribution in the quarter that this was reported as part of electronics, ex any charges?

It improved from the run rate but we nonetheless incurred a loss during the quarter, Bob, but it was below the kind of 30 to $35 million run rate we were talking about as we had some new business booked during the quarter, the revenue line improved as well?

Yes, can you flesh that out just a little bit?

Yes, if you look at all in we had a loss of about $15 million on revenues of about 65.

As we had some good revenues coming in from the Norway contract, we disclosed during the quarter.

Now, in the first quarter, you talked about guidance what of 30, 32?

That is before restructuring.

I mean, how much restructuring are we going to see in this quarter?

I mean, I didn't add up the numbers in the fourth quarter but I think it was about 50 million, looks like something like that?

Hey, Bob, if you turn to the back of the press release, we have included a schedule that provides some estimates.

Okay.

For, excuse me, cost as well as benefits, and we provide detail there which is our best thoughts at this point in time on the first quarter impact.

Looks like about 65 million of cost, which is a little over a couple of cents.

Okay, and how about TyCom?

And again, that's included in the press release.

What are you looking at for in terms of TyCom in this quarter?

I would say roughly 30 million in that range.

I guess, there's a lot of questions been asked but you haven't commented on what's going on in October.

We gotten some read on this quarter, certainly, other companies have indicated come pickup in October.

Any comment in that regard?

Bob, we are feeling okay about October.

It is coming in where we thought it would at this this point in time.

And I think this question has been addressed a little bit previously, but the electronics book to bill, you guys were running like 1.06 in July, ending part of the quarter you were running a little better than that and then you closed at just a little bit over 1.

Just go into that a little bit more about where you saw the dissipation and strength there and what happened in October?

Yes, part of the down turn there that we saw, we actually did start out the first month of the quarter higher, but we did see some drop off on the auto end of the business, and, again, from a seasonality, we went back and looked at the year before that.

It seems to trend pretty consistently that that softens up a little bit.

We expect that to be kind of at the run rates, normalized run rates again in the first quarter that we are expecting.

And so far, by the way, we track this, I think Bob as you know, weekly.

The track record so far, starting out this quarter, is where we thought it would be.

Dave, do you want to touch on any of the others?

Is there any other detail you might - That was the biggest piece that came back down.

One of the things, I guess, just to put the first month of any quarter into perspective, generally, not always, but generally you see a little higher book to bill there than you do for the quarter because shipments tend to be a little higher in the last month of the quarter.

Right.

As we provide a little bit of color.

I mean, the automotive businesses was right around 1 during the quarter.

The communication, computer, consumer business was a little bit above 1 during the quarter.

Where we saw a tick below one was in our industrial and commercial businesses during the quarter.

So that gives you a little bit of perspective there.

And in our wireless business may come to be specific, we saw book to bill significantly above 1 in the quarter.

Okay, thanks, guys.

Okay, bye.

Thanks.

And we do have a question then from Brian Langenberg with Langenberg & Co. Please go ahead.

Okay, guys, a couple things.

First let's go back to healthcare and I'm going to ask you here basically to spill your guts about what the sales and positive impact and what was the nature of that changing your distribution relationships in the quarter back in healthcare.

And then after that, if we can talk about electronics for a little bit.

If you think about, I know this is going to be of a blunt instrument sort of number, if you think about where your current productive capacity is by geographic region and what you think your capacity utilization is in each of those areas, that would be very helpful.

And the third thing, just to make sure in that $1.42 to $1.52 should we assume that you have baked in there that you own TGN the entire year until it is sold?

Yes, this is Bill, on the last one yes, that is the assumption in numbers that we own it for the year.

And hopefully we don't.

Thanks, got it.

And the other two?

Yes, as we look at the impact of those distributor contracts I talked about, the revenue impact during the quarter, Brian, was a little over $30 million.

Uh-huh.

And it was two contracts specifically.

So that will not be repeating in the future.

Was there a profit impact?

It was negligible.

Okay.

Brian, I think your question on the electronics footprint, if I understood it properly, as you know, we continue, Brian, we did this through '03 and will continue in '04, to migrate additional production to low cost manufacturing locations and we primarily are looking to do a significant increase to our footprint in China, by the way which is already significant but we want to take that up further in a couple of spots in eastern Europe.

If you look at utilization it does vary around the world but if I gave you kind of a lump number for electronics, it is in the kind of 75 to 80% range if you lump the world together, but again, there is a lot of movement going there at this point in time.

Okay.

And we will get into more detail on that at the meeting that is coming up for electronics in New York.

Okay, great, thank you.

Operator, we will take one more question.

Very good.

And that question then comes from Jack Murphy with John Levin & company.

Please go ahead.

Good morning.

The $230 million of restructuring savings is that before or after tax?

That is a pretax number, Jack.

Could you explain, I would think, because most of these employees seem to be in developed countries, if you assume $50,000 of costs saved per employee and half a million dollars per facility you get way above $230 million in savings.

Can you tell me if if those numbers are wrong or are these people not full-time employees or how should I look at that?

Some of this is facility rationalization, some of this is manufacturing rationalization, you can tell from the announcement, it is in some of the fire and security footprint, plastics footprint.

I'd just say to you by in large our payroll is lower than you describe there on an aggregate basis with these actions.

Particularly in these businesses, our payroll costs are lower than average, Jack.

So these people don't have healthcare and they don't have anything else?

No, there is healthcare but when you look at wages plus all in benefits you are still pretty far down from that $50,000 figure you used?

Really?

Yes.

Okay.

Thank you.

We have got to get out of New York City a little more, Jack.

Thank you much, every one, operator we will end the questioning there.

Thanks for your time today.

Thank you.

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