江森自控 (JCI) 2004 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Tyco second quarter 2004 earnings results conference.

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

Later we will conduct a questions and answer session with instructions given at that time.

If you should require assistance during the call, please press star, then zero, and an operator will assist you.

As a reminder this teleconference is being recorded.

I would now like to turn your teleconference over to the Senior Vice President of Investor Relations, Mr. Ed Arditte.

Please go ahead, sir.

Good morning and thanks for joining our conference call to discuss Tyco's second quarter results for fiscal year 2004, and the press release we issued earlier this morning.

With me today are Tyco's Chairman and Chief Executive Officer, Ed Breen, and our Chief Financial Officer, Dave FitzPatrick.

Before we get started, 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 statements that we've included there.

In addition, we will use certain nonGAAP measures in our discussions this morning, and we also ask you to read through the sections of our press release that address the use of these items.

I also wanted to inform everyone that Ed Breen will be speaking at the electrical products group conference tomorrow morning at 9:00 a.m.

Ed's presentation will be available life via webcast which can be heard by logging on to www.tyco.com, and clicking on the appropriate icon.

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

Thanks, Ed, and good morning, everyone.

I am delighted to report to you this morning that Tyco had a very good second quarter.

We had stronger earnings per share, and continued strong cash flow and we also made progress on our divestiture program.

We are on track in our efforts to build a strong operating company, and this progress has given us the confidence to raise our guidance for both earnings and cash-flow for the full year.

Before we get to the revised guidance, let me quickly recap the second quarter.

Overall we reported earnings per share of 37 cents on a GAAP basis.

Included in these results is a net charge of $119 million, or four cents per share from our restructuring and divestiture program.

From a cash flow perspective we continued to show that Tyco can generate strong cash flow with cash from operating activities of 1.8 billion, and free cash flow of 1.4 billion.

We reduced our debt to 17.7 billion, net debt to 14.6 billion, and ended the quarter with a debt to capital ratio of 38 percent, down from 40% last quarter.

Our balance sheet continues to improve and we expect to see continued strong cash flow and debt reduction over the balance of this year.

Based on our earnings and cash flow performance during the first half of this fiscal year, we are raising our EPS guidance from the $1.42 to $1.52 per share range to a new range of $1.52 to $1.58 per share for the full year.

As with our previous guidance, these estimates exclude the impact from the restructuring and divestiture program we announced last November.

Our guidance for the third quarter is 39 cents to 42 cents per share, again before the impact of our restructuring and divestiture program.

With respect to cash flow, we are raising our previous cash flow guidance from cash from operating activities from greater than 5.4 billion to 5.7 billion.

Our guidance for free cash flow has changed, from greater than 3.2 billion to 4 billion, before any voluntary pension contributions.

From an overall Tyco perspective, we saw gradual improvement in the global economy in our second quarter.

Our electronics business saw steady improvement in the quarter, and that continued through April.

Healthcare continued to see nice growth trends, despite a tough comparison to a year ago.

Our industrial and construction related businesses saw improving market conditions in the quarter, specifically, we had better order rates and increased backlog in engineered products.

Overall the economy has picked up and we are hopeful that this trend will continue.

On the cost improvement side, one of our strategies at Tyco is to reduce our G&A expense, and use some of that savings to fund higher levels of R&D and sales and marketing spending in our businesses.

We continue to focus on G&A expenses, and are working to reduce these expenses as a percentage of revenue.

This quarter we increased Tyco-wide R&D spending by 36 million, led by higher spending in both Healthcare and Electronics.

On the divestiture front, we exited ten of the more than fifty businesses we identified in the program announced last November.

So far we have generated over 100 million of proceeds, and we are on track to generate approximately 400 million in proceeds from this program, excluding the sales of the Tyco global network.

Next, we made progress in implementing our restructuring program in the quarter.

While our spending is a bit lower than we had originally planned, I feel very good about the quality of the execution that we are seeing.

Finally, we are continuing to gain traction in our strategic sourcing and Six Sigma initiatives.

These programs are important elements of our operational focus, and our business continuing to ramp in these important areas.

We expect to generate over 300 million in savings from our sourcing efforts, and over 200 million from our Six Sigma efforts this year.

All in all, the second quarter was a good quarter of progress, and we feel good about the balance of 2004.

Now let me turn the call over to Dave.

Thanks, Ed, and good morning, everyone.

As Ed mentioned, we had a solid quarter with strong earnings and cash-flow, putting the company on a nice path to an increasingly improving balance sheet.

As most of you know, this is a dramatic change from where we were in early 2003.

Before we get to the segment results let's quickly recap some of the highlights during the quarter.

First, looking at the top line, our businesses saw the benefits of an improving economy which led to an improvement in our organic revenue growth to 3.4%.

Focusing on margin, our operating margin in the quarter was 13.7% before restructuring and divestiture related charges.

This is an 80 basis point improvement over our performance in the first quarter.

Primary working capital was a modest source of cash in the quarter, even in the face of double-digit revenue growth.

Our working capital was at 70 days in the quarter, a six-day improvement over last year.

The benefits of an improving balance sheet resulted in declining interest expense, interest expense declined $74 million year over year, as a result of our cash generation and debt reduction activities.

Finally, our tax rate for the quarter was 24.7%, compared with 27% in the first quarter, due to a $23 million favorable non-U.S. tax adjustment.

As we note in our press release, the company continues to expect a full year tax rate of approximately 27%.

Let's now turn to the segment results and we will start with Fire and Security.

At Fire and Security, revenue increased 8% with seven percentage points of the increase due to currency.

Operating income improved from a loss last year to income of $220 million.

Included in the second quarter income is a net charge of $47 million related to the divestiture and restructuring program.

The net restructuring charge in the quarter was $10 million, with $26 million of charges offset by $16 million of savings related to the program.

Last year's second quarter included $352 million of charges.

The remaining increase reflects improved profits in three of the four Fire and Security businesses.

Looking at our operating performance by business unit, again before restructuring or divestiture related charges and we will start with worldwide securities excluding continental Europe.

This represents 47% of segment revenue and this business grew 4% organically in the quarter.

The operating margin in the quarter was approximately 15%, led by strong performance in ADT North America, which benefited from cost improvements as well as lower bad debt expense.

Looking at Continental European Security which represented 7% of segment revenue, we had another improved quarter year over year in this business unit.

Although organic revenue declined 3% the business generated a modest profit before restructuring charges.

This compares with a significant loss in last year's second quarter and near break even performance in the first quarter.

Tyco Safety Products which accounted for 11% of segment revenue, had another very solid quarter with organic revenue growth of 10% due to strength in breathing systems, video surveillance, and access control equipment.

Operating margins in this business unit were in the mid-teens.

Finally, the worldwide fire business which represented 35% of segment revenue, experienced an organic revenue decline of 5%.

The operating margin, although flat sequentially, was down over 100 basis points year over year.

The business was impacted by soft commercial construction markets and competitive pressures in the mechanical and electrical contracting markets.

We , did however, see improved order activity late in the quarter.

Turning to disconnect rates in our global security businesses, the trailing twelve-month disconnect rates are as follows.

In the second quarter the U.S. average disconnect rate was 15.9%, the rest of the world non U.S. average was 16.1%, resulting in a total for Fire and Security of 15.9%.

This is two tenths of a point up from a years ago.

The slight tick up order in the disconnect rate, I should say not a year ago, the first quarter, the slight tick upward in the disconnect rate is attributable to lower disconnect rates in last year's second quarter dropping out of the trailing twelve-month calculation.

Overall the disconnect rate has been essentially stable for the past three quarters.

Turning to Tyco electronics, revenue in this business segment increased 12% year over year, to over $2.8 billion with organic revenue growth of 5%.

Sequentially revenue was essentially level despite typical seasonal weakness in our second quarter.

Our connector and cable assembly business, which accounted for 50% of the segment's revenue in the quarter grew 10% organically, or 18% including the benefit of foreign exchange.

The connector business experienced widespread growth in the automotive, communications, computer, as well as industrial markets.

Growth in these areas was partially offset by continued weakness in certain non-connector businesses including battery packs, electrical services and power systems.

Reported operating income of $380 million included $44 million of divestiture related charges.

These relate to the write down of certain businesses as we move closer to divesting them.

In the electronic components business which excludes the Tycom installations and maintenance business, the operating margin excluding restructuring and divestiture activity improved 40 basis points sequentially to 15.0%, and this was despite 50 basis points of head wind from higher pressures metal costs.

Business activity continued to improve in the quarter with higher bookings and backlog.

The book-to-bill ratio was 1.06 in the quarter, with the components backlog growing by 8% organically from calendar year end.

In addition, our third quarter is off to a good start as we saw strong order activity in April.

As a result we continue to believe our growth rate will build for the remainder of the year, and we remain confident in achieving the targets we set out last December, which were 4 to 8% operating revenue growth and operating margins in the 15 to 16% range.

Moving along to Healthcare, another strong quarter for our Healthcare business with revenue in the quarter increasing 9% to $2.3 billion, which is a 4% increase in organic sales.

Growth occurred in all business units led by our pharmaceutical and medical businesses.

Our pharmaceutical business had an especially strong quarter driven by new dosage products for pain management, including a new extended release morphine tablet.

Our medical business continues to perform well, particularly in the wound care market.

Operating income in Healthcare grew 13% and the operating margin expanded 90 basis points to 25.4%, driven by higher volumes and productivity improvements, partially offset by a $17 million increase in R&D as we continue to invest and step up our rate of investment in our Healthcare business.

Engineered Products, revenue in our Engineered Products Segment increased 33% in the quarter.

As indicated in our press release we are now including certain subcontractor costs as revenue in our infrastructure services or earth-tech business.

This change had no impact on profits but reduces our operating margin.

The change added $169 million to revenue in the quarter with currency adding another $92 million.

Organically, revenue grew 8% in engineered products driven by increased volumes and selling prices in our electrical and metal products business as well as solid increases in infrastructure services and fire and building products, partially offset by a modest decline in our flow control business.

Backlog has increased 9%, 7% increase excluding the benefits of currency, since the start of the fiscal year, and we continue to see improving order activity across the segment.

Operationally, the segment benefited from better volume and favorable margins in electrical and metal products, as well as the significant decrease in charges from the years ago period.

We continue to expect year over year profit improvement over the balance of the year driven by better volumes, higher selling prices and cost improvements.

Finally, in Plastics and Adhesives, revenue for the quarter declined 4%, including a two percentage point benefit from currency.

The majority of the revenue decline can be attributed to a difficult comparison with the year ago period due to a Homeland Security related spike in duct tape and plastic sheeting volume.

In addition, continued weakness in our A & E Molded Plastics business more than offset sales increases in the Plastic Film business Operating income in Plastics and adhesives declined $32 million in the quarter which included net restructuring charges of $24 million.

Operationally, weaker volumes at A & E, and resin spread tightening more than offset cost reductions.

Now to wrap up our comments this morning, let me turn the call back over to Ed.

Thanks, Dave.

Before we do open the lines for Q&A, I'd like to make just two additional comments.

First, I'm pleased with the progress we are making in our efforts to build an operating company culture here at Tyco.

We are still in the early innings, but we are gaining significant traction.

I fully expect that our operational excellence initiatives will add meaningfully to our earnings and cash-flow growth over the next few years.

Second, our cash generation is developing into a real strength for us.

As I mentioned earlier, our debt position has significantly improved over the past year.

In addition, our earnings are benefiting from lower interest expense resulting from our strong cash-flow.

Looking forward, we are also be using our strong cash-flow to excelerate our organic growth, and this is something that the entire management team will be spending time on during our strategic reviews this summer.

Let me stress that we are committed to debt reduction in 2004 and we are targeting a net debt level of between 10 to $12 billion by the end of next year.

We are beginning to study additional uses for our cash-flow above and beyond debt repayment and we'll have more to say about this as we move into 2005.

Again, thanks for joining us this morning.

And, operator, let's open up the lines for questions.

Thank you.

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

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

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

Once again, ladies and gentlemen, if you have a question or a comment, please press star the one at this time.

The first line we'll open is John Inch with Merrill Lynch.

Please go ahead.

Thank you, and good morning.

I guess, first question is on corporate expense, which I think now includes the Tycom Global Network.

It declined sequentially in year over year.

I'm just wondering if you could just talk about what were the inputs into that.

Yeah, John, this is David.

We look at corporate expense, in the first quarter we did experience a hedging related loss that was included in corporate expense.

The Tycom, the TGN I should say, related costs which we include in corporate are, I think it was about $15 million in the quarter.

As we look out towards the remainder of the year, I guess for the year we would expect overall corporate expenses to be somewhere in the 270, $280 million range.

But I mean in terms of the quarter sequential move, I would say the biggest change was the absence of the hedging related charge we saw in the first quarter.

Okay.

Then just to clarify, the 27% tax rate you see for the year, is that with the lower tax rate this quarter imply the tax rate exceeds 27 in the back half or is that, this 27 the run rate from here?

I'd expect to see 27 is about the run rate, John.

Just then as a follow up, I want to ask about health care. health care again is pretty comparable comparisons seeing organic growth at 4% is a little bit lower than what we saw in the last quarter.

I'm wondering if there is something you can talk about there in terms of why the growth has been a little bit lower and what you think the growth is going to be for the rest of the year?

John, I think there might have been some adjustments going on in our international business.

As you know, last quarter and first quarter our international business really picked up very significantly for us from the fourth quarter to the first quarter, and organic was a little lower this quarter I think between three and 4% internationally and then a little bit higher in our North America footprint.

As we look at our preliminary April results and looking in the second quarter I don't see it as an issue, we expect organic to ends up in the five to 7% range as we go through the year.

Thank you.

Thanks, John.

Next line we'll open is Don MacDougal at Bank of America.

Please go ahead.

Good morning, guys.

Just wanted to know what the restructuring charges and losses on the divestiture program that are now assumed in full year guidance, has that changed from where it was a quarter ago?

No, Don, let me touch on the restructuring.

We are a little bit behind what we originally laid out for guidance on our restructuring costs.

However, a lot of that relates to the way we have to account for it, how it has to be done, completed before we account for it.

We are a little slow out of the chute on it but we are not on the actions we've taken and we would expect from a restructuring standpoint that we will spend the dollars by the time we exit the fiscal year that we talked about earlier.

And as for losses that we might expect on the divestiture program, any ballpark there?

It's hard to say.

It just depends on when the transactions occur.

As we mentioned when we announced the program, loses from sale could be between 250 and 750 million, and it's really going to depend on when those actions occur.

We are making good traction.

As you know we've exited ten of these deals although on the revenue side it's not that significant a part of that revenue yet.

But we are fairly close on some of the other deals that add up to more of the revenue that was in that approximately $2 billion that's for sale.

But knowing exactly when it's going to close it would be hard to gauge that.

I would still think the loss from those sales would be in that range.

I would also add one other point on that.

The numbers we are talking about getting from this program, the $400 million, and I do think we will get around 400, does exclude the Tycom Global Network, and we are in active talks on that, but the process for that will take a little bit longer because of some licensing issues and all, but I am very confident we will have a sale on the network down the road here a little ways.

Next question would be on the topic of raw materials and pricing.

David mentioned at least ones raw material cost pressure.

Do you have an overall number for what the impact on Tyco was for the quarter, and then any comments you have on whether you were able to pass those price increases along to customers.

I guess as we look at the overall impact on raw materials, we are seeing the impact primarily in our Electronics business, Don.

And there the head wind as we highlighted was about half a point in terms of margins.

So as you look at the revenue base there it's in the 14, $15 million range.

And if commodity prices hold for the quarter, that is extrapolate to 50, 60 million.

In our Plastics business, we did highlight that we did see some impact of tightening spreads.

We were able to pass much of the price of the cost increase I should say along in the form of price but not all so that's having an adverse impact on margins Steel, we by steel in a number of our businesses, and there we have had some success in terms of price recovery in some of those businesses.

So when you look at overall commodity price pressures it's something we think we can continue to navigate through during the remainder of the year.

Don I would also add to that as you look at the spot prices on these metals in our Electronics businesses it's copper gold and silver are the three big drivers and it would appear, and I say appear, that things have peaked, or have begun to decline slightly in the business as we look at spot prices that have occurred from the March to May time frame.

So there might be a good trend there occurring.

Final question would be on Electronics pricing.

Typically you've been seeing in the 5% price deflation environment.

Recently.

Has that changed at all?

No.

It's still approximately 5%.

In fact it's between 5% and 5.2%, which is exactly where we were in the quarter before.

I would say we analyze that in detail by business customer segment and it's still running in that level.

Thank you.

Thanks, Don.

The next line we'll open is Jeff Sprague, with Smith Barney.

Please go ahead.

Thanks.

Good morning.

A couple questions around Fire and Security.

First, it appears that dealer spending is coming in a little bit below what you thought.

I'm assuming that's maybe just an issue of locating the quality of accounts but could you elaborate on what's going on on that side of the business?

Jeff, this is something as a management team we are spending a lot of time on.

We are really in a transition period here in the ADT business and you're correct, our spend this year will probably come in more of more in the 300 million range unless we do increase that the second half versus kind of the 400 million range we had targeted.

So about 100 million down run rate basis.

Really two things are going on.

We are selectively adding key dealers in the country with our program into the program that we want and that's just taking some time.

As we reduced it now we are saying which ones do we want for the long-term with us as partners, and we are going through that transition.

More importantly, we are going through a very significant transition with our internal sales group.

I think you know our goal is to get a higher percentage of our sales generated through internal sales.

One of the things we had to do was just about totally redo the sales force in that business to a higher quality level sale that we are going to because it is not the zero down any more, we are going with the up front charge, et cetera, et cetera and therefore we are doing the redoing the sales group.

Just a couple of numbers for you to put that in perspective.

We are now running our sales group internally about 30% on headcount below where we were to enter the program to redo it.

We plan on getting that headcount by the end of this fiscal year or the first quarter of '05 back to the level we want want it at, which will be adding that 30% back and I think that will have quite an impact on our sales efforts as we enter '05 for the business.

You still have roughly 4% of organic growth.

Yes and jeff, the key is our internal sales group at 30% less headcount had a very effective quarter for us and the trends looked very good as we went through the quarter.

Our last month was better than the first month going into it.

You can see the transition taking hold very quickly, and despite that headcount reduction very good output from that group and obviously the organic came from that end because the dealer spend was down.

Could you also elaborate a little bit, Ed, on how the changes in commercial practices are being greeted in Europe relative to the smaller commercial accounts?

Well, I think very well, but I almost don't like saying this but we were unfortunately leading the market with the zero down in Europe, so we were hanging out there by ourselves and when we pulled it back we are competitive with others in the local markets with what we are offering.

Again, you saw organic down, I think it was 3% in Continental Europe.

I'm not concerned about that because again we are getting a whole new sales force in place to generate organic growth for us in that business.

But the business we are getting is much higher quality and you can just see that in the results with the turn we are seeing in the business.

I don't want to get carried away that this quarter was spectacular in the business but it was a slight profit and improvement from the first quarter which is break even, and the quarter before that was a significant loss.

The turn is happening.

We will generate more sales and generate organic growth as we go forward as the sales force gets solidified and put in place.

Great, thanks a lot.

Thanks, Jeff.

The next line we'll open is Jack Kelly, with Goldman Sachs.

Please go ahead.

Good morning, Ed.

The first question was just on the Fire group, you had indicated organic growth down 5 percent, margins down 100 basis points, can you just talk about what's happening geographically?

Is there anything different in different sections of the country, or Europe?

And then secondly on the contracting side of that business, can you give us a sense of how margins are in the backlog, what's your bidding, which might be an indicator of the future?

Jack, I just, one indicator we saw during the quarter, the margins in this business are down in the low single digits when you aggregate it together.

I wouldn't say there's any significant trend we are seeing in different parts of the world.

Although what's interesting about this business is, if you look at our different regional or districts sales offices, there is a large disbursement in performance.

And we are really analyzing that closely because some of our offices are doing very well and some are not doing well at all.

And it's very much a process where you do the same thing each and every office around at least in the North America footprint, so there's no reason we shouldn't all perform to a level where some of them are at.

We are studying that through our Six Sigma efforts, and I think well make a lot of progress there.

This business is a real block and tackle, do the basics right, be very efficient in your time management and your inventory management, and that's what we are looking at to see what the better offices are doing.

I would point out though as we exited this quarter, we started to see some, and I would say order activity but more bidding activity that seems to be picking up in the business and that doesn't surprise me because we are seeing a pick up in some of our other commercial and industrial businesses for instance, in Engineered Products, so we did start to see a little bit of order flow and bid rate pick up.

And I feel better about the pricing that at least preliminarily it looks like we are going to see there.

I think one final point on it, we did make significant management changes in this business that I feel very good about, very operationally focused talent by bringing Dean Severs in as our new President and I think we will have the focus that we want on the cost side of the equation in this business because I think there's a lot of opportunity there also.

In summary this one is going to take us a little bit of time.

Obviously the economy will help us here, but we have our own issues and our own cost and efficiency issues that we are dealing with, but we are very focused on it now and we'll make good progress over the next year.

Dave just one more question, can you talk a little bit about the spreads?

I mean, that was always a spread rather than a margin business, 20 to 30 cents was your spread per pound, where are you now?

What would it take to get back to what you think is reasonable profitability objective there?

We are in the mid to high 20s right now and I think the thing we have to see and as you dissect the business, the performance in the Plastics Films business which is much of your spread relationship was actually pretty good during the period.

The Plastics and Adhesives segment was challenged by the tough compare on the adhesive side with the year ago.

Our A&E Business in the molded plastic hanger side of things as well as a couple of challenges at businesses in Europe.

The core films business did not have bad performance year over year.

But it was offset by those other factors I mentioned.

But obviously we'd like to see spreads move back even close to that 30-cent level.

If the film side was okay, then I'm unclear what was happening in A&E.

You are saying the spreads there were tight?

Well, volumes we mentioned volumes were down.

Okay.

All right.

Thanks.

Next line we'll open is Chet [Louie] at Barkley's.

Please go ahead.

Good morning everyone.

You guys have done a great job on the deleveraging front, your financial ratios with leverage at 38%, and your businesses risk profiles looked more like an A rated credit.

Can you talk a little bit more about your conversation with the rating agencies and why the credit ratings are substantially lower than what they should be, also what are you guys doing to get your ratings back up to single A?

Chet, this is David We have, as we've been discussing for some time active discussions with the rating agencies.

I meet with them all on a quarterly basis, Martino [inaudible] and her treasury team meets with the agencies even more frequently than that.

We are quite pleased with the success we've had, number one in our businesses generating substantial amounts of cash.

Number two we done what what we said we were going to do in terms of using that strong cash generation to pay down debt.

Consequently we've had very, very good performance in our debt to capitalization ratios over the past 12 to 18 months.

We are encouraged by the move that Moody's announced a week ago and we will continue to work with the rating agencies and our goal remains solid six B credit ASAP.

We want to get there as quickly as possible.

And then in the longer term getting our credit ratings to a solid Single A.

Do you see a good chance that Moody's could upgrade you guys to investment grade which is really long overdue?

We need a two notch move there and we continue to work with them to share the information in terms of both progress and commitment in terms of getting there.

Great.

Thank you.

Next line well open is the line of Lee Cooperman with Omega Advisors.

Please go ahead.

Thank you.

Good morning.

I was wondering if I could get you to look out a little bit.

You made an interesting comment, and by the way, congratulations, you are doing a fabulous job for us.

You mention at the end of '05 that your net debt will be down to around ten to 12 billion, and your free cash-flow currently is running around 4 billion.

I'm just wondering what the components of that net debt would be?

Because you have roughly 4.5 billion I think of outstanding converts that are now I believe all in the money.

Are you assuming something happens to convert them or are you assuming the non-convertible debt is retired?

No, the convert debt stays in place there, Lee.

You're making a good point we have 4.3 billion or so, 4.5 billion of convertible that's in our debt calculations although counted in our diluted share account, and that's in our debt calculation at that point in time.

So basically towards the ends of '05 if the 4.5 billion, I am getting a little old so I might slip a number here and there, but I believe the convert's a convertible at one at 22.78 or one at 2175, or am I wrong.

That's right.

So the stock is 28, $29 pre opening, assuming nothing changes dramatically in the next year the ten to 12 billion you're talking about includes $4.5 billion of real equity, so essentially your net debt is about $6 billion for a company generating $4 billion in free cash flow.

So we are woefully underleveraged looking out 18 months which is a miracle when you think where we were a year, year and a half ago.

What do you think, obviously debt repayment is your priority now, but wouldn't we be over capitalized looking out 18 months from now?

Yeah, and Lee, looking back to my comments, this is one of the really exciting pieces of Tyco now.

It's happened so rapidly from where we were when some of us arrived at the company a little less than two years ago.

This is becoming a real asset for us.

And we, going into the middle of next year will have cash available to look at our options for what else are we going to do.

As I mentioned in my prepared comments, we will look at what is the best return for our shareholders in use of that cash.

We will look at everything, share repurchase, increased dividend, what we are going to do potentially in acquisition side.

We'll be very careful, very diligent about it but we are getting ourselves into the position where with the management team and our board we will be addressing that near term because we are getting there quickly.

One last question, from a stand point of a guy like me modeling, not that I model at my age any more, but basically the shares outstanding have risen about ten, 12% on a fully diluted basis, what do you think the share creep would be going forward assuming no major change in your policy at the end of '05 when you have more flexibility in terms of option grants, whatever?

I assume the increase year over year is on a fully diluted basis as a result of convertibles that we sold.

But do you think that the share count will remain relatively steady going forward from here or do you think we should model in meaningful increases?

I think, Lee, this is David, as we look at the roughly 2.2 billion, I think it was 2.217 billion diluted share count, that is up over a year ago.

When we look at that, we issued approximately two hundred shares associated with the $4.5 billion of converts, so that was nine to 10% dilution there.

We are seeing a little bit of an increase, and this is with a diluted share calculation as options become somewhat more in the money, we had a slight increase there, but for modeling purposes I wouldn't think that should be any more than one to 2% a year, just in terms of as options become more and more in the money, technically we go through the required reverse treasury stock method for calculating dilution.

That's about the only thing that I think we would see over the coming number of quarters.

Thank you.

Thanks again for a great job you are doing for us.

Thanks, Lee.

Next line we will open is David Bleustein at UBS.

Please go ahead.

Hi, maybe to clean up, 27% tax rate for the year includes or excludes the credit this quarter?

The approximately 27 percent, David, includes the credit.

Thanks.

Next question, operator?

Next line we will open, Thomas Denslow at Hamilton Investment.

Please go ahead.

You kind of mentioned uses of cash and you listed a number of things including the dividend.

I know currently there are restrictive covenants in some of your bank agreements.

Can you address what you are doing to have those removed, or what need to do so that that will be a viable option when the time arises to make that decision.

Sure, Thomas.

In the new bank facilities we put in place in December of 2003 we do not have restrictions with respect to dividends.

So we have the flexibility with respect to covenants and the like to move on the dividend front without going back and renegotiating any provisions there.

Okay.

Great.

Thanks.

Operator we will take one, two more questions at the max.

All right.

Thank you.

The next line we will open is Brian Jacoby with Morgan Stanley.

Please go ahead.

Thanks, regarding Lee's question again.

You have 2 billion debt come due this calendar year and next year in aggregate.

It certainly looks likes if you are going to live up to what you are saying you are going to have to either take out bonds for tender or to open market purchases, and if you were to pursue that would that be anything that would you do now or would you wait until there's some clarity regarding the litigation overhang?

Look, Brian, let me just say our number one driving goal is our ratings with the agencies.

So our goal is to reduce debt as intelligently as we can over the intermediate term.

That's the number one goal.

I understand what we have that's due and how much cash we are going to have.

If we have to we will sit on some cash and let that build up in the interim period, but we will look at any other intelligent ways that we can to reduce debt.

One other thing.

I guess to round it out, essentially would you do anything not to say what it would be but would you do anything in front of a litigation overhang, or is it something you would want priority on that before you would pursue anything such as debt tenders, share buybacks and so forth?

No, Brian, we would look at older alternatives.

We are not going to sit around waiting on the litigation.

If there's other opportunities to make a intelligent move we would do that.

Great.

Good quarter.

Thank you.

One more questions, operator.

Last question will come from the line of Rob Cornell with Lehman Brothers.

Please go ahead.

Hi, everybody, last question.

You know, good quarter but you didn't comment on market shares, for example in Electronic, health care and even Fire.

How do you think you are doing there?

I think we are doing fine.

If you look at our electronics business we really have to dissect it into all of its pieces.

And when we go through that calculation we feel very good about it.

You know as you know a couple things in our Electronics business if you do a compare us to some of the competitors out there, we have a very significant piece of our connector and cable assembly business in the auto industry.

And the auto industry is doing very well and we expect content to continue up.

But it's certainly not growing at the growth rates of the consumer electronics end of our markets and some of the other ones.

When you look at it by piece I feel very good on a market share front. health care I feel good.

Market share front we look at it by country and region.

And feel very good and although we were a little low on organic this quarter I suspect we will be fine except as I said for the remainder of the year we are off to a good start in April.

I would say on the Fire and Securities side, I wouldn't really say we are doing great on the market share at this point in time.

We are purposely going through this transition period.

It does not concern me for the long-term because I feel very good about the growth rates as we get into mid '05, but because of this transition we are going through, yeah, are there other players adding up more accounts than we are on the ADT side, possibly, yes more so than a year ago but long-term that will not be an issue for us.

Is it two early to tell whether you are getting traction on the health care R&D spend or is that going to be an '05 phenomena?

I'm glad you asked that.

We've had a review and Rich Meelia has been around to every single R&D facility during the last quarter reviewing what we call these edge programs, and we're feeling very confident that we'll see some flow in the beginning of '05, but a much more significant flow of products by the middle of '05 on the programs.

There is about 41 to 42 of these programs that are clicking according to schedule that we will bring products out from, so I think you will see good traction.

We are feeling very good about it and, therefore, we are continuing to add on the R&D side to take that percentage up another two points.

Sounds good to me.

Thanks.

All right.

Thanks, Bob.

Thanks everyone for joining us this morning.

We will be talking to you over the next weeks.

Thanks.

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