江森自控 (JCI) 2005 Q1 法說會逐字稿

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

At this time all participants are in a listen-only mode, and later we will conduct a question-and-answer session and instructions will be given at that time.

If you should require assistance during the call please press star, then zero.

As a reminder this conference is being recorded.

I would now like to turn the conference over to our host, the Senior Vice President of Investor Relations, Mr. Ed Arditte.

Please go ahead.

Thank you, Rochelle, and good morning to everybody.

Thanks for joining our conference call to discuss Tyco's first quarter results for fiscal year 2005 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.

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 in the press release.

In addition, we will use certain non-GAAP 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.

In reviewing our operational performance with you this morning we will also present certain non-GAAP financial information for businesses below the segment level in order to provide additional visibility into the particular results at the subsegment level.

The press release and all related tables can be found on the Investor Relations portion of our Web site at Tyco.com.

Before we get started, I wanted to quickly mention that we will be hosting an investor meeting in New York City on February 22nd.

The meeting will begin at 8:30 and conclude shortly after noon.

The meeting will include updates on our Healthcare and Fire & Security segments as well as an update on our operational excellence activities.

You should have received your invitation by now, but if you have not and would like to attend this meeting, please let us know.

The meeting will also be Webcast for those of you who cannot attend in person.

Now, to get us started, let me turn the call over to Ed Breen.

Thanks, Ed, and good morning.

I'm pleased to report to that you Tyco is off to a good start in fiscal 2005 with first quarter earnings and cash flow in line with our expectations.

Our GAAP earnings per share from continuing operations were $0.35, compared to $0.34 a year ago, but this year's EPS included $0.07 of charges related to the early retirement of debt and divestitures.

Adjusting for these charges EPS grew 24 percent year-over-year.

Our free cash flow was 475 million in the first quarter which is traditionally our lowest cash flow quarter.

Organic revenue growth was 4.3 percent with good growth in four of our five segments.

Operating profit increased 13 percent, and the operating margin expanded 110 basis points to 13.9 percent.

We were pleased with the progress we made in a number of areas.

Let me quickly run through a few of the segment highlights for you during this quarter.

In Healthcare we had organic revenue growth of 4 percent led by double-digit growth in surgical and pharmaceuticals.

We also won a significant contract to be the preferred supplier of surgical products to Novation hospitals which begins in April.

We anticipate this contract will add over 100 million of sales in 2006, and 150 to 200 million by 2007.

In Electronics, we had solid organic revenue growth of 6 percent in a tough environment, driven by strength in automotive, industrial, and computer and consumer.

In Engineered Products we had strong organic revenue growth of 9 percent with growth in three of the four business units, and more importantly, backlog in our largest business, Flow Control, grew at a double-digit rate in the quarter.

We continued to make good progress in utilizing our cash to grow the company, improve our balance sheet, and return capital to shareholders.

We increased our spending on research and development by 15 percent year-over-year to 215 million, led by a 17 percent increase in Healthcare and a 15 percent increase in Electronics.

Our capital spending grew 39 percent to 287 million as we continued to identify and fund projects with attractive returns.

During the quarter and into early January we repurchased 460 million of face value convertible bonds which, as you know, serves to reduce debt and lowers our diluted share count.

These repurchases reduced our diluted share count by just over 20 million shares.

When added to our repurchases in the previous quarter, we have now bought back nearly $1 billion of convertibles and lowered our diluted share count by 43 million shares or 2 percent of our shares outstanding.

We also retired 1.1 billion of maturing term debt in the quarter.

In early December we announced the substantial increase in our quarterly dividend from a penny and a quarter per share to $0.10 per share.

On an annualized basis, this increase equates to an incremental $700 million return of capital to our shareholders.

And as we've said in the past, we will continue to evaluate the dividend periodically.

During the first quarter we continued to build momentum in our operational excellence programs.

On the Six Sigma front we are tracking towards our full-year target of $300 million of savings.

Employee training continues to be a priority for us, and we currently have over 4300 belts trained and almost 3500 active projects in our pipeline.

In our real estate footprint reduction program, we're also making good progress towards our full-year goal which calls for us to exit over 150 facilities.

Turning to working capital, this was not a good quarter after very good progress over the past two years.

We made progress on accounts payable, which was encouraging, but the pickup in business activity that we saw in certain areas led to higher levels of receivables and inventory.

Also, a portion of the inventory increase is due to the higher cost of certain raw materials, primarily resins, steel, and copper.

Despite higher working capital in the first quarter, we continue to expect our working capital velocity to show good improvement over the full-year.

Finally, our strategic sourcing teams had a good first quarter, but we are clearly seeing more headwind certain metals, resins, chemicals, and non-wovens.

In response to these pressures, we have launched a number of new teams in the United States as well as in Europe and Asia.

As a result, we are increasing our activities and our growth savings target in an attempt to fully offset the commodity headwind we are seeing.

I also want to make a couple of quick comments about Electronics and Fire & Security.

In Electronics, the market tone is improving from the choppy conditions we experienced from August through November, and this should help the performance of our plants.

In addition, better revenue from an improving market will also help our margins.

In Fire & Security, we are carefully balancing our investment in the sales force expansion and other marketing initiatives with our cost reduction programs.

As we look to the balance of the year, we fully expect to make good margin progress and plan to generate higher growth from the re-engineering of the sales organization.

Overall it was a good start to 2005.

Our earnings were in line with our expectations.

We continued to invest in our businesses to promote organic revenue growth, we made additional progress in improving the balance sheet, and we continued the process of returning capital to shareholders via repurchase of convertibles and announcement of substantial dividend increase.

Now let me turn it over to Dave to review the operations.

Thanks, Ed and good morning, everyone.

Let's turn first to the segment results and we'll start with Fire & Security.

In this segment revenue grew 2 percent to $2.9 billion with flat organic revenue growth.

Operating income was $283 million, which included a $7 million divestiture charge.

The operating margin was 9.8 percent on a GAAP basis, or 10.1 percent adjusting for the divestiture related charge.

While the operating margin improved nicely year-over-year, we did see a sequential decline, and this was primarily due to increased investment in sales activities, higher seasonal advertising expenses, and seasonality in some of our fire contracting businesses.

Looking at our operating performance by business unit within Fire & Security without the impact of restructuring charges and divestitures, our Worldwide Security business, excluding continental Europe, which represented 50 percent of segment revenue, grew 2 percent organically in the quarter, primarily driven by stronger commercial sales.

The operating margin in the quarter was essentially flat year-over-year at approximately 14 percent, primarily reflecting higher sales and marketing costs which offset operational improvements.

Revenue in continental European security, which represented 7 percent of segment revenue, declined 6 percent as we continue to transition this business to an internal sales model focused on higher end commercial customers.

The operating margin was in the mid single digits range in the quarter.

The Worldwide Fire business, which represented 32 percent of segment revenue, declined 1 percent organically, reflecting a more selective contracting approach with a greater emphasis on growing our Electronics and post-installation services business in 2005.

Contract bookings and backlog improved in North America, and we expect to see positive organic revenue growth for the remainder of the year.

Operating margins were above 5 percent.

Finally, Safety Products, which accounted for 11 percent of segment revenue, generated organic revenue growth of 3 percent in the quarter with an operating margin in the high teens.

As we anticipated, our trailing 12-month security disconnect rate increased slightly to 15.4 percent from 15.1 percent last quarter as a large number of dealer accounts acquired in the peak year of the dealer program, which was 2002, are hitting the peak 36-month-plus disconnect period.

We continue to expect modest increases in attrition rates over the next two to three quarters.

Looking ahead, we see a stronger second quarter with a pickup in organic revenue and operating margins.

For the full year, we continue to expect organic revenue growth in the 3 to 4 percent range and operating margins of 12 percent plus.

This guidance assumes an acceleration of organic revenue growth in the second half of the year driven by stronger growth at ADT as well as an improvement in the global fire business.

Turning now to Electronics, as Ed indicated we were pleased to achieve 6 percent organic revenue growth in the quarter despite a choppy external environment.

We had nice growth in our automotive, consumer, and computer and general industrial markets, which was partially offset by weakness in power systems.

From a geographic perspective, we had good organic revenue growth in Asia Pacific and Europe, with slightly lower growth in North America.

On a reported basis, revenue growth was adversely impacted by the divestiture of the electrical contracting services business and the accounting calendar change we announced last quarter.

Operating income in the quarter was $414 million, and the operating margin was 14.4 percent, which was below last year's 14.9 percent.

The margin decline was primarily driven by the accounting calendar change which shifted the slow holiday season into our first quarter results, and we estimate this change cost us approximately 70 basis points of operating margin.

In addition, higher metals costs, particularly copper and gold, continue to be a sizable headwind and cost us about 90 basis points of margin on a year-over-year basis, and 30 basis points sequentially.

I should note that the calendar change will create a favorable comparison in the second quarter as we look at operating margin.

From an overall market perspective we felt better about order activity and the overall tone of the market as the quarter came to a close, particularly in comparison to the start of the quarter when inventory levels were being adjusted in the supply chain.

Our book-to-bill ratio approved to .99 in the quarter versus .96 in the previous quarter.

As we look to the second quarter, we believe the inventory adjustment the market has experienced is largely over.

Because of lower order rates over the past few months we expect organic revenue growth to be in the low to mid single-digit range.

On the margin front, we expect a significant improvement based on higher revenue and improved operating performance in certain areas of the business, coupled with the calendar change I mentioned earlier.

We continue to target full-year organic revenue growth in the 5 to 7 percent range with the operating margin in the 16.5 to 17.5 range.

This guidance assumes a continued firming in the global electronics market as the year progresses.

Turning now to Healthcare, we had a solid quarter with continued operational improvement.

Revenue grew 6 percent to $2.3 billion, and organic revenue growth was 4 percent, driven by strong sales at pharma and surgical, partially offset by modest declines in retail and respiratory.

Operating income increased to $581 million, which included an $11 million divestiture charge.

Adjusting for this charge, the operating margin expanded 80 basis points to 25.5 percent.

R&D spending grew 17 percent to $50 million in the quarter as we continue to build our new product pipeline.

Moving now to Engineered Products, we had a good quarter with 9 percent organic revenue growth driven by growth in three of the four business units.

This was led by Electrical & Metal Products, partially offset by a modest decline at infrastructure services.

The Electrical & Metal business continued to benefit from higher pricing in the steel market, while Flow Control and Fire & Building Products benefited from stronger markets in the quarter.

Operating income grew 55 percent to $172 million, and the operating margin expanded significantly, over 300 basis points, to 11.4 percent, and market conditions in the segment continued to show signs of improvement.

In Flow Control, our largest business, our backlog increased 23 percent year-over-year, and 13 percent sequentially in constant currencies in the quarter.

Pricing remains firm in Electrical & Metal Products and Fire & Building products continues to perform quite well.

For the full year we continue to expect organic revenue growth in the 4 to 6 percent range for the segment, with operating margins of 10 to 11 percent.

In Plastics & Adhesives revenue increased 9 percent to $464 million.

Organically revenue grew 4 percent in the quarter with growth in three of the four business units, partially offset by continued weakness in the A&E plastic hanger business.

In the plastics films business, we continue to aggressively pursue price to offset rising raw material costs.

Operating income increased $11 million, and the operating margin improved 220 basis points due to restructuring charges of $30 million in last year's first quarter.

Adjusting for the charge, the operating margin fell 490 basis points to 5 percent, primarily due to higher resin costs as well as a significant decline at our A&E plastic hangers business as we continue to transition to a direct sales model in Asia.

We expect that higher resin prices will continue to pressure margins over the remainder of the year.

We are continuously striving to offset as much of the cost increase as possible through pricing, but at this point, we have not been able to fully offset the resin cost pressure.

Before I turn it back over to Ed, I also want to update you on a few other items.

Our tax rate was 29.4 percent for the quarter.

The tax rate was increased by nearly four percentage points, primarily due to the non-tax deductability of early debt retirement charges.

For the year we continue to expect the tax rate to be around 27 percent.

Net interest expense declined $58 million in the quarter to $181 million.

With respect to our divestiture program I'm pleased to report we are now approximately 80 percent complete and now expect our total proceeds to exceed $500 million.

Additionally, we expect $130 million of proceeds from the sale of TGN.

As we previously announced, we adopted a 4-5-4 calendar format so that all of our business units close on the same day.

This will improve our control environment as we implement Sarbanes-Oxley Section 404.

As a result of this change, we booked $26 million of income directly to shareholders equity in the first quarter, which primarily reflects the performance of our Electronics segment during the last two weeks of September.

Now let me turn the call back to Ed.

Thanks, Dave.

Let's turn first to guidance for the full year and second quarter of '05.

For the full year we remain comfortable with our guidance of earnings per share from continuing operations of $1.88 to $1.98 excluding the impact of divestitures and charges associated with early retirement of debt.

For the second quarter we expect earnings from continuing operations to be in the range of $0.45 to $0.47 per share, also before the impact of any divestitures and charges for early retirement of debt.

Our guidance for cash from operating activities and free cash flow remains unchanged.

We continue to expect cash from operating activities of approximately 7 billion and free cash flow to exceed 4.5 billion for the full-year '05.

Both estimates exclude any voluntary pension contributions and as most of you know, our definition of free cash flow subtracts the dividend payments.

Overall we feel good about the global economy and the position of our businesses.

Our backlog is building in our key industrial businesses and we are excited about the Novation contract in Healthcare which should begin to generate sales during the second half of the year.

In addition, we are seeing some encouraging signs from our Electronics end markets.

Thanks for joining us on the conference call this morning.

And with that we'll open it up for any questions.

Operator, if you'd please queue the first question up.

Certainly.

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're using a speakerphone, please pick up the handset before pressing the numbers.

Once again, if you have a question, please press star one at this time.

One moment, please, for the first question.

Your first question comes from the line of Don MacDougall of Banc of America.

Please go ahead.

Good morning, everyone.

Hey, Don.

I guess I'll start first with a question I think I know the answer to, but nonetheless we'll get it out there.

Any change to 2006 guidance based on what you've seen here with the first quarter?

I think you did reaffirm after you reported last quarter.

Don, no change at all.

Okay, great.

Moving to Electronics and the margins, they came in a little lower than I was expecting.

I was just wondering if you could maybe give us a walk to that 16.5 to 17.5 full-year number with a little granularity around how much is coming from volume, how much is coming from raw materials being less of a headwind, exactly how do we get to that range?

Yeah.

Don, let me try to walk you up.

The quarter was reported 14.4, but as Dave had mentioned, take, you know, the calendar change as we highlighted a quarter ago was going to occur, affected us for 70 basis points.

So you're at a 15.1 run rate, I would say, for the quarter, if you adjust for the calendar change.

What occurs, and let me just talk to the second quarter, and I think that will help build you up.

We're expecting in the second quarter, as again Dave had mentioned, a significant revenue ramp, although, by the way, when you see the organic percent year-over-year, because there was a big second quarter last year, it will be low single digits, but revenue will be up a good $300 million sequentially in Electronics when you go into the second quarter, so obviously we're expecting margins north of 16 percent, you know, as we enter the second quarter.

As you build from there, we are expecting the markets to continue to pick up where we're in the 4 to 7 percent organic growth range for the year which means the second half of the year will be a good 5, 6, 7 percent, which we did see in the first quarter.

We'll dip a little in the second but we expect that back.

And I would point out also, that the order rate we saw in the last six weeks, back to the comment about things firming, was over one book to bill each of the six weeks.

So we ended the quarter at a .99, the quarter before that was a .96, but the last six weeks seemed to have firmed up a little steadier for us on and consistently so I think that bodes well for the organic growth rate as we move forward.

If you kind of extrapolate out into '06, kind of half of the improvement will be from cost improvement.

That's either cost take out or our ability to move facilities to some low labor markets which we're still very focused on this business and Don, the other half I'd say maybe it's two-thirds but half the two-thirds would be volume.

Ed, is there anything to suggest that your 5 percent price deflation assumption is, you know, is something that might change?

No, Don, if anything, and I don't want to take this as an indicator yet, but when we do our roll-up by customer and all, we actually think from a pricing standpoint we were slightly below 5 percent in the quarter, and as we always highlight we've been kind of nailing right around 5 percent, or slightly above, so I don't know if there's an indicator that's improving at all but it certainly didn't get worse.

Look, obviously the one other thing we're dealing with here is headwind from raw material, and, you know, as we highlighted, it was 30 basis points just sequentially and almost a full point year-over-year, and our plan says that raw material is not going to hurt us much more.

We're kind of at the peak levels.

One more quick one and I'll turn it over to someone else.

Any comments on the non-residential market?

It's an important market for Tyco in a number of areas.

It's been fairly sluggish.

Have you seen any pick up there yet?

We have.

And we mentioned a quarter ago that we were seeing it in the bid activity, but we had not seen it really in our backlog yet.

We're starting to see our backlog and order rate pick up, and it affects both our Fire business and our Engineered Products division which, you know, specifically [inaudible] Flow Control.

Let me give you a couple of data points there and hopefully this continues.

In Flow Control, which is clearly in that end of the market, our backlog is up 23 percent year-over-year, it's up 13 percent sequentially, and in Simplex Grinnell, which goes, I think, Don, right to the heart of non-residential construction, our backlog is up 11 percent year-over-year, 10 percent sequentially, and the electrical contracting part of the business is up 12 percent year-over-year.

So, again, fingers crossed, but, boy, the last quarter for our industrial businesses and commercial construction markets finally started to see it come in the backlog.

Thank you.

Thanks, Don.

Thank you.

And our next question comes from the line of Jeffrey Sprague of Smith Barney.

Please go ahead.

Jeff, you there?

Sorry about that.

Good morning.

Hey, Jeff.

Wonder if we could pick up --.

Just take off that mute button, Jeff.

Exactly, that tricky mute button.

If we could look at the Security business, could you update us, you touched on it a little bit, but where exactly you are in this transition of the sales force both U.S. and Europe?

It clearly sounds like the U.S. is farther along, but are we halfway through?

A third of the way through?

How does that play out over the year?

Jeff, the sales force, let me give you ADT U.S., which is one of the real big pieces of this.

We now have the sales force built back as we exited the year, and I'll give you a few numbers because I think these are important to put it in context.

We're at a sales person level of about 4600 people.

That's both residential and commercial.

During the last quarter that we ended, we added an incremental 100 sales people to that number, but let me tell you the other number that's important, which we're coming to a close on in the next two quarters.

The plan churn.

We hired an incremental 100, as I mentioned, but we really hired 460 people, and remember we're upgrading the sales force as we've been talking about and we've churned out about 360 people.

We have a couple more quarters to go and we're kind of through that planned process that we have.

What we're starting to feel, Jeff, is that we're getting a lot of the sales people we added a year, a six months ago, four months ago, are starting to come up the learning curve and so if you noticed in this quarter, one of the things we started to do, and we're going to obviously watch this very closely as we spent very heavily on sales, marking, and advertising in our ADT footprint globally during this quarter, and that was a big part of our cost take-up that we saw sequentially.

Now, we planned that, we knew that.

There's some seasonality there, but we also planned it to go up, and we are expecting, as we get into the second half of this year, that the organic growth rate is going to start lifting in this business with the sales force change and the marketing promotion we're going to put behind it.

Could you maybe you don't have the same granularity on Europe, but where is Europe in kind of the transition process?

Very similar.

We're a couple quarters away from being completed there.

Jeff, the difference there, though, is even probably more dramatic, if I could say it that way, because we're going from truly a 100 percent dealer program to basically a 100% internal sales force, and so we're about 80 percent through, or a couple more quarters to do, but I will tell you the learning curve of our sales group there and sales management team is probably a little bit longer the way we're tracking.

But we feel good about it because we churned down the revenue in continental Europe 6 percent as David highlighted, but we really are churning off these bad accounts, and we're bringing all what we consider as we're tracking these very high quality accounts, and if you notice, our margins in continental Europe were now in the mid single digits this quarter which is up from slightly profitable a quarter ago, and you know before that a significant loss.

So I think we're starting to see the benefit of that.

And just to follow-up on the cost issue, you kind of characterized this quarter as kind of the maximum hurt Is that kind of the maximum hurt on materials looking at on a stand-alone basis or in terms of kind of the price/cost trade-off as you look at maybe getting some price in a few places over the balance of the year?

Well, I mean, look, we think the raw materials net-net, is fairly peaked for us here.

So, I mean, do we see a little more headwind?

We could.

But Jeff, I think one of the big things that I highlighted this is, we've really ramped up our strategic sourcing teams to go after more of the spend.

We have about $16 billion of yearly spend, and our sourcing teams were not, as I think you saw from prior presentations, were not addressing the whole 16 billion.

We've been working our way up to that.

So we've expedited some of our teams and told them, hey, we need a good $100 million or so of extra cost savings on the sourcing side to protect us from any additional headwinds that we're seeing here on the raw materials, so that's how we're working that.

Let me just go back and highlight though, on Fire & Security, because that was some of our headwind on a cost front, but it was all sales, marketing, and advertising headwind that we planned in the ADT footprint.

When you look at the rest of the footprint we're taking the actions we saw.

And obviously we'll monitor this organic rate over the next couple of quarters to see if we're getting it.

Great.

Thanks a lot.

Thanks, Jeff.

Thank you.

And our next question comes from the line of Jack Kelly, Goldman Sachs.

Please go ahead.

Good morning.

Good morning, Jack.

Ed, could you give us a little more maybe color on the working capital situation?

You had indicated in Electronics things picked up sharply in the last six weeks of the quarter.

Can we get a feel for how December was versus maybe November, October for the whole company in terms of how revenues went, just to kind of validate the fact that there was maybe a cash drain due to a pickup in business?

Yeah.

Well, Jack, we had a stronger December in Electronics, and you hit right on it, than we normally have.

Orders were coming in pretty good as we highlighted, and continuing, by the way, after the quarter closed, you know, for the couple weeks we know of at this point in time.

So we had a heavier shipments at the end of the month than, quite frankly, we normally do in the business.

And when you break out our working capital, let me just give you a few facts with it.

Our inventory was up 370 million, our receivables were up 236 million, and I would expect, Jack, on the receivables we're going to get a lot of that.

That's all ex currency by the way, but we're going to get a lot of that back this quarter, especially with the back end on some of our Electronics, we're very focused on that.

Interestingly to note, for the first time we started to make progress on payables as we focused our team on that, and our payables helped us by $110 million, so net-net, you know, we were kind of, we used $500 million.

I would also point out, though, the first quarter of last year, and this is similar even the year before that, we always use cash in our first quarter, and last year we used about $270 million of cash.

So, I mean it's a, you know, a couple hundred million dollars difference year-over-year, but I think we'll recover a lot of it in the second quarter, specifically on the receivable side.

The businesses, Jack, I'll just add, were, you know, just taking a little bit more granularity there where we had the working capital builds primarily.

In addition to Electronics was Engineered Products, and again, we have plans and we should get that back throughout the remainder of the year.

Okay.

Great.

With regard to the raw materials you had mentioned a 90 basis point hit in Electronics and Plastics hurt also.

When you had mentioned you thought things were peaking, Ed, were you talking in terms of in subsequent quarters we'll see less of a negative hit, so Electronics would be something less than 90?

I don't know how you want to characterize Plastics, but that we should be kind of recouping or catching up?

How should we think about that?

Let me clarify that.

Definitely less in Electronics than you're hearing the 90 basis points, and hopefully sequentially we're not seeing another 30 basis point lift here by the [inaudible].

So less in that area.

However, let me just, and most other areas.

However, resin, we still aren't sure that there's not significant cost pressure coming there and there is the business we're trying to aggressively offset with it pricing moves.

Get resin out of it, which is just our, basically, mostly our Plastics business, the others we think the increment starts to subside.

But if we think of Plastics, then, we should think of the margin spread or the margin hit getting worse than it was in the December quarter?

I think a lot of that, Jack, depends on the future in terms of polyethylene, polypropylene and polystyrene.

As we indicated, we're trying to get what we can back in the marketplace but we're not getting 100% so a lot of it depends on the future.

To the extent there are increases in these raw materials things could get a little tougher at Plastics & Adhesives.

Finally, Ed, could you just kind of remind us in terms of your thoughts on acquisitions?

You had mentioned second half of '05 were creeping up on that, and maybe just size, what you're thinking about in terms of acquisitions, and maybe what the total spend would be in '05?

Yeah, Jack, we're looking in that area, but we're looking specifically in Healthcare and Electronics.

So that's where we're focused.

One of the key reasons we're focused in those areas, obviously we like those two industries.

We do like our other industries, but we like them on top of the fact that the management teams are capable and ready of doing it and they don't have significant other restructuring activities and things like that going on.

Secondly, the size, if I was to scope it for you, I've said the word modest a few times in the past, modest to me means, and don't hold me exactly to this number, but I'm just trying to get you in a range, it is if we did a deal for $500 million, that would be modest getting significantly above that would not be modest.

So kind of that's how we're thinking.

Ballparking again by saying it won't happen in the first part of the second half of the year.

If we do something this year it will be towards the back end of the fiscal year and I'd also say from a criteria standpoint, I'm obviously not going to get into all those details, but I promise you will we will be looking very closely at strategic fit, earnings accretion and return on capital metrics very closely on anything we do.

Thank you.

Thanks, Jack.

Thank you.

And our next question comes from the line of Bob Cornell of Lehman Brothers.

Please go ahead.

Good morning, everybody.

Hey, Bob.

You mentioned a couple times that business was accelerating and sort of hinted things were good in January, maybe just expand on what really went on here in January in some of the key businesses.

That momentum get extended?

Bob, it feels, yes, it feels like it.

We only have a few weeks of data here but on the Electronics front specifically as I mentioned, and again, I hate to look at one or two weeks and look at book to bill but the book to bill is above 1, and it's not, it's up around 1.04, 1.05, something like that, which clearly is very different than we saw, you know, we dropped off at the end of July so we had August, September, October, November, which were lighter, and as Dave highlighted, that was that book to bill in kind of the .96 range, then we got to the .99 range in the last kind of six weeks or so since, feel pretty good, and it feels like it's across the core segments, as we mentioned, especially our connector business.

We see it in industrial, we see it on the commercial side, we see it on the auto side, so it feels pretty good right now, and therefore we're feeling that we're past that inventory adjustment period.

Another question is, you didn't specifically say, wrap up the impact of the '04 restructuring and benefit program and what the impact might have been in this quarter.

Could you give us sort of a wrap-up on where you are there and what the outlook is?

I think, Bob, as we look at that time overall program, we did indeed, as we mentioned, last time, you know, complete it.

So as we look at the balance of the outlook of 2005, the full savings, we're not going to get the full 280, but that's the annualized, so things are indeed on target and as you saw perhaps in the P&L, what we're absorbing in the business was less than 10 million of charges this quarter.

So on track, and it's given us some good tailwind for 2005.

When do you expect the free cash flow I guess to bounce back above year-ago levels, and maybe could you give us sort of an expectation of how the free cash flow would track from the first quarter to the full-year targets you've got?

You know, Bob, maybe a way to state that is last year our free cash flow in the first quarter was a little over 700.

291 million higher than this year's first quarter.

Right.

So what we plan on doing as I mentioned, we plan on recouping a nice chunk of that in the second quarter.

We're not going to drag it out into the third and fourth.

And I think you can tell from our comments a big area for us has to be working capital improvement in the quarter specifically in receivables, so hopefully we call that kind of delta back plus in our own right have a good second quarter past that and that will put us on good track.

Just one other very detailed question.

It looks like you had a, accrued another current liabilities jumped up form 159 to 330.

Was there anything particular going on there?

Well, if anything accrued, I mean, you're saying the cash used in accrued lives?

Yeah.

I mean if you look at that, I mean the first quarter, Bob, is the quarter we pay out bonuses so there's a lot of moving pieces in there in terms of overall liabilities, but the biggest outflow is seasonally this is the quarter we pay bonuses.

Right.

Okay.

Thanks very much, guys.

Thanks, Bob.

Thank you.

And our next question comes from the line of Steve Volkmann, Morgan Stanley.

Please go ahead.

Hey, good morning.

Hey, Steve.

Just a quick follow-up on ADT.

I think we've historically talked about a bunch of new product which I think was supposed to be kind of ready to put through the new sales force and I guess I'm just wondering if you can drill down a little bit more on that.

As we go through the year are we going to see, is that what's really driving the organic and or the margins?

Steve, it's, you're right on the mark with the comment.

We are planning on that being a second half of the year event to start building up in that area, and hopefully our ARPU, or monthly revenue, continues to move up.

As it did last year, we have been, I'm going to call this test marketing these new packages that I talked about in about eight different markets, specifically around the U.S., and we did do some heavy promotion and advertising against that, and we're, I don't want to get into the details yet because there are test markets and all, but we kind of have this silver package, gold package, platinum package where we're going to put together more services.

For instance, carbon monoxide, just to say an easy one, that gets packaged with the initial sale.

And the initial results of our tests are very encouraging.

That's what we're getting ready to launch on a national basis, and then a global basis as we go through '05, and we've been waiting to get this sales organization trained and in place the way we want it to launch it.

But where we've done these tests in the markets we're feeling, we're encouraged by it, which it helped drive up this ARPU.

And I hope get us to close at a higher percentage of the leads that we have also, but to me the bigger driver is the ARPU working its way up kind of from that $32 level in the residential side up to a higher number.

And we did have a good track record with that last year.

We got more than a dollar lift out of it, but clearly, we think we can get more of that as we go out the next couple of years.

So we're kind of right at the cusp of that happening for us but give us another quarter or so.

Okay.

Great.

And then just, Dave, just to make sure I understand this, in terms of the guidance that you guys are giving, kind of ex items and so forth, is there any change in the tax rate assumed in there versus what we talked about last quarter?

No.

Thanks.

Thank you.

And our next question comes from the line of Steven Tusa, J.P. Morgan.

Please go ahead.

Good morning.

Hey, Steve.

Just a couple of quick questions.

First on Electronics, you talked a little bit about the end market trends, what are you seeing in the auto business in particular in Europe?

Pretty solid, Steve.

Europe was very nice for us in the quarter, continued to look at in our order rate after the quarter ended, so, no, it looked pretty good.

Okay.

And then on just Fire & Security, just digging in a little bit --

Let me just add that our global auto looked pretty good, but Europe specifically was very solid.

Okay.

You think you're gaining a little share there?

I would hope, but I'm not going to say that.

Okay.

As far as Fire & Security is concerned, you know, just looking at kind of the moving parts, you know, you talked about the investment in the new sales force and perhaps in some of the new products, you know, you finish the 4Q at 15.5, 16 percent worldwide Security and did 14 percent this quarter.

Could you just maybe explain some of that sequential decline, just put some numbers around that?

Yeah, Steve, there were truly two items.

I mean there's seasonality in our business also.

We always start, it's our first quarter is our lowest then we ramp up, but the bigger thing that occurred, and I probably ought to walk you through whole Fire & Security piece a little bit just to get it.

But the ADT business, globally, we spent, and a little bit of this was on the Fire side, but most of it is in the ADT side.

But when you look at our roll-up of all of Fire & Security, we spent almost a full incremental point on sales, marketing, and advertising, and that's sequential.

That's a sequential comment from the fourth quarter to this first quarter results.

And that was my point earlier.

We are obviously monitoring that very close.

We think our organic rate is going to pick up.

We've been holding our spending back on purpose until the sales force thing got in place, so I mean we literally spent that much incremental fourth to first quarter, so that's where a big piece of that sits.

Now, look, I'll say to you as we watch that we're going to certainly throttle our sales and marketing spend with additional cost take-out actions we have over the rest of the year.

We're not just going to spend, spend, spend, and go at it that way, but we did definitely stoke it up in the last three months, and that's where a big piece of it was.

Interestingly, and that's really, when you look at the sequential difference, Steve, you really found it, it's right there in the ADT worldwide number because if you look at the other three segments that Dave FitzPatrick reviewed with you, the Fire business feels good, margins were above 5 percent, we had been running them at a year at lower than 3 percent, and usually our first quarter seasonally is a weak quarter in Fire, so backlog was building and our margins were over 5 percent in our weakest seasonal quarter of the year.

Tyco Safety Products did about what we thought, high mid teens in the business, and as we highlighted earlier, continental Europe had its best profit quarter since we've been in the company as we're churning old accounts off new accounts [in it] we were above 5 percent also there.

So when you go back to it, it was one area, ADT, and it's where we put a lot of sales and marketing expense in, and obviously we'll throttle that.

And then lastly, just on R&D, what was the total R&D spend last year in Healthcare in total, and is this 17 percent increase, I mean, this might be kind of lumpy, but, you know, should we think about that through the rest of the year, you know, this kind of investment in this area?

Last year, just highlight, because this has been ramping now for a year and a half, last year Healthcare R&D ramped about 39 percent.

So it was very significant.

This year, as we highlighted, it was about 17 percent, and I would think the way we're planning it we're going to run 17 percent, 20 percent, it's going to be not as high as last year, but still in that range, give or take 20 percent.

And how much do you expect total company R&D to be up for this year?

It's going to be close to 10 percent.

Yeah, we're 10ish percent, but we ought to probably get you a more refined number.

We have it.

Okay.

Great.

Thanks.

But Steve, the R&D is also going up as we highlighted in the Electronics business.

Not much on a dollar basis in Fire & Security, because the product business is only a billion to $2 billion, so it's really mostly in those two businesses.

Operator, next question.

Thank you.

And next question comes from the line of John Inch with Merrill Lynch.

Please go ahead.

Thanks, good morning.

Hi, John.

Just as a request, when you guys plan your next analyst meeting after this upcoming one, it would be helpful if we could get a little bit more than three and a half weeks advanced notice.

That's all.

I have a question on the tax rate.

I mean, if you ex out the 3.8 percentage points it looks like it's 25 and change, 25.6.

Am I missing something?

I thought the guidance date was for 27.

Does that imply that there was some sort of tax benefit that we're not--

We had some minor adjustments and benefit settlements during the quarter but for the year, John, we're still expecting in the range of 27.

Was another quarter a higher than 27 number to play catch up for the first quarter?

Possibly, but I mean could it be a few tenths below 27?

Yes.

I mean we've said all along kind of in the range of 27, and that's our latest outlook as well.

Question on the old [inaudible] power business, Tyco Power Systems.

You guys are still calling it out as relatively weak.

I think we have seen some signs that maybe segments of those industries may be turning up.

What do you think this business does on the run rate basis over the coming year or so?

Well, John, we're obviously planning incremental improvement in the business, but I've got to tell you, we have not seen it yet, and we did not see it in this quarter.

Now, look, the good news is, it's not that big a piece of our pie, but it is a problem piece in the Electronics pie, so we're obviously watching it very closely, but we have not seen the up-take yet.

And it makes sense to keep this business?

Well, John, look, I think as we said before we're finishing off the divestiture program we now have and we're 80 percent or so through it.

We're going to look again here, take a hard look at our portfolio and look at a few pieces of it.

We're always going to be looking at moves both on the acquisition side and the divestiture.

So that doesn't mean there's not going to be something else coming up here.

Last question.

The 4 percent organic growth that you put up this quarter, Ed, when we realize ultimately the positive impact of all the new marketing and R&D and so forth initiatives, what do you think is a good long-term, I'm not talking about your '06 targets, but what's a good long-term organic growth target that we should be thinking about for Tyco on the top line?

I feel like I'm going to put a new target out by saying this and I don't mean to do that, so, look, we've said 4 to 6 percent obviously, but I mean at a minimum we would want to get to the high end of that range consistently, you know, the 6 percent range, and if we can get above it, we can get above it.

You know, look, one of them I'm very bullish on is the Healthcare business.

I mean the Novation hospital contract alone, if you extrapolate those numbers, could be a point to two points easily onto our organic growth rate.

The pipeline, the new products is going to flow, so that one feels good, and, you know, feels like that should go up from last year, it was 4.8 percent organic and it just seems to me that one should be probably above the high end of our range as we highlighted last year.

So that, Electronics should probably get up there and, you know, don't forget, and as I always highlight in our portfolio for the last two years, you know, out of 40 billion in revenue, 12 of it's Fire & Security that we kind of planned around.

It had basically no organic growth because of the change we've been going through.

So anything we start incrementing up from here starts to help us.

So, look, at a minimum the high end of that range.

Thank you.

Operator, we'll take two more questions.

Okay.

Thank you.

Our next question comes from the line of Lee Cooperman, Omega Advisors.

Please go ahead.

Thank you.

Good morning.

Just want to make sure I understand kind of the game plan.

Net debt at the end of the quarter was about $11 billion, cash minus debt.

And my recollection is there's roughly $4 billion of converts in the capital structure of that 11 billion that are way into the money now.

I think the conversion price is in the 20s.

So it really is $7 billion of net debt for a company that's generating $4.5 billion of free cash flow.

You said your acquisition appetite would be modest and later rather than early, defined as 500 million.

What is the priorities for the use of cash flow?

I'm going on the assumption since you just had a fairly significant increase in dividend that any dividend increases are likely be modest and not any time soon, but for a company generating $4.5 billion of cash flow, debt of 7 billion is very modest.

I know you've focused your stock repurchase on the converts, which I'm not quite sure why, given the strong balance sheet that exists now, but what can you tell us is the first question, about the intentions of using this free cash flow given what you said so far about acquisitions and your free cash flow definition is after dividends?

Second, there seems to be some disappointment regarding the operating leverage, stock trading down this morning after these numbers and the mix of the earnings.

What would you say to the question, is there still low hanging fruit left for the company now that you've brought in your team, you've done a lot of good things and things have improved and stabilized?

Do you still see low hanging fruit where we can get some operating leverage?

Those two questions.

And third, a small item.

What are the actual shares outstanding at the end of quarter as opposed to average, on a fully diluted basis?

Lee, maybe, I don't know if I call it low-hanging fruit, but yeah, the term I've used before, and it's there in the company.

We're tracking very well on Six Sigma, so we know what the goal is for the year, which is where we get a lot of our cost take-out.

We tracking those 3500 programs, we know how much we need to get, and we'll track towards that this year and we felt pretty good about the traction in the first quarter.

The one area that is not as easy but hopefully this subsides a little here, but we're also doubling down our efforts, is the strategic sourcing side as I mentioned, because clearly there was additional headwind, but we're doubling down on our team is focused on new sourcing opportunities and hopefully as I mentioned, we're targeting a good $100 million of incremental savings we need to find to help us out in that area.

But look, if you look out over the next few years in the business, there's still nice cost opportunities at Tyco and it really, the two biggest areas reside in Engineered Products, Fire & Security, because of not being put together in the structure, and I would also highlight another one, because it's big, and the continuing movement of our manufacturing facilities on the Electronics side to still ramp up in low labor cost markets because there's great leverage on that, which we did continue to do during this past quarter.

So know that's there.

Lee, on the, kind of the debt side, the cash question, I think we're sitting kind of around 12 billion of net debt just to clarify it a little bit.

The converts are now about $3.5 billion that are out there after the buybacks that we've done, whatever that is 8.5 billion or so.

Our goal has been all along to get our net debt down, or our debt down here another couple billion to about $10 billion, and clearly want to be a single A investment company as we look out into the intermediate future.

So that's our goal.

And, look, where we're going to spend the money, if I just organize it kind of in a parado, it's organic growth opportunities, productivity opportunities, which can be significant in this company, some combination, whether it's these converts or share buyback, but I think we're showing a strong commitment to that by taking 2 percent of our shares out of the market in the last two quarters, and some acquisition activity and we just made the dividend move but we will look at the dividend again as we move down the road.

The 10 billion of debt basically when can you call the converts?

Because basically you're already there.

The converts are like at 50% premium.

On the Series A, in January of '06, the Series B, '08.

Gotcha.

And -

And in terms of the shares outstanding we'll have to get back to you with the --

Okay.

No problem.

No, but I have the shares outstanding at the end of the quarter, 2 billion, 12 [million], 531,218, but terms of what you're really interested in I would assume is the diluted share count we'll have to get back to you with an end of period as opposed to average converts and options.

Gotcha.

The only other observation I would make is, I suspect it probably moves you to make, to effectively defease, protect yourself against the stock dropping and the converts no longer being deeply in the money so effectively getting that into equity so you wind up you're already below your debt target because your 8.5 billion after converts are really into stock, and my guess is there are things you can do maybe to protect yourself in the event the stock had a kind of catastrophic drop and it wouldn't be that expensive, but I'll leave that to the bigger minds than mine.

Thank you very much for your responses.

Operator last question.

Thank you.

The last question comes from the line of Wendy Caplan, Wachovia Securities.

Please go ahead.

Hello.

Wendy, are you there?

One moment, please.

Go ahead, Wendy.

Thank you.

Can you hear me?

Yes.

Good morning.

Good morning.

Can you talk about how you're thinking about the mix in Electronics, given that the early cycle consumer business specifically auto, and I know you mentioned it was strong, particularly in Europe this quarter, how you're thinking about the mix there as we go through the year?

And can you also comment on the offsetting retail and respiratory business in Healthcare?

Yeah, Wendy, the retail and respiratory business, I'll give you a couple numbers on it.

The respiratory was down 2 percent so it wasn't significant for us.

As we track out the rest of the year, we're looking at growth in the business that's above 4 percent, maybe 4 to 5 percent, somewhere in that range.

The retail side of the business we had a real issue during the quarter with some raw material from one of our vendors in the business, and that's what hit us there and I think, Ed, it was down about 5 percentish over there.

Now we don't expect significant growth in that business.

We're looking at the 2 percent range is where we should be.

But we'll make that up hopefully as we correct that supply chain issue this quarter.

And the issue of mix specifically auto and consumer driven businesses in Electronics as we move --

I mean I think you know, Wendy We're coming off of a small base on the consumer side but one of the focus areas for both Juergen Gromer and Mucho Komodo who runs that business for Juergen is to invest in the consumer space.

So the percentages in our mix will go up but it will still be a fairly modest piece of our overall Electronics business as we exit 2005 which we think is a good opportunity for growth in the future.

Thank you.

Thanks, Wendy.

Okay.

Thank you very much for joining the call.

Look forward to reporting to you next time which will be in the early part of May.

Thanks for joining us.

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