江森自控 (JCI) 2007 Q3 法說會逐字稿

Welcome to the Tyco reports third quarter results conference call.

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

Later we will conduct a question and answer session.

Instructions will be given at that time.

(OPERATOR INSTRUCTIONS)

As a reminder this conference is being recorded and I would now like to turn the conference over to our host, Mr.

Ed Arditte.

Please go ahead.

Thank you.

Good morning, everyone, and thanks for joining our conference call to discuss Tyco's third quarter results for fiscal year 2007 and the press release that we issued earlier this morning.

With me on today's call are Tyco's Chairman and Chief Executive Officer Ed Breen and our Chief Financial Officer Chris Coughlin.

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 read through the forward-looking cautionary informational statements that we've included there and also in the most recently filed 10-Q.

In addition, we will use certain non-GAAP measures in our discussions and we ask you to read through the sections of our press release that address the use of these items.

Now, as most of you know we completed the separation of Tyco into three public companies on June 29, and the results presented in our press release today reflect electronics and healthcare as discontinued operations.

Tyco Electronics and Tyco Healthcare, which is now known as Covidian, will release their third quarter results and hold investor conference calls tomorrow and Thursday respectively.

The press release issued this morning in all related tables can be found on the Investor Relations portion of our website at tyco.Com.

Now, let me quickly recap our earnings this quarter.

On a GAAP basis we incurred a loss from continuing operations of $6.13 per share in the quarter which includes $6.68 of special charges.

During the quarter we incurred charges of $5.83 for the class action settlement, $0.69 for separation activities, $0.09 for goodwill impairments and $0.07 for restructuring.

Excluding these charges our earnings per share from continuing operations were $0.55 in the quarter.

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

Thanks, Ed, and good morning, everyone.

Overall, the third quarter was a good one for Tyco.

In total, revenue grew 8% with 5% organic revenue growth and our operating income before special items grew 15%.

Our revenue growth and operating margin were at the high end of the range we told you last quarter.

All of our businesses showed improvement in revenue and operating income with the exception of electrical and metal products which declined year-over-year as we expected due to lower metal spreads, even though it did improve sequentially.

Growth in revenue and operating income was led by flow control which grew its revenue by 16% organically and increased its operating income before special items by 39 million or 45%.

ADT worldwide and Fire Protection Services also had solid operating quarters with 4% organic revenue growth and improvement in operating margin before special items both sequentially and year-over-year.

In addition, we have started the process of reducing our corporate expenses and our corporate costs in the third quarter were below prior year levels and last quarter.

Now, let me make a few comments on separation and the new Tyco International before Chris provides an update on our business performance during the quarter.

As Ed mentioned, we are delighted to have completed the separation of Tyco into three public companies.

Through this transaction, shareholders now own the stock of Tyco Electronics, Covidian and Tyco International.

The separation represents two years of hard work by dedicated employees around the world and is clearly a milestone in Tyco's history.

We are excited about the opportunities for all three companies and we see a bright future for each of them.

For the new Tyco International more specifically, we are excited about the revenue and earnings growth opportunities ahead and our strong cash flow gives us significant financial flexibility as we move forward.

Those of you who joined us for the Investor Day heard that our goal for Tyco is to expand our market leadership positions in three global businesses--Electronic security, fire products and services, and industrial valves and controls.

We also provided more specifics about our growth and profit improvement plans in each of our businesses and I wanted to comment on a few of these this morning.

Let me start with ADT worldwide.

ADT is a strong global security business with more than 7 billion in revenue which includes 3.8 billion of recurring revenue and more than 1 billion of additional service revenue.

Our focus in this business is on first, growing our revenue in North America and in our key emerging markets, and secondly, improving the profitability of our European operations with a particular focus on restructuring our operations this year and next.

We believe these actions will make ADT even stronger over the next few years.

For our Fire Protection Services business, we manufacture and sell fire products and services globally with 2007 revenue of roughly 3.5 billion.

Almost half of our fire revenue comes from highly repeatable services.

Our plan is to improve our mix of business and to continue to focus on the more profitable, electronic, and service revenue.

Additionally, we will work to continue to improve our operating efficiency by applying best practices from our North America business which you all know has improved very nicely over the last couple of years and translate that into the other regions around the world.

On the products side, we have our Safety Products business which is a leading manufacturer of fire suppression, electronic security, and life safety products with approximately 1.8 billion of revenue this year.

I believe that many of you are seeing the performance of this business for the first time with the additional detail that we are now providing on Tyco and I fully expect this business to be one of the faster growing parts of our company as we increase our focus on new product development and technological leadership.

We have market leading positions in fire suppression and electronic security, and our breathing business which operates under the Scott brand name has good growth potential in targeted new markets.

As an example we recently won a major design and manufacturing contract to provide respiratory protection products to the UK Ministry of Defense and we believe these products have growth opportunities in other international markets.

Next, our Flow Control business is a global leader in valves and related products with more than $3.5 billion of annual revenue.

This business is split roughly one-third each in water, energy, and general process industries.

The last two years have been very strong and we anticipate another strong growth year in 2008.

Our efforts in this business over the near term will be focused upon key vertical markets, energy and water to name two, and on continuing to make our cost structure more efficient.

I feel good about the progress we've made in this business but there still is more work to be done.

With that let me turn the call over to Chris.

Thanks, Ed, and good morning, everyone.

Let me remind you that we have realigned our businesses into five new reporting segments--ADT Worldwide, Fire Protection Services, Flow Control, Safety Products and Electrical and Metal Products.

All of the business operating results discussed today are consistent with this new segment reporting structure.

Let me first turn to our global security business, ADT Worldwide.

Overall, revenue grew 6% to $1.9 billion with 4% organic revenue growth.

Operating profit for the quarter was $205 million which included $46 million of charges for a goodwill impairment and $11 million of restructuring charges.

Excluding these charges, ADT's operating profit was 262 million and its operating margin was 13.7%.

Now let me break down our revenue into two types--First, product, installation and service and second, recurring which represents contractual service revenues primarily for our monitoring services.

On a worldwide basis, our product, installation and service revenue grew 6% organically.

While this revenue growth was solid in all regions, the increase was generated primarily from North America and Asia , which continues to benefit from good commercial construction activity.

Recurring revenue grew 2% organically to $936 million with growth in most major regions of the world with the exception of Continental Europe which continued to decline as we expected.

Our total global account base grew to 7.1 million as new units increased both year-over-year and sequentially and our attrition rate of 12.6% improved 50 basis points from last quarter with continued improvement across all regions.

In addition to growing our account base, our average revenue per user also increased from $44.50 at the end of last quarter to $45.27.

ADT Worldwide's operating income excluding the restructuring increased $42 million sequentially and $20 million year-over-year to 262 million.

Our operating margin of 13.7% improved 220 basis points sequentially and 30 basis points year-over-year.

As most of you know, the ADT business model generates a significant amount of depreciation and amortization, and we believe that EBITDA is an appropriate metric for measuring performance.

During the quarter, ADT Worldwide generated $483 million of EBITDA and our EBITDA margin was 25.3%.

During the quarter we also invested approximately $190 million of capital in generating new accounts both internally and through our channel of independent dealers.

As I mentioned, our attrition rate has continued to steadily improve and we have seen substantial improvement in this metric since 2003.

In North America, our attrition rate has improved from almost 16% in early 2004 to 11.9% this quarter.

This improvement resulted in an extension of the estimated life of our North American account base.

There for, beginning this quarter, we extended the expected accounting lives of our accounts in North America to 15 years and have reflected this change for certain elements of deferred revenue, selling costs, depreciation, and amortization.

The net impact on this quarters results was a decrease in revenue of $10 million and an increase in our operating income of $15 million mostly due to the lower depreciation and amortization.

This positively impacted our margin in the quarter by about 70 basis points on a worldwide basis.

It is important to note that this impact does not reflect a catch up or any retroactive benefit.

Now, let me make a few comments on our performance in our major regions around the world.

In North America, our revenue grew 3% organically and our operating margin of approximately 19% reflected improvements from the extended lives on the account base.

Some of these improvements were offset by higher selling expenses in the quarter.

As we discussed in our Investor Day, our focus is mostly on growing our North American business faster and therefore, we will be increasing our spending on certain growth initiative s which we expect to fund with operating improvements.

Also, as we discussed at the Investor Day, the operating margin will move a bit quarter to quarter based on seasonality and the growth rates of the residential business and the commercial business which have very different margin structures.

Next, our Europe, Middle East, and Africa region grew 3% organically in the quarter despite the fact that our recurring revenue declined approximately 2%.

The good news in the quarter is the rate of decline in our recurring revenue continues to trend down.

Our operating margin in this region was approximately 5% but was down mostly -- modestly primarily due to recurring revenue.

As many of you know, our primary focus in Continental Europe is on our cost structure and we expect to start realizing the benefits from our restructuring activities in our earnings in 2008.

During the quarter we recorded $11 million of restructuring charges primarily in Europe.

Finally, our businesses in the rest of the world collectively grew 12% organically in the quarter with good growth in Asia where construction activity remains strong.

Our operating margins were in the low teens.

Again, our primary focus in these businesses is on growth.

Before I move on to our Fire business, I wanted to mention the work we are doing in connection with the election by cellular service providers to switch from analog signals to digital only signals, which is set to be completed by February 2008.

Some of our customers use cellular radios as their primary line of communication for their security systems or as a back up against a problem with the land lines if they are not working.

With the switched digital, we are contacting our customers in North America that still have analog radios to switch them over to digital.

This impacts approximately 5% of our North America customer base and we estimate that we will incur costs of approximately $20 million to implement this change over the next few quarters.

Now, let me move on to Fire Protection Services.

Revenue grew 7% to $882 million with 4% organic revenue growth.

Operating income for total fire protection services was 57 million and included $13 million of special items primarily for restructuring.

Excluding these items, operating income was 70 million which increased 13% year-over-year.

On an operating margin basis, we improved 40 basis points to 7.9%.

Our North America business, SimplexGrinnell grew 3% organically while Europe, Middle East, and Africa grew 1% and the rest of the world 9%.

While SimplexGrinnell's growth was slower than in prior quarters the backlog is at record levels and continues to grow albeit at a slower pace.

Most of the operating income increased over the prior year was from North America, Australia, and Asia.

These improvements were partially offset by a decline in operating income in Europe.

As we have discussed before, we also have restructuring plans in place in Europe to address this cost structure.

This quarter, we incurred restructuring and divestiture charges of $13 million in total, of which the majority was for Europe.

Turning to Safety Products, revenue grew 5% to $452 million and organic revenue growth was 2%.

Strong organic growth in our Fire, Suppression, and Electronics Security businesses, particularly in video and access, more than offset continued softness in life safety.

As Ed mentioned we are actively working to expand our customer base in Life Safety and we believe we will see improvement in the revenue for this business in 2008.

Operating income in Safety Products was $73 million in the quarter and excluding restructuring impairment charges of $8 million, our operating income was $81 million and the operating margin was 17.9%.

On a year-over-year basis, operating income was essentially flat as volume and operating leverage and Fire Suppression and Electronic Security was offset by the lower profit in Life Safety.

Additionally as we told you at the Investor Day, we have begun to modestly increase our investment in research and development to develop new products which we expect to fund mostly through cost reductions.

On a quarter sequential basis, operating income and operating margin improved primarily as a result of volume improvement and our cost reduction initiatives.

Now, I'll move on to Flow Control, where revenue grew 22% to $982 million.

Organic revenue growth was 16% with double digit growth across all of the businesses which include water, industrial valves, and thermal controls.

Growth was strong across all end markets and particularly in our energy markets, and our water business which grew more than 25% year-over-year as there has been a tremendous amount of project activity in Australia over the past year to expand water infrastructure.

Our overall orders and backlog which grew nicely in the quarter.

Orders were up 13% year-over-year and our backlog was up 42%.

While our backlog was at a record $1.5 billion level, we continue to feel very good about the future growth prospects for this business.

In line with our strong revenue growth, Flow Controls operating income also increased significantly.

Our operating income before special items of $126 million was 45% higher than last year's third quarter, and our operating margin of 12.8% improved 200 basis points.

Much of this improvement was a result of stronger volume and operating leverage.

Now I'll turn to Electrical and Metal Product s.

Revenue of $519 million was essentially flat versus last year.

On a sequential basis, revenue increased $41 million as a result of a higher volume of core steel products and better pricing.

We typically see higher revenue in the third quarter versus the second quarter as construction activity in North America tends to be stronger.

Our operating income was $47 million and our operating margin was 9.1% which is about what we expected.

As we have discussed previously, metal spreads have been a head wind for us year-over-year; however, spreads have been improving sequentially and this dynamic will likely continue into the fourth quarter.

In the third quarter, operating income was down $37 million year-over-year but was up $21 million sequentially.

For the fourth quarter, we expect operating income to improve 5 million to $10 million over what we saw in the third quarter.

Now I'll talk about corporate and other and I'll make a few comments.

The operating results from our infrastructure services and other businesses generated $341 million in revenue and $24 million in operating income this quarter.

As we said previously, we have been exploring strategic options for our infrastructure service business and have concluded that it does not fit within our portfolio and therefore it will be reported as a discontinued operation beginning in our fourth quarter.

Regarding our corporate expense, we have begun to make progress on reducing these costs.

Corporate costs were $161 million for the quarter which was down 12% year-over-year and 25% sequentially.

We expect to continue to reduce these costs as we work toward a $500 million run rate by mid 2008.

Let me touch on income taxes for a moment.

Obviously, the separation itself and the resulting changes in our legal structure coupled with the special items consisting of such things as a class action settlement, restructuring, and separation have made the GAAP tax rate for the third quarter not a particularly meaningful number so let me try to give some perspective on our tax rate.

For the third quarter, the tax rate adjusted for the special items we've outlined was 30.6% and we expect our fourth quarter tax rate to be in the 30 to 32% range.

Due to the timing of recognizing certain tax matters, this rate has had significant movements quarter to quarter.

For the full year of 2007, our tax rate, again, adjusted for the special items we outlined, will be approximately 27% and we expect this to come down to around 25% for the full year 2008.

Second, in May, we agreed to a settlement that resolves most of our class -- our securities class action litigation, and received preliminary approval for this settlement from the Court on June 13.

Just to remind everyone, we have already funded an escrow account for the full amount of the settlement claims, and our cash and debt levels at the end of this quarter reflect this payment.

Now I'll touch on our cash at the end of the quarter.

We ended the quarter with $1.3 billion of cash and our cash flow from operating activities and our free cash flow in the quarter were both impacted by separation, legacy tax, and restructuring items which total approximately $340 million.

Excluding these items, our free cash flow in the quarter was approximately $203 million.

As for our debt levels, we have approximately $4.5 billion of gross debt and we are comfortable with the debt at this level which is our target.

We expect net interest expense to be approximately 65 million to $70 million in the fourth quarter reflecting among other things the additional interest expense on the debt incurred to fund the class action settlement in June.

Next, included in our special items for the quarter was a goodwill impairment as I mentioned of $46 million.

This charge, which is really also related to the separation, results from the change in our reporting segment structure and a required reallocation of the $11.5 billion of goodwill that is currently on Tyco's balance sheet.

Finally, we will still have some separation costs going forward and we expect both the income statement and cash charges to be approximately $200 million spread out over the next few quarters.

The total for our separation costs remain within our previous estimates.

Now let me turn the call back over to Ed Breen for some closing

Thanks, Chris.

Let me conclude with a few comments on our outlook and then we'll open up the lines for your questions.

As we look to the fourth quarter, we anticipate our top line growing in the 6 to 7% range with organic revenue growth of about 4%.

We expect each of our businesses to generate higher revenue both sequentially and year-over-year.

We anticipate continued strong revenue growth in Flow Control but expect it to moderate down a few percentage points from the 16% organic revenue growth rate we saw in the third quarter.

In ADT, we expect our recurring revenue base to continue to grow in the 2 to 3% range and our product installation and service revenue to also grow at a similar rate due to slower but still positive sales to our retailer customer base.

From an income perspective, we see our operating margin in the 9 to 9.5% range with operating income improvements in a number of our businesses more than offsetting a continued negative comparison in our electrical and metal products business.

As Chris mentioned, we do expect electrical and metal products to improve again on a quarter sequential basis but it will be approximately 25 million to $30 million below last years fourth quarter.

We also expect our operating income to benefit from the progress we are making in reducing our corporate expenses.

In providing this outlook, let me remind you that our infrastructure services business will be reported as a discontinued operation next quarter and therefore, is not included in this outlook.

In wrapping up the call this morning, we feel good about our progress we are making in a number of areas and we believe we are are on target for nice improvements in 2008.

We will give you more color on next year on our next quarterly conference call.

Thanks for joining us this morning and with that, Operator, if you would give instructions We'll open it up for questions.

Certainly.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Scott Davis from Morgan Stanley.

Please go ahead.

Good morning, guys.

Good morning, Scott.

A lot of detail here to swallow.

For sure.

One of the things that, excuse me if you answered this question already in your prepared remarks, but when you look at Flow Control, obviously, a couple hundred basis points year-over-year margin pick up, and it wasn't clear to me, obviously growth is very strong but was this all operating leverage?

Is there some price there that's benefiting?

Is it mix?

Is there something else that we should keep in mind here?

Yes, Scott, it's mostly operating leverage.

A little bit of price is in there but I'd say the majority of it is operating leverage and we're pumping a lot more through a fixed manufacturing footprint that we have, and it's balanced very nicely through all of our facilities.

The growth is in every region and it's really in every one of our key verticals so the facilities are really pumping and it's across that whole platform so a lot of good leverage we're getting.

Okay, and then moving away from the operations fee, now that you're moving Earth Tech to discontinued ops, it's been for sale for a bit here.

What's your outlook on timing for getting that deal done?

Scott, it actually hasn't been for sale for a long time.

As we indicated earlier in the year, we were going to be looking at our alternatives here, so we have actually just come to the final conclusion that we would be divesting this business, so I would expect it's going to take some time to get that done.

We'll have to see what the markets are right now, but again, our overall anticipation is it would be done within the next 12 months obviously as we identified it as a discontinued business.

I wouldn't expect anything in the very near term, but I would say in the 6 to 12 month time frame.

Fair enough, and as far as your stock has pulled back a little bit from the initial days, clearly with the market and also just for other reasons, but as far as timing of getting back into the market to buyback shares or doing something with your capital structure, is there any timing issues here?

Any restrictions on buying back stock in the near term or any reason why you shouldn't be in there right now buying back stock?

Well, Scott, there's no restrictions as of now, going through separation and reporting the quarter we were under some restrictions but there won't be going forward, so as we generate excess free cash flow, as we said at the investor meeting, we'll be looking at returning that to shareholders.

I think with this management team with our track record over the last few years we're not going to sit on any excess cash, so it will be returned to shareholders.

Having said that though, let me say priority wise, and again as we talked at the Investor Day meeting, our priorities are clearly programs that focus on organic growth.

They're low risk, high return, so we'll be funding those.

We will continue to fund efficiency improvements and our restructuring programs to make our footprint more rational.

We will be looking at some bolt on acquisitions and I put that as a bolt-on comment, and they would be in one of the three major global platforms.

You got Fire Security, or Valves and that's where they would be related and then I do plan we're going to have excess cash here coming in the near term and we'll address that because we won't sit on it.

Got you.

And Scott, I'd also mention, as we finalize our plans for 2008 we'll also be reviewing our whole dividend policy as well.

Okay, fair enough.

Thanks.

Our next question comes from the line of Shannon O'Callaghan with Lehman Brothers.

Please go ahead.

Good morning.

Good morning, Shannon.

So, electrical and metal is sort of, obviously absent from the three core platforms here, can you talk a little bit about maybe updated view on strategically what you might be able to do there or what you're thinking about?

Yes, Shannon, obviously, as we've said during the Investor Day, we have three really growth platforms that we see continuing to grow and invest in and electrical and metal products which is primarily a North American business has been a very strong business in terms of its profit and cash flow generation over a long period of time but is very volatile because of the deal spreads, so again, we plan on continuing to manage that business.

We think there's some operating improvements that we can make, and we are separated out so that everyone can look at this and understand better the volatility, but again, over a long period of time it's averaged about a 15% margin, produces positive cash flow, doesn't take a lot of additional investment for us, so we believe right now that the best is to manage that business as we have been.

It is going to be volatile and we will again be providing separate analysis so it's not buried within another group.

Okay, so we shouldn't read the fact that it's not a core platform is to read that it's a target for strategic alternatives?

No, I wouldn't read into that.

Okay, and on ADT, can you give us a sense in Europe or the 5% margin this quarter, you talk about recurring revenue bottoming next year, sequentially, how should we think about the margin from the 5% here?

Well, kind of sequencing it, Shannon, two things will happen.

One, our restructuring starts to kick in, some savings from that in '08, that will help us as you know, I think about two-thirds of our restructuring dollars are focused on Europe, both ADT and Fire, so we'll get savings from that in '08 and then as we exit '08 at the end of '08, the recurring revenue will cross over as we bid five quarters or so ago in the U.S.

And by the way as we track this, all of Europe, the EMEA business as we reported, our recurring revenue this year looks like it's going to decline approximately 2% and that compares to the year before that of a decline of approximately 5% and even higher than that the year before, so you can see we're starting to bring it down where we'll hit that crossover, so the combination of the recurring turning up which by the way is the high margin piece of the business and the restructuring will start to move those margins, and as we said last month, we expect to be able to get the double digit margins around 10% over the next few years.

Okay, thanks a lot, guys.

Yes.

thanks, Shannon.

Our next question comes from the line of Steve Tusa with JPMorgan.

Please go ahead.

Hi, good morning.

I just had a question on the cash flow.

Maybe I'm just not familiar with the seasonality here since we don't really have the historical cash flow statements for the new company.

What do you expect, I think you did about [1.050] billion last year.

Are you kind of on track for the same type of performance this year that would imply a little bit of a ramp in the fourth quarter?

Yes, Steve.

You're right.

We did generate about $1 billion on a comparable basis for what I'll call the as if Tyco were a standalone a year ago, and we are on track very similar in the pattern that we have had historically and the pattern that we had last year, so on an operating basis, the fourth quarter is always our strongest quarter due to some seasonality of some of our businesses, so I would expect to have as we did last year a very strong operational fourth quarter in terms of our cash flow.

Obviously as I mentioned in my remarks we'll still have some of the separation items that we'll be going through there but the pattern that you see in 2007 is the same as it has been in the past.

Okay, got you, and what was that fourth quarter number last year?

Was it north of 500 million?

It was north of 600 million.

Got you.

And then the other question was I didn't see any kind of reference in the press release to housing at all in North America.

Can you maybe just comment on any kind of pressure there in ADT from the housing markets?

Yes, Steve, I put these both in the slight category.

There's a positive that with the slowdown of people buying homes or moving as much in this environment right now, it helps your attrition a little bit, but it's a negative a little bit from the standpoint of when there's movements.

That is one of the trigger points of when people look for an alarm system.

However, as you're watching with us over the last two year period now while the housing market has subsided here, our recurring is slowly picking up and that's simply the dynamic of the business model change, us having our own salesforce, that salesforce maturing, offering more attractive packages of service to people and I think as we continue to hone that down and keep focusing on that, we'll be able to creep our recurring revenue up despite what's going on in the housing market but it is a slight negative obviously, but you don't see it because we're trending because of our own business model change.

It would have to get pretty bad for you to get to the point where you actually call it out as a head wind I would think.

Right and we think again next quarter our recurring will creep up just a little bit more.

It takes time because it's a big base but it looks like it's trending again next quarter up some so and we expect that to continue in '08.

It seems pretty steady and stable to me.

One last quick one.

On commercial construction, I think there's been a growing debate around where we are in this cycle.

Are you guys seeing anything that worries you in North America on the commercial construction side outside of retail?

I would say just on the retailer one, I just call that lumpy business.

It's big project stuff and we think that will be a little lighter in the fourth quarter.

I don't read any much into that that there's a trend there.

That one bounces around on us some.

On the commercial construction in total, I would say it looks like our order rates are a little lower in our Fire business, but running in the mid single digit range.

Last year we were running in the double digit, 10 to 11% range which historically is not where that business would run, so we're kind of running the last couple of quarters in that range and we're kind of targeting mid single digits is the range we would run in next year.

So, yes, I would say it did soften a little bit from what we see in that order rate but still feels pretty good to us.

Great.

Thanks a lot.

And it feels pretty good in Asia and the other Markets.

Appreciate it.

Thank you.

Yes.

Our next question comes from the line of Jeff Sprague with Citigroup.

Please go ahead.

Thank you, good morning, everyone.

Good morning, Jeff.

Could we explore a little bit this change in life at ADT what actually was the catalyst for that?

I know the relationship to attrition isn't perfectly reciprocal but an 11.9% attrition rate would imply kind of an eight or nine year account life.

15 sounds awful long.

Again, Jeff, we have done significant analysis on this and again it is related primarily to the reduced attrition rates so our actual experience is now better and it has been for some time and so again, we made the decision, reviewed obviously in great detail by the auditing firm and whatnot to extend those lives which had generally been in the range of 10 all the way up to 14 years depending on the pool they were in but we're also doing accelerated depreciation, so which impacts again the, as you said some of them drop off faster so we've got an accelerated up front, then it becomes more straight line.

So we believe that the methodology that we're putting into place better matches in terms of really the revenue and expense that we've seen.

Many of our competitors also use a 15 year life but they use a straight line so we actually are now moving to an accelerated front for the first number of years and then it flattens out.

My understanding is that it previously was an accelerated double declining balance for the first eight years and then straight line for four?

Yes, it depends on the pool we have.

We have different pools depending on whether it's a subscriber or a dealer account, but that is correct.

And so just thinking about the impact into '08, you gave us the impact in the quarter.

We should just kind of annualize that impact as kind of the '08 benefit from this change?

I would say approximately, yes.

Just a little under $1 million in a quarter I would say that's correct.

So we get a half a year this year and then we'll get the full year impact next year.

Jeff, I would also point out that I think Chris mentioned this that on our internal accounts we've historically been straight lined so among the changes that we made was to go to an accelerated methodology there as well so where the lives were extended from 10 years to 15 years, we're still using, we're switching to an accelerated method so in effect, those accounts will better match the cost and the revenue as Chris pointed out.

And I guess the balance sheet in essence still reflects the other companies, right?

They are are carried as discontinued ops and everything but what I'm wondering is the 15 billion in equity, is that basically the new Tyco equity?

Yes.

And just on the special charges moving forward, we're going to have separation which seems like things you might call out, but what about this kind of routine kind of chopping and cleaning and ongoing operational stuff?

Does that continue into '08?

That will, Jeff, continue as we've highlighted a few quarters ago, we announced the restructuring program is kind of 350 to $400 million and it will run into '08.

We will highlight it for our investors and I would say and hopefully we get the bulk of that out of the way in the first half of the year so it's very little in the second half.

Last one for me.

Should we think about corporate going down kind of on a linear basis to that 550 target in the mid year of '08 or is there some lumpiness in that?

There will be a little lumpiness as we move through, and we have some of, again as we will have some legal expenses and whatnot as we still wind down certain of the items that we've got, so I think as we get into '08, you'll start seeing it coming down on a more linear basis, and I think again, by mid '08 I'm confident that we'll get to that 500 run rate.

Great.

Thanks a lot.

Thanks.

We have a question from the line of Nicole Parent with Credit Suisse.

Please go ahead.

Good morning.

Good morning, Nicole.

In the Safety business, could you give us a sense for how much fire suppression and electronic security actually increased in the quarter and what the decline in Life Safety was and as you roll forward, what do you think Life Safety does over the next 12 months?

Do you see that turning around at all?

I'll try to get you some of those numbers on those businesses but just commenting first on Life Safety as we've said in our comments, we did have a difficult year this year in terms of the grants.

We have been extending that business as we mentioned as an example, the UK business and the Department of Defense, so we do see that business in '08 improving somewhat.

Nicole, let me just give you the growth rate in the quarter.

Fire Suppression grew about 7.5%, Electronic Security grew about 5%, and Life Safety was down 8%.

That's year-over-year.

And these are, Nicole, just to be clear, these are organic numbers.

Yes.

Thanks, and I guess as we think about operating margin, could you just talk a little bit about the seasonality of the businesses and as you look into Q4, is there anything abnormal when you look at the businesses year-over-year, is there any impact of seasonality or non-recurring items that benefited the fourth quarter of the year going into any of the businesses?

So, Nicole, there really is not much seasonality sequentially going from Q3 to Q4 except Q4 is our strongest quarter in our Fire business, mostly SimplexGrinnell.

During the summer and towards the tail of the Summer here, we do a lot more work in a very big vertical which is our University and schools when they are mostly shut down or not as many people there so that's when that work gets done and we always see that pick up so last year we had a very strong quarter in SimplexGrinnell, every year we do and we plan on having a strong quarter this year although by the way it's a tough compare organically to last year, it was really robust but that would be it and then as we explained the electrical and metal thing moves around and we kind of told you what to expect there about a 5 million to $10 million sequential improvement from the third quarter in the operating profit.

Okay, and just one last one, Ed, when you think about what you're most encouraged by in the quarter relative to what you still think is a challenge within one of the businesses, could you just characterize that for us?

Well, I mean, to me, it felt good that, look, I like longer term and this takes time is we've got the recurring revenue thing tackled.

We understand it.

We're focused on it.

We've got it moving in the right direction in every part of the world except Europe and as I mentioned a minute ago, Europe is going to now decline only 2% this year and we will turn that by the end of '08 so if you just take bigger picture and think out over a few years, that's a very important metric and trend for us to continue, and I don't take it for granted but it is one of those things once you turn it and you get it right, it's kind of a big thing that's moving in the right direction and so I'd say that's a big one.

I also by the way feel very good about the momentum going into '08 and our Flow Control business.

It just feels good.

I feel like we're well positioned.

We've got a good product line up and we're in very nice verticals so that feels good.

And I expect to see better growth and I think we've made the right investments over the past year in the Safety Products business.

As George Oliver mentioned at the investor meeting we've been ratcheting up the R&D, by the way we've been offsetting it as you can see with operating efficiency improvements because we're keeping the margins you can see again this quarter up around 18% but I think we can drive better growth out of that and by the way we should be able to with the type of businesses we're in so I'd say that's three of the bigger ones.

Great, thank you.

Thanks, Nicole.

Our next question comes from the line of David Bleustein from UBS.

Please go ahead.

Hi, good morning.

Good morning, David.

Two quick ones.

First the 2008 tax rate looks like it's a little bit above what I was expecting.

What was it in your structure that changed that made the next years rate higher?

Next years rate is actually lower.

What we've said is that the annualized tax rate this year, we estimate to be about 27%.

We've got some tax planning that we're doing right now.

We expect that that rate will be about 25%.

You'll recall at the Investor Day, we had had a range in there where we figured that it could be below 25% but we indicated in year one, with the incremental debt that we put on the balance sheet to fund the class action suit that we would start out at the high end of the range, so I would estimate it to be about 25%.

As you recall, that debt, we don't get a tax benefit for it.

So by '09 you'd expect to be in that 21 to 24% range?

Again, we didn't give a range of 21 to 24.

I think we said 22 to 25, and I do expect that we're going to be able to move the rate down.

Okay, and then the next question is Ingersoll Rand recently received a set of adjustment from the IRS challenging, amongst other things, its intercompany loans.

Have you seen anything similar or any change in the IRS's stance recently?

Each company is different on how they're structured but I haven't seen any particular change in the IRS.

Obviously, we are audited and get questioned about numerous different things but I wouldn't say that we've seen a change in stance in any way, and we believe that just in our own case that we have taken the appropriate deductions and are very confident in our tax positions.

Terrific, thanks.

Thanks, David.

Our next question comes from the line of Deane Dray with Goldman Sachs.

Please go ahead.

Thank you, good morning.

On the goodwill charge, on the impairment, that actually came in lighter than what we thought it might be given the size of the total goodwill on the books.

Is that, and it was all in ADT Australia and has that review, the annual review of goodwill impairment has that been completed?

Yes.

Obviously some of these you do annually, Deane, but we spent a fair amount of time here over the last couple of months and obviously as you change to a different Company and a different reporting structure at different segments, the accounting rules require us to reallocate goodwill and just so everybody realizes, we actually then put goodwill on the businesses that had nothing to do with generating that goodwill depending on what the segment structure is, so again, there was a range of outcomes that we had disclosed before.

We did anticipate we would have some impairments but we think we've done a thorough review, and it did come in at the lower end of our range.

Good, and then if you look at the headline numbers for restructuring and separation expenses, they came in lower than what we were looking for certainly.

Is that a question of timing?

Is some of the separation items go, are we seeing that in discontinued?

Just could you bridge that for us?

On the first one, Deane on the restructuring, you'll see us pick up on that and as we said we'll spend kind of 350 million to 400 million on the program as I said a few minutes ago we want to try to get the bulk of it out of the way in the first half of '08 that we haven't spent yet and we've been actively working at this.

A lot of our restructuring is in Europe and without getting into all the details you know the process there takes a little bit longer so we've been working that hard and hopefully we'll now move the needle in some of the spending there and you'll see that over the next few quarters.

I'd also mention, Deane, there are some very complex accounting here and things like separation costs also are included within disc ops, so I think in total , if you if look at the three companies combined and what we've got in terms of our separation cost, we're well within the range that we've provided and in fact I believe we'll be at the lower to mid point of that range and not near the high end but some of the accounting gets lost as you get into discontinued operation

Sure, and then last topic is back into Flow if we could.

16% organic revenue growth and record backlog.

This is mostly a short cycle business.

Are you set up to be able to, what are lead times like with the products, are you anticipating any problems on shipping these?

No, we're not.

We do as I mentioned in our guidance comment, we expect a little bit of moderating this quarter from the 16%, but again, we do have a record backlog so trend is going to be very good.

We just have some big project stuff in Asia that's a little lumpy and it looks like it could be this quarter, but generally speaking, no.

We got supply.

One of the issues by the way we're wrestling with is our working capital is a little high because of all the inventory we're bringing into Flow and we don't have the most efficient footprint yet, so we really got to keep our eye on that.

We're going to focus on that during the fourth quarter but we're in pretty good shape to deliver.

Great.

Thank you.

Yes.

Okay, Operator.

We have time for two more questions.

Okay, the next question comes from the line of Ted Wheeler from Buckingham Research.

Yes, hi, good morning all.

I wanted to go back on the Fire Protection business and talk a little bit about the orders and just kind of probe what you see the market doing and what, if any interpretations on market share you have on the progress there?

Yes, I'll touch on North America, I think, specifically, and we as I said a few minutes ago, we see a little moderating in kind of the second half of '07 here and '08 where we think it's more of a midsingle digit type of business over the next year, and it had been double digit kind of last year.

We are at record backlog level in the SimplexGrinnell business also at this point in time so we feel pretty good going into next year and again we always have a big fourth quarter and then we dip seasonally to a lower, our lowest quarter in the first quarter, but generally speaking, we feel good about the commercial construction market.

It seems decent.

I've seen some reports that it moderated just a tad, but at these levels that will be good business for us.

Do you have any sense of what competitors are doing or what your books see in terms of--?

Well, look, I've seen reports from others and by the way, our own reports but these are actually some third party looks from just the dynamics in the market competitively.

We really started to get our act together a couple years ago and I think it's pretty obvious we picked up a few points of share during that period of time, and again we're picking up share in SimplexGrinnell more in the area where we want to get it.

We're working that mix issue.

We're focused much more on getting the mechanical -- excuse me, the electronic piece of the business and we've seen a nice pick up there and that's the focus, that, and then get the service tail.

Thanks, and one other on the, just on the Corporate, with discontinued ops not in the other income and corporate line, are there any other extraneous or sort of non-recurring type numbers that flow through that if you aggregate corporate and other?

No.

I think, again, corporate and other includes our business like the infrastructure business as well as you have revenue and some profits in there, but the rest is just what we term and we include in our corporate number, there's nothing particularly that we haven't called out.

So the 500 million should capture all of that?

Yes, in terms of the target the 500 million is really designed to speak to the corporate expense number, not the performance from the operating units that are in that corporate and other segment, and Ted, the other comment I would make is in the press release in the tables in the back and there will be additional detail on the web, you can see the detail of what's in corporate expense and which of the special items are in there and so you can appropriately model going forward.

Thanks and I guess I did have one other.

On the Electrical and Metal performance of trend line 15% margin, do you think that we reached that during '08 at some point?

Ted, if we could forecast that business--.

Well, I guess you kind of have by saying that it's sort of a 15% margin business.

We said over a long period of time.

You look back over a 10 year period, we've had margins that have ranged from single digit, high single digits into the 30s.

Okay.

So it swings very significantly in a very short period of time, so we're not going to get into the business of trying to forecast quarter to quarter or longer than a quarter ahead where we see those margins going because it just moved too much.

Fair enough.

Thank you.

So each quarter we'll give you our thoughts on what we think the next quarter will be so we can help as best we can with reducing the near term volatility.

Would it be fair to say that volatility in steel prices kind of introduces these waves and if we had stability in steel prices, we would expect over time this migration to a better margin?

Yes.

Yes.

Okay, great.

Thanks.

Thanks, Ed.

Operator, last question.

Okay and our last question comes from the line of John Inch with Merrill Lynch.

Please go ahead.

Thanks, good morning.

Good morning.

So I guess I want to go back to ADT and this extended lives issue.

The one thing I'm not clear on is, well, first you're going to 15 years.

That's a global number.

What was the number before and maybe you could talk a little bit about the timing.

That's what I'm not clear on particularly given that it strikes me that Europe is still going through this fairly significant restructuring phase, isn't it a little bit premature to start making these changes right now?

Yes, John, let me just be clear.

The change that we made relates to our North American business only.

Okay.

So and again, we've had different pools that we have depending on the type of accounts that we have.

Those have ranged in the past from 10 to 14 years and now we've extended those to the 15 years and again, we've got significant now, information and history that we're confident in the way that we're doing this in that it is the most appropriate way to recognize this expense.

But the decision to change this was this, Chris, your discretionary decision or was there some accounting trigger point, because it does benefit you by about $0.08 annually.

Right.

No, I mean, it is what it is.

So the reality is that the reduced attrition rate and our lives were in fact longer, so again, we have been studying this and looking at this trend for the past 12 months and as things continue to improve, the appropriate accounting had to be to extend the lives.

Okay.

Ed, you have talked historically about the opportunities to restructure Flows footprint.

It strikes me this business is running completely full tilt with very strong backlogs and that's the outlook.

Have you guys shelved the restructuring or, because I'm trying to think of sort of your commentary about trying to get most of this done before early '08.

If the trend continues, it strikes me Flow is not going to get that opportunity does that suggest if business kind of slows you have to go back to the restructuring well and Flow, call it in 2009 or something?

John, the Flow Control will be a slow movement and I'll just ballpark it, a few manufacturing facilities a year that we will move most likely into some key emerging markets.

Okay.

So and I want to distinguish that because it not closing some just to close them, because we have too much capacity.

We really, our business is shifting more into emerging markets because it's an infrastructure type business, that's where it's happening so we want to A) it will improve our cost structure in getting there but we also need to be there because our customer base and revenue is moving there.

So it's not anything we have to do in one big -- we feel like we got to crunch it like we're doing in Europe.

We'll just kind of bleed it every year a little bit as we go and we've laid out about a three year plan that we're going to work against so there's no crunch in '08 here with that one.

And finally, Ed, now that Tyco has separated and it's a going concern, should we be anticipating incremental management changes in the foreseeable future, sort of senior level, more operations level?

Your thoughts there.

Yes, one area you'll continue to see us beef up is our European operation.

We've added six or seven key executives during the last year.

I would venture to say we'll add about that many more this year into some key spots, but as far as the line-up, the very senior line-up, we just went through this and I feel very good as I've said before about our operating Presidents and so you won't see any changes occurring there.

Thanks much.

Okay, John, thank you.

Want to thank everybody for joining our call today.

We look forward to talking to you on our next quarterly call where we report on our fourth quarter which will be in mid November, and obviously, look forward to following-up with any of you that have questions on today's call over the coming days.

Operator, any update on replay?

Certainly.

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