江森自控 (JCI) 2010 Q1 法說會逐字稿

Welcome to the Tyco first quarter earnings conference call.

At this time, all participants have been placed on listen only mode until the question and answer session.

(Operator Instructions).

This conference is being recorded.

If you have any objections, please disconnect at this time.

I will now turn the call over to Mr.

Ed Arditte.

Sir, you may begin.

Good morning, ladies and gentlemen, and thanks for joining our conference call to discuss Tyco's first quarter results for fiscal year 2010 and the press release issued earlier this morning.

With me today on our 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 review today's press release and read through the forward looking cautionary information on statements that we've included in the press release.

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.

The press release issued this morning and all related tables as well as the conference call slides can be found on the Investor Relations portion of our website at tyco.com.

Now let me quickly recap this quarter's results.

Revenue in the quarter of $4.25 billion declined 4% over the prior year with an organic revenue decline of 9.6%.

Earnings per share from continuing operations attributable to Tyco common shareholders were $0.63 and included $0.02 related to special items.

Before special items, earnings per share was $0.65.

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

Thanks, Ed, and good morning, everyone.

I'm pleased with our results this quarter and with the hard work of our team around the globe, whose efforts helped us achieve better than expected earnings despite the challenging environment.

Our results for the quarter continued to be driven by our cost management and restructuring efforts as well as the continued strength of our service and recurring revenue business, which represents over 40% of our total revenue.

It is these actions coupled with the growth of our service business which have largely offset the impact of lower revenue and our product businesses and in our systems installation activities at ADT and Fire.

While we have started to see the rate of revenue decline slow, this portion of our business continues to be soft.

As a result, we continue to actively work both our restructuring activities and tighter cost management, and these efforts were reflected in our operating margin this quarter.

Despite a $400 million organic revenue decline, we maintained our operating margin year over year.

Now let me make a quick comment or two about each of our businesses and Chris will provide you with more detail in a few minutes.

Starting with ADT, our income performance in the quarter was strong.

Similar to the last few quarters, growth in recurring revenue helped to partially offset declines in our systems installation and service revenue.

We also saw continued improvement in our operating margin both sequentially and year over year as growth in the higher margin recurring revenue business, combined with the benefits of cost containment initiatives and restructuring, more than offset the decline in volume.

Additionally, a number of our key metrics, particularly growth in our account base and average revenue per user, continue their positive momentum.

Next, we continued to see soft conditions in Flow Control as we enter the low point of our cycle.

While we have improved productivity and implemented cost containment initiatives, these actions can only partially offset the impact of volume deleveraging on the operating margin.

We will continue to see pressure in Flow Control through the first half of the year, but we expect that the improvements we have made in the business over the last few years and a modest pickup in the second half of the year should improve our performance.

Additionally, the continued stabilization of our backlog is also encouraging.

Turning to Fire, revenue was better than expected and the operating margin benefited from cost containment initiatives.

We continue to focus on growing our service revenue and maintaining our strong position in key vertical markets.

In Safety Products, the sequential revenue decline was offset with product mix and cost savings, resulting in operating margin performance similar to the fourth quarter.

Our order activity has stabilized and we feel good about our ability to strengthen our margins when the revenue environment improves.

And finally, Electrical and Metal Products performed as expected.

Although demand for steel and copper building products remains soft, both steel and copper prices are beginning to increase, which is expected to improve our operating performance in the second half of the year.

Before I turn it over to Chris, I want to comment on our operational areas of focus for 2010.

First, we are continuing to invest in our businesses to strengthen our long-term competitive capabilities, and our initiatives are both product and service focused.

As we indicated, our intention is to maintain our long-term investment plan despite the economic environment.

Secondly, we are carefully managing our cost structure and continue to look for cost reduction opportunities.

We have aggressively executed restructuring actions over the last year which are expected to provide incremental savings of $175 million in 2010, and we will implement additional restructuring actions throughout the course of this year.

Next, the last 1.5 years has shown the importance of maintaining a strong balance sheet.

Our cash position is strong and we will deploy our cash to fund our internal growth initiatives as well as productivity and restructuring plans.

As we generate excess cash, we will invest in areas that generate the best return for our shareholders, which will include bolt-on acquisitions in Security, Fire, and Flow Control as well as share repurchase.

In December, we announced the acquisition of two privately held Brazilian valve manufacturers, which expands and complements the Flow Control product offerings in Brazil and gives Tyco a leadership position in the Brazilian market, a market we have continued to target.

As you all know, we announced last week that we have entered into a definitive agreement to purchase Brinks Home Security, which operates as Broadview Security.

These acquisitions are being funded in a balanced, tax efficient way that keeps our balance sheet strong and we expect them to contribute nicely to earnings and cash flow and generate solid returns on capital.

Finally, we recently announced a proposed dividend increase that our shareholders will vote on in our annual general meeting in March.

The proposed dividend represents a 5% increase over the $0.80 share dividend approved by our shareholders in 2009.

Now let me turn the call over to Chris to discuss our operating results in more detail.

Thanks, Ed, and good morning, everyone.

Let me start with ADT worldwide.

Revenue of $1.8 billion declined 3% organically as the 5% growth in recurring revenue was more than offset by a 13% organic revenue decline in systems installation and service.

Recurring revenue, which represented over 55% of ADT's total revenue in the quarter, continues to perform well.

However, systems installation and service revenue continued to be impacted by the weak economy.

Despite pressure on the top line, the operating margin before special items in the quarter of 14.4% improved 180 basis points over the prior year.

Restructuring activities, along with cost containment actions and growth in our higher margin recurring revenue business, more than offset volume headwinds, resulting in year-over-year operating margin improvement.

From a regional perspective within ADT, our North American residential and small business unit grew its recurring revenue 8% organically in the quarter due to strong account growth in the second half of 2009, which was partly attributable to opportunistic bulk account purchases.

Additionally, the operating margin before special items improved 1 full percentage point over the prior year.

Recurring revenue currently represents more than 85% of our residential and small business revenue and continues to provide steady and consistent performance.

On a year-over-year basis, we grew our residential account base by almost 5% while increasing our average revenue per user by 3%.

Additionally, our residential attrition rate improved by 10 basis points to 13.3% on a quarter sequential basis.

Turning to our North American commercial business, the revenue mix is quite different.

While 40% of our revenue was recurring, the remaining 60% is related to systems installation and service.

Although our commercial end markets continue to be impacted by the economic downturn, the rate of organic revenue decline has slowed somewhat and was down 11% in the quarter.

However, the operating margin before special items improved 130 basis points year over year to 10.8% as a number of positives, including the benefits of restructuring and cost containment initiatives, offset the volume decline.

The attrition rate increased 20 basis points to 14% while orders remained relatively flat on a quarter sequential basis.

Moving on to the Europe, Middle East, and Africa region, organic revenue declined 8%.

However, the benefits of our restructuring actions are taking hold and help contribute to an improvement in the operating margin before special items, which increased by more than 2 full percentage points over the prior year to 6.4%.

In the Asia-Pacific and Latin American regions, which are predominantly commercial, organic revenue grew 2% on a combined basis.

The operating margin before special items improved approximately 150 basis points year over year and remains in the low teens.

Turning next to some of our key metrics, our global account base grew 3% year over year to almost 7.5 million accounts, and excluding the impact of foreign currency, our average revenue per user grew 1% to $46.32.

Both our account base and average revenue per user have been steadily increasing throughout the global downturn.

While the worldwide attrition rate increased 10 basis points to 13.5% on a quarter sequential basis, it has consistently stayed in the mid 13% range for the last four quarters.

Now I'll turn to Flow Control, which had revenue in the quarter of $923 million with an organic revenue decline of 14%.

Valves declined 15%, water declined 10%, and thermal controls declined 14% due to the continued softness in the capital spending in our end markets.

Before special items, operating income was $118 million and the operating margin was 12.8%.

The operating margin performance in the quarter was better than we had expected due to product mix, particularly the seasonal strength of thermal controls during the winter months.

However, the significant volume deleveraging resulted in 170 basis points decrease in the operating margin before special items year over year as the benefits of cost containment action and restructuring activities were more than offset by the $130 million organic revenue decline.

Excluding currency, the year-over-year order rate decline slowed to 13% from 18% in the prior quarter.

On a quarter sequential basis, orders remained relatively flat excluding the large Pacific Water project we booked in the fourth quarter.

Although we continue to see a pickup in quoting activities, we are not yet seeing this translate into a meaningful change in our order levels.

Backlog of $1.65 billion declined 2% on an organic basis, the second consecutive quarter with minimal backlog decline.

Turning now to Fire and Protection Services, revenue in the quarter was $833 million and the organic revenue declined 6%, as we continued to experience softness in systems installation revenue and to a much lesser degree in our service revenue.

Service represents about half of Fire's revenue and declined 2% organically as growth in inspection and maintenance revenue was more than offset by customers delaying other service projects.

Systems installation revenue declined 10% organically in the quarter due to weaker demand in our end markets.

The backlog of $1.2 billion remained flat on an organic basis, which is encouraging.

Before special items, operating income was $64 million and our operating margin was 7.7%.

The benefits of cost containment initiatives and restructuring actions are helping to mitigate margin pressure from the lower revenue.

Moving on to Safety Products, revenue in the quarter was $358 million with an organic revenue decline of 14%.

Organic revenue growth of 4% in Life Safety was more than offset by soft demand in our fIre Suppression and Electronic Security end markets.

Organic revenue declined 22% in Fire Suppression and 10% in Electronic Security.

Before special items, operating income was $53 million and the operating margin was 14.8%.

Better than expected operating income in the quarter resulted from product mix, in particular higher margin Life Safety and Electronic Security products.

On a quarter sequential basis, the benefits of our cost containment initiatives and restructuring actions essentially offset the continued revenue headwind as well as an increased investment in sales and marketing capabilities and research and development.

Lastly, Electrical and Metal Products had revenue of $297 million in the quarter with an organic revenue decline of 30%.

The revenue decline was primarily due to significantly lower selling prices for both steel and copper products.

Decreased volume also contributed to the decline, although to a much lesser extent.

Operating income before special items of $23 million was about what we had expected.

On a year-over-year basis, lower revenue was almost fully offset by improved steel spreads.

Looking ahead to the second quarter, we expect revenue and operating income before special items to be similar to the first quarter.

Based on end market demand and pricing activity in the quarter as well as the seasonal lift we get in the summer months, we continue to expect that operating income before special items for the full year should approximate $120 million in our Electrical and Metal Products business.

Before I turn the call back over to Ed, let me touch on a few other important items.

First, from a cash flow perspective, we had a good start to the year.

Our free cash flow in the first quarter was $79 million and included $50 million of payments, primarily for restructuring.

This compares to a free cash outflow of $215 million in the prior year, which included $25 million of payments primarily related to restructuring.

The year-over-year increase in cash flow is primarily attributable to the management of working capital.

Next, corporate expense in the quarter was $98 million, which included $2 million of special items.

This is somewhat lower than our previous guidance of $110 million, mostly due to the timing of certain expenses.

For the second quarter, we expect corporate expense to approximate $110 million and continue to expect our full-year corporate expense will approximate $430 million.

Next, other income in the quarter of $9 million related to an increase in receivables from Covidien and Tyco Electronics under the tax sharing agreement related to pre separation taxes.

This income was more than offset by a charge reflected in the tax line.

Finally, our tax rate for the quarter was 14.9%.

This was well below the annual guidance of 19% to 20% due to the accounting timing of certain items.

Although the tax rate can move around quarter to quarter, we continue to expect both a second quarter and annual tax rate of 19% to 20%.

Now let me turn the call back over to Ed Breen to wrap up this morning's call.

Thanks, Chris.

Before we open up the lines for questions, I want to spend a few minutes on our guidance for the second quarter and our expectations for the second half of the year.

Based on our current order rates and backlog, we expect an organic revenue decline of approximately 6% to 8% in the second quarter.

Additionally, we expect that foreign exchange rates will favorably impact revenue by approximately 6% year over year.

Therefore, we expect total revenue in the second quarter, which is seasonally our lowest quarter, to be approximately $4.1 billion.

From a business perspective, we see positive growth in ADT's recurring revenue in the 4% range offset by a revenue decline in systems installation and service, which should result in a flattish organic revenue growth rate year over year.

However, we expect a sequential decline in operating margin before special items to 14% due to the seasonal nature of our retail business, which traditionally benefits in the first quarter from higher revenue and operating income.

Next, we expect continued revenue headwinds in Flow Control.

We think the second quarter is likely to be our trough quarter, with the year-over-year revenue decline resulting in additional volume deleveraging.

In addition, the first quarter benefited from the high margin mix of our seasonally strong thermal business.

For the second quarter, we expect Flow Control revenue to approximate $900 million and the operating income before special items to approximate $100 million.

Additionally, the seasonal decline in our Fire business is expected to result in revenue of approximately $800 million in the second quarter.

Despite the revenue decline, we expect the operating margin before special items to be similar to the first quarter.

In Safety Products, we expect an organic revenue decline in the low teens and an operating margin before special items of approximately 14%.

Lastly, as Chris mentioned, we expect sequential headwinds related to an increase in both corporate expense and the tax rate in the second quarter in comparison to the first quarter.

These increases will cost us approximately $0.08 per share sequentially.

From an earnings perspective, this is expected to result in earnings per share from continuing operations before special items in the range of $0.50 to $0.52 per share.

As we look to the balance of the year, there are a few items that we expect to be tailwinds in the second half of the year versus the first half of the year.

First, as Chris mentioned, Electrical and Metal Products should have a much better second half of the year due to more favorable volume and pricing for both steel and copper.

As a result, the earnings contribution in this business should be much higher in the second half of the year.

Second, our other businesses, particularly ADT and Fire, also have seasonal increases in revenue and income in the third and fourth quarter.

Despite the economic environment, we expect both of these businesses to earn at a higher rate in the second half of the year due to their customer base and when work is scheduled.

Lastly, we expect Flow Control to exit the low part of the cycle in the second half of the year, which will increase its earnings contribution.

Based on our current order activity, which is performing as we expected, and our specific business expectations for the remainder of the year, we continue to see our full-year earnings per share before special items to be in the range of $2.30 to $2.50.

Thanks for joining us on the conference call, and operator, with that, let's open it up for any questions.

(Operator Instructions).

Our first question is from Deane Dray with FBR Capital Markets.

Your line is now open.

Thank you, good morning, everyone.

Good morning, Deane.

Can we follow-up on the comments about the second half seasonality for Tyco?

It's been a while.

We certainly didn't see much of a normal seasonality this year -- or in 2009.

So can you expand on maybe what we -- typical seasonality in 2007, 2008?

And then within your guidance for this year, it still does not assume a significant economic pickup.

So if we start seeing some restocking and some economic activity coming back, how might that change your assumptions?

Okay, Deane.

To clarify, you're absolutely right -- we are not counting in this guidance on economic pickup.

A very little bit in the second half of the year, which would be kind of in the Flow area, but not anything significant.

So our guidance is truly based on orders staying at these levels.

So you're correct if we see pickup in order activity, that clearly will help the year out that we are not counting on in that guidance.

If -- Deane, if I go back, maybe I'll use 2008, which I think was a very typical trend year for the company, we definitely pick up in the second half of the year.

If I remember the numbers correctly, our revenue in the second half of that year was $800 million higher than the first half of the year.

I thought it was also interesting last year, although you didn't actually see it as much in the numbers -- but as business was trending down for everybody last year, we actually did have some seasonal lift that occurred, and our revenues were $90 million to $100 million higher in the second half of last year than in the first half despite the decline we were going through.

So we clearly see seasonality.

The biggest pieces are, as I mentioned a minute ago, they are in Fire and they are in ADT and we do an awful lot of work in the spring and summer months when work is scheduled, number one, because of warm weather, but number two, we have key verticals like the education vertical that want us -- they cram all their work into the summer months when their campuses and schools are either closed or less busy.

So we clearly see that happening.

We normally do see some lift seasonally in our Flow Control business in the third and fourth quarter, so we are expecting all of that to occur, maybe to a lesser extent with the economy, but it will occur for us.

And then as Chris and I both mentioned, Electrical and Metal, I think just all the trends we are seeing here will clearly have a stronger second half of the year than first half of the year for us.

So I think we are teeing up nice.

I would hope that would get us more towards the higher end of our guidance range.

I think things would have to fall apart, the wheels would have to fall off the economy at this point I think for us to be down to the low end of the guidance range we have.

And clearly getting off to a very good start in the first quarter with the $0.65 clearly builds my confidence that we are off to a good start to get there.

This is Martin.

Might mention in the second quarter specifically -- if you look back, that quarter in particular is always our lowest quarter because of the seasonality that Ed mentioned with retail and ADT trailing off from the first quarter, strong thermal margins that we always have in the first quarter.

And that's particularly when you look at -- exclude temp which could move all over the place, depending on where steel spreads are as well as our corporate expense.

Great.

And thank you.

Just have a clarification.

It was interesting on how you've reported ADT this quarter -- you're calling out the North America ADT business.

I know in the past we have looked at US.

My guess is this may be a recast, either reorganization, but also an anticipation of integrating Brinks because they report on that basis.

So just give us some color about what that change is and if we were to look back at what US might have been this quarter.

Deane, I'll take that one.

Specifically we will be giving you the disconnect rate and some of the other key metrics on a North American basis as opposed to just a US basis.

In our numbers, though that we have given you each quarter, it's really been on a -- mostly on a North American basis.

As we move forward here, obviously, with the announcement last week to acquire the Brinks Broadview business, it operates on a North American basis as well.

And so we will be -- once the transaction closes, we will be presenting you North America, which is obviously very, very heavy US and a little bit of -- a little bit of Canada.

And, Deane, Canada's results are very similar to our US results.

You're not seeing any variation there when we put that in.

And same profitability?

About the same, yes.

Great.

Thank you.

Thank you.

Our next question is from John Inch with Bank of America Merrill Lynch.

Your line is now open.

Thank you.

Just firstly, good morning, everyone.

Good morning, John.

Why are we guiding this quarter to such a narrow range when the last couple quarters you've basically beat by $0.10 to $0.20?

Shouldn't -- just intuitively shouldn't the range because of all of these moving parts and the recent couple of quarters, shouldn't the range be wider?

John, one of the reasons, again, that we had the quarter that we did in Q1 was the anomaly of the timing of accounting that we had in both tax and corporate that we -- it's always difficult, particularly in the tax area, because our tax rate is going to move significantly quarter to quarter.

But we have a pretty good sense of where it's going to end up on a full-year basis.

So what we try to do is just operationalize those areas that can move and realize they can be a swing factor quarter to quarter.

Again, I think operationally if you look at our second quarter, the margins in most of our businesses are holding relatively steady.

We do have, as we indicated, a decline in the flow business with the -- again, a fairly significant drop in our organic revenue forecast that will reduce the operating margin in Q2 in the Flow business, so we are pretty comfortable with that range.

John, I would add to that, we have had -- we typically have on a quarter a $0.02 range or a $0.03 really over the last several years, so I think it's also in keeping with what our pattern has been.

Okay.

So in other words, the way to think about this is this is your operational view with a caveat or an asterisk that these other items like tax can actually swing the results.

Is that pretty much what you're communicating?

Absolutely.

I want to actually just ask about ADT in Asia-Pacific and Latin America.

2% organic growth, yet those economies certainly in Asia and China are booming.

Why is that business not growing more quickly, and are you -- do you think it will grow more quickly based on resources that are being allocated there or whatever?

John, I think by the way that that business will pick up over the next 12 months from an organic standpoint.

I think you're absolutely right -- the global economy saw a downturn.

Our business there, remember, is mostly commercial.

So I think we saw the downdraft in our orders there, although they did stay positive in those regions.

But we saw the downdraft there.

And we are starting to see, obviously as I think everyone else's economic activity rebounding, for instance, in a China, in an India.

So my gut is we will benefit and our organic rates will pick up in quote some of those more emerging markets.

I actually feel good, though, the fact that they stay positive for us felt good in this downturn.

But they were up around 10% to 12% type of numbers and my gut is we will walk our way back up there over some period of time.

The other thing I would add to that, John, is that our margins in that group of businesses continued to be quite good, particularly given the mix of recurring and nonrecurring that we have.

And actually as we indicate in our remarks, had better year-over-year margins on relatively low organic growth in the quarter.

Just lastly, if you look, you take a step back and you look at Tyco's history and where things are heading, there's now a shift toward M&A, right?

You've done -- obviously Broadview was opportunistic, but you're stepping up M&A in other areas.

You did the Brazil Flow deal.

Can I ask, why within your portfolio, Ed, why does it make sense to be building the Flow business?

How do you think about Flow in conjunction with what that has to do with Fire and Security?

I understand Fire and Security, but why do you want to build the Flow business versus maybe focus on building the Fire and Security businesses disproportionately?

If you step back, when we separated the company into three, our goal with Tyco International was to end up with these three global platforms, so that we have Flow being one of those key platforms, Fire and then Security.

We really like all three platforms -- as I've mentioned before, one of the dynamics I like is they are global, they are all emerging markets.

So I think these businesses have nice growth rates in a decent economy.

I also like the fact that we are in very fragmented industries in Fire, Security, and Flow and so I think there's real opportunity for us both whether it's organic or bolt-on, to do -- to really have nice organic growth come through there, and therefore good returns to our shareholders if we are smart about how we go about it.

So I view all three platforms just as important as -- each one as important as the next one as far as our ability to grow it and get good returns from our shareholders.

Flow Control, as you know, done right is a nice steady business with very nice margins and if the economy hadn't turned down here, I think you would have continued to see us make margin improvement in the business.

And I've been pretty impressed over the last year that we've actually maintained our margins where we have despite the downturn.

So very important platform for us and we will continue to expand there and focus there just as much.

Let me clarify, though, you did see us announce these -- the Brazilian deal and obviously the Brinks Broadview deal the other week.

But as I mentioned in my prepared remarks, share repurchase will be a part of our future thought process here.

We are not just turning the switch over.

If there's something good we can bolt on, we will put it on.

But we are not sitting around here as a management team looking at doing a series of deals just for the sake of doing that.

If there's something good with good returns, we will do it, that really make sense for us on the global platform.

But we are staying very focused on operating the company organically on -- as you can tell I think by our results, our real intense focus on our operations and we are not going to lose that momentum.

And is it fair to say a very large deal in Flow is off the table?

I think that's got perhaps some folks a little concerned.

I'm just curious on your thoughts there.

Well, I'll go back to my comments when we did the call a week or so ago on Broadview, as I mentioned -- in aggregate, if we do some bolt-on deals over the next year, I would think they would be somewhere in the range of $300 million to $500 million and that would be in aggregate.

Thank you.

Thanks, John.

Thank you.

Scott Davis with Morgan Stanley, your line is now open.

Okay.

Good morning, guys.

Good morning, Scott.

I share John's confusion on guidance for 2Q, but understand your conservativeness.

Anyways, can we move into Broadview a little bit?

And one of the things that -- I was on the road when you did your call, so excuse me if I'm duplicating some of the questions, but when I walked through the Broadview earnings model, and it seems like the costs that can come out of there are substantially higher than what you're guiding to -- can you talk a little bit about what can't come out and why, to maybe help us understand the integration there?

Well, certainly, Scott, what we can eliminate are things like the duplicate functional costs.

But what we want to maintain is, obviously, a large degree of the sales force that's generating new accounts that we can then plug into our monitoring centers around the world in the US and Canada and get the synergies there.

There will also be some synergies in branch offices but we still will need a lot of the installation capabilities that they bring, so sort of the administrative, we can consolidate, get synergies but again we want to be able to drive the growth aspects through their sales force and the additional installation capabilities that we get.

Scott, I would just add to that, as we outlined last week, there are three buckets of savings.

There's traditional operational savings, which I think if you look at it relative to their operating costs, are fairly significant as Chris just outlined.

There are some other savings that effectively start to happen on day one from stopping the rebranding and stopping the royalty expense.

And then given the way we are structuring the deal, there are additional savings from a tax efficiency point of view.

And the combination again of all three are what drives the economics of the deal.

And finally, with respect to a good portion of these synergies, they start to accrue on day one simply by making changes in what's being done and the way the deal has been structured.

John, I'll also mention that when you look at this on a cash basis, because of the level of synergies that we get, it's much more accretive even on a cash basis than it is on an accounting basis because we under the accounting rules when we acquire it, we will write [up] the value with accounts.

We will then take additional amortization of about $60 million over what Brinks would report today.

So, again, we think that the economics of this in with the synergies will generate very significant ongoing cash flow that's even in excess of the nice accretion that we get on an accounting basis in EPS.

No, understand.

It calcs out on your numbers to be a 10% year one cash on cash return, which would seem to me, once you're able to take out some additional costs and add some additional synergies over time, particularly with the sales force, that that's substantially more attractive than buying back your own stock here.

So presumably if you can do more deals like that, it makes sense.

Is there any restrictions that you see as far as -- really maybe just DOJ or to going out and continuing to roll up the industry?

I mean, I know by your measures, I think combined now you'll have something like 25% or 26% market share, but is there another way that the regulators may calc that that makes it more difficult for you to do deals?

Scott, we will always look at that but I think you just laid out the numbers.

I think in combo now, we were around 20% there, 4%, so you're at 25% in total.

And there's hundreds and hundreds of competitors in each given region or market, as you all know from where you live.

So I would think there's opportunities to add to the base over time.

But just back to a point on the Broadview, as Ed Arditte just mentioned, one of the things I do like -- I like the strategic fit obviously of the deal.

But one of the things I like on the synergy side of this deal is we really do get a big piece of the synergies literally on day one, which is very comforting, and then we will work really hard to get the operational ones over the first year.

But to be able to get the rebranding out, to be able to get the payment back to the old parent out of the number right away, to be able to get day one the tax synergy because of the way we structured the deal are all very big swings on the synergy side for us.

And I think we have a very good plan laid out to get the operational cost out, and we will be very focused on that over the next few months.

Scott, I would also add that as I mentioned in my remarks, we were able in 2009 to acquire some bulk accounts, and again we have the resources to be able to do that.

If those are available at a good price and we get a very nice return, I think that's probably more likely if we see those kinds of opportunities than other significant acquisitions of US based residential entire security businesses.

Makes sense.

Guys, one of the questions I'm getting from people is just concerns about losing some of the Broadview salespeople and maybe some churn, increased churn in the accounts.

Is there any type of plan to retain these folks?

And I assume that in the transition these accounts are still on full contracts and churn is less of an issue, but can you address both those questions?

Scott, obviously, this is a bigger deal, but we have a lot of experience on bringing accounts in and bulk accounts.

We did a bulk deal for 80,000 accounts as Chris mentioned -- that was in the second half of last year.

We have a very good modeling of what occurs here and I feel very confident we will hold onto the accounts.

There will be some marketing to these accounts that will occur and be real positive, I think.

So that I don't have a concern on.

And as Chris mentioned, we clearly do want the sales team at Brinks -- they are an excellent group of people, they have done a great job and we clearly want the installation people, they do a great job.

We are going to need them, because we expect we will be able to generate the incremental leads that they have been generating over time.

And by the way, we are both going to learn from each other here some things we do better, some things they do better.

So net net, I think that should be helpful to us, and we will have some programs to make sure people are not nervous during the interim period until we close the deal, typical things companies do and all that.

So we will make every move there to make sure there's stability.

Fair enough.

Thanks, guys.

Thank you.

Thank you.

Nigel Coe of Deutsche Bank, your line is now open.

Thanks, good morning guys.

Good morning, Nigel.

I wanted to dig into Flow a little bit.

I think you mentioned Flow revenues hit a trough in the second quarter, which is obviously encouraging.

But based on the backlog on the order flow you've seen so far, I mean what happens in the second half?

I mean, do we see a pickup sequentially or do we flatline for a few quarters?

You should see some gradual lift in the third and fourth quarter -- and by the way, we do see that every year.

What happens as we mentioned is we seem to get a stronger quarter in the quarter we just reported because of thermal.

Thermal dips down in the second quarter and then thermal starts lifting again in the third and fourth quarter, which is part of the help also, and then we just see some natural lift in the order patterns of our customers in the business.

The two things Nigel, I feel better about now -- I've been a little hesitant here watching this one -- is clearly now for two quarters in a row, we have maintained our backlog level, which feels good.

And when we are reporting some of these numbers, we are taking a big project out we won in Pacific Water, but by the way, Pacific Water is a big project and it's all going to shift in the second half of this year.

So maybe we do ourselves a little disservice by exing it from the numbers when we are talking to you.

But that happens to be part of our second year lift that we know we'll get.

I think probably the more encouraging thing, although I'm still holding my breath a little bit on this, is we are really seeing across the globe from our sales teams a pickup in bidding activity, projects that we are talking about.

And that's pretty uniform across all of our markets, so I've got to think -- and with the economy now improving some, I've got to think there's a little bit of a longer cycle business.

I think we are seeing the pattern here that maybe we will start to see a little bit of a different trend in orders come in the near future.

We haven't seen it yet, but it would appear that we are getting closer while we are maintaining the backlog.

Let's hope so.

And then just want to dig into the margins this quarter.

Obviously, we saw a $21 million dropdown sequentially on [$32 million] of revenues.

I know the FX impacts that a lot, but if you look at it on a constant currency basis, what sort of decremental did you see this quarter?

In which business?

You're talking about overall?

In Flow, yes.

Again, in the Flow business, I think it was -- what are we down at [12.8] -- ?

And again it was impacted on a favorable side by that thermal business which that quarter is their highest margin, and that's why we see it going down closer to 11% with the deleveraging that we get.

So we had, again, about a 14% organic revenue decline in the quarter.

So when we look at our valves businesses, even our thermal business, while it's their highest quarter, it's not as high as it's been in the past because of the volume.

So as we look toward the second quarter, we get again another hit where our expectations are another low teen kind of operating organic revenue decline that will cause some deleveraging

And on that note -- the [certain] thing about trough margin based on the fact that you are looking for this to be a trough revenue quarter and you're getting some pickup in the second half of the year, so I'm just trying to think about the impact of the Pacific pipe projects because I'm seeming that's probably a slightly low margin.

Those margins have been quite good over time, and again I think by the size of those projects, that we could expect that that would help to improve in the second half the overall margin from what you'll see as we exit here Q1 and certainly through Q2.

So I think that the mix of business will continue to improve.

Again, it's the -- it's sort of the low point is always Q2 and now we will see that start to rebound across the businesses as volume starts to pick up, and Pacific will not hurt the margins.

Okay.

And then just a quick one on E&M.

You maintained the full year outlook at about $120 million but we see the big move in the sale price in December and January since you gave the guidance in November and I just wondered, I mean, how -- I mean, I'm not assuming you project sale prices, but have you foreseen some move in the sale price or does this move provide some upside potential to that number?

Nigel, you know as well as I, this is a very, very difficult business to forecast over time.

I think, you know, we are looking at, you know, not dramatic changes in pricing from where we are today.

We know where our cost base is and what we have acquired in terms of steel and we do get that second half volume which is more seasonal, which is a key driver to that.

So it's a combination of all those, but I will say that is a -- that's a volatile business, it could do better and it could do somewhat worse depending on how those prices move, and we have seen them move so fast and so significantly over the last two years that that's why we just lay it out for you in terms of what our current expectation is and then each quarter we will update you.

Nigel, a little more to what Chris just said -- we are saying this quarter will be similar to the first because we are moving through a steel layer that obviously we know exactly what our cost is because we have it in inventory and we are moving it through.

But one fact we do know is we are buying at some very nice prices, and we do know our spreads are improving right now.

We know pricing is going up and it's been holding.

So again to Chris's point, it's hard to project that out far, but the trends on both sides will get good with the inventory we are bringing in this quarter for next quarter and the pricing we are seeing.

Thanks.

Thank you.

Our next question is from Steven Winoker of Stanford Bernstein.

Your line is now open.

Good morning.

Good morning, Steve.

Just trying to again get back to the guidance questions for the full year versus where you felt things were last time you issued guidance.

So you've got the Q1 beat, you've got the tax and corporate items, but then on the operational front and you talk about the concerns that you have, it still nonetheless mathematically implies a deterioration in those numbers for the other three quarters of the year, or have I got that wrong?

Steve, I don't believe that you're going to see a deterioration in the second half.

In fact, I think as we have discussed, we would see an uptick in our businesses in the second half because we also have a seasonal impact there.

So again, as you mentioned, the corporate and tax items are just timing.

They don't impact our yearly guidance, so I can't -- and again, we have given what the numbers are for our temp business, but the other businesses I do believe we are going to see again as we have talked about, slight upticks as we get through the second half.

Steve, maybe just on the numbers to help you, because just to clarify your point -- if you want to use the $0.65 for the quarter and use the midpoint of our guidance of $0.51 we would be at $1.16 at the half year point.

And if you just times that by two, and that might not be the right way to look at it, but you would already be at the low end of the range, and we get lift in the second half of the year.

So I just want to -- I feel more confident after this quarter about our year and getting towards the upper end of our range than I did last quarter, and when you simply just do the math on where we think the first will end up at, I think you can walk your way there.

Steve, let me just add to that second half lift that Ed referred to, what we are not embedding in that is an expectation of a meaningfully different economy.

We are embedding in that just a fairly normal seasonal lift that we see in our third and fourth quarter compared to the first half of the year.

Right.

And compared to the last time you issued guidance, it really -- you're saying basically you gave the range before, but you were really talking more to the low end, and now you have much more confidence to the high end of that guidance.

Is that how I should think about it?

I would say I have much more confidence in the high end of the range now.

Okay.

And then secondly, and just a minor point but if I think about the adjusted GAAP guidance you gave for the second quarter just to GAAP -- or just -- sorry -- adjusted EPS going to GAAP, is the restructuring spend that you're anticipating this quarter, did you talk about that?

We did not specifically talk to a number for the quarter.

What we have said is that we expect about $100 million to $150 million potentially in the full year.

As you know, it can be very difficult to determine exactly what quarter in meeting all the criteria that you have, particularly when you're dealing with major locations outside the US, so we don't break that down by quarter.

Okay.

And then finally, on the Flow business and the Safety Products business -- certainly for Flow, the quoting activity is up but the orders are not yet there.

So should I interpret that as bids not moving forward yet or losing bids?

Just not moving forward yet, and I think, Steve, if you -- I just looked at last quarter.

We were seeing the same activity percolate.

It's been going on for four months or so now.

I think some of our other players in this business also saw the same thing and it wasn't translating into orders yet, but bidding activity is up.

Okay.

And the capacity level that you're holding in Flow Control, again, given this -- the view that you have, does that mean you're also basically more or less continuing to reduce capacity or holding where you are?

Just slight reduction in capacity, but we are not taking that much out.

We are -- the restructuring we are doing is more back office in that area, with a little bit on the manufacturing footprint side.

So I think I was asked this a quarter ago, and things rebound either in Safety Products, which is our manufacturing arm there, or in Flow -- the capacity is there in those businesses.

Right.

So same thing for Safety?

Yes.

Great.

Thanks.

Thanks, Steve.

Operator, we are going to try to get in two more questions here before we wrap up.

Thank you.

Our next question is from Steve Tusa with JPMorgan, your line is now open.

Hi, good morning.

Hi, Steve.

Steve, I'm going to ask you to be quick, so we can get two in.

Sure.

I just wanted to ask philosophically around your guidance -- I can understand that you guys came out as a new public company a couple years ago and you wanted to put up conservative numbers.

But beating by $0.10 every quarter seems like -- is there a visibility concern that you have?

I know you moved your reporting date up, so that's a positive, but I'm just curious the philosophy around whether we should continue to expect conservatism here?

I'm curious how you feel about that.

Steve, let me comment.

I think that one of the things that you've seen where we have beaten by a significant number, it's really been driven first and foremost by tax.

And so clearly as we came out of the separation, we had a negative tax synergy and have been uncertain as to how quickly we could implement those very complicated tax restructurings that we have done inside the business.

And there are timing issues as we have talked about in terms of accounting.

So that has really been the key factor in driving that as well as our corporate expense -- we have taken some aggressive actions there.

And so those have been the two items that have driven some of the overperformance, if you will, in terms of versus our guidance.

And if you look operationally, they have been on a much tighter, tighter range.

So I would say even going forward over the next year or so, if we are going to see significant movements, it still may be things like tax that will do it.

Okay.

Thanks a lot.

Thanks, Steve.

Thanks, Steve.

Thank you.

Our final question today is from Gautam Khanna from Cowen, your line is now open.

Good morning.

Quickly, could you characterize the pricing you're seeing on the incoming bid activities in the Flow Control business?

And also while I got you, if you can update us on what your expectations are for free cash this year and where ADT margins were in the quarter?

Thanks.

On the cash, as typical for us, I think we will be very consistent on the cash front.

I think we will approximate somewhere around net income.

Last year we were over that.

This year, our forecast is it will be around the net income.

Again, by the way, I would actually rather see a pickup in business and we actually build some working capital and maybe get a little headwind there, but pending things hanging where they are, I would think we will approximate net income.

I would point out as you saw -- this was the best first quarter of cash performance the company has ever had, so I feel like that put the year off to a good start from a cash standpoint.

Again, that was management of working capital that enabled that to happen.

On the pricing side, I think your question was specifically the flow.

We are seeing a little bit of pockets of pressure here and there but not significant.

The place we have seen the pricing pressure really for the last, I guess, six months or so build a little bit was on the systems installation side of our business in some of our regions.

And that doesn't surprise me, because the business has been down fairly significantly double digit organically for the last year, and we have seen a little bit of pricing pressure there.

But to be honest with you, we are not seeing anything there that I don't feel we can't offset with good cost containment actions on the other side.

So I think it won't be something that's a headwind that we are not -- we can't take care of.

And just on the margin question for ADT, our margins moved from the last year's quarter at about 4.2% up to 6.4%, as I mentioned in my remarks.

Okay.

Thank you, guys.

Thanks for joining us.

Ladies and gentlemen, this will wrap up our first quarter earnings conference call.

Look forward to talking to you.

If you have any follow-up questions, our second quarter earnings conference call will be scheduled obviously for the latter part of April.

Look forward to talking to you soon.

Thanks very much.

Thank you.

This concludes today's conference.

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