江森自控 (JCI) 2010 Q3 法說會逐字稿

Welcome to the Tyco third quarter earnings conference call.

All participants have been placed on a listen only mode.

(Operator Instructions).

Today's conference is being recorded.

If you have any objections please disconnect at this time.

I would now like to turn the call over to the Antonella Franzen, Director of Investor Relations.

You may begin.

Thank you.

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

With me today are Tyco's Chairman and Chief Executive Officer Ed Breen, our Chief Financial Officer Chris Coughlin, as well as Naren Gursahaney, President of ADT Worldwide.

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.

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

The press releases 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 $4.3 billion was up 3% year-over-year with flat organic revenue.

Earnings per share from continuing operations attributable to Tyco common share holders was $0.50 per share and included $0.22 per share related to special items.

Before special items, earnings per share was $0.72 compared to our guidance of $0.60 to $0.62 per share.

The $0.72 per share compares to the midpoint of our guidance of $0.61.

The $0.11 difference consisted primarily of $0.07 of better operating results, $0.10 attributable to a lower tax rate, offset by a net $0.06 charge for a legal reserve and a benefit from certain pension plan changes.

Now let me turn the call over to Ed Breen for some opening comments.

Ed will be followed by Naren who will discuss our ADT business, and then Chris will review the results from our other businesses before we wrap up and take your questions.

Thanks, Antonella, and good morning, everyone.

Overall this was a good quarter for Tyco.

From an operational perspective we saw sequential improvement in revenue and operating margin across all business segments.

Additionally, we completed the acquisition of Broadview Security and are well underway with the integration process and are very excited about the opportunities of joining the best of both ADT and Broadview.

From a capital perspective, we invested more to strengthen our businesses and returned excess cash to our shareholders through dividends and share repurchases.

Let me start off with a few overall comments.

First, the majority of our segments, including the service side of our fire business, grew revenue organically year-over-year.

The system's installation and service side of our ADT business turned positive after six consecutive quarters of organic revenue decline.

Operating margins improved both year-over-year and sequentially, driven by our cost management efforts and the continued growth of our recurring revenue and service activities.

Additionally, increased volume in our product and manufacturing businesses also contributed to the operating margin improvement.

From an orders perspective, it's important to keep in mind that our service and recurring revenue businesses have been growing and represent 40% of our total revenue.

Orders for the remaining 60% of our portfolio, which is our product and systems installation revenue, grew 5% year-over-year on a global basis with order growth in flow control, fire and safety products.

Second, our free cash flow generation continues to be strong and provides us with the financial flexibility to fund our organic growth investment activities, make selective acquisitions and return excess cash to our shareholders.

As we indicated last quarter, we resumed our share repurchase program and to date have repurchased 15.8 million shares for $575 million.

We expect to continue repurchasing shares during the fourth quarter and will likely utilize the remaining $325 million authorization under the program by our fiscal year end.

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

Starting with ADT, our recurring revenue continued to perform well, with 4% organic revenue growth.

Excluding Broadview, our account base and ARPU both increased and the disconnect rate continued to improve.

Additionally, the systems insulation business has stabilized.

Growth in the Asia-Pacific and Latin America regions, and improving conditions in North America, offset the continued softness in Europe.

We also saw continued improvement in our operating margin both sequentially and year-over-year.

Growth in our higher margin recurring revenue business, coupled with the benefits of restructuring activities and cost actions, as well as improved productivity and mix in our systems installation business, contributed nicely to the operating margin improvement.

Turning to Flow Control, performance in the quarter was as expected -- sequential improvement in revenue and operating income and continued growth in order activity.

The announced divestiture of our waterworks business in Europe is another step in focusing our portfolio on industries and products that we can leverage on a global basis.

This business, which sells to markets in Europe, makes products such as hydrants, fittings, couplings and valves, primarily for the transmission and distribution of water for residential use.

Our intention is to grow our Flow Control business with global products and services that utilize advanced technology in critical applications.

Next our Fire business had operating margin improvement, both sequentially and year-over-year, despite the continued pressure on the top line.

More importantly, the quarter marked a turning point to positive order activity, and backlog continued to grow.

Next, the continued investments we have made in our Safety Products business to fund our growth plans and maintain our R&D, sales and marketing expense throughout the economic downturn are starting to pay off.

We are well positioned for recovery and have seen the benefit of increased volume in our operating margin which improved 350 basis points year-over-year.

And finally Electrical and Metal Products performed a bit better than expected in the quarter, due to improved pricing for both steel and copper products.

The previously announced tax-free spin of this business to our shareholders continues to move forward and we are tracking to complete the separation within the first half of our fiscal year 2011.

Overall, we saw improving conditions across all our businesses in the quarter.

The top line stabilized.

Operating margins increased and order activity improved.

Additionally, we made good progress focusing our portfolio around our three core platforms of security, fire and flow control.

Now let me turn the call over to Naren to review our performance in ADT and provide you with an update on the Broadview integration process.

Thanks, Ed, and good morning, everyone.

ADT continued to show good progress against all of our key financial and operating metrics.

Revenue in the quarter was $1.8 billion with organic revenue growth for the first time in several quarters growing at 3%.

Recurring revenue continued to grow nicely at 4% driven by our North America residential and small business operations.

We also continue to see nice recurring revenue growth in Asia-Pacific and Latin America.

Systems installation and service revenue grew slightly on our organic bases, up almost 0.5%.

While we still saw declines in North America and EMEA, the declines were very modest compared to what we've seen in the past.

These declines were offset by 17% organic revenue growth in the rest of the world.

Before special items, operating income was $275 million, and the operating margin was 15.1%.

Excluding the impact of Broadview and a $12 million benefit in the quarter related to certain pension plan changes, the operating income before special items was $271 million and the operating margin was 15.3%.

A 170 basis point improvement year-over-year.

While a portion of this improvement is a result of our improved business mix with more of the higher margin recurring revenue, we are also reaping the benefit of our restructuring and other cost reduction initiatives, including our operational excellence initiatives.

We also saw continued progress in improving customer retention with a 30 basis point improvement in our attrition rate to 12.8%.

Our account base now stands at over 8.8 million recurring customers, including the addition of the Broadview account base of 1.4 million customers.

Excluding Broadview, we grew our account base by 3% and our average revenue per user grew 1% to $45.72 excluding the impact of foreign currency, which is consistent with what we've seen over the past several quarters.

As Broadview's customer base was nearly 100% residential compared to ADT's mix of residential and commercial customers, the new blended overall ARPU decreased by 4% to $43.42 per account.

In terms of regional performance, we continued to see solid performance in our North America residential business where unit and ARPU growth were consistent with what we've seen over the past several quarters.

Although the commercial side of our North America business remains soft, we are seeing increased activities in certain vertical markets like retail.

Despite the 3% decline in organic revenue, our operating margin improved 110 basis points year-over-year as the benefits of our restructuring and cost containment actions more than offset the revenue headwind.

In EMEA, we continued to see strong margin improvement in both the UK and continental Europe.

The operating margin before special items of 12.1% increased 820 basis points year-over-year and 560 basis points on a quarter sequential basis.

These results included a $12 million benefit related to certain pension plan changes which contributed 300 basis points to the margin improvement.

With these trends we continue to feel good about achieving our 10% target by the end of 2011.

In the rest of the world, which includes several of our key emerging markets, we are seeing solid top and bottom line growth.

Growth was 10% for recurring revenue while systems installation and service revenue growth was in the mid to high teens.

We continue to invest in emerging markets and remain excited about the opportunities we see there.

Much of our focus during the third quarter was on the closing of the Broadview acquisition and the initial stages of integration of this business into our North America residential and small business platform.

As you are aware, we closed the deal in the middle of May so our results include about six weeks of Broadview this quarter.

Broadview's impact on the quarter was an operating loss of $8 million, primarily driven by the purchase accounting impact of the transaction that we mentioned when we announced the deal.

As we move forward, it will become more difficult to call out Broadview's results separately as we are fully integrating the business into our ADT residential and small business platform.

We've adopted a best of both approach to integration and are committed to leveraging the best people, processes and technology from both organizations as we build our new ADT North America residential business.

John Koch, who has been leading our ADT North America business for the past four years, will lead this combined business.

John has assembled a leadership team that includes several key leaders from both ADT and Broadview.

We are very pleased with the progress we've made so far in our integration efforts and we remain confident we will deliver on the synergy and accretion expectations that we stated when we announced the deal.

On a fiscal year basis we expect the impact to be neutral in fiscal 2010 and accretive by about $0.10 in fiscal 2011.

The accretion estimates includes the impact of non-cash purchase accounting charges.

Looking at this on a cash basis, the fiscal 2011 accretion is actually $0.18 per share.

Much of our current effort are focused on the marking side as we prepare to migrate away from the Broadview brand and consolidate all of our lead generation to the ADT brand.

We expect to finalize this transition during the fourth quarter.

We have also begun to train our sales teams on a standard set of product offerings and are moving forward to integrate our field teams into a common management structure.

In addition, we've focused considerable time and effort on communications with both our customers and our employees.

While we are still early in the process, the response from customers appears to be favorable with both businesses showing modest improvements in retention on a quarter sequential basis.

Finally, I thought I would comment on the rollout of our new interactive services platform, ADT Pulse.

As we indicated in the past, we've launched our operational pilots during the third quarter and are currently offering these solutions in five test markets across the country.

These are operational pilots focused on developing our capabilities to sell, install and service these new solutions which combine life safety with lifestyle.

The initial customer response has been positive with no marketing and advertising support.

We are also seeing a nice pick up in our installation fees and ARPU.

We are currently ramping up our training efforts and expect to expand from our current pilot approach to a full market by market national rollout later this calendar year.

I look forward to updating you on our progress with ADT Pulse during future calls.

Before I turn it over to Chris, let me provide you with our guidance for the fourth quarter.

We expect revenue to approximate $1.9 billion with an operating margin before special items of approximately 16%.

Now let me turn the call over to Chris.

Thanks, Naren.

And good morning, everyone.

I will start with Flow Control.

As Ed mentioned, we announced a definitive agreement to sell our waterworks business in Europe for approximately $245 million.

The transaction is expected to close in our fourth quarter and is now reported in discontinued operations.

On an annual basis, this business generates about $350 million of revenue with an operating margin in the high single digits.

Approximately $0.01 per share in the quarter and an estimated $0.05 per share for the year has moved to discontinued operations.

During the quarter, Flow Control had revenue of $849 million which again excludes the revenue from our European waterworks business.

Organic revenue declined 7% as the 11% growth in water and the 16% growth in thermal control were more than offset by a 17% decline in the valves business.

As expected, the organic revenue decline has moderated.

The 7% decline this quarter compares to a 14% decline in the first quarter and a 13% decline in the second quarter.

Before special items operating income was $119 million and the operating margin was 14%.

Despite the volume deleveraging, the operating margin performance in the quarter was similar to last year due to increased activity in our Pacific water business related to the Australian desalinization project.

Additionally the operating margin continued to benefit from our cost management and restructuring activities.

For the second consecutive quarter, we have seen year-over-year growth in orders, which is encouraging.

Excluding currency, orders grew 4% year-over-year.

It's important to keep in mind there is a six to nine month order to revenue conversion cycle in Flow so the recent order activity we are seeing will most likely impact our fiscal year 2011.

Backlog of $1.5 billion declined 3% on a quarter sequential basis.

Again excluding the impact of foreign currency.

Primarily driven by the shipments of products for the Australian desalinization project.

As we look to the fourth quarter, we expect continued improvement in organic revenue with a year-over-year organic revenue decline in the mid-single digits.

While our revenue will grow sequentially, product mix in the quarter is expected to result in an operating margin before special items of approximately 13%.

Turning now to our Fire business, revenue in the quarter was $822 million, and the organic revenue declined 6%.

Service revenue grew 2% organically offset by continued weakness in system installation which declined 13% organically.

Our strategy of being more selective in our project work has contributed to the organic revenue decline.

However, the benefit of this discipline can be seen in our improved earnings and operating margin performance.

Before special items, operating income was $85 million and the operating margin was 10.3%.

Operating results were positively impacted by a $7 million benefit related to certain pension plan changes which improved the operating margin by 80 basis points.

The remaining improvement in operating margin of 110 basis points resulted from the benefits of our restructuring actions, cost containment activities and the selectivity in project work which more than offset the revenue decline.

We expect operating income before special items in the fourth quarter to approximate the third quarter level excluding that pension benefit.

Year-over-year orders turned positive growing 4%, again excluding the impact of foreign currency.

Backlog of $1.2 billion increased 5% on a quarter sequential basis excluding the impact of foreign currency.

Moving now to Safety Products, revenue grew 5% in the quarter to $389 million with an organic revenue growth of 6.5%.

The revenue growth was driven by strong performance in electronic security which grew 15% organically, and life safety which grew 14% organically.

Organic revenue was flat in fire suppression after five quarters of double digit organic decline.

Before special items operating income was $65 million and operating margin improved 350 basis points to 16.7%.

Higher revenue and better productivity, coupled with savings from our restructuring actions and cost containment activities, more than offset our continued investments in sales, marketing and R&D.

On a year-over-year basis we expect organic revenue growth to be similar to the third quarter with an operating margin of approximately 16%.

Lastly, Electrical and Metal Products had revenue of $390 million, with organic revenue growth of 15%.

Year-over-year revenue growth was primarily due to higher selling prices for both steel and copper products.

Although demand has stabilized, volume remains at historically low levels.

Despite the continued low volume, the operating income before special items of $41 million was better than expected and represents a significant improvement over the prior year's operating loss of $6 million.

The $47 million increase in operating income is primarily due to better steel spreads.

Looking to the fourth quarter we have seen steel prices weaken in recent weeks after increasing sharply the first half of the calendar year.

Based on current market dynamics we expect revenue of $375 million and operating income of approximately $30 million.

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

As you have just heard, certain of our defined benefit plans were converted to defined contribution plans, resulting in a $22 million benefit in the quarter which has been reported in our business segment results.

Next, we perform a number of actuarial valuations during the second half of the year to determine if there are any liability reserves which need adjustment.

As a result, we increased our legal reserve by $52 million which is reported in corporate expense.

Including this charge, corporate expense before special items in the quarter was $142 million.

Looking to the fourth quarter, we expect corporate expense to be approximately $115 million bringing our full year corporate expense to about $450 million.

Turning to interest expense, we issued $500 million of bonds at a very attractive interest rate.

Additionally, we redeemed approximately $875 million of outstanding bonds resulting in an $87 million charge in the quarter which again is included in special items.

Next, our tax rate for the quarter was approximately 6%, well below the rate we guided to last quarter.

We had expected our annual tax rate to be in the 17% to 18% range and now believe our tax rate for the full year will be in the range of 15% to 16%.

This improvement reflects the impact of our tax planning activities as well as the Broadview acquisition.

As we have discussed in the past, the timing of the impact of tax items can move the rate significantly quarter to quarter.

We expect the fourth quarter tax rate to approximate 23%.

We intend to continue repurchasing shares in the fourth quarter and expect our average share count to be about $500 million in the fourth quarter as it will include the full impact of the shares issued for the Broadview acquisition.

I also want to touch for a minute on restructuring.

To date we have incurred approximately $60 million of restructuring charges, excluding Broadview.

Compared to our estimate of approximately $150 million for the year.

Our original estimate included costs to significantly restructure or shut down certain small operating units.

We are now more confident that we will be able to sell certain of these operations which could therefore reduce our restructuring cost by $40 million to $50 million.

This would result in full year restructuring charges of approximately $100 million.

A majority of these actions we have taken over the last two years are permanent in nature and will not result in increased cost as business conditions continue to improve.

In addition, we incurred restructuring and acquisition charges of $37 million in the quarter related to the Broadview transaction.

We continue to expect these charges will approximate $100 million, of which a large majority will be incurred in the first six months of the acquisition.

Let me turn the call back to Ed to wrap up this morning's call.

Thanks, Chris.

Overall, I am quite pleased with our performance so far this year.

As I previously mentioned, we have continued to actively manage our portfolio.

The Broadview acquisition has increased the recurring revenue portion of our portfolio and we have taken several steps in divesting businesses that do not align with our global strategy.

Overall, the actions we have taken this year have further strengthened our core platforms.

Second, our teams around the world have continued to respond quickly to the continued challenging economic environment.

We have managed our cost position well, restructured certain operations and maintained key investments that position our businesses for future growth and continued margin expansion.

Lastly, our already strong balance sheet position has been further strengthened by our refinancing of debt and reduced tax rate.

Now let's turn to our guidance for the fourth quarter.

Looking ahead to the fourth quarter we expect the trends we saw this quarter to continue.

We expect fourth quarter revenue of approximately $4.4 billion.

The overall operating margin in the fourth quarter should slightly improve from the 10.4% we achieved in the third quarter.

Our debt restructuring should decrease our interest expense by approximately $5 million sequentially.

And as Chris explained, our tax rate will approximate 23% in the fourth quarter.

We therefore expect our EPS before special items in the fourth quarter to be in the range of $0.62 to $0.64.

Last quarter we indicated that we expected EPS to be in the range of $2.50 to $2.58 for the full year including approximately $0.05 of EPS from our European waterworks business.

As this business is now reported in discontinued operations, our full year guidance range would be $2.45 to $2.53 per share.

Based on our fourth quarter guidance, we now expect EPS from continuing operations before special items to be in the range of $2.56 to $2.58, which again excludes the $0.05 of earnings from our waterworks business.

Therefore our revised guidance of $2.56 to $2.58 is a $0.06 to $0.10 per share increase from our previous guidance.

With that, Operator, let's open up the line for any questions.

(Operator Instructions).

Our first question is from Jeff Sprague with Vertical Research Partners.

Your line is now open.

Thanks and good morning.

I had a couple specific questions for Naren but also just to maybe start on the guidance.

The revenue outlook for Q4, what are you assuming for the underlying growth or lack thereof in Broadview?

I think we are expecting consistent growth with what we've seen for the past couple quarters.

The one cautionary piece there, Jeff, is from the time we announced to the time we closed, we did see a decline in the number of sales reps they had as there was a little bit of a challenge replacing sales reps because of the uncertainty.

We are now ramping that back up on the ADT side and the Broadview side and look to get that up.

But other than that I don't expect any significant changes to the kind of growth we have been seeing with them.

Jeff, I will remind you that as we get into the fourth quarter it will be difficult, if not impossible, to break out Broadview revenue versus the normal ADT revenue as we've combined all our marketing programs programs and the brand.

So we will just be reporting on ADT revenue.

And we will highlight, obviously, the residential small business piece of that.

Okay.

And then, Naren, just more specifically, as you think about these things together and the notion of the best of both, probably in broad terms the best on the ADT side as subscriber acquisition cost and attrition on the Broadview side, and I just wonder what your initial thoughts are now as you are six or eight weeks into this where those two can meet and how you would target those going forward.

Again, we are still very early in the integration so I'm hesitant to draw any conclusions at this time.

Based on what we've seen, and what we expected to see was very good from a customer service perspective.

We found some interesting technologies that they use to serve customers better.

And actually reduced the cost to serve on the service side so not just on the attrition side.

Clearly they are very selective upfront on the account acquisition side.

We still believe that we will get the subscriber acquisition down closer to where ADT was over time.

And then attrition rates, again, for the combined business we expect to continue to take those down in the same kind of progress we've seen over the past, let's say, year excluding the impact of the economy.

And Jeff, I thought it was nice that -- we've had a lot of questions around will you have disconnects because Broadview is going under ADT -- you can tell by the disconnect rate, the ADT disconnect rate improved sequentially but so did Broadview.

I think that's a real key indicator to an answer to that question because we've had a fair amount of communication already with the Broadview customer base.

They are well aware of what's taking place and to see that attrition rate decline I thought was a good sign.

Then, Naren, I was wondering if you could also just comment, and again acknowledging it's probably early, but your initial thoughts on ARPU and what the subscriber acquisition cost looks like for interactive once you include the higher sell that would happen at the time of the interactive.

And Jeff, the one caution on this one is we have not really started the advertising campaign to support this.

So whatever units we are getting are basically upsells at the kitchen table at this stage.

From a pricing perspective, we've targeted, depending on which of our three offerings they pursue, anywhere from a $10 to a $15 increase in ARPU for those specific products.

So in the $10 to $12 range because we expect the mix to be more towards the lower end of the product offering there.

Seems to be holding well but again we are very early in that roll out right now, just in the five test markets.

And the subscriber acquisition cost is higher.

But that's being offset by the higher install dollars that we get up front.

So from a net perspective we aren't seeing a significant change there.

Ed or Chris, I'll jump off but just one last one here.

Can you give us some early thoughts on some of the high level items for 2011?

There's a lot of stuff moving around -- tax rate, Broadview coming in.

Naren gave us a (inaudible) number.

We have to think about a temp spin.

What are your overarching thoughts on how to frame 2011?

I will let Chris jump in with corporate and tax in a moment.

I think you, Jeff, just mentioned a couple of these here.

ADT, because of Broadview coming in, will add $0.10 to earnings next year.

So that's a tail wind on an EPS basis.

You need to take about $0.20 out for Electrical and Metal because we are assuming the spin happens towards the beginning of the year, so that would come out of that number.

And I would say maybe just one other point is Flow, because we're starting to see the orders improving -- by the way, they did continue to improve during the month of July -- but when you look at the backlog, how it's going in and this conversion cycle we are talking about, I think you will see a nicely stronger second half of next year for flow.

But probably still a little bit muted during the first half of the year until this increased order activity kicks in on a shipment basis.

Chris, you might want to add.

Yes, I think when you look at our corporate expense, for example, I do expect we will be able to reduce that again slightly from where we have been this year.

On the tax front, it's still very early to determine what kind of a tax position we will have.

Obviously we have done a terrific job since the separation in reducing that tax rate, and as we indicated Broadview will be a positive.

We have taxing authorities around the world looking at their tax policies right now.

I think between that and obviously what ends up being our geographic mix of revenue and profits could impact that.

But again we have done a good job in holding it.

I don't think anything dramatic there.

Then obviously we will have the impacts of the share repurchase as we continue to reduce our share count.

And offset some of that impact of the Broadview acquisition.

And then obviously the refinancing that we have just completed will reduce our interest expense, as well.

Thank you.

Our next question is from John Inch with Merrill Lynch.

Your line is now open.

Good morning, everyone.

Naren or Ed or Chris, did you take up the Broadview accretion expectation?

I know you had said $0.07 in the first fiscal year.

How does that dovetail with a couple quarters or quarter and a half of ownership in fiscal '10 versus fiscal '11?

And are we still on track for -- if you parse this altogether what does this imply for fiscal '12, second year of ownership, et cetera?

John, I think it's consistent with what we talked about when we announced the deal.

The only difference is we talked about first 12 months and second 12 months and now we're just calendarizing it around our fiscal year.

So no change at all.

So the $0.10, Naren, if you go back to the way you had originally laid this out, first 12 months, second 12 months, how does that roll through to fiscal '12?

Is that like a $0.15 accretion number or is it a little bit higher?

I would say it's in that range.

When we talked originally we said $0.07 for the first 12 months and $0.14 for the second 12 months.

So I think you're in the range.

Okay.

What exactly were purchase accounting charges -- not restructuring charges but purchase accounting charges -- for Broadview in the quarter?

And then I'm just trying to understand, is your guidance going forward going to be including Broadview restructuring charges as part of the integration or are you excluding those?

It's not really clear.

Let me take that, John.

First, in 2010 in the guidance we have provided, the restructuring and acquisition costs related to the transaction we have excluded from the guidance.

The impact of the purchase accounting, which includes adjustments to the deferred revenue base as well as the subscriber asset base which needs to be amortize, those are operating costs that we have included in our guidance for the year.

So there are a lot of adjustments that happen and some pretty complicated purchase accounting adjustments which generated this $8 million loss for the quarter.

Again, that's for a six week time period.

But the normal operating margin that we saw as a standalone were essentially the margins that we achieved in the quarter.

So no real change there.

It's just the noise from the purchase accounting.

I hope that clarifies it.

Chris, from the $0.72 operations versus the $0.50 gap, how much of that was Broadview associated charges?

There were $37 million of what I'll call one time restructuring charges and acquisition costs.

That was going from the $0.72 down to the $0.50, but then included in the $0.72 is an $8 million loss from Broadview which is the result of having to write off things like the deferred revenue balance and writing off some of the subscriber base, and additional amortization.

I think that makes sense.

Just curious on the temp spin, perhaps this is a question for Ed, have your thoughts toward prospectively selling this business changed?

I'm just trying to think out loud as clearly I'm assuming people have perhaps expressed an interest in the business since you announced the spin.

What are your thoughts toward a spin versus a sale at this point?

John, we are still down the road of clearly going toward the spin.

We've heard some rumblings out there that there might be some interest in the business but nothing definitive.

My gut is we will know that answer over the next 60 to 75 days.

And if we did get an offer clearly we will assess that and see what the best avenue is for our shareholders.

But my thinking at this point clearly is we are headed down the spin route.

John, I want to also add, we've obviously talked about this business since the separation and with the dramatic impact that the economy has had on that business and their competitors, the strategic, what you would think of as strategic buyers, are in very poor financial position.

Actually our business is in much better shape than many others.

So that also impacts that decision.

Makes sense.

Thank you very much.

Our next question is from Nigel Coe with Deutsche Bank Your line is now open.

Thanks, good morning.

Obviously there is quite a bit of a gap between Broadview's ARPU and your residential legacy ADT, residential ARPU.

Can you just maybe talk about some of the strategies that you have to maybe improve the Broadview ARPU toward your legacy.

Just to clarify, Nigel.

When you look at our residential business against Broadview's business, the gap is not that significant.

When you look at our total ARPU it gets distorted a little bit because of the commercial side of our business.

That said, there is a small gap between the two and it's really driven more by the content of what they were selling.

They had a very simplified package they were offering.

And as we looked to add more sensors, more devices there, there is an opportunity to take up the ARPU over time.

And, again, as we bring the sales force together and standardize the product offerings for that combined sales force, there should be a little bit of a pick up there.

And then can you just maybe quantify what the impact of Broadview with the purchase accounting charges, what the impact was on ADT margins during the quarter?

And maybe then secondly on top of that, your expectation for the contribution in 4Q within your guidance.

Nigel if you look at ADT and you adjust, because we also had, remember, the pension benefit in the quarter of about $12 million and you also adjust for the impact of Broadview, if you do an apples to apples to ADT how we have previously reported, the margin was about 15.3%.

But that includes Broadview?

No, when you exclude Broadview.

If you exclude Broadview OI was around $271 million and the OI margin was 15.3%.

And the contribution in 4Q from Broadview, within the EBIT number?

Overall we gave a total revenue number and a total OI number.

And as Naren and Chris had mentioned before, as we move forward it becomes more and more difficult to completely separate Broadview from the total as, again.

everything will be completely integrated as we move into the fourth quarter.

It will be positive.

What happens, again, I'll try to explain this, the revenue impact, we lose about $10 million a quarter because of the deferred revenue which is written off and we have $13 million to $14 million of additional amortization each quarter.

But again, once we get into this quarter, all the revenue is combined.

So that's why we're just going to give the overall perspective of ADT.

And, Nigel, one other thing I would add is, as we said before, is the transaction in total was a little bit dilutive to our earnings in this quarter and it's a little bit accretive next quarter.

So for the full year we're neutral.

And then as you move towards (inaudible) Pulse in the next 12 months, is that going to be a material drag to ADT margins?

I wouldn't expect it to be a drag.

Okay.

And then just finally on the European EMEA margins for ADT, I think you called out a 3 point impact from the pension.

Correct.

It was 12.1 including that pension benefit.

If you back that out it was a 9.1 for the quarter.

And I think you mentioned there's a 2 point benefit from the France disposal.

Little less than that.

Year-over-year France contributed about 140 basis points to the margin improvement.

So on a comparable basis we're in the high 7s on EMEA margins?

Comparison to last year with France, yes.

That's good.

Thanks, guys.

Our next question is from Steve Winoker with Sanford Bernstein.

Your line is now open.

Good morning.

Just first question on the waterworks European disposal divestiture.

You mentioned it's been at high single digits today.

What were the margins at peak?

I'm just trying to work through the multiples if you go back in time?

About high single digits.

As I pointed out, that's why I went through it, it's more couplings, fittings, products like that.

It's not our highly engineered-type products, Steve.

Strategically that was one of the reasons.

It's a nice business for someone else to own.

But for us strategically it's more on the lower end of what we were doing and didn't play to our global platform strategy.

That's about what it was.

It's running right now about as well as it was.

20 times EBITDA.

You're saying the margins are pretty consistent despite the volume changes over time.

Yes.

And then just broadly speaking, how do you think about your overall Tyco European business strategy developing?

What does Tyco look like in Europe as you work your way through all these divestitures now?

As Chris mentioned, our restructuring, Steve, will go down because we now look like we will be able to sell some, what I'll call, smaller non-strategic operations.

And just a ballpark we are talking now, we're down to maybe $100 million to $120 million of revenue with very marginal bottom line performance.

So that's the ballpark of what we are talking.

And that's both a little bit on the Fire side and a little bit on the Security side then we will be pretty much done with, I would say, that program.

Steve, what I feel good about is we're getting much better discipline around our lead process, what we are going after, what we are not going after, the verticals we want, the verticals we don't want.

So we are, as Chris mentioned, we are purposely, more on the Fire than ADT side, but both sides of the business, we're purposely reducing our organic revenue growth a little bit on purpose because we aren't going after some verticals.

And we are clearly seeing the benefit of that in the bottom line margin performance of the business.

As Naren said, if I look at it, with the divestitures we've done, with the restructuring and the selectivity of bidding, we've got the margins this quarter at 9.1% on a true run rate basis on the ADT side.

And you can see very nice margin improvement occurring on the international fire side which is really for the same reasons.

In the next, I'd say, two quarters or so I would say we are clicking about where we want to be with the portfolio and it won't change from there.

And Chris, maybe you could talk about in a little more detail on that $52 million legal reserve.

You mentioned liabilities and just maybe give us a little more color there.

Sure, Steve.

As we do every year, we perform our annual analysis of asbestos related liabilities and the related insurance assets that we have which we did this quarter.

And we do that.

We base it on our claims experience that goes back over the last five years and then we look out over the next seven.

So as we completed that analysis this quarter, we decided we should increase that reserve by the $52 million.

And again that charge is included in corporate expense.

Again this is more of a one time catch-up.

Have you seen a material change on the asbestos side that is driving some of that?

Not a material change right now going forward.

Obviously there are a lot of variables that go in that in terms of claims which go up in certain periods and go down in other periods.

So we may face a $10 million head wind going in on our annual expense.

Not on the $52 million.

That's what we see right now.

Okay.

And on the non-GAAP tax rate, the 6% number, is that mostly a result on the acquisition side?

Or is there something else going on there?

There's some other tax planning activities that we had planned on completing this year but, again, it's difficult to pin the exact timing.

So it was included in our guidance, it actually came out a little bit better than our guidance.

But it was that, the full impact of that, plus the Broadview acquisition that drove it down.

So, again, I think as you look at our results quarter to quarter, the way to really look at each quarter is just use the annual tax rate of 15% to 16%.

Okay.

And then just a last question on capital allocation.

You have been talking about an acquisition on the order of a few hundred million dollars around that previously.

Are you still thinking about that or do you want to give us a sense for that given your comments on share repurchases, et cetera?

Yes, Steve.

We haven't changed our thinking.

We are looking at some acquisition stuff that could be up to $500 million, and one we are looking at that who knows if we will get over the finish line, will be a couple hundred million, so it's that type range.

Right down the middle of the plate in either Fire, Flow or Security.

But even with that one, we model out our capital plan going forward, we are in a nice position to still have excess cash.

We're funding all of our internal capital.

We're funding all our growth initiatives.

So we have been comfortable.

You can see from what we previously guided to last quarter we did significantly more share repurchase during the quarter.

If we do the $325 million more here in the fourth quarter, we will have done $900 million in about 4 5 months.

And acquisitions of the size you are talking about, you would not be talking about additional share issuance, right, in those deals?

Most likely not.

Okay.

Great.

Thanks.

Our next question is from Steve Tusa with JPMorgan.

Your line is open.

Good morning.

Just starting on Flow, the orders are up 4% but you talked about them being double digit in April and May.

Is there a tougher compare in June or what happened in June, because then you said July has actually remained pretty good?

Steve, look, it's a very lumpy business.

We actually thought a couple big orders would hit in June that did not, but we ended up pretty flat in June so the aggregate for the -- you are correct, we were up higher in April and May, down flat in June, and therefore we ended up at 4.3% for the quarter.

I did feel pretty good that we had about the same results here in July which we just preliminarily rolled up yesterday.

That feels good.

What I have been watching because it is lumpy and one or two big orders can really sway, I'm looking at the lead flow that our sales team is working on, and it feels very robust right now.

And there is a couple big, what I call elephant deals, that I don't know when they will book but I have a high confidence that we will get a couple of these.

Again, the flow of it feels good coming in with the sales team.

And not to talk about competition per se but I have noticed a few other flow control companies also saying that their sales activity this quarter just feels pretty robust and they are feeling good.

I'm not declaring victory that we have turned a corner.

But it's two quarters in a row now of organic growth.

If you go back, fiscal '09 this business, orders were down over 20%, as was the competitors that report.

In the first quarter we improved that to down 13% and now the second and third quarter and July now positive with good lead generation.

So I think it bodes well for the second half of next fiscal year.

So turning to next year, you talked about the first half, second half being better.

Do you grow next year?

Or is it like the first half is down as much as the second half is up?

No, we will grow next year.

And then as far as fire protection is concerned, I kind of understand the sequential dynamics there.

But looking back at last year's fourth quarter, very strong almost $100 million in OP.

I know last year you talked about positive seasonality there in the services business.

You're talking about a much lower number in the fourth quarter of this year.

What's going on there?

Was there something unusually strong about last year?

Steve, again, our Fire business, similar, actually, to our Flow business, is a much later cycle business.

What we saw at the end of last year was the work off of the backlog during that period.

And then the order intake started to decline.

It was really that impact that we saw, similar to what we saw in Flow.

That makes a lot of sense.

And then lastly you talked about corporate expense being down in '11 from '10.

That excludes the charge, correct?

Yes.

Thanks a lot.

Our next question is from Bob Cornell with Barclays Capital.

Your line is now open.

Another question on Broadview, a couple questions.

What were the operating contributions in the quarter, sales and profit margin?

On a GAAP basis Bob?

What were the sales?

It looks like the margins were pretty high when you take out the one-time items you just defined.

Maybe just give us explicitly.

It looks like the margins were north of 20% ex the items.

Just wanted to go back at that.

Generally speaking, again taking out the deferred revenue piece, apples to apples to the way they reported in the past, they were in the $60 million to $65 million of revenue and in the low $20 million from an operating profit perspective.

Right.

Now, how would the $10 million and the $13 million in one-time charges evolve in the fourth quarter and into next year?

Again, those were not necessarily one-time charges.

They were the impact of purchase accounting.

But again as I indicated, we have about $10 million a quarter in revenue that Broadview would have recorded because they would have had the deferred revenue on their books which we do not, and then the increased amortization.

So I guess it's about $65 million on an annual basis that goes evenly by quarter.

But that's in all of our numbers that we have given you.

So when we gave you the fourth quarter guidance those charges are in there.

And also in the accretion numbers that Naren spoke to.

That was my next question.

That's why the cash accretion is so much bigger when you look at this economically.

The cash accretion is so much bigger than the accounting because of the increased amortization.

Got that.

Is it possible on this call to give us an updated walk to the $0.10 of accretion revenues, profits and the various charges, how to get to the $0.10 even though I understand you are integrating the business?

Or how do you get the $0.10.

I can't run through all of the numbers with you right now.

But again, if you look at the annualized revenue that Broadview had, less some of the deferred revenue charges, add that to $65 million, add back the shares and take out then the tax impact, which is about 2% on our overall tax rate, you do all that math and it comes out to about $0.10 on a first year basis.

Bob, for us, the synergies, I don't think are going to that hard to track.

We have a very detailed schedule because we didn't count on revenue synergies per se in the deal, as you know.

We didn't count on ARPU going up, with some of these questions we're getting.

It's all cost actions and tax.

The two full percentage points on the type of tax line is $50 million and the other part of it is all cost actions that we are tracking against -- head count moves, consolidation of facilities -- that we can actually count the hard dollars on the cost side against.

Okay, we'll be watching for that.

Again, none of these have changed since all the numbers that we gave at the time of the acquisition.

So we are spot on track with the synergies and with all of the accounting and tax assumptions.

Okay, thanks.

Operator, we have time for one more question.

Thank you.

Our final question today is from Gautam Khanna with Cowen and Company.

Your line is now open.

Thank you.

You mentioned the strong orders that flow in July and the pipeline being still pretty strong.

Just as a follow-up, are these opportunities likely to convert to sales in the same time as is typical or you seeing lead times stretch or are you just generally seeing any backlog stretch at Flow or at Fire?

No, we are not.

Again, the conversion time on Flow is six to nine months.

And, by the way, when we are looking at backlog we are talking about 12 month backlog, by the way, when you hear it in our numbers when we talk about it.

I don't know, there is nothing stretching out at this point in time there.

And that would be true on the Fire side.

And the only caveat I would give you, I've heard some other companies worrying about this, is from a production standpoint on some of our panels and all we have had some shortages on components that we are really scrambling around on.

But at the end of the day it didn't impact us that significantly.

That would be my only point about lead times pushing out, component suppliers are tight and we're really managing that closely.

Okay.

Just one last follow-up.

In the past I think you've mentioned some pricing pressure on the sprinkler side of the Fire business.

Now that orders at least appear to be showing some life, are you seeing any firming of those prices?

Not on the sprinkler side.

We continued this quarter to see softness there.

Let me clarify, though, where we make the majority of our money in Fire, which is the service side, and our fire panel electronic business we have not seen margin deterioration.

The margins on the sprinkler business, which in all of Tyco is the one place we did see it and that's not improved yet.

Got it.

Thank you.

Operator, that concludes our call.

Thank you.

This does conclude today's conference.

Thank you for participating.

You may disconnect at this time.