江森自控 (JCI) 2010 Q4 法說會逐字稿

Welcome to the Tyco fourth quarter earnings conference call.

(Operator Instructions) This call is being recorded.

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

You may begin.

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

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

Let me remind you that during the course of the call, we will be providing certain forward-looking information.

We ask you to look at today's press release and read through the forward-looking cautionary informational statements that we've included there.

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 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.

When we refer to changes in average revenue per user, backlog, and order activity, these changes are excluding the impact of foreign currency.

Additionally, references to our operating margins during the call are excluding special items, which is a non-GAAP measure.

Again, these non-GAAP measures are reconciled in the schedules attached to our press release.

Now, let me quickly recap this quarter's results.

Revenue in the quarter of $4.5 billion was up 4% year-over-year, with organic revenue growth of 2%.

Earnings per share from continuing operations, attributable to Tyco common shareholders was $0.55 per share, and included $0.19 of special items, primarily related to restructuring activities.

Earnings per share from continuing operations before special items was $0.74, compared to our guidance of $0.62 to $0.64, driven by approximately $0.03 per share of better operating results, and $0.08 per share due to a better-than-expected tax rate.

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

Thanks, Antonella.

And good morning, everyone.

Overall, 2010 was a good year for Tyco.

Not only am I pleased with our operating performance in yet another challenging year, but more importantly, I am pleased with how we have continued to position our businesses for future growth.

Before we get into our results for the quarter, I want to spend a few minutes reviewing the progress we made in 2010, in the key areas of cost management, growth investments, portfolio refinement, and our focus on cash.

First, our cost management remained a top priority.

Throughout the year, we were very active in identifying and executing cost containment initiatives and restructuring programs.

These actions helped offset the impact of the organic revenue decline we expected in 2010, and contributed to the 100 basis point improvement in our operating margin, year-over-year.

Second, we continue to invest in our businesses to strengthen our long-term competitive capabilities for both products and services.

For example, the acquisition of Broadview Security increased our recurring revenue base.

Broadview's solid and North American footprint brings additional capability and capacity to generate new high-quality accounts, as well as additional install and service expertise.

Our capital spending grew modestly year-over-year, as it has each year through the downturn.

A high percentage of our capital goes towards growth in our large service revenue base, which continued to grow nicely in 2010, and represented about 40% of our revenue.

From a technology and innovation standpoint, we increased our engineering head count in our R&D centers around the world by almost 20% during the year.

Let me touch on a few of our service and product introductions this year.

In our ADT North America business, we recently rolled out ADT Plus, our new interactive home security platform, and we are supporting the launch with a highly visible advertising campaign.

In our Fire business, we are rolling out our remote diagnostic service, which allows us to remotely monitor our customers fire alarm network.

This technology enables us to diagnose problems without a truck roll, reduces system downtime, and improves our first-time fix rate.

And, our Security Products business recently released a new video management platform, which allows users to seamlessly integrate analog and IP cameras into a single solution.

Additionally, we continue to focus our efforts in emerging markets.

During the year, we acquired two Brazilian valve manufacturers, which expanded and compliment our Flow Control product offerings and leadership position in South America.

Additionally, we have developed several localized products.

For example, our Sensormatic business has recently introduced the Essentials solution set, which is a lower cost, anti-theft solution, with features suitable for the emerging markets.

Third, we have completed the last major portion of our portfolio refinement with the sale of the majority interest in our Electrical and Metal Products business.

Earlier in the year, we took a meaningful step in repositioning ADT in Europe by divesting our business in France and more recently, we have exited some smaller non-strategic markets.

Last quarter, we announced the sale of Flow Control European Waterworks business, which we recently completed.

Over the last few years, we have significantly refined our portfolio around our three core platforms of Security, Fire, and Flow Control, and we have now reached a point where the heavy lifting is behind us.

Lastly, we continue to generate solid cash flow.

During the year, we used our cash to invest in our businesses, make selective acquisitions, and return excess cash to shareholders.

We completed our $1 billion share repurchase program, increased our annual dividend, and announced a new $1 billion share repurchase program.

Our revenue picture has continued to brighten over the last few quarters.

Our organic revenue has improved each quarter throughout 2010, and in the fourth quarter, we reported organic revenue growth of 2%, with improvement in all business segments.

More importantly, order activity has continued to improve on a year-over-year basis, each quarter throughout the year.

For the quarter, our operating margin improved 120 basis points, year-over-year, and we expect that it will continue to improve in each business segment in 2011.

Now, let me give you a quick overview of our results for the quarter, for each of the businesses, and then Chris will provide you with more details in a few minutes.

Starting with ADT, our recurring revenue continues to perform well, with improvement in all key metrics, account growth, ARPU, and the disconnect rate, all of which translated into organic recurring revenue growth of 5% in the quarter.

Systems Installation and Service revenue stabilized last quarter, after six consecutive quarters of organic revenue decline, and grew 1% in the fourth quarter, driven by the Asia, Pacific, and Latin America regions.

Additionally, we continued to make margin progress in our ADT EMEA region, which exited the quarter with an operating margin of 9.8%, reflecting the benefits of our restructuring actions and portfolio refinement.

On a global basis, ADT's operating margin improved both sequentially and year-over-year, driven by improved operational performance in our Systems Installation and Service revenue, growth in our higher margin recurring revenue business, which is partly attributable to the Broadview acquisition, and the continued benefit of restructuring and cost reduction activities.

Turning to Flow Control, our revenue was in-line with our forecast.

However, our fourth quarter operating earnings were impacted by a charge related to a project , that we retained as part of the 2008 divestiture of our Earth Tech business.

Absent this, our operating margin was better than expected.

Year-over-year, growth in our Flow Control orders continued in the fourth quarter.

Orders were up in all three platforms of valves, water, and thermal, and our customer activity continues to be strong.

Moving to Fire, the turnaround in order activity we saw last quarter has continued.

The summer seasonality of our service work, as well as the benefits from restructuring and cost containment resulted in better-than-expected operating income in the quarter.

And finally, Safety products saw strong order activity in the fourth quarter, resulting in better-than-expected organic revenue growth.

More importantly, we accelerated our investments in R&D and sales and marketing, to better position the business for future growth.

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

Thanks, Ed.

And good morning, everyone.

Let me start with ADT Worldwide.

Revenue of $1.95 billion grew 8% in the quarter with organic revenue growth of 3%.

Recurring revenue, which represents more than half ADT's total revenue, continued to perform nicely, growing 5% organically in the quarter, driven by continued strong growth in North America.

Additionally, ADT Systems Installation and Service revenue grew 1% organically in the quarter.

Strong organic growth in the rest of the world more than offset the modest decline in North America and EMEA.

From a proper perspective, operating income before special items in the quarter was $306 million, and the operating margin was 15.7%.

The operating margin improved 150 basis points, year-over-year, while we continued to increase our investment in sales and marketing.

From a regional perspective, within ADT, nearly 90% of our North America residential and small business unit is recurring revenue, which grew approximately 35%, or 7% organically, in the quarter.

The operating margin remains strong year-over-year, while we continued to invest in our sales force expansion.

Additionally, our key metrics continued their positive momentum.

Year-over-year, average revenue per user grew 1%, and our account base grew 2%, excluding the accounts we acquired as part of the Broadview acquisition.

Our residential attrition rate improved 40 basis points year-over-year, and 10 basis points on a quarter sequential basis to 13%.

Turning to our North America Commercial business, the mix of revenue is very different -- 60% is Systems Installation and Service revenue, while 40% is recurring revenue.

The organic revenue decline moderated to 1% in the quarter, and we saw a nice turn in Commercial order activity, which was up 10% year-over-year.

The operating margin improved 50 basis points year-over-year, as the benefits of restructuring and cost containment activities more than offset the revenue decline.

The attrition rate remains in the low 13% range, which is a nice improvement from the 13.8% attrition rate in the fourth quarter of 2009.

Next, in EMEA, the organic revenue decline continued to moderate, declining 1% in the quarter, which is an improvement from the mid-single digits we saw earlier in the year.

The operating margin improved 260 basis points year-over-year, to 9.8%, as we have made significant strides in restructuring the region.

And finally, in the Asia, Pacific, and Latin America regions, where revenue is predominantly Commercial, we saw solid organic revenue growth of 11% in the quarter.

The operating margin is in the low teens, and reflects a 140 basis points improvement year-over-year.

Emerging markets performed well during the quarter, running double digits organically, as we continue to focus on expanding our presence.

Turning to our key metrics for ADT Worldwide, our global account base now stands at 8.9 million accounts, which is a 21% increase over 2009, and a 3% increase when adjusting for the accounts acquired in the Broadview acquisition.

Average revenue per user for our Heritage ADT account base grew 1.5% year-over-year on a global basis.

As the mix in our account base has shifted more to residential, with the Broadview acquisition, our global average revenue per user of $44.60, declined 3%.

Our worldwide attrition rate held steady at 12.8%, on a sequential basis.

Before I move on to Flow Control, let me quickly touch on the Broadview integration.

We have completed two major milestones in the Broadview integration since our last earnings call.

First, our customer day one, which included the conversion from Broadview Brinks, to a single ADT brand in the marketplace was very successful.

While advertisement and marketing materials have been fully converted to the ADT brand name.

Secondly, we have integrated our financial reporting and human resource systems.

Overall, the Broadview integration is progressing as planned, and we are on track to continue to deliver on our synergy and earnings accretion targets.

Turning now to Flow Control, revenue of $868 million in the quarter declined 5% organically, which was in line with our guidance.

Solid organic revenue growth in Water of 9%, and Thermal Controls of 8% was more than offset by a 12% decline in Valves.

We expect the organic revenue decline in Valves to continue to moderate, based on increased Valve order activity, over the last few quarters.

Operating income before special items was $111 million, and the operating margin was 12.8%.

Included in the operating income, is a $9 million charge related to a project we retained as a part of the Earth Tech divestiture in 2008, which adversely impacted the operating margin by 100 basis points.

The operating margin continues to be impacted by volume deleveraging, which was partially offset by the restructuring activities and cost containment actions.

These changes in our cost structure will enhance our operating margin performance as volume continues to improve.

We continue to be encouraged by our order activity, which has improved on a year-over-year basis for the last three quarters.

As you may recall, during the fourth quarter of fiscal 2009, we received a large order for an Australian desalinization project.

Excluding the impact of this project, order rates in the quarter increased 5%, year-over-year.

To date, we have completed 75% of that project, and expect to recognize the remaining revenue during the first quarter of fiscal 2011.

As we completed several large Pacific Water projects, including shipments related to the desalinization project during the quarter, backlog of $1.5 billion declined 5% on a quarter sequential basis.

Turning to Fire Protection services, revenue in the quarter was $893 million in organic revenue, declined 1%.

Service revenue, which represented more than 50% of total revenue, grew 4% organically in the quarter, and was more than offset by continued weakness in Systems Installation, which declined 6% in the quarter.

However, the pace of the decline in Systems Installation has slowed considerably, from the double-digit decline we have seen in previous quarters, even as we continue to be very selective in our project work.

Operating income before special items was $91 million in the quarter, and operating margin was 10.2%.

Growth in Service revenue, along with continued benefits from restructuring and cost containment activity, as well as the selectivity of project work contributed to this operating margin performance.

Order activity and Fire continued to be encouraging, with a 4% year-over-year increase in the quarter.

Typically, Fire is operationally stronger in the summer months, especially in the education end market, as a significant amount of electronic upgrade work is performed while schools are closed.

As expected, backlog of $1.2 billion declined 4% on a quarter sequential basis.

Moving on to Safety Products, revenue grew 9% in the quarter, to $406 million, with organic revenue growth of 13%.

The organic revenue growth was driven by solid performance across all three platforms.

Electronic security grew 24%.

Life Safety grew 18%, and Fire Suppression grew 6%.

Before special items, operating income increased 17% to $63 million, and the operating margin improved 100 basis points, to 15.5% year-over-year, even as we accelerated certain sales, marketing, and R&D investments in the quarter.

Strong organic revenue growth, benefits from restructuring activity and improved productivity, contributed to the operating margin improvement during the quarter.

On a full-year basis, we increased our investment in R&D, sales and marketing, by 6% in Safety Product, and we will continue to drive innovation, especially as we build out our presence in the emerging markets.

As we announced early this morning, we have agreed to sell 51% of our Electrical and Metal Products business to CD&R.

Total cash in the transaction to Tyco is approximately $720 million, with minimal tax leakage.

We came to the conclusion that a sale of a majority stake in Electrical and Metal Products would be in the best interest of our shareholders, based on several key factors.

First, it provides our shareholders with an attractive value for the 51% ownership stake, $720 million in cash, and a retained interest of 49%.

We will use the proceeds to accelerate our previously announced $1 billion share buyback program.

And we will also allow our shareholders to benefit from an eventual divestiture of our remaining stake as the markets in electrical metal products strengthen in the future.

And it increases our focus on our core security buyer and Flow Control business platforms, and will increase our service revenue to about 45% of our total revenue next year.

It also reduces volatility in our operating results, and lastly, the Electrical and Metal Products business will be able to pursue its own strategy as a separate company led by its own management team.

So let me quickly summarize the estimated earnings impact of the transaction.

We will continue to consolidate the results of Electrical and Metal Products until closing, which we will expect to happen in the December-to-January time frame.

Post-closing, we will report the earnings from our remaining ownership under the equity method, meaning a single after-tax number in our P&L, within income from continuing operations.

As you know, the results of this business are difficult to predict.

On a full-year basis, we have assumed a 10% increase in operating earnings in 2011, to $125 million.

For purposes of our guidance, we expect Electrical and Metal Products to contribute approximately $360 million of revenue, and $20 million of operating earnings before special items, in the first quarter.

For the remainder of 2011, we expect our equity interest post-closing will result in an expected loss of approximately $15 million, due primarily to noncash acquisition accounting adjustments, such as the write-up of inventory, as well as interest charges.

The $720 million of cash from the transaction will be used to buy back shares in our second and third quarters.

We estimate the total earnings per share we will report from operations of Electrical and Metal Products, and a lower share count, will add approximately $0.07 per share to our base Tyco EPS in 2011, and $0.12 per share on an annualized basis.

In addition, we expect to report an after-tax gain of approximately $200 million on the transaction.

Again, we expect there will be minimal taxes on the transaction.

Let me touch on a few other important items.

First, corporate expense before special items was $110 million in the fourth quarter, bringing our full-year corporate expense to $444 million.

As we look ahead to 2011, we expect corporate expense for the full year to be in the range of $400 million to $420 million, with about $100 million of expense in the first quarter.

Turning to interest expense, we had $56 million of net interest expense in the quarter.

As this reflects a full quarter's benefit of the debt refinancing we completed in the third quarter, this is a good quarterly run rate for fiscal 2011's net interest expense.

Next, our effective tax rate for the quarter was 13.6%, well below the rate we guided to last quarter.

The reduced rate was a result of a number of positive nonrecurring tax items, which were recorded in the quarter.

For 2011, we are expecting our tax rate to be in the range of 18% to 19%, an increase from this year's 13% level.

Anticipated increases in earnings and high tax jurisdictions, as well as nonrecurring tax benefits reported in 2010, will drive the increase in the rate next year.

As you have seen in the past, you should expect some volatility in this rate, quarter-to-quarter, due to the timing of recognizing certain tax matters.

We exited the year with a diluted share count of 493 million shares.

Based on our $1 billion share repurchase program, we expect an average share count of approximately 480 million shares in fiscal 2011.

Let me quickly now touch on restructuring.

As Ed mentioned, we were active in executing numerous restructuring actions to reduce our cost base in 2010.

And we also incurred charges in connection with the acquisition of Broadview Security.

We ended 2010 with total restructuring and acquisition charges of approximately $180 million, and a net gain on divestitures of about $40 million.

For 2011, we expect to incur restructuring and acquisition charges of approximately $150 million, related to the Broadview acquisition and other restructuring actions.

As I mentioned previously, we would expect to report a gain on the divestiture of Electrical and Metal Products of approximately $200 million.

We will continue to exclude both the charges and the gain from our guidance in 2011, in order to provide a more meaningful analysis of our quarterly results.

We will, however, continue to provide you all of the details of our special items, on a segment-by-segment basis.

Before I turn the call back over to Ed, I want to call your attention to the realignment of our segments, which will begin in the first fiscal quarter of 2011.

We have created an integrated Global Fire segment, consolidating the Fire Suppression and Life Safety platforms of our current Safety Product segment, into our Fire Protection segment, which will be led by George Oliver.

Additionally, the Electronic Security products platform, within our current Safety Products segment, will be integrated into our ADT business, which will continue to be led by Naren Gursahaney.

So when we report our first quarter result, we will have three core segments of Security, Fire, and Flow Control.

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

Thanks, Chris.

Let's turn now to our earnings guidance starting with some thoughts on the fiscal first quarter.

We expect to see growth in our ADT business, both on the top line and in our operating margin, driven by continued growth in our higher margin recurring revenue base, as well as the acquisition of Broadview Security.

We expect ADT's revenue to approximate $2 billion, with more than 100 basis points improvement, year-over-year, in the operating margin to approximately 15.5%.

Turning to Fire, we expect revenue of approximately $1.1 billion, with an operating margin of approximately 10%.

In our Flow Control business, we have seen improved order activity and we expect Flow to be a contributor to our growth in earnings in fiscal 2011, mostly in the second half of the year.

Although we will have a tough revenue compare in the Water business in 2011, due to the large Australian project we recognized in 2010, we expect improvement in the Valves business, and continued growth in Thermal, to offset this decline on a full-year basis.

For the first quarter of fiscal '11, we expect Flow Control's revenue to approximate $825 million, with an operating margin of 13%.

Again, we expect Flow's revenue and earnings to increase in the second half of the year, as we have seen improvement in our order activity in recent months.

And just to be clear, the business-specific guidance that I provided is based on our new reporting structure that Chris just discussed.

Overall, we expect revenue in the first quarter to approximate $4.3 billion, including the $360 million revenue contribution from Electrical and Metal.

We expect operating income before special items in the range of $450 million to $460 million, including the $20 million operating income contribution from Electrical and Metal.

Based on these items, and the specific guidance Chris provided for corporate expense, and below-the-line items, we expect earnings per share from continuing operations, before special items, in the first quarter to be in the range of $0.65 to $0.67, based on a weighted average share count of just over 490 million.

Now, let's shift our guidance to the full year.

We expect full-year revenue of $16.6 billion to $16.8 billion, including the $370 million revenue contribution from Electrical and Metals, that we expect in the first quarter.

As we have continued to restructure and refine our portfolio, we expect to see continued operating margin improvement in 2011.

We expect our operating margin to increase 120 to 150 basis points, in 2011, to the range of 11.5%, to 11.8%.

Included in our full-year guidance, is $20 million of operating income related to Electrical and <Metal, in the first quarter, and a $15 million loss, related to our equity interest for the remainder of the year.

As a result, we expect our earnings per share from continuing operations, before special items, for the full year, to be in the range of $2.85 to $2.95.

As Chris mentioned, our earnings guidance excluding acquisition and restructuring charges, as well as the net benefit from divestiture activity.

Before I open up the lines for question, I would like to acknowledge Chris Coughlin, who is retiring after five years as our CFO.

It has been my pleasure to have worked alongside Chris, and I want to thank you for your significant contributions to Tyco.

You've had a long and successful career and I know you are looking forward to enjoying more time with your family, and certainly on the golf course, in your retirement.

I know I speak on behalf of everyone at Tyco in wishing you the best in the years ahead.

Thanks for joining us on the call, and Operator, if you could open it up for any questions.

Thank you.

We will now begin the question-and-answer session.

(Operator Instructions) And one moment, please.

The first question comes from Scott Davis with Morgan Stanley.

You may ask your question.

Thank you.

Good morning.

Good morning, Scott.

I don't want to harp on guidance because I know historically you guys have been fairly conservative, but maybe you can give us a little bit of a background on what kind of a macro environment you are expecting, and what kind of global improvement sequentially in your new three businesses?

And I guess my comment to add to the question is that, if you did $2.70 this year, guiding to $2.85 to $2.95, that would imply 6% to 9% EPS growth, with probably a 3% lower share count.

You know, that's not giving yourselves much credit for operating improvements.

Scott, remember that the base number that you just quoted, $2.68, was included temp for the full year.

That's fair, so --

-- the $0.19 per share of earnings, so I think to look at it on a comparable basis, you have to take that $0.19 out of the base year, and therefore we're looking at pretty significant growth year-over-year.

And additionally, we had the tax head wind of about $0.20 per share.

So operationally, I think we're going to be up, and Ed, you can comment on the macro environment.

Scott, maybe just to give you a couple of numbers.

And I will use the consensus from all of analysts, so I don't know if this is your specific number, but to Chris's point, I think guidance for next year is at $3.10, with temp in the number.

If you use the numbers that, again, all of the analysts had in aggregate, you would take $0.26 out of the number, which would put you at $2.84.

And as we just mentioned, temp for the full year, with the $20 million profit in the first quarter, $15 million (inaudible) rest of the year is basically just neutral.

So that, if you just do that, it would take the adjusted guidance, if I just used that to $2.84, just to put some numbers around what Chris said, and we just guided to $2.85 to $2.95.

So, that is a big piece of it there.

If you look at the macro picture, we're counting on -- and this will go a little bit to our earnings momentum that we think we have next year.

We're counting on total revenue growth in the 4% to 5% range.

Now, currency helps out a little bit, organic, we're forecasting a little bit lower, so our swing organically would be from minus, say 3%, that we had in fiscal 2010, to a plus approximately 2% to 3% in fiscal 2011.

So, that would be the revenue line.

And then to your question, on the operating income growth, if you just take Electrical and Metal out of this conversation, we will be growing our operating income somewhere in the mid-to-high teens, year-over-year, on that 4% to 5% revenue growth.

So I think we're going to get a good leverage through the P&L during the year.

Part of that will be the Broadview acquisition being in for a full year.

And a very big piece of that obviously will be our cost containment and restructuring actions continuing to kick in.

Scott, I would also remind you that in our Flow business, which is, later coming out of the cycle, that we would expect that we will still have some head wind moving in through the first half of the year, and then turn to growth in the second half of the year.

Okay.

So there is some timing issues there.

Yes.

Okay.

My follow-on just relates to this Earthtech loss.

It wasn't clear to me what that legacy loss is, and if -- and Chris, were you talking about having that fully ring-fenced in, that's a once and done liability?

Yes, this is a -- it is a one-time kind of a charge that we had.

There was an older tech project that we had to -- responsible to oversee and to complete.

There was some problems with one of the major contractors there.

We had to step in to complete that project.

So once that project is completed, it's a one and done.

Okay.

That's good.

I will pass it on.

Thank you.

Thanks, Scott.

Thanks, Scott.

Thank you, the next question comes from Nigel Coe with Deutsche Bank.

You may ask your question.

Yes, thanks, good morning.

So you've given a fairly narrow range for full-year guidance, a $0.10 range, but you haven't given -- I didn't get it, anyway -- any current, in terms of segment-by-segment guidance.

Is that because you're realigning the segments or because you prefer not to give guidance on that basis?

We've provided I think quite a bit of guidance for the first quarter.

And as you say, we don't yet have all of the analysis out to the -- into the public domain on the year-over-year within each business, as we have to restate the current 2010 and wait for our 10K to be issued.

I think in terms of the narrow guidance that we -- that you look at there, I mean one of the benefits of the portfolio restructuring that we've done is at a much larger portion of our business is now that recurring revenue base, quite predictable.

And so we're comfortable with a narrower range right now than we had provided in the past.

As we lose a lot of volatility that you would have had, for example, from the Electrical and Metal Products business.

Yes, as Chris mentioned, Nigel, the mix of business for fiscal '11, will be about 45% to 46% recurring and kind of repeatable business.

That's really the big piece, the addition of Broadview coming in, and the exiting of Electrical and Metal.

So it is $0.04 to $0.05 revenue growth -- and I would think that at least two points comes from currencies.

So --

One point from currency, about three points of organic.

We use our currency rates at the end of our fiscal year.

So currency is adding about one point to that revenue growth.

Okay.

So, three to four points.

But did you two points this quarter.

And I'm seeing Flow will be growing, I would assume five, it accelerates, obviously -- it will probably decelerate but it seems that 3% is a very conservative number.

Well, if you walk, Nigel -- and actually, I hope it is conservative, when we get through the year, but I mean if you look at it now, I think we've got a very good handle as we just mentioned around the recurring part of the business, kind of growing in the 4% to 5% range.

So ADT recurring is in the 4% to 5%, on a global basis.

North America would be higher, but when you lump it all together, and Fire in the quarter on a service rep base grew about 4%.

So I think those two, I think are pretty locked in, I would think, if the economy kind of stays where it's at.

So then if you look at the rest of the business, which is Flow, overall we're thinking the Flow is still soft in the first half of the year, with a lift in the second half of the year.

Because, we're seeing the order trends and the conversion is kind of nine months to get there, so you know, that keeps it down a little bit.

But again, second half of the year, better.

And then Systems Installation side on the Fire side is down still, although nothing like it was.

It's mid-single digits, negative, now.

It was double-digits, and we're being much more selective on some project work.

So you're still negative on the Systems Installation, although, again improving each quarter, and I think when you wrap all of that together, that's how we kind of got to a few percentage points of organic revenue growth.

And look, if the economy continues to improve, that will potentially be conservative but we're counting on an environment we're sitting in right now as we see it.

Okay.

And then just digging into Flow a little bit and then I will pass it on.

Emerson is guiding for double-digit growth and process management, and historically your Flow business has grown comparably to that segment.

If we take away the Water drag, the sort of pipe drag mix next year, as your Valve and Flow control business grown comparably to that.

It is, Nigel.

We look at it every quarter.

We look at not only the company you just mentioned but the other big company most of you compare us to.

And when you look at it, by the way their process management is not exactly our Valve business.

The part that relates to us, our business, grew almost identical in the quarter to what theirs grew, by the way both orders and revenue.

And the other company we always get compared to out there, when you look at the order growth in the quarter, order growth on the like-for-like business is very similar.

But Nigel, I would point out to you, again, I don't want to read too much into this, and we're not taking this fully into account, when you look at both of those other companies, a big part of their portfolio leads the Valve business, and those parts of their portfolios were up much more than the Valve part, which I think portends well for what could be coming here, which also ties to why we've been feeling so bullish about the customer activity we're seeing.

So I thought this was the first good quarter from some of our competitors, who have leading indicators by like six months, that yes, not only are we seeing an order increase during the last couple of quarters, but also it looks like more could be coming here, but we will have to wait and see on that.

I would point out, just as another tidbit, our orders in the month of October grew 6.2%, which is again a little bit of an improvement from the quarter we just ended, which was 5%.

So, the trend appears to be continuing.

Thanks a lot.

Thanks, Nigel.

Thank you.

The next question comes from John Inch with Bank of America Merrill Lynch.

You may ask your question.

Good morning.

It is (inaudible) on behalf of John.

Just wondering about your 18% to 19% tax guidance for next year.

I understand the quarter-to-quarter volatility, but just trying to understand how much variability there could ultimately be with respect to your 18% to 19% full-year guidance range.

Again, as we've seen, we've driven the tax rate down dramatically over the last few years and, as I mentioned, we had a couple of nonrecurring tax matters that brought that number down.

So again, we had the benefit of the Broadview acquisition, which will bring that rate and provide a benefit for us in 2011.

So, we think overall, again, as business grows, and the mix of business, and the growth that we've seen in North America, for example, a higher tax rate jurisdiction, we think that the 18% to 19% range looks reasonable.

We'll still look to other opportunities as we go forward, but that is our best estimate right now.

And it could move within a quarter, as we've seen before, it can move a couple of percent in any one quarter.

It can go up as high as 20% or 21%.

It could go down as low as 15%.

But we think the average will be 18% to 19% for the year.

Okay.

And then in your temp sale agreement, are there any stipulations around future transactions?

So for example, if CD&R decides to sell their 51% stake to a third party, or if CD&R wants to buy out your 49% stake within the next couple of years?

Yes, you know, again, they can certainly -- we have the ability to sell our stake if we think that the value is reasonable for our shareholders.

They can't force it upon us.

So, we have I think a good partner with CD&R and I think as we move down over the next couple of year, we would expect to divest that 49% at a good value to our shareholders, and be able to keep that value within Tyco, to be able to reinvest in our core platforms.

And you know, just to point out, [Alana], this business still, and pretty much any steel fab company right now, our volumes are down almost 50% from where they were from before the economy went.

We clearly expect improvement over the next few years.

So, putting steel spreads aside a second, just volume lift should bring this business back to a better valuation over time.

So sitting on the 49% ownership piece we have, we feel very good we are going to extract some good value out of it, and cash back into Tyco a few years down the road.

Right.

Okay.

And just lastly, what are you assuming for pension expense next year?

Pension expense, I think as you know, we have really closed down all of our pension plans to new participants, and are on defined contribution plans.

So, we expect no headwind at all on our pension expense in 2011.

And I estimate that on a cash basis, as we did this year, we would have to put in less than $100 million in cash, so pension will have a very minimal impact on us in 2011.

Great.

Thank you.

The next question comes from Jeff Sprague with Vertical Research Partners.

You may ask your question.

Thank you.

Good morning, everyone.

Good morning, Jeff.

I may have missed it, but just ballpark, can you give us what the split then would be on Safety.

Do I think of that $1.5 billion, how much is going into ADT and how much is going into Fire?

Yes.

For our total Safety external revenue was about $1.5 billion for the year.

The Electronics Security piece, which is a piece that is moving into ADT, is about $300 million of revenue for the year, and the remaining piece will all go into our Fire segment.

Which is Life Safety, and Fire Suppression, those two companies.

Okay.

And we will get out of all of that comparative information as soon as we can after we file.

And just thinking about in that context, there is not a lot going into ADT out of that chunk, but if I look at the Q1 sales base last year, I've got to adjust for France going out, Broadview coming in, a little bit of currency.

I mean it looks like the ADT guide organically is, I don't know, flat to down slightly in Q1.

Is that correct?

No, in Q1, we're expecting continued organic revenue growth, particularly on the recurring side.

Again, as you've indicated, we did have a number of divestitures.

We had France.

We've also divested in a number of smaller businesses, so I think as we look at -- we're looking at sort of modest revenue growth in the quarter.

And Jeff, just to jump in real quick, FX year-over-year, is really nothing in Q1, quarter-over-quarter.

And as you mentioned, you do have Broadview coming in but you also have France going out.

And Chris just mentioned, there is another $60 million or so of revenue that we recently divested that you won't have next year as well.

So there is organic growth built into the Q1 number.

Okay.

Great.

And is share repurchase on hold then until the temp transaction closes?

No, we will be able to, once we released the earnings and it is in the market for a couple of days, we would be able to start going into the market.

So, we will start to do some share repurchase as we expected, and obviously this transaction allows us to speed that up, get more done earlier in the year.

And then Ed, you hit your EMEA target, basically at 9.8%, obviously that is a quarter number, not an annual number, but can you annualize that number now in 2011?

Yes, Jeff, the fact that it is 9.8%, I did not want to declare that we hit 10%, so if you noticed I said 9.8%, but I'm feeling -- I'm very confident we will be north of 10% next year in the region.

It is tracking very nicely.

As you can see it, is not really much from any revenue lift yet, so we got there with a base of business that was depressed.

We are starting to see that business come back, but it not positive yet.

I think you got a good sign there that with the 9.8%, I'm very confident of the 10% and I won't give you all of the details but I push my team for a different number over the next couple of years, that we are going to put some real solid plans around to get to.

And just finally, from me, I know it is early days, but on Pulse, can you give us a little more color, how many people signed up, and what is the ARPU, how many geographies are you in?

Just any preliminary read?

Yes, Jeff, and by the way, I'm going to caveat that again, you just said it twice, but this is very preliminary.

We just launched, as you know, at the beginning of last month, so we have about a month, but keep in mind that that's a month where some sales people were trained, some aren't, each region is at a different level.

So, that's a very mixed, when I say we did a national rollout, how much we really were going at it.

But we signed up about 8,200 Pulse customers during the month and about 85% of them took the Select package, which is the first tier package.

And the other 15% were the second and third tier package.

Now, I put a big caveat around that.

Our teams are just learning how to sell it and how to do that.

So obviously, we think the 15% that took the second and third tier will move up but I don't want to put a number on that yet.

And by the way, overall, those 8,200 customers, that was about 15% of the accounts we signed up took Pulse.

And just to clarify, right now, it is only being sold by our internal sales force.

That's correct.

So that take rate is really on what our internal sales force offered, so soon we will be rolling it out to the dealer network.

By the end of the year the dealers will be rolling it out.

And so far, Jeff, when do you the math, the average ARPU increase is about $10 a month, and just to point out that the IRR on this, on the Pulse package, is higher than the underlying IRR in the ADT business.

And that's with a longer install time, actually, pretty significantly longer install time but that is all taken into account in the IRR.

And I would expect that we will improve on that install time as we get better and better at it, and our people get trained up.

Would those customers primarily be new or are they upsell?

All new we have not gone -- I say all, a couple, some by default , but we haven't really marketed the install base, unless they got excited by some TV advertising, but it is pretty much all

Thank you.

Terrific.

Thank you, Jeff.

Thank you.

The next question comes from Scott Gaffner with Barclays Capital.

You may ask your question.

Good morning.

Good morning.

I was hoping you could just walk us through a little bit of the rationale on the temp sale versus the spend.

It looks like maybe the business conditions were worsening a little bit there.

Came in at $24 million in operating profit for the quarter, versus I think you had guided to $30 million, and now first quarter looks like $20 million.

Was it a function of the results getting a little bit worse there?

And wanting to wait this thing out?

Or did CD&R just sort of swoop in at the end and come in with a better offer?

No, Scott, as we have been preceding, we announced that we wanted to separate this business back in April.

And we have been proceeding along on the spin alternative, but we always were looking at all strategic alternatives.

And so, as we move down and we're talking to other parties, in addition to the spinoff to shareholders, we felt that this transaction, which again provides us over $700 million of cash today, it gives us the upside opportunity as the market improves, as Ed said, over the next few years, for the remaining 49%.

And importantly, it keeps the value of the transaction, within the Tyco family here, so that we can reinvest that in our core business.

And we have been able to structure this internally so that we don't have any tax leakage.

So we have a very good partner.

And we believe that, again, if you looked at the spin alternative, and the valuation that that would get, which of our large shareholders would likely hold it versus sell it, and put pressure on the stock, the index funds and the like, that we felt that this alternative was better for the existing shareholders of Tyco than the spin alternative.

So included in the $720 million of cash, are you including the $415 million that you'll get from the debt deal that the Electric and Metal business is going to do?

Yes, we are.

So the equity piece that CD&R put in was about $306 million, and then we get the debt proceeds and then again, when we sell our 49% stake down the road, we will get the cash proceeds, and again, be able to reinvest that back as well.

Scott, I don't think there is any doubt that the value of a spin, and we have a lot of analysis around that, versus what we are going to extract and cash out of this deal, I don't think, -- it is not the same number.

We are going to do much better in this transaction.

Because we're already getting $720 million right now with the 49% still owned.

Right, and you can then turn that around and accelerate the share buyback.

Remember, the share buyback, on an annual basis, so not in the fiscal year, which will $0.07, but on an annual basis that will be $0.12.

Right.

Just lastly, Ed, you mentioned in your prepared remarks that you thought portfolio transformation or refinement was complete.

Can you maybe just flesh that out a little built and maybe take some thoughts around Flow off the table, and talk about how integral that is to the overall business going forward?

Yes, Scott, I mean there is always a few little things here and there.

But I would say that the portfolio refinement in Flow was complete with the Waterworks piece.

And clearly, the European piece, we had a lot of traction this year, and pretty much finished that off.

And you can see that was part of the reason for the nice improvement us getting up near the 10% margin in Europe, and obviously temp's up.

And as I say the heavy lifting is done on all of the portfolio moves.

And we like the portfolio with the three platforms.

We like the dynamics of the three.

We think we're in good markets for the next many years.

And the growth markets, they're markets that are going to grow, specifically in the emerging markets, so the dynamics of these three platforms, we really like and that's where we're going to be focused.

We hope to be adding to these platform, as we mentioned in our remarks, you noticed that we acquired some businesses in our Flow business in Brazil, so we think in each of these core platforms of Security, Fire, and as well as Flow that we could continue to do some acquisitions going forward.

Thank you.

Thanks, Scott.

Thank you, the next question comes from Gautam Khanna with Cowen.

You may ask your question.

Yes, could you characterize your Flow RFP pipeline?

If I recall, back in April and May, we saw 10% order growth year-on-year, and it sort of decelerated, but you talked about elephants in the pipeline previously.

What can we expect going forward?

Decelerating order pipeline?

Or just kind of continuing along this mid-single digit pace for a while?

Let me just clarify that, your first comment.

Let me just go through a bunch of kind of numbers with you, to show you the pattern.

When the business dropped in fiscal '09, our orders were down a little more than 20%.

In the first quarter of 2010, our orders were down 13%, then we started to go positive.

And let me just read you them.

Second quarter was 3.6% positive.

Third quarter was 4.3% positive.

And the fourth quarter was 5.3% positive.

And I just mentioned a moment ago, October was plus 6.2%.

So although that's, I would say, mid-single digit, you can see a gradual increase right through that period there.

And then my other point was, and again, I'm not forecasting this in our number, we did not take this into account, but when you look at some leading indicators, like some pumps, some process management stuff that was just mentioned a moment ago from some competitors, they are seeing double-digit order growth rates occurring.

And we would typically, if that pattern continues, yes you would potentially, six, seven months down the road see that in the Valve business.

And, again, we have not taken double-digit into account here, as you can tell from our guidance but that's kind of where things are.

So to my point about just customer activity, our team, as we pulse them, are feeling bullish about the activity out there.

But again, I just read you the exact numbers that we've seen so far.

So gradual -- I don't know if that is gradual, that's pretty significant improvement from 20% down.

But each month and each quarter is improved throughout the last six, seven months.

I appreciate that.

The other follow-up, just quickly, maybe on Jeff's question, the portfolio appears to be sort of set, with perhaps changes on the edges going forward.

But what do you anticipate your annual restructuring will be, kind of after fiscal '11?

Did you say the $150 million this year is -- includes $50 million for Broadview?

Yes, I would guesstimate for you, after this year, that our restructuring on a go-forward basis is going to be $30 million to $40 million.

Okay.

All right.

Thanks a lot, guys.

Operator, we have time for one more question.

Thank you.

Our final question comes from Steven Winoker with Sanford Bernstein You may ask your question.

Good morning, thanks for fitting me in.

Good morning, Steve.

Couple of questions.

One, on the sale price, I'm just trying to get my head around the decision on letting go 51% of E&MP, for basically under seven times operating profit over the last, what -- five years, under four times peak operating profit, certainly a bigger number off the recent trough.

Is it really just cash at this point?

Because you could have made the decision obviously to hold out until as you said the economy gets -- things get better, and you get a much, much better valuation.

Yes, I think we looked at it and looked at, again, the volatility that we could expect, how long the recovery might take, what this business would do in the marketplace on its own, if it were to spin.

We looked very significantly at the multiples that the competitors are trading at right now, which is certainly below the multiple of which we -- that we got on the sale, so if you look at it right now, we got about 7.5 times EBITDA for the business.

And so I think we took some value off the table, which I think was the appropriate thing for our shareholders, while still providing additional upside potential and eliminating some of the volatility.

And again, it is unknown as to how long it would take to get back to sort of historic levels.

So, I think that the value of cash today, when you look at it on an ECF kind of basis, that we took all of those things into consideration, and looked at all alternatives, and clearly believed that this is the better alternative for our shareholders, than a spin of the business.

Okay.

All right.

And, Ed, you talked a little bit about growth, certainly for next year, but as you think about the business longer term, with the new profile, how are you thinking, or how should we think about organic growth, given the 7.5% plus down the other year, and 3% this year, and given the 2% to 3% you're talking about for next year, where does this -- where does the portfolio sort of normalize out, if we could use that term?

Well, I think, Steven, when you look at, it I would break it again into the two or three buckets.

The recurring piece is kind of growing in that 4% to 5% range right now.

And that should probably be 5% to 6%, a little bit better because you got a bad -- you know, the economy is not quite there, and all of that.

So we should be able to pick that growth rate up.

And by the way, the point, the Fire business has been picking up on the service side from one point negative, to plus 4% this month.

So I would say that the 45% of our recurring business should be growing 5% to 6%, something like that.

And then you get the kind of -- the Flow business, and I think that is a big question mark, back to the last conversation.

It's clearly a nice single-digit grower, but is it a double-digit grower?

Because before the downturn, we were growing 15% to 20%, and so was some of the other big players in the market.

So I think there is a lot of oomph in that business, if you talk, not next year, but just long-term, very nice upside because infrastructure build around the world.

And then our Systems Installation and Service business, when you lump in the higher growth in emerging markets, and a little bit lower growth in the other markets, is also like a 6% grower.

So, you lump all of that together, and I think organically, and in a decent economy, we have a pretty nice growth rate, and a lot of stability with the recurring revenue.

Okay.

And can I just squeeze one last in?

Sure.

Which is on the Safety Products integration, just can you remind me how much of that is third party, and why that part is not at risk, as you fold it into the core businesses?

Well, the total third party revenue for Safety Products is the $1.5 billion that we report.

And again, about $300 million of that will go to ADT and the remaining $1.2 billion goes to Fire Protection.

So, that never included all of the inter-company sales, that Safety Products sold to ADT or to Fire.

Okay.

Great.

Thanks.

Thanks, Steve.

Thank you.

And this does conclude today's conference.

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