Including impairment, restructuring and other unusual charges from continuing operations of $1.15 per share, which are discussed below, the loss for the fourth quarter from continuing operations was 85 cents per share, as compared to earnings of 61 cents for the same quarter last year. The loss per share from continuing operations for 2002 after all charges was $1.40 per share, compared to income from continuing operations of $2.40 a year ago.
Diluted pro forma earnings from continuing operations for the fourth quarter were 30 cents per share as compared to 82 cents per share for the fourth quarter of fiscal 2001. Pro forma results from continuing operations for the fourth quarter of fiscal 2002 are presented excluding the discontinued operations of CIT, are before impairment, restructuring and other unusual charges, which are discussed below, and reflect a tax rate of 35.9%. Assuming a 22.0% tax rate, which is the effective rate on pro forma earnings from continuing operations for the full fiscal year, fourth quarter 2002 pro forma earnings were 36 cents per share. Pro forma earnings per share for 2002 were $1.79 compared to $2.88 for fiscal 2001.
"Tyco's operations generated strong cash flow and revenues that exceeded the expectations we outlined in our September 25th conference call. Considering the difficult economic environment and the issues facing the Company, this performance reflects our leading market positions, the strength of the products and services we offer, and the dedication and hard work of our employees. We will continue to build these businesses and leverage their strengths over time," said Ed Breen, Tyco's Chairman and Chief Executive Officer.
CASH AND LIQUIDITY
Free cash flow was approximately $1.3 billion in the quarter. The primary drivers behind the strong quarterly cash flow were strong collections of accounts receivable and reduced inventory levels.
Tyco refers to the net amount of cash generated from operating activities, less capital expenditures, spending on the Tyco Global Network (TGN), changes due to the Company's accounts receivable securitization program, and dividends, as "free cash flow." Free cash flow is not a substitute for cash flow from operating activities as determined in accordance with GAAP. Included as a reduction of operating cash flows in the fourth quarter of fiscal 2002 is $191 million related to cash spending on restructuring and other unusual items, compared with $102 million in the fourth quarter last year. Cash flow from operating activities was approximately $1.8 billion in the quarter.
The Company paid $431 million in cash for acquisitions in the quarter, including $326 million for the acquisition of dealer accounts, $93 million relating to purchase accounting liabilities and $10 million related to contingent deferred purchase price on prior acquisitions. Free cash flow is calculated before these expenditures.
Tyco's debt-to-capitalization ratio was 49.4% at September 30, 2002 compared to 49.0% at June 30, 2002. The net debt-to-capitalization ratios were 36.2% and 43.8%, respectively, for the same periods.
IMPAIRMENT, RESTRUCTURING AND OTHER UNUSUAL CHARGES
The Company recorded impairment, restructuring and other unusual charges from continuing operations of $2.8 billion pre-tax, or $1.15 per share after-tax (EPS), of which approximately $2.2 billion is non-cash and $600 million is cash. The charges are as follows:
Tyco Telecommunications (formerly TyCom) related:
Total charges associated with TyCom were approximately $2.2 billion pre-tax, or 88 cents EPS, of which approximately $1.72 billion is non-cash and approximately $460 million is cash. The non-cash portion relates primarily to the impairment of goodwill and intangibles ($663 million), impairment of TGN and other fixed assets ($592 million) and the write-down of certain investments, accounts receivable and inventory. The cash portion is primarily related to severance, facility consolidations and the termination of certain lease commitments.
All Other Charges:
The Company took additional charges of approximately $600 million pre-tax, or 27 cents EPS, of which approximately $470 million is non-cash and approximately $130 million is cash. The non-cash charge is comprised primarily of $109 million related to the impairment of goodwill in the Engineered Products and Services segment; $111 million related to the impairment of intangible assets associated with the Security business outside of the United States; and $224 million related to inventory and long-lived assets at Electronics. The cash portion relates primarily to severance and facility consolidations.
PRO FORMA QUARTERLY RESULTS FROM CONTINUING OPERATIONS
Pro forma quarterly segment profits and margins for the Company's Electronics, Healthcare and Specialty Products, Fire and Security Services, and Engineered Products and Services segments that are presented in the discussions below are operating profits before impairment, restructuring and other unusual charges and credits. The Engineered Products and Services group, formerly Tyco Flow Control, has been presented as a separate segment for all periods presented to conform with current internal reporting structures. In fiscal 2001, its results were included in the Electronics and Fire and Security Services segments. Additionally, pro forma results presented below for the third quarter reflect changes in each segment as a result of certain accounting adjustments and reclassifications. See the accompanying table to this press release for adjusted pro forma segment results by quarter for fiscal 2002.
Results before impairment, restructuring and other unusual charges are commonly used as a basis for operating performance, but should not be considered an alternative to operating income determined in accordance with GAAP. For GAAP results by segment, see the accompanying table to this press release. All dollar amounts are stated in millions.
Electronics
September 30, 2002; June 30, 2002; September 30, 2001;
Segment revenues $2,564.2 $2,650.7 $2,785.1
Segment profit $ 234.4 $ 339.8 $ 797.1
Segment margins 9.1% 12.8% 28.6%
For the quarter ended September 30, 2002, revenues for Tyco's electronics businesses, excluding Tyco Telecommunications which is discussed below, decreased approximately 3% from the same period a year ago to $2.52 billion. Pro forma profit at Tyco's electronics businesses, excluding Tyco Telecommunications, was $306.5 million, or 12.1% margin, for the quarter ended September 30, 2002, compared to $703.1 million, or 26.9% margin for the quarter ended September 30, 2001. On a sequential quarterly basis, revenues were flat and pro forma profit declined 16%. The Electronics business continued to be negatively impacted by further softening of demand in the telecommunications end markets the company serves. These decreases were partially offset by revenue growth in automotive products and revenues from companies acquired in fiscal 2002. Pro forma margins were impacted primarily as a result of continuing pricing pressure, operating inefficiencies and the impact of reduced volume on a fixed cost base.
Revenues at Tyco Telecommunications decreased year over year 76%, and sequentially 71%, to $40.7 million, as the Company is winding down the construction of undersea systems for third parties. Tyco Telecommunications had a pro forma loss of $72.1 million for the fourth quarter compared to pro forma profit of $94.0 million in the fourth quarter a year ago and a pro forma loss of $23.2 million in the third quarter of fiscal 2002. The Company expects that this business will generate operating losses of approximately $200 million in fiscal 2003 as it does not anticipate any new construction contracts or sale of capacity on its systems. Restructuring actions commenced during the fourth quarter are anticipated to reduce those losses to a run rate of $125 million to $150 million by the end of 2003.
Healthcare and Specialty Products
September 30, 2002; June 30, 2002; September 30, 2001;
Segment revenues $2,595.3 $2,526.0 $2,335.9
Segment profit $ 512.2 $ 528.1 $ 606.8
Segment margins 19.7% 20.9% 26.0%
The Healthcare and Specialty Products segment revenues for the fourth quarter of fiscal 2002 increased 11% over the same period a year ago, and 3% from the previous sequential quarter. Changes related to the components within the segment are detailed below.
Tyco Healthcare revenues increased year over year 14% to $2.12 billion, and 4% from the previous sequential quarter. Pro forma profit was $498.6 million for the fourth quarter of fiscal 2002, or down 1% compared with the prior year and up 10% sequentially. Within Tyco Healthcare, the revenue increase was driven primarily by the acquisition of Paragon Trade Brands in January 2002. International growth continued to be strong, and in the United States, growth at Kendall, Mallinckrodt and U.S. Surgical was partially offset by the divestiture of SDI in the fourth quarter. Pro forma margins decreased as compared to the same period last year in the healthcare business primarily due to the acquisition of Paragon, which has margins lower than the segment average, product mix and higher selling costs associated with the introduction of new products. Sequentially, improvement came from Paragon, the divestiture of SDI and product mix.
Tyco Plastics' revenues were down slightly from the both the previous year and previous sequential quarter, to $476.9 million. The impact of acquisitions offset an organic decline in this business. The decline is a result of decreased volumes in the hanger business and unfavorable pricing in the adhesives business. Pro forma margins were down year over year in the group as a result of volume shortfalls and pricing issues, as well as expenses associated with inventory management and accounts receivable.
Fire and Security Services
September 30, 2002; June 30, 2002; September 30, 2001;
Segment revenues $2,887.2 $2,711.3 $2,271.1
Segment profit $ 322.6 $ 316.8 $ 468.5
Segment margins 11.2% 11.7% 20.6%
Tyco Fire and Security revenue increased 27% year over year and 6% from the previous sequential quarter. The increase is primarily the result of acquisitions, such as Sensormatic, Security Link, Edison and the ADT Authorized Dealer sales programs, slightly offset by a decline in the North American Fire Protection business. The Company expects revenue growth in Security to slow as it scales back its dealer sales program, and Fire Protection revenue to moderate as well. The Company's fire businesses performed well in 2002 due to strong backlog, but weakness in industrial construction markets are expected to negatively impact the segment in 2003.
Pro forma margins in the segment have declined from the prior year primarily as a result of the acquisition of Sensormatic, as well as pricing and competitive pressures in the contracting businesses worldwide.
Engineered Products and Services
September 30, 2002; June 30, 2002; September 30, 2001;
Segment revenues $ 1,311.1 $1,197.9 $ 1,125.3
Segment profit $ 197.2 $ 193.1 $ 222.6
Segment margins 15.0% 16.1% 19.8%
At Tyco Engineered Products and Services (formerly Tyco Flow Control), revenues increased 17% over the prior year and 9% from the previous sequential quarter. At Tyco Flow Control (formerly Valves & Controls), revenues increased due to several large turn key heat tracing projects and acquisitions, partially offset by pricing pressure and market conditions. Within Tyco Electrical and Metal Products, revenues increased primarily as a result of increased selling prices as steel prices rose significantly during the quarter, a trend that is expected to continue in the first quarter of fiscal 2003. Tyco Infrastructure revenues increased slightly, as a result of acquisitions, and Tyco Fire and Building Products revenues were flat. Pro forma profit was down from last year due to reduced royalty payments from divested businesses as well as market and competitive pressures on selling prices within the Flow Control and Fire and Building Products divisions. Sequentially, these pressures were partially offset by the impact of cost savings programs and favorable pricing at Electrical and Metal Products.
FISCAL 2003 GUIDANCE
Earnings per share from continuing operations are expected to be in a range of 30 cents to 33 cents for the first quarter of fiscal 2003, and $1.50 to $1.75 for the full fiscal year. Free cash flow is expected to approximate $0 to $300 million in the first quarter of fiscal 2003 and $2.5 billion to $3.0 billion for the full fiscal year.