Tyco Electronics Reports Third Quarter Financial Results

The company reported an operating loss of $508 million, compared to operating income of $459 million in the prior-year period.  The operating loss included $891 million of costs related to the company's share of Tyco International's previously-disclosed securities class action litigation settlement and $50 million of separation-related costs.  Restructuring costs were $28 million in the quarter, compared to $2 million in the prior-year period.  Excluding these items, adjusted operating income was $461 million, compared to $461 million a year ago.  The adjusted operating margin was 13.5 percent, compared to 14.4 percent a year ago.  This decline was a result of lower production levels and an unfavorable sales mix compared to last year.  The operating margin including restructuring costs was 12.7 percent.

Adjusted Operating Income, Free Cash Flow, Adjusted Operating Margin and Organic Revenue Growth are all non-GAAP financial measures and are described near the end of this press release.  For a reconciliation of these non-GAAP measures, see the attached tables.

The company reported a loss from continuing operations of $933 million, or $1.88 per share for the quarter -- compared to income of $305 million, or earnings per share (EPS) of $0.61 in the prior-year period.  The loss from continuing operations included a $1.79 per share charge for the company's share of the Tyco International class action litigation settlement, as well as $0.47 per share in allocated debt retirement costs related to separation, and $0.07 per share in other separation costs.  Restructuring costs were $0.04 per share.  To further assist in understanding these charges, the company has provided a summary schedule attached to this document.

"On an operational basis, our performance was in line with our guidance," said Tyco Electronics' Chief Executive Officer Tom Lynch.  "Our overall growth was due to strength in our Undersea Telecommunications business.  In other markets, our results were mixed.  We experienced good growth in Asian and European automotive, industrial machinery, aerospace and defense and mobile phone markets.  However, this growth was mostly offset by revenue declines in the computer, communications equipment and service provider markets, as well as continued declines in the North American automotive and housing-related markets."

Lynch continued, "During the quarter, we also made progress on key strategic initiatives to simplify our portfolio and manufacturing footprint.  With respect to portfolio focus, we began the process of divesting the Power Systems business and accelerating our exit of other low-margin business.  We also began to accelerate manufacturing simplification, which is geared to reduce the number of manufacturing sites and increase our low-cost production.  These initiatives will strengthen the company and are key to achieving our operating margin goal of at least 15 percent in the next three years."

CASH FLOW

Cash provided by operating activities was $299 million in the quarter, compared to $392 million in the prior year.  Current-year cash provided by operating activities was negatively impacted by a $163 million advance payment to the U.S. Internal Revenue Service against certain proposed tax adjustments, pursuant to the separation-related tax sharing agreement.

Free cash flow, which is adjusted for the above tax payment and net capital expenditures, was $324 million in the quarter, compared to $249 million in the prior-year period.  The improvement in free cash flow was due primarily to working capital.  Capital expenditures during the quarter were $140 million, or 4 percent of sales, which were down slightly compared to the prior year.

Also during the quarter, the company funded into escrow $921 million related to the company's share of the Tyco International class action litigation settlement.  This payment is reflected in cash used in investing activities.

OTHER ITEMS

·         The company recorded a non tax-deductible charge of $891 million related to its portion of Tyco International's previously-disclosed class action litigation settlement.

·         The company recorded $282 million of costs related to its separation from Tyco International, which included $232 million of non tax-deductible allocated costs related to the early retirement of debt, and $50 million for other costs related to the separation.

·         As previously disclosed, the company is pursuing the divestiture of its Power Systems business.  The results of this business are now reflected in discontinued operations and all prior periods have been restated.  Included in the third quarter Loss from Discontinued Operations is a $435 million after-tax impairment charge related to the expected divestiture.

ORDERS

Total company orders were flat in the quarter compared to the prior year, and the book-to-bill ratio was 0.98.  Excluding the company's Wireless Systems and Undersea Telecommunications segments, where order patterns are typically uneven, orders were also flat in the quarter and the book-to-bill ratio was 1.02.

OUTLOOK

For the fourth quarter of fiscal 2007, the company expects revenue growth of 5 to 8 percent with organic revenue growth of 3 to 5 percent.  The company further expects an operating margin before restructuring and separation costs in the range of 13 to 13.5 percent.  Restructuring costs are expected to be in the range of $40 to $50 million and separation costs are expected to be up to $50 million.

Lynch said, "Order patterns in the third quarter for the most part continued a trend we have been seeing for over six months now, with growth in automotive and industrial markets outside of North America offset by continued declines in our orders in the computer market and most markets in North America.  The expected fourth quarter sales growth will continue to be aided by strength in our Undersea Telecommunications segment, coupled with growth in the Network Solutions segment.  We expect that our operating margin before restructuring and separation-related costs will continue to be affected by a lower margin sales mix and lower production levels compared to the prior year."

SEGMENT RESULTS

Tyco Electronics is comprised of four reporting segments: Electronic Components, Network Solutions, Wireless Systems and Undersea Telecommunications.  All dollar amounts are pre-tax and stated in millions.  All comparisons are to the quarter ended June 30, 2006 unless otherwise indicated. 

Electronic Components

The Electronic Components segment is the world's largest supplier of passive electronic components, including connectors and interconnect systems, relays, switches, circuit protection devices, touchscreens, sensors, and wire and cable.

Revenue in the segment grew 1 percent organically year over year.  Strength in the aerospace and defense, industrial machinery and mobile phone markets was offset by an 8 percent decline in the computer market, primarily driven by the strategic decision to exit certain low-margin business.  Sales growth in the automotive market was 4 percent, where double-digit growth in Asia and continued growth in Europe more than offset declines in North America.  On a geographic basis, segment revenue grew 6 percent in Asia and 3 percent in Europe, but declined 5 percent in the Americas.

Operating income decreased by $52 million, due to lower production levels and a lower margin sales mix, as well as higher restructuring and separation costs.  The lower production levels and lower margin sales mix primarily resulted from the slowdown in North America, particularly in automotive and housing-related markets.  Restructuring and allocated separation-related costs in the quarter were $18 million and $20 million, respectively, compared to no costs related to these items in the prior-year quarter.

Network Solutions

The Network Solutions segment is a supplier of infrastructure components and systems for telecommunications and energy networks.

Organic revenue growth in the segment was essentially flat versus the prior year.  Sales to the building networks market grew 12 percent, reflecting higher pricing on copper cabling products and strong demand for faster and more secure networks.  Sales to the communication service provider market decreased 11 percent, due to a strike at a large European customer compared to strong sales to that customer in the year-ago period. Sales to the power utility market grew 3 percent. 

Operating income decreased by $6 million, entirely due to restructuring and separation-related costs.  On an adjusted operating margin basis, the benefits of higher volumes in the building networks and power utility markets were offset by volume decreases in the communication service provider market.  Restructuring and allocated separation-related costs in the quarter were $4 million and $3 million, respectively, compared to no costs related to these items in the prior-year quarter.

Wireless Systems

The Wireless Systems segment is a leading innovator of wireless technology for critical communications, radar and defense applications.