Including impairment, restructuring and other unusual charges from continuing operations, which are discussed below, the loss for the quarter ended June 30, 2002 from continuing operations was 4 cents per share.
Diluted pro forma earnings from continuing operations for the third quarter were 45 cents per share as compared to 73 cents per share for the third quarter of fiscal 2001. The 45 cents per share in the current quarter was a decrease of 6.3% as compared to pro forma earnings of 48 cents per share for the second quarter of fiscal 2002. Pro forma results from continuing operations for the third quarter of fiscal 2002 are presented excluding the discontinued operations of CIT, are before impairment, restructuring and other unusual charges, and assume the Company's year-to-date tax rate of 18.5%. Assuming the 26.4% tax rate which was accrued for the quarter on earnings from continuing operations, earnings were 41 cents per share. The difference between the accrued and pro forma tax rate reflects the classification of CIT as a discontinued operation and the need to provide for the Company's expected full year tax rate of 18.5%.
Lead Director John Fort said: "Despite a tough economic environment and the issues that have faced the company in recent months, Tyco's businesses have continued to achieve a solid performance and demonstrate their strong fundamentals. We are committed to building these world-class operations, and to enhancing the global leadership positions they have forged in their industries. Toward this objective, one of our key priorities is to complete as rapidly as possible the search for a new CEO who has the right combination of skills to lead our company forward."
CASH AND LIQUIDITY
Free cash flow, after deducting $184 million in spending on the Tyco Global Network (TGN), was approximately $657 million in the quarter, or 73% of pro forma income from continuing operations. If TGN spending were excluded, free cash flow would have totaled approximately $841 million in the third quarter of fiscal 2002, or 93% of pro forma income from continuing operations. Free cash flow for the quarter ended June 30, 2002 was below the Company's initial estimate of $900 million to $1.1 billion, primarily as a result of an accounts payable balance of approximately $336 million less than expected due to stricter payment terms stemming from perceived liquidity issues.
Tyco refers to the net amount of cash generated from operating activities, less capital expenditures and dividends, as "free cash flow." "Free cash flow" is not a substitute for cash flow from operating activities as determined in accordance with generally accepted accounting principles (GAAP). Included as a reduction of operating cash flows in the third quarter of fiscal 2002 is $178 million related to cash spending on restructuring and other unusual items, as compared with $58 million in the third quarter of fiscal 2001.
The Company paid $559 million in cash for acquisitions in the quarter, including $396 million for the acquisition of dealer accounts, $63 million relating to purchase accounting liabilities and $81 million related to contingent deferred purchase price on prior acquisitions. Free cash flow is calculated before these expenditures.
Tyco Industrial's debt-to-capitalization ratio was 49.0% at June 30, 2002 compared to 48.7% at March 31, 2002. The net debt-to-capitalization ratios were 43.8% and 41.5%, respectively, for the same periods. The change in the ratios reflect the loss on discontinued operations during the third quarter without the benefit from the proceeds of the CIT IPO. On a pro forma basis to reflect the proceeds received subsequent to June 30, net debt-to-capitalization is 35.5%.
IMPAIRMENT, RESTRUCTURING AND OTHER UNUSUAL CHARGES
The impairment, restructuring and other unusual charges from continuing operations consisted of the following:
· Goodwill write-offs - $513 million pre-tax, or 26 cents per share after-tax, related to the impairment of goodwill at the Tyco Telecommunications and Tyco Engineered Products and Services businesses. These are all non-cash charges.
· Impairment of long-lived assets - $239 million pre-tax, or 10 cents per share after-tax, of which $125 million relates to intangibles associated with Healthcare businesses which have been exited and $105 million relates to software development projects at ADT which have been cancelled. These are all non-cash charges.
· Restructuring costs - $72 million pre-tax or 3 cents per share after-tax. This is a cash charge, and is related primarily to severance and facility closings associated with streamlining initiatives in each of the Company's business segments as well as Tyco's Corporate group. These streamlining plans involve 1,300 employees, 4 manufacturing plants and 42 sales and distribution facilities worldwide. These plans were all announced during the quarter ended June 30, 2002.
· Other charges - $131 million pre-tax or 6 cents per share after-tax. Approximately 83% is a cash charge, and is comprised primarily of charges associated with the termination of the Company's break-up plan.
· Taxes - $87 million, or 4 cents per share, related to the tax rate on continuing operations.
PRO FORMA QUARTERLY RESULTS FROM CONTINUING OPERATIONS
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 and, for the period ended June 30, 2001, goodwill amortization. Additionally, results for the period ended June 30, 2001 reflect the adoption of SAB101. We have presented our Engineered Products and Services group, formerly Tyco Flow Control, as a separate segment for all periods presented to conform with current internal reporting structures. Previously, its results were included in the Electronics and Fire and Security Services segments. 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
June 30, 2002 March 31, 2002 June 30, 2001
Segment revenues $ 2,650.7 $2,493.9 $ 3,462.7
Segment profit $ 338.3 $ 373.1 $ 862.1
Segment margins 12.8% 15.0% 24.9%
For the quarter ended June 30, 2002 as compared to the quarter ended June 30, 2001, revenues for Tyco's electronics businesses, excluding Tyco Telecommunications which is discussed below, decreased approximately 12% to $2.51 billion. Earnings at Tyco's electronics businesses, excluding Tyco Telecommunications, were $361.5 million, or 14.4% margin, for the quarter ended June 30, 2002 compared to $719.5 million, or 25.1% margin for the quarter ended June 30, 2001. On a sequential quarterly basis, revenues increased 8% and earnings declined 8%. The year over year decrease in revenues resulted from a continued softness in demand in the end markets the Company serves, with weak market conditions across all geographic regions. The business units most severely impacted serve the telecommunications, power systems, communications, and printed circuit markets of Electronics. Sequentially, revenues have improved in each of the major end markets, most notably computer and consumer electronics, industrial, and distribution. The year over year margin decline was predominantly caused by decreased volume, partially offset by improvements in selling, general, and administrative expenses. Sequentially, price erosion continues, though at a lower level than previous quarters.
The outlook for the Electronics end markets remains difficult for telecommunications products and revenues are expected to be sequentially flat. The remaining end markets should provide 2 to 5% growth within their area. Book to bill ratios are improving for all end markets except telecommunications. The division continues to focus on product innovation and customer service, as evidenced by the following recent awards and new contracts: Celestica Partners in Performance award; Arrow Electronics award for fastest growing supplier; TTI, Inc. Supplier Excellence Award; Honda Motor Company's Honda Quality Performance Award; and M/A-COM's $33 million contract for its OpenSky network in Oakland County, MI in support of Homeland Security.
Revenues at Tyco Telecommunications decreased year over year over 77%, and sequentially 14%, to $139.4 million, due to fewer third-party manufacturing contracts and a very weak undersea capacity sales market. It is expected that this business will continue to generate operating losses for the near term, as this market is not expected to show signs of recovery for the foreseeable future.
HEALTHCARE AND SPECIALTY PRODUCTS
June 30, 2002 March 31, 2002 June 30, 2001
Segment revenues $ 2,526.0 $2,446.8 $ 2,261.2
Segment profit $ 525.0 $ 505.1 $ 539.5
Segment margins 20.8% 20.6% 23.9%
The Healthcare and Specialty Products segment revenues for the third quarter of fiscal 2002 increased 12% 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 13% to $2.04 billion, and 4% from the previous sequential quarter. Within Tyco Healthcare, the revenue increase was driven primarily by the acquisition of Paragon Trade Brands in January of 2002, but also by sales from new products at USSC and Valleylab, and increases in each of Mallinckrodt's major product categories. The International group continued its strong performance as well. These increases were partially offset by declines in certain product lines as a result of competitive pressures and the exiting of certain businesses. Earnings were $452.3 million for the third quarter of fiscal 2002, or flat with the prior year. Margins decreased as compared to June 30, 2001 in the healthcare business as the benefits of ongoing cost reduction plans and higher volume were offset by margins at Paragon, which are lower than the segment average, product mix, and higher selling expenses in certain areas. The outlook for Healthcare remains fundamentally strong, and it should continue to see increased revenues from recent new product launches such as USSC's Spiral Radius product, Valleylab's LigaSure ATLAS and AXS instruments, and Mallinckrodt's Fluoxetine product line.
Tyco Plastics' revenues increased 6% year over year, and 1% from the previous sequential quarter, to $483.9 million. Revenue increases for both periods were due to acquisitions, as organic revenues declined as a result of general market weakness which has impacted volumes and selling prices in the hangar business, as well as volume declines at the adhesives business due to the loss or delay of certain customer contracts. Margins were down year over year in the group as a result of the volume shortfalls and pricing issues.
FIRE AND SECURITY SERVICES
June 30, 2002 March 31, 2002 June 30, 2001
Segment revenues $ 2,711.3 $2,569.5 $ 1,913.3
Segment profit $ 350.3 $ 400.7 $ 305.2
Segment margins 12.9% 15.6% 15.9%
Tyco Fire and Security achieved revenue increases of 42% year over year and 6% from the previous sequential quarter. Year over year the increase is primarily the result of acquisitions, such as Sensormatic, Security Link and Edison and strong performance from the ADT Authorized Dealer sales programs. Strong performance by Fire Protection in Europe and Simplex/Grinnell in the U.S. contributed as well. Sequentially, the Security business is down slightly, as increased demand generated in the post-September 11 environment has now declined.
While segment profits increased year over year, they were down sequentially, and down as a percentage of revenues for both periods due to increased amortization expense in the current year third quarter in the Security business, primarily Sensormatic, losses on contracts in Northern Europe and Australian fire protection businesses, and lower profitability in non-U.S. security businesses as a result of more difficult commercial markets.
The Fire and Security businesses continue to focus on providing comprehensive solutions for their customers. Among the new program launches and contracts awarded recently are the following: T-DAR, launched by ADT US, is a new detection system for airports utilizing optical tracking technology; AssetPro, an anti-shoplifting solution designed specifically for small and mid-size retailers; Thunderstorm 1x3 from Ansul, a new foam fire suppression product developed and sold exclusively for Williams Fire & Hazard; Homeland Security Contracts - ADT has won a number of contracts that cover airports, water and sewer facilities, and government locations; National agreement with the #1 pharmacy in America awarded to Simplex/Grinnell to provide life-safety services; Sommerton (Australia) Power Station - project involves products and services from multiple Tyco companies, including Tyco Fire & Security Australia, Wormald, ADT, and O'Donnell Griffin Water Technology.
ENGINEERED PRODUCTS AND SERVICES
June 30, 2002 March 31, 2002 June 30, 2001
Segment revenues $ 1,235.7 $1,151.3 $ 1,043.2
Segment profit $ 197.7 $ 177.4 $ 224.0
Segment margins 16.0% 15.4% 21.5%
At Tyco Engineered Products and Services (formerly Tyco Flow Control), revenues increased by approximately 18% over the prior year and 7% from the previous sequential quarter, resulting from a combination of small acquisitions, higher volume and increased selling prices in certain sectors. Tyco Valves & Controls benefited from the integration of several smaller acquisitions and strong efforts to generate additional volume to offset continued global market pressures, particularly in the industrial process, oil and gas, power, and water markets. Within Tyco Electrical and Metal Products, pricing increases and the acquisition of Century Tube offset weak product demand in certain areas. Tyco Infrastructure and Tyco Fire and Building Products both experienced strong year over year growth, although the current weak commercial construction markets and economic uncertainties are causing some project delays and a more competitive market environment. Segment profits were down year over year primarily due to decreases in royalty payments from divested businesses. While there is weakness in certain of the markets the businesses serve, as well as worldwide competitive pressures, measures in place to control costs enabled each of the businesses to achieve a sequential increase in profits.
FISCAL 2002 AND 2003 GUIDANCE
Earnings per share from continuing operations are expected to be in a range of 45 cents to 47 cents, before unusual items, for the fourth quarter, which would put the full year pro forma earnings in a range of $1.99 to $2.01, on total revenues of approximately $36 billion. Free cash flow, after deducting spending on the TGN, is expected to approximate $1 billion in the fourth quarter of fiscal 2002 and $2.5 billion for the full fiscal year. The Company anticipates that fiscal 2003 earnings per share will be in a range of $2.10 to $2.25, on total revenues of approximately $38 billion, and free cash flow will be in a range of $4 billion to $4.5 billion.
CONFERENCE CALL AND WEBCAST
The company will discuss third quarter results on a conference call for investors today at 8:30 am EST. Interested parties may access the conference call live today, or by replay through July 29, 2002, at the following website: investors.tycoint.com/medialist.cfm.
____________________________________