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Tyco Reports Second Quarter 2016 Earnings from Continuing Operations Before Special Items of $0.45 Per Share and GAAP Earnings of $0.33 Per Share

Press Release

  • Confirms that plans are on track for its strategic merger with Johnson Controls to create a global leader in building products and technology, integrated solutions and energy storage
  • Enhances business portfolio with acquisition of ShopperTrak to expand retail analytics solutions, and divestiture of Australian fire detection and protection business
  • Expands pipeline with 7% orders growth in the quarter, and backlog increases 2% on quarter sequential basis, both excluding the impact of foreign currency and divestitures
  • Achieves 126% adjusted free cash flow conversion rate in the quarter
  • Provides guidance for third quarter 2016 EPS before special items of $0.52 - $0.54
  • Tightens guidance range for full-year EPS before special items to $2.05 - $2.10 from previous $2.05 - $2.20

Tyco TYC, -0.81% today reported $0.33 in GAAP diluted earnings per share (EPS) from continuing operations for the fiscal second quarter of 2016 and diluted EPS from continuing operations before special items of $0.45, compared to previous guidance of $0.44 to $0.46. Revenue of $2.3 billion in the quarter decreased 4% versus the prior year, primarily due to a 4% negative impact of the stronger U.S. dollar against foreign currencies. Organic revenue declined 1% in the quarter, with acquisitions contributing 4 percentage points of growth, which was partially offset by a 3 percentage point impact related to divestitures.

"I am pleased with the progress on our planned merger with Johnson Controls to create the global leader in building products and technology, integrated solutions and energy storage," said Tyco Chief Executive Officer George R. Oliver. "Our integration teams are making great strides, and I am more excited and confident than ever about the value creation potential of the merger for customers, shareholders and employees."

"While ongoing sluggish economic conditions in key sectors put pressure on our short-cycle product markets in the second quarter, our continued focus on productivity initiatives enabled our Integrated Solutions & Services teams to deliver better than expected margin performance. We have made significant improvements in the fundamentals of our business. We are investing for future growth through a dedicated focus on service and installation within our North American fire and security business, continued product innovation and our commercial excellence initiatives. As a result of these initiatives, our order pipeline and backlog continue to build, which positions us well for increased growth in the second half," Mr. Oliver added.

(Income and EPS amounts are attributable to Tyco ordinary shareholders) ($ millions, except per-share amounts)



Q2 2016


Q2 2015


% Change


Revenue


$

2,331



$

2,430



(4)%



Segment Operating Income


$

289



$

306



(6)%



Restructuring and Repositioning


$

(10)



$

(29)



(66)%



Operating Income


$

225



$

221



2%



Income from Continuing Operations


$

145



$

183



(21)%



GAAP Diluted EPS from Continuing Operations


$

0.33



$

0.43



(23)%



Special Items


$

0.12



$

0.07





Segment Operating Income Before Special Items


$

311



$

331



(6)%



Restructuring and Repositioning Before Special Items


$

(16)



$

(29)



(45)%



Income from Continuing Ops Before Special Items


$

192



$

215



(11)%



Diluted EPS from Continuing Ops Before Special Items


$

0.45



$

0.50



(10)%



Organic revenue, free cash flow, adjusted free cash flow, operating income, segment operating income, and diluted EPS from continuing operations before special items are non-GAAP financial measures and are described below. For a reconciliation of these non-GAAP measures, see the attached tables. Additional schedules as well as second quarter review slides can be found in the Investor Relations section of Tyco's website at http://investors.tyco.com.

SEGMENT RESULTS

The financial results presented in the tables below are in accordance with GAAP unless otherwise indicated. All dollar amounts are pre-tax and stated in millions. All comparisons are to the fiscal second quarter of 2015 unless otherwise indicated.

North America Integrated Solutions & Services



Q2 2016


Q2 2015


% Change


Revenue


$

947



$

944




–%

Operating Income


$

131



$

125




5%


Operating Margin


13.8%



13.2%





Special Items


$



$





Operating Income Before Special Items


$

131



$

125




5%


Operating Margin Before Special Items


13.8%



13.2%





Revenue of $947 million was up slightly compared to the prior year. Modest organic revenue growth was driven by 1% growth in integrated solutions and flat service revenue. Acquisition growth of 1% was offset by the weakening of the Canadian dollar. Backlog of $2.57 billion increased 4% year over year and 2% on a quarter sequential basis, excluding the impact of foreign currency.

Operating income for the quarter was $131 million and the operating margin before special items improved 60 basis points to 13.8%, including a 20 basis point headwind related to non-cash purchase accounting. Underlying operations improved 80 basis points, driven by improved execution and productivity benefits.

Rest of World Integrated Solutions & Services



Q2 2016


Q2 2015


% Change


Revenue


$

768



$

847



(9)%



Operating Income


$

57



$

67



(15)%



Operating Margin


7.4%



7.9%





Special Items


$

(20)



$

(23)





Operating Income Before Special Items


$

77



$

90



(14)%



Operating Margin Before Special Items


10.0%



10.6%





Revenue of $768 million decreased 9% compared to the prior year, driven by a 9% unfavorable impact from foreign currency exchange rates. Organic revenue declined 1%, as 1% growth in service was more than offset by a 3% decline in integrated solutions. Acquisition growth of 8% was mostly offset by a 7% decline related to divestitures. Backlog of $1.91 billion increased 13% year over year, partly driven by acquisition activity, and 3% on a quarter sequential basis, excluding the impact of foreign currency and divestitures.

Operating income for the quarter was $57 million and the operating margin was 7.4%. Special items of $20 million consisted primarily of a loss on divestitures. Before special items, operating income was $77 million and the operating margin was 10.0%. The operating margin declined 60 basis points, including a 40 basis point impact related to non-cash purchase accounting. Underlying operations declined 20 basis points driven by the mix of revenue decline, partially offset by productivity benefits.

Global Products



Q2 2016


Q2 2015


% Change


Revenue


$

616



$

639



(4)%



Operating Income


$

101



$

114



(11)%



Operating Margin


16.4%



17.8%





Special Items


$

(2)



$

(2)





Operating Income Before Special Items


$

103



$

116



(11)%



Operating Margin Before Special Items


16.7%



18.2%





Revenue of $616 million decreased 4% compared to the prior year. Organic revenue declined 3%, driven by Life Safety Products due to increased Air-Pak X3 shipments during the comparable quarter in the prior year, as well as softness in Fire Protection Products related to the high-hazard heavy industrial sector. Acquisitions contributed 3 percentage points of growth, which was fully offset by changes in foreign currency exchange rates. A divestiture negatively impacted revenue by 1%.

Operating income for the quarter was $101 million and the operating margin was 16.4%. Before special items, operating income was $103 million and the operating margin was 16.7%. The 150 basis point decline in operating margin included a 50 basis point headwind related to non-cash purchase accounting. The underlying margin decline of 100 basis points was driven by the decline in revenue and a lower mix of higher-margin products.

OTHER ITEMS

  • Cash from operating activities was $124 million and free cash flow was $46 million, which included a cash outflow of $196 million from special items primarily related to the IRS litigation and prior year restructuring and repositioning activities. Adjusted free cash flow for the quarter was $242 million representing an adjusted free cash flow conversion rate of 126% for the second quarter and 111% for the six months ending March 25, 2016. The company completed the quarter with $345 million in cash and cash equivalents.
  • Corporate expense for the quarter was $46 million before special items and $54 million on a GAAP basis.
  • Restructuring and repositioning charges were $16 million before the reversal of $6 million of prior-period charges treated as special items, compared to $29 million for the prior year period.
  • The tax rate before special items was 17.3% for the quarter.
  • As disclosed on April 21, Tyco and Johnson Controls confirmed their merger plans and that the combined company expects to deliver $650 million in operational and global tax synergies over the first three years after closing. The transaction, which is subject to customary closing conditions, including regulatory approvals and approval by both Johnson Controls and Tyco shareholders, is expected to be completed on or around October 1, 2016.
  • As previously announced, during the quarter the company completed the acquisition of ShopperTrak, a leading global provider of retail traffic insights and location-based analytics, for approximately $175 million in cash. This business currently generates approximately $75 million in annual revenue.
  • As previously announced, during the quarter the company divested its fire detection and protection business in Australia. In fiscal year 2015, this business had revenue of approximately $260 million.

ABOUT TYCO

Tyco TYC, -0.81% is the world's largest pure-play fire protection and security company. Tyco provides more than three million customers around the globe with the latest fire protection and security products and services. Tyco has over 57,000 employees in more than 900 locations across 50 countries serving various end markets, including commercial, institutional, governmental, retail, industrial, energy, residential and small business. For more information, visit www.tyco.com.

CONFERENCE CALL AND WEBCAST

Management will discuss the company's second quarter results for 2016 during a conference call and webcast today beginning at 8:00 a.m. Eastern time (ET). Today's conference call for investors can be accessed in the following ways:

  • Live via webcast - through the Investor Relations section of Tyco's website at http://investors.tyco.com,
  • Live via telephone (for "listen-only" participants and those who would like to ask a question) - by dialing 800-857-9797 (in the United States) or 517-308-9029 (outside the United States), passcode "Tyco",
  • Replay via telephone - by dialing 888-568-0738 (in the United States) or 402-998-1493 (outside the United States), passcode 2577, from 10:00 a.m. (ET) on April 29, 2016, until 11:59 p.m. (ET) on May 6, 2016, and
  • Replay via webcast - through the "Presentations & Webcasts" link on the Investor Relations section of Tyco's website: http://investors.tyco.com.

NON-GAAP MEASURES

Organic revenue, free cash flow (outflow) (FCF), and income from continuing operations, earnings per share (EPS) from continuing operations, operating income and segment operating income, in each case "before special items," are non-GAAP measures and should not be considered replacements for GAAP results.

Organic revenue is a useful measure used by the company to measure the underlying results and trends in the business. The difference between reported net revenue (the most comparable GAAP measure) and organic revenue (the non-GAAP measure) consists of the impact from foreign currency, acquisitions and divestitures, and other changes that either do not reflect the underlying results and trends of the Company's businesses or are not completely under management's control. There are limitations associated with organic revenue, such as the fact that, as presented herein, the metric may not be comparable to similarly titled measures reported by other companies. These limitations are best addressed by using organic revenue in combination with the GAAP numbers. Organic revenue may be used as a component in the company's incentive compensation plans.

FCF is a useful measure of the company's cash that permits management and investors to gain insight into the number that management employs to measure cash that is free from any significant existing obligation and is available to service debt and make investments. The difference between Cash Flows from Operating Activities (the most comparable GAAP measure) and FCF (the non-GAAP measure) consists mainly of significant cash flows that the company believes are useful to identify. It, or a measure that is based on it, may be used as a component in the company's incentive compensation plans. The difference reflects the impact from:

  • net capital expenditures,
  • dealer generated accounts and bulk accounts purchased,
  • cash paid for purchase accounting and holdback liabilities, and
  • voluntary pension contributions.

Capital expenditures and dealer generated and bulk accounts purchased are subtracted because they represent long-term investments that are required for normal business activities. Cash paid for purchase accounting and holdback liabilities is subtracted because these cash outflows are not available for general corporate uses. Voluntary pension contributions are added because this activity is driven by economic financing decisions rather than operating activity. In addition, the company presents adjusted free cash flow, which is free cash flow, adjusted to exclude the cash impact of the special items highlighted below. This number provides information to investors regarding the cash impact of certain items management believes are useful to identify, as described below.

The limitation associated with using these cash flow metrics is that they adjust for cash items that are ultimately within management's and the Board of Directors' discretion to direct and therefore may imply that there is less or more cash that is available for the company's programs than the most comparable GAAP measure. Furthermore, these non-GAAP metrics may not be comparable to similarly titled measures reported by other companies. These limitations are best addressed by using FCF in combination with the GAAP cash flow numbers.

The company has presented its income and EPS from continuing operations, operating income and segment operating income before special items. Special items include charges and gains related to divestitures, acquisitions, restructurings, impairments, certain changes to accounting methodologies, legacy legal and tax charges and other income or charges that may mask the underlying operating results and/or business trends of the company or business segment, as applicable. The company utilizes these measures to assess overall operating performance and segment level core operating performance, as well as to provide insight to management in evaluating overall and segment operating plan execution and underlying market conditions. The Company also presents its effective tax rate as adjusted for special items for consistency, and presents corporate expense excluding special items. One or more of these measures may be used as components in the company's incentive compensation plans. These measures are useful for investors because they may permit more meaningful comparisons of the company's underlying operating results and business trends between periods. The difference between income and EPS from continuing operations before special items and income and EPS from continuing operations (the most comparable GAAP measures) consists of the impact of the special items noted above on the applicable GAAP measure. The limitation of these measures is that they exclude the impact (which may be material) of items that increase or decrease the company's reported GAAP metrics, and these non-GAAP metrics may not be comparable to similarly titled measures reported by other companies. These limitations are best addressed by using the non-GAAP measures in combination with the most comparable GAAP measures in order to better understand the amounts, character and impact of any increase or decrease on reported results.

The company provides general corporate services to its segments and those costs are reported in the "Corporate and Other" segment. This segment's operating income (loss) is presented as "Corporate Expense." Segment Operating Income represents Tyco's operating income excluding the Corporate and Other segment, and reflects the results of Tyco's three operating segments. Segment Operating Income before special items reflects GAAP operating income adjusted for the special items noted in the paragraph above.

NO OFFER OR SOLICITATION

This communication is not intended to and does not constitute an offer to sell or the solicitation of an offer to subscribe for or buy or an invitation to purchase or subscribe for any securities or the solicitation of any vote or approval in any jurisdiction, nor shall there be any sale, issuance or transfer of securities in any jurisdiction in...


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