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Tyco Q3 Earnings in Line with Estimates; Beats on Revenues

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Tyco International Ltd. , in its fiscal third-quarter 2014 results, met the Zacks Consensus Estimate for earnings and surpassed the revenues estimate of the same. Results were primarily driven by broader product capabilities and more efficient operational execution. The security and protection services provider reported adjusted income from continuing operations of 54 cents per share compared with 46 cents in the prior-year quarter, in line with the Zacks Consensus Estimate of 54 cents.



Adjusted income from continuing operations came in at $253 million, up 18.8% from $213 million recorded in the year-ago quarter. The increase was driven by strong organic growth, as the company built on the growth momentum of the previous quarter.

Excluding non-recurring items, income from continuing operations were $434 million or 93 cents per share versus $112 million or 24 cents per share in the year-ago quarter.

Revenues climbed 4.9% year over year to $2,662 million, beating the Zacks Consensus Estimate of $2,647 million. Organic revenues improved 4.0%, led by 12% year-over-year growth in products. Acquisitions contributed 2.0% to growth, which was partially offset by the unfavorable impact of divestitures.

Segment Performance

North America Systems Installation & Services: Third-quarter revenues were almost flat year over year at $968 million, as revenue growth was counteracted by negative impacts associated with recent divestiture and foreign currency translation. Both service and installation revenues registered 1% progress, resulting in 1% total organic revenue growth for the quarter.

Backlog was $2.5 billion, up 1% year over year. Operating income came in at $117 million versus $88 million in the prior-year quarter. Operating margin improved to 12.1% versus 9.1% in the prior year, reaping the benefits of restructuring and productivity initiatives.

Rest of World Systems Installation & Services: Revenues improved 3.1% year over year to $1.0 billion driven by acquisitions, but partially offset by the adverse impact of divestitures. Organic revenue growth was 2.0% with service revenues rising 1.0% and installation revenues going up 4.0%.

Backlog of $2.3 billion increased 8% year over year, excluding the impact of foreign currency. Operating income came in at $101 million, up 31.2% from $77 million in the prior-year quarter. Operating margin stood at 10.1% versus 7.9% in the prior-year quarter, aided by the business mix that contributed to growth.

Global Products: Revenues were $693 million in this segment, up 15.5% year over year, driven by acquisitions. Organic revenues were up 2%, with healthy growth across Life Safety, Security and Fire Protection products. Operating income came in at $136 million, while operating margin was 19.6%.

Balance Sheet and Cash Flow

Cash and cash equivalents at quarter-end were $1.9 billion, while long-term debt aggregated to $1.4 billion. Cash from operating activities totaled $152 million with a free cash flow of $74 million, which included a net cash outflow of $234 million. Adjusted free cash flow was $308 million.

During the quarter, the company repurchased 13 million shares for $556 million. Presently, the outstanding share repurchase authorization stands at $1.1 billion.

Acquisitions and Disposals    

The company divested certain businesses in its Rest of World Installation & Services operating segment. These units generated revenues of $41 million in fiscal 2013, posting an operating loss of $11 million.

Tyco concluded the sale of its South Korean security business, ADT Korea, for $1.93 billion in cash. Also, the company sold the residual interest in its former electrical and metal products business, Atkore International, in a cash deal valued at around $250 million.

Further, Tyco acquired a commercial and residential security business in Belgium and finalized an agreement to buy a residential security business in Brazil, for an aggregate cash price of about $45 million. The company expects to generate revenues of around $35 million on an annualized basis from these businesses.

With continued growth in service and products revenue being supported by a rise in installation revenue, Tyco expects sound top-line growth in the near future.

Moving ahead, Tyco International is set to boost its healthy organic growth momentum as it seeks opportunities to expand its revenue base. According to the company, its strong balance sheet provides flexibility so as to continuously fund organic and inorganic growth initiatives and maximize return for its shareholders.

Tyco currently has a Zacks Rank #4 (Sell). Some better-ranked stocks in the diversified operations industry include Noble Group Ltd. , Macquarie Infrastructure Company LLC (MIC - Free Report) and CLARCOR Inc. , while Noble Group carries a Zacks Rank #1 (Strong Buy), Macquarie and CLARCOR hold a Zacks Rank #2 (Buy) each.

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