Tyco International Management Discusses Q2 2013 Results - Earnings Call Transcript

| About: Tyco International (TYC)

Tyco International (NYSE:TYC)

Q2 2013 Earnings Call

April 26, 2013 8:00 am ET

Executives

Antonella Franzen

George R. Oliver - Chief Executive Officer and Director

Arun Nayar - Chief Financial Officer and Executive Vice President

Analysts

Jeffrey T. Sprague - Vertical Research Partners, LLC

Nigel Coe - Morgan Stanley, Research Division

Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division

Scott R. Davis - Barclays Capital, Research Division

Charles Stephen Tusa - JP Morgan Chase & Co, Research Division

Gautam Khanna - Cowen and Company, LLC, Research Division

Ajay Kejriwal - FBR Capital Markets & Co., Research Division

Deane M. Dray - Citigroup Inc, Research Division

Shannon O'Callaghan - Nomura Securities Co. Ltd., Research Division

Operator

Welcome to the Tyco Second Quarter Earnings Conference Call. [Operator Instructions] Today's call is being recorded. If you have any objections, please disconnect at this time.

I will now turn the call over to Antonella Franzen, Vice President of Investor Relations. You may begin.

Antonella Franzen

Good morning, and thank you for joining our conference call to discuss Tyco's second quarter results for fiscal year 2013 and the press release issued earlier this morning. With me today are Tyco's Chief Executive Officer, George Oliver; and Chief Financial Officer, Arun Nayar.

I would like to remind you that during the course of today's call, we will be providing certain forward-looking information. We ask that you look at today's press release and read through the forward-looking cautionary informational statements that we've included there. In addition, we will use certain non-GAAP measures, including normalized earnings per share in our discussions, and we ask that you read through the sections of our press release that address the use of these items. The press release issued this morning and all related tables, as well as conference call slides, which contain summary financial information, can be found on the Investor Relations portion of our website at tyco.com. Please also note that we will be filing our second quarter SEC Form 10-Q later today.

In discussing our segment operations, when we refer to changes in backlog and order activity, these figures exclude the impact of foreign currency. Additionally, references to operating margins during the call exclude special items, making them non-GAAP metrics. These non-GAAP metrics are reconciled in the schedules attached to our press release.

Now let me quickly recap this quarter's earnings. Earnings per share from continuing operations attributable to Tyco common shareholders was $0.16 and included charges of $0.26 related to special items. These charges related primarily to a legacy environmental matter, as well as separation and restructuring activities. Earnings per share from continuing operations before special items was $0.42 compared to the prior year quarter of $0.30. As we mentioned on our last earnings call, EPS this fiscal year is not directly comparable to the prior year as the prior year's results include corporate and interest expense associated with supporting the ADT and Flow Control businesses.

Additionally, our 2013 results are being impacted by dis-synergies associated with the separation of the commercial security operations in North America from ADT. Normalizing last year's results for these items, the comparable prior year earnings per share before special items would have been $0.35.

Now let me turn the call over to George.

George R. Oliver

Thanks, Antonella, and good morning, everyone. I am pleased with our second quarter results and the progress we are making in executing our growth strategy. In our Installation & Service businesses, service revenue growth is accelerating, the margin in our install business is improving and backlog is growing. In our Global Product businesses, we continue to benefit from our investments as revenue growth outpaces the market.

Overall, our second quarter results reflect strong operational performance with a year-over-year increase of 20% in earnings per share before special items on a normalized basis. Earnings growth during the quarter was driven by a better mix of revenue, as well as the continued strong execution of actions to increase productivity and reduce our cost structure.

Service revenue in both North America and Rest of World increased as a percentage of total revenue and the overall growth rate for service accelerated from 2% last quarter to 3% this quarter. As we continue to strengthen our discipline as an operating company, we are driving productivity and cost out and accelerating restructuring. Additionally, we are benefiting from the sourcing initiatives related to our $4 billion global buy. As we discussed at our Investor Day back in September, we have consolidated 15-plus procurement groups into a single global organization and implemented a strategic sourcing process that leverages our scale to accelerate savings.

The combined benefit of productivity and sourcing is expected to contribute $150 million of gross savings on an annual basis, which will fund incremental organic investments and offset inflationary pressures for net savings of $50 million annually.

For the quarter, the net impact of these savings was an incremental $0.02 year-over-year. Overall, I am very pleased with our progress over the last 6 months as we continue to take a disciplined, focused approach to achieving our growth objectives and strengthening Tyco's position as a world-leading fire and security company.

On the acquisition front, we have a very active pipeline of bolt-on acquisition opportunities that we are evaluating. As we have discussed before, we evaluate each deal against numerous metrics including, above all, strategic fit. From a financial perspective, we are committed to remaining disciplined around the financial metrics of an acquisition. We look for strong growth potential, EPS accretion by year 2 and an ROIC well in excess of our risk-adjusted weighted average cost of capital.

For example, let's take a look at the 2 larger acquisitions we completed a little over a year ago, Chemguard and Visonic. Chemguard was acquired by our fire products business in September of 2011. The company is a leading provider of an extensive line of fire suppression products, services and specialty chemicals with strong R&D capabilities. This acquisition strengthened our presence in the oil and gas vertical and in high-growth markets. Today, Chemguard is fully integrated with our fire products platform and has been a strong performer since the acquisition, delivering against high expectations.

The Visonic acquisition, completed in December of 2011 and part of our security products platform, expanded our wireless technology platform while complementing our geographic presence in the intrusion market. I am very pleased with the strong performance of Visonic and our ability to leverage Visonic's technology and geographic footprint to complement our existing intrusion business. In fact, we have recently integrated Visonic's leading-edge PowerG technology into our existing DSC intrusion product line and introduced our PowerSeries Neo hybrid intrusion detection platform, which was recently highlighted at ISC West. This new platform redefines intrusion security by providing a hybrid solution that combines the flexibility of a hardwired system with the simplicity of a wide range of wireless devices.

We continue to make good progress on acquisitions. In the quarter, we acquired First City Care, a U.K.-based installation service provider of access control, video surveillance, intruder alarms and security systems integration. This acquisition is being combined with our Installation & Services business in the U.K., strengthening our security expertise in the banking vertical. We expect this acquisition to add approximately $20 million of annual revenue.

Additionally, we signed a definitive agreement to acquire National Fire Solutions Group or NFS, which is a leading provider of fire protection services, including installation, inspection and maintenance services in Australia. NFS provides us with the opportunity to strengthen our fire protection portfolio in Australia while advancing our strategy for growth in the global fire industry. This acquisition is expected to close in the third fiscal quarter and add approximately $65 million of revenue on an annual basis.

We continue to assess the strategic fit of all of our business units and will pursue divestitures that do not align with our long-term strategy. For example, we recently signed a definitive agreement to divest our guarding business in North America and expect to close the transaction in our fiscal third quarter. Lastly, we also returned capital to shareholders during the quarter with $70 million in dividend payments and $150 million in share repurchases.

As there were many questions on project selectivity on the last earnings call, let me quickly address that before I turn to our business results for the quarter. I want to make clear that project selectivity is not a new initiative. It is the way that we do business, delivering profitable growth.

As some of you may recall, we implemented project selectivity in SimplexGrinnell, our North America fire business in fiscal 2011. And within a 3-year period we'll have increased operating margins nearly 400 basis points. During this time period, we established minimum margin targets for all installation projects, implemented a second level of review for all large projects to ensure that they could be executed at the expected margin rate, and we focused on insulation products that would lead to long-term service. Today, our SimplexGrinnell fire business is growing in line with the market and installation projects are being executed above the margin backlog as resources are focused on the right opportunities.

As we previously discussed, we have implemented the same playbook in our North America commercial security business. In the short term, this will result in revenue compression in our North America Installation & Services segment. But the end result is a more profitable, service-intensive mix of revenue, which not only benefits operating income but also our customers as we focus on providing value-added design, installation and service.

Now let me turn to an overview of our segment results and give you a feel for the business environment in each of the segments. Then I will turn it over to Arun to provide you with more details regarding our quarterly results.

Starting with our North America Installation & Services segment, overall revenue was consistent with the prior year as growth in SimplexGrinnell was offset by a decline in commercial security. As expected, the revenue decline will accelerate in the second half of the year. More importantly, we expect the operating margin to improve on a quarter sequential basis in the back half of the year as planned actions to reduce the cost structure are executed.

In Rest of World Installation & Services, we continue to see nice growth in service across Europe, Asia, Latin America and South Africa. This growth is being partly offset by a decline in installation revenue during the quarter. Given our record-high backlog, we expect installation revenue to grow in the second half of the year, driven by Asia as well as other high-growth markets, which will offset the continued pressure on installation revenue in Continental Europe and the U.K.

In Global Products, revenue continued to grow well in excess of GDP rates. Double-digit growth in the quarter included organic revenue growth of 7% with the remainder attributable to acquisitions. The operating margin, excluding special items, improved on a quarter sequential basis, and we continue to expect improved sequential performance each quarter for the balance of the year.

Now let me turn the call over to Arun to discuss the operating results in more detail.

Arun Nayar

Thank you, George, and good morning, everyone. Let me start with an overview of our results for the second quarter, and then go through the details of our segment performance.

Revenue in the second quarter was $2.6 billion, an increase of 3% overall and 2% on an organic basis. The Global Products business continues its strong growth trend with organic revenue up 7% in the quarter. Service revenue accelerated to 3% in the quarter while system installation revenue was down 3%, mainly due to continued weakness in Europe and implementing project selectivity in North America security. In the quarter, organic growth was supplemented by strategic bolt-on acquisitions, which added $28 million or about 1 percentage point. Embedded in our overall revenue increase this quarter is the continued strong performance in the growth markets, which grew 16% in the quarter and 11% on an organic basis. The growth was primarily driven by Latin America, Asia and the Middle East.

Segment operating income before special items was $321 million, a 10% increase over the prior year on a normalized basis. Segment operating margin was 12.3%, which is a 90 basis point improvement over the prior year on a normalized basis. As George mentioned, a higher mix of service revenue, improved installation margins and the benefits of productivity and restructuring initiatives drove the year-over-year operating margin improvement.

Now let me get into the details of each of the segments, starting first with North America Installation & Services. Revenue in the quarter of $953 million was consistent with the prior year. We continue to see positive traction in our organic service revenue growth as we prioritize our efforts in this area. In fact, service revenue growth accelerated to 2% in the quarter from 1% in the prior quarter. As expected, installation revenue declined 3% due to the project selectivity in the commercial security business.

Operating income before special items in the quarter was $104 million and the year-over-year operating margin increased 220 basis points on a normalized basis to 10.9%. An increased mix of higher-margin service revenue, improved execution on installations as well as sourcing and productivity savings drove the operating margin improvement. Overall, orders in North America Installation & Services were flat year-over-year with service orders growing 2%, offset by installation orders, which declined 2%. Sequentially, the dollar value of installation orders has stabilized and service orders have accelerated.

As we mentioned last quarter, order rates in the installation business can fluctuate extensively quarter-to-quarter as there can be a large order in the range of tens of millions of dollars that can skew the year-over-year compares. For example, last year, we had a retail order where the bulk of the order was booked in the third quarter, resulting in a 20% increase in installation orders, which will make for a tough compare in the third quarter of this year. This is why backlog is the more important metric. For Q2, backlog was up 2% sequentially to $2.5 billion.

As we move into the third quarter, we expect year-over-year revenue to decline 2% to 3% as the growth in SimplexGrinnell is offset by a decline in Commercial Security. On a sequential basis, we expect revenue to increase 2% to 3% and the operating margin to improve to 11.5% as we leverage the additional seasonal pickup. Given our performance in the first half of the year, we now expect revenue to decline 1% to 2% on a full year basis versus our original estimate of a 2% to 3% decline. Additionally, given the accelerated benefits of our sourcing and productivity initiatives, we now expect the full year operating margin to be in the range of 11.5% to 11.8%, which is ahead of our prior full year guidance of 11.4%.

Turning to Rest of World Installation & Services. Revenue of $1.1 billion, which was up 1% on both a reported and organic basis. Growth in service revenue accelerated to 5% on an organic basis while installation revenue declined by 4% due to continued weakness in the European markets. In the quarter, acquisitions contributed 1% to revenue growth, which was offset by a 1% decline due to changes in foreign currency exchange rates.

Orders increased 2% year-over-year with service orders up 4% and installation orders declining by 1%. The decline in installation orders was due to a tough compare with a large mining project in the prior year as well as continued weakness in Europe. Operating income before special items was $120 million and the operating margin was in line with the prior year at 11.1%. Backlog of $2.6 billion increased 5% on a quarter sequential basis.

As we look forward to the third quarter, we expect year-over-year organic revenue growth of 3% to 4%, supported by the increased backlog. Additionally, given the expected close date of recent acquisitions, we expect an additional $25 million of revenue. We expect the operating margin for the third quarter to be similar to last year as noncash purchase accounting adjustments, which are typically higher in the first few months after an acquisition, offset leverage on increased volumes.

Turning to Global Products. Revenue grew 11% in the quarter to $578 million. Organically, revenue was up 7% with a double-digit growth in our security products and life safety platforms. Acquisitions contributed 3 percentage points to growth in the quarter. Product orders increased 12% year-over-year with growth across all 3 platforms.

Operating income before special items was $97 million and the operating margin was 16.8%, a nice sequential improvement. Year-over-year, the operating leverage on increased volumes was more than offset by 80 basis points of planned incremental growth investments in R&D and sales and marketing. Looking ahead to the third quarter, we expect revenue to increase to a range of approximately $580 million to $600 million and the operating margin to increase to approximately 18.5% to 19%.

I also want to take a moment to discuss a legacy environmental matter at our Marinette, Wisconsin, Global Products facility, where we have been performing ongoing remediation. Prior to the acquisition of ANSUL in 1990, this site manufactured arsenic-based agricultural herbicides, which resulted in significant soil and groundwater contamination on the site and in sediment in parts of the adjoining Menominee River. During the second quarter of 2013 the results of a treatability study indicated that additional river sediment would require treatment and offsite disposal to comply with the terms of an administrative consent order that ANSUL entered into with the U.S. Environmental Protection Agency back in 2009. As a result, we recorded a charge of approximately $95 million on a pretax basis as a special item to increase the environmental reserve to reflect our best estimate of what will be needed to comply with the consent order. We expect that a large majority of the cost will be incurred within this calendar year.

Now let me touch on a few other important items. First, corporate expense before special items was $54 million in the quarter, a bit better than expected due to the timing of certain expenses. As many of you know, corporate expense tends to be higher in the second half of the year due to the timing of certain expenses and a number of actuarial valuations that we perform annually. Therefore, we expect corporate expense before special items in the third quarter to increase to approximately $60 million. Next, our effective tax rate for the quarter before the impact of special items was 17.9%. We expect the third quarter effective tax rate to be approximately 19%.

Now let me touch on cash and our cash flow expectations for the year. This year, we continue to expect adjusted free cash flow to be around 90% of net income. Based on this conversion rate, we expect our adjusted free cash flow for this year to be approximately $800 million with the bulk of that coming in the second half of the year. This free cash flow phasing is consistent with prior years and the normal seasonality of our business. During this year, we expect to return about $300 million to shareholders in dividends and the remaining will be used to fund acquisitions or repurchase shares.

Lastly, we are aggressively executing on our plan to integrate our fire and security businesses to improve productivity and reduce our cost structure. We are simplifying, standardizing and automating our operations as we bring together our fire and security footprint and execute our Branch in a Box strategy. In light of the progress we have made in identifying opportunities related to these initiatives, we are increasing our expectations around restructuring and repositioning charges for the year to a range of $75 million to $100 million from our original estimate of approximately $50 million. The benefit of these actions will deliver significant shareholder value as outlined in our 3-year plan.

Now let me turn things back over to George to wrap up this morning's call.

George R. Oliver

Thanks, Arun. Let's turn now to our overall earnings guidance for the third quarter and our expectations for the full year.

Based on our current order rates and backlog, we expect revenue in the third quarter to approach $2.7 billion with organic revenue growth of 1%. In terms of bottom line results, we expect to see a nice sequential improvement in the third quarter operating results across all 3 businesses, contributing $0.07 of earnings on a quarter sequential basis. We expect this to be partly offset by an increase in corporate expense and a higher tax rate in the third quarter, which when combined will cost us about $0.03 per share. In total, these items are expected to result in a net increase of about $0.04 per share on a quarter-sequential basis. With an expected average share count of approximately 472 million shares, we expect earnings per share before special items in the third quarter to be in the range of $0.45 to $0.47.

Now let me update you on our full year guidance. Based on current exchange rates, we now have a $75 million headwind to our original revenue estimate, which is expected to be offset by the impact of recent acquisitions. Therefore, we continue to expect revenue for the full year to be in the range of $10.6 billion to $10.7 billion.

From the time we originally gave our full year EPS guidance of $1.75 to $1.85, we now have a $0.05 headwind, primarily related to changes in foreign currency exchange rates and share count. Despite these headwinds and the uncertainty in the economic environment, we are increasing the low end of our guidance as we are confident in our ability to deliver on our second half expectations. We now expect full year earnings per share before special items to be in the range of $1.80 to $1.85, which represents an earnings per share increase of 12% to 15% over fiscal 2012's normalized base of $1.60.

Thanks for joining us on the conference call this morning. And with that, operator, please open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question today is from Jeff Sprague with Vertical Research Partners.

Jeffrey T. Sprague - Vertical Research Partners, LLC

George, just to elaborate a little bit more on the outlook. Obviously, you have always kind of a seasonally back end-loaded year. It seems like this year is maybe a little bit less backloaded than normal, I guess, because of the selectivity thing. But just give us a little bit more color on how that plays out Q3 versus Q4 and where kind of the upside versus downside to your guidance might be?

George R. Oliver

What I'd do, I'd start by saying, Jeff, when you look at our performance quarterly and then look at first half to second half, typically when you normalize our performance, it's about 45% in the first half, 55% in the second half. Now when you look at this year's third and fourth quarter, when you look at our full year guidance of $1.80 to $1.85, it's wrapped around a consensus of $1.83. And what's important here as you look at the underlying operations going forward in the third quarter, that really we're driving very strong operational performance. Now in the third quarter this year, we do have -- when you look at last year during the third quarter, we had a very strong retail quarter with high margins. And when you look at the compare there year-on-year, we have a mix of about $0.01 to $0.02 that's giving us a little bit of headwind in the third quarter. And typically, last year, when you look at our third and fourth quarter, typically our fourth quarter is the highest. Last year, during the third quarter, we had a very strong third quarter because of that retail business. So typically, we do get the lift in the fourth quarter, so it's a little bit of anomaly last year. But I think we're positioned very well in spite of the economic environment with the productivity and cost out that we're achieving, that in addition to the restructuring that's being completed, we're going to be very well positioned to be able to deliver on our guidance.

Jeffrey T. Sprague - Vertical Research Partners, LLC

Great. And I was also just wondering on the acceleration that you are seeing in some of the service revenue numbers. What's actually behind that? Is it prior install business that's now coming into the service stream? Is it people picking back up on service they deferred? Is there any kind of common theme there to take away? And what does it imply for the next year or so as we look out?

George R. Oliver

Well, I'd start with project selectivity. So if you go back and really think about our project selectivity that we've had in place now in fire for the last couple of years and we're implementing that within commercial security, that in itself yields projects that have higher service revenue attached to those projects over the life cycle of the projects. So when you look at our split between install and service, we're growing service 3% with install slightly down. That suggests we're getting a higher level of service for the installs on the install projects that we're performing. In addition, Jeff, we're increasing our capabilities in service and expanding our footprint. So when you look at our service sales reps year-on-year, we're up 8%. And so we're investing similar to what we're doing in our products business, reinvesting in technology. In service, we're reinvesting in capabilities and footprint to make sure that we're going to be positioned to be able to accelerate the service growth. And so it's really the combination of those 2 that has positioned us well to accelerate service 3% to 4% this year. And I think we'll be well positioned for next year to get to the 5% service growth.

Operator

The next question is from Nigel Coe with Morgan Stanley.

Nigel Coe - Morgan Stanley, Research Division

The backlog trends were somewhat better than I expected in both North America and Rest of World. And I'm wondering if maybe you could just add some color in terms of the end market conditions. Are we seeing some more product activity breaking free but maybe a bit more retrofit [ph] activity? Any color on the end markets this quarter versus previous quarter would be really helpful.

George R. Oliver

Sure. Let me start with the global GDP. I think we're seeing what everyone else is seeing with that global GDP down about 30 basis points. Now as we look at our business, it's a big element of our business, nonresidential construction that has a big impact on us. Now when you look at that space, the ABI, the Architecture Billings Index, is a lead indicator. And over the last -- it's been about 6 or 7 months, Nigel, that it's been improving. And so we've seen some of that with the activity that we see in the market. But a little bit of a concern that it has slowed over the last couple of months. And what's important to us is that in spite of what's happening within the macroeconomic environment, we're driving very strong productivity and cost out, controlling what we can control to make sure that we're going to be positioned to be able to deliver on our commitments. And so when you look at that, I think the reason why the backlog -- going back to the initial part of your question, when you look at backlog on our install orders, we were up about 2% in total. Now that is similar type of performance within North America and Rest of World. Now as you look at our backlog, sequentially we increased our backlog 3%. And we expect -- based on our order activity, we expect that to continue to increase in Q3. And what's important now is knowing what's within that backlog that we're going to be able to be positioned not only to deliver on the growth in the second half but also being able to deliver on the margin commitment over the next 2 quarters also.

Nigel Coe - Morgan Stanley, Research Division

Okay. No, it's good performance. And then maybe one for Arun. I've got to say, I wasn't expecting to hear the word arsenic on the Tyco call. Just to what extent do you believe that this is sort of capping the liability and that this won't escalate from what you've reserved this quarter?

Arun Nayar

Well, Nigel, first of all, you're right. This is something that goes back to the '40s and '50s, as part of the acquisition that we actually did in 1990. But the work, the arsenic work in producing the herbicides was done very early last -- very early in the last century, actually. So in terms of the second question that you had, the point is that we finished the treatability study, we did extensive work in coming up with the reserves that we have put on the books right now. And keep in mind that this work is going to be completed in the next 12 months. And so it's not a very long tail here that we're looking at and that's what gives us the confidence that we should be able to get this done within the reserves that we have put up.

Operator

The next question is from Steven Winoker with Sanford Bernstein.

Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division

First question, if you did look at the project selectivity, sometimes you have some thoughts about how much that actually did hold back organic growth in the timeframe. And I think it's often been a couple of points. What are you -- if you had to take a look, what do you think -- how much do you think that probably took away from growth this quarter?

George R. Oliver

So Steve, the way that I would look at this is that as we've discussed before that we have capacity to do design and be able to spec jobs that are more strategic to what we're trying to accomplish, which is the service growth. And so it's really now -- it's refocusing that activity, that resource with much more discipline around the projects that we put that capacity on, which then positions us to be able to get the recurring revenue longer term. So a lot of that is really just a reallocation of our resources and making sure that we're focused on the right spaces that drive those type of projects that create a service base for us longer term. And so I think in line with what we're seeing from on nonresidential construction standpoint, you would say that our overall install performance is in line or maybe a little bit above what we're seeing from a nonresidential construction standpoint.

Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division

Right. And surely, it would have been higher otherwise, I guess, is just what I'm just trying to get at.

Arun Nayar

I think if you think about it, Steve, our fire business, like George has said before as well, is growing in line with market. And as you look at what we are trying to do, as we get our security business in the same pace. Once we get through this lapping [ph] Issues, we should be growing the security in line with market. And today, the market is around the 2% to 3% if you look at U.S. GDP.

Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division

Okay. Perfect. And then the other question is on -- you used to talk about growth in net cost efficiencies of somewhere around -- I think it was something like $170 million to $100 million and reinvesting about half of that in growth investments. Another quarter in, some acceleration, taking additional restructuring, how are you thinking about those sorts of numbers now?

George R. Oliver

What I'd say, Steve, is across the board we're seeing good results on all of our initiatives, productivity, cost out and then the Branch in a Box and simplifying our infrastructure. We're very confident in the goals that we laid out back in September to get the $150-million-plus of growth savings. We're putting a lot of that back into the organic investment, as we have discussed, in R&D. And then positioning to make sure that we have a service franchise that can accelerate growth. We're offsetting the inflationary pressures. And then the net result is $50 million being generated that's going to the bottom line. And what I would say is on the sourcing side of that activity, on the $4 billion buy, we're seeing now accelerated progress. We now have the single global sourcing organization in place. We've strategically gone after each category. We're getting acceleration now of savings within each category. That's going very well. The Branch in a Box on the infrastructure, this is something that's going to take a little bit longer term. We're in the early innings of Branch in a Box. What I would say is we're making great progress as far as how do we take the commercial security businesses, combined with what we had within the fire protection businesses and really begin to synergize that footprint and that capability so that we're going to be positioned more competitively to be able to accelerate growth.

Operator

The next question is from Scott Davis with Barclays.

Scott R. Davis - Barclays Capital, Research Division

You spent a fair amount of time at the beginning of the presentation just talking about acquisitions and cash redeployment and such. And obviously, that's very important in a low-growth environment. But when you think about your pipeline, I mean, you announced a couple of small deals. Do you have enough of a pipeline and the confidence that you can move the needle? And I guess, kind of how I would define moving the needle is probably kind of adding $300 million or more to revenues per year.

George R. Oliver

Yes, Scott. Let me take that. When we look at our pipeline, we're focused on acquisitions that enhance our technology capabilities, fill any gaps that we have within our products. We look to strengthen our service capabilities, extend our service footprint globally and making sure that we've got the right footprint within the emerging markets. That's really the focus of our acquisitions. And we continue to be very disciplined on the returns that we expect on these acquisitions. So we have a pipeline that's very robust. We have historically been able to complete acquisitions that -- I think if you looked at last year, we had about $400 million of revenue that were associated to the acquisitions that we had done in the previous 12 months. And we're in a similar range with the pipeline that we're pursuing today. Now I would say that we've recently looked at a large acquisition that we walked away from because it didn't meet our financial hurdles. And then knowing that acquisitions tend to be lumpy, they're not linear over the course of the year, that we've also said we're not going to sit on cash. And so in the quarter, we did $150 million of share buybacks and we still have $600 million of share repurchase authority in place.

Scott R. Davis - Barclays Capital, Research Division

Okay. And just to be -- just to back up a little bit, I know the selectivity issue was very topical last quarter. And when you look at these numbers, it really didn't influence the results hardly at all really. I mean, it was fairly muted. I mean, is this more of the type of -- well, I guess, another way to say it is selectivity, is it a little less selective now? Or is it just that you got through one really tough quarter last quarter and from here on, it's a modest hit to the top line but not the kind of magnitude we saw last quarter?

George R. Oliver

Let me start by saying not at all. I mean, we're very disciplined, very focused in how we're growing our installation business, positioning ourselves to be able to accelerate service, and then being able to execute on those installation projects as planned. Now as we have said, the orders are very lumpy. Now as we look into the third quarter, as Arun mentioned during his comments, that we have a very large retail order that we had last year third quarter, and we showed 20% order growth last year. That was in the prior year. Now as we look at third quarter this year, without being able to repeat a similar order, we're going to have some pressure on our order rate in the third quarter, right? And so they tend to be lumpy. What's most important is that you're focused on backlog. And what's very attractive here is our backlog continues to increase, that we've increased 3% on a quarter sequential basis. And we do expect with the order activity that we see today that we expect that the backlog will continue to increase in the third quarter.

Operator

The next question is from Steve Tusa with JPMC.

Charles Stephen Tusa - JP Morgan Chase & Co, Research Division

So just for the fourth quarter, I guess, to get to the -- I kind of understand the third quarter bridge. But I guess, I'm just looking at the way consensus stacks up, you've got a -- you're a little bit below consensus for the third quarter, but you're kind of like revising your estimates higher for the rest of the year, which means the fourth quarter is going to be revised up substantially when it comes to consensus. So I'm just curious, I think the high end of the range gets you to like $0.57 using the midpoint or something like that for the third quarter. Is there another moving part, like is tax rate a little bit lower now for the year, to kind of bump that number up? I know you kind of beat it by a couple of pennies this quarter. So maybe I'm just struggling a little bit with kind of the fourth quarter dynamics and what's implied there.

George R. Oliver

So let me start by looking at the third quarter. So third quarter, as we said, we have a $0.07 additional earnings from operations on a quarter sequential basis. So we're making some real nice progress operationally quarter-to-quarter sequentially, and that will continue third to fourth quarter. Now in the third quarter, as I said, we have a little bit of a headwind because of the retail revenue that we had last year, which is about $0.01 to $0.02 impact. And then we also have the negative swing in corporate and below-the-line items, which is about a $0.03 impact. So the net sequential improvement was about $0.04. Now when you look at our guidance, to the midpoint of our guidance, it would assume $0.54 in the fourth quarter. And based on our performance, in the plans that we have in place with the revenue and the orders that we have in place for the remainder of the year, extremely confident that we're going to be able to deliver not only on the revenue but be able to deliver the improvement in operating margin for the total year.

Charles Stephen Tusa - JP Morgan Chase & Co, Research Division

Okay. And so what would be now the annual corporate and tax rate guidance?

Arun Nayar

So Steve, the tax rate is we're guiding still to the 19% to 20%. We expect we'll probably end up in the lower end of the 19% to 20%. But the guidance is still the 19% to 20%. In terms of corporate, we may be a little bit higher than the $225 million that we had guided to. But keep in mind that the interest expense will be a little bit lower than what we had guided to. So the 2 together should be in the same -- as a combination, should be the same as before.

Charles Stephen Tusa - JP Morgan Chase & Co, Research Division

Okay. And is there anything in the revenue comps for these businesses that swings around a little bit or it's pretty much in line with expectations? I mean, is there -- does products pick up? It looks like product picks up a little bit in the fourth quarter. Is there anything there? I'm just backing into what you used for the annual guidance?

George R. Oliver

No, we're right in line with the annual guidance. As far as the split between the segment, Steve, is that what you're asking?

Charles Stephen Tusa - JP Morgan Chase & Co, Research Division

Yes.

George R. Oliver

We're pretty much -- Arun talked a little bit that we're maybe a little bit better in North America. But on average, we're about in line with the guidance that we provided and in line with the margin rates also with the activity that we have, with the productivity cost out and restructuring that supports that for the remainder of the year.

Antonella Franzen

Yes. And Steve, the only thing I would add in the comments that both George and Arun made is that you will continue to see sequential improvement in the margin across the board in all 3 segments going into the third quarter and going into the fourth quarter.

George R. Oliver

And Steve, one thing to note there is with the restructuring yield, based on the current economic environment and positioning not only for the second half but for next year, we've accelerated some of the restructuring programs.

Operator

The next question is from Gautam Khanna with Cowen.

Gautam Khanna - Cowen and Company, LLC, Research Division

Can you calibrate us on what percentage of the revenues today come from new nonresi and maybe some color on the verticals in nonresi, where you're seeing more RFP activity, and when those might convert to orders?

George R. Oliver

When we look at our install business, right, in the downturn, there was much higher percentage that was tied to upgrades, repairs and that type of business. Now as we go forward, with a new, new business, we will start to see a shift in that. But we really haven't seen a change in that mix since the downturn. I mean, recognize that the nonresi construction space really hasn't had much of a recovery and then therefore, we're anticipating that we're going to start to see a pickup. But it's a about in line with what historically you've seen over the last couple of years.

Gautam Khanna - Cowen and Company, LLC, Research Division

Okay. And in terms of kind of RFP activity, which verticals are you starting to see kind of the ABI stuff actually manifest in quoting activity?

George R. Oliver

Well, I mean, it's a little bit across the board. There's some commercial. On the commercial vertical, we're starting to see activity. Oil and gas is another that we're starting to see activity. Health care is one that we have, depending on where we are, we've got a strong position. So it would be the ones that you would expect, given the activity in the market.

Gautam Khanna - Cowen and Company, LLC, Research Division

Okay. And George, just one last one. Can you remind us when you kind of realigned the sales force incentives to align with that project selectivity initiative? Was it in the September quarter? Was it at the end of it? So the optics will improve when, in the December quarter with respect to year-over-year orders?

George R. Oliver

Yes. We changed the incentives. As we planned for the combined company, starting in September, we planned our incentive systems in line with our strategy. And that's when we had the full implementation of project selectivity in commercial security. Now we continue to work to get, as we think about the combination of fire and security, to have very common standardized incentive plans in place across the globe for 2014.

Gautam Khanna - Cowen and Company, LLC, Research Division

Got it. So we lap -- December will be the first kind of clean quarter, where we have the...

Antonella Franzen

There might be some comparability variability in the first quarter because we implemented all of this in the first quarter of this year. But clearly, as we progress through the other quarters of '14, clearly the lapping issue is far behind us.

George R. Oliver

Just recognize we had 2 different structures before. So we had a commercial security structure and a fire structure. There were incentive systems in place. Within those systems, we realigned those to the strategy of project selectivity driving revenue growth -- driving profitable growth, both revenue and margin. And so now as we think about the combination of the businesses, as we have discussed, we've begun to now integrate these businesses regionally. And so now we're going to one standard platform that enables us to be able to incentivize no matter where our people are with the same system, with the same metrics to be able to deliver on our growth strategy.

Operator

The next question is from Ajay Kejriwal with FBR.

Ajay Kejriwal - FBR Capital Markets & Co., Research Division

So maybe if you can talk a little bit about service in Europe. We saw both Niscayah and Chubb kind of seeing pressure here, but looks like your service revenues were up nicely. So maybe talk about what you're seeing there. And is there any favorable shift in share for you?

George R. Oliver

I'd start, Ajay, by saying overall, we continue to perform very well relative to the economic environment that I think everyone is seeing. So when you look at our overall performance, organic growth was down just modestly in the second quarter. What's pleasing to us is that the growth in service is plus 3%, so a 3%, and products was also positive 3%, which was offset by a decline in installation, which was high single-digits. Now what I would say is that the combination of the strategy, the focus on project selectivity and making sure that we're focused on the end markets and the type of projects that lead to service revenue is a big part of this success. We've also been investing in new products and new platforms within our product businesses to be able to serve the European market. And the combination of the 2 really have positioned us well in spite of the economic environment to be successful. And I also would say is that if you'd go back 3, 4, 5 years, there was a lot of restructuring that took place within the old Tyco in really getting the fundamentals of these businesses back in line so that we would be positioned to be able to reinvest in the businesses to be able to accelerate growth. So it's a combination of those activities.

Ajay Kejriwal - FBR Capital Markets & Co., Research Division

Got it. So you did, in terms of restructuring, what your competitors are doing now a couple of years ago, so you have much better position. Is that kind of what's helping you?

George R. Oliver

Absolutely. I'd say we've done a lot of restructuring. And now with the combination we have with commercial security and fire, we're continuing to do more restructuring. But I would say that we restructured the businesses to get to very attractive fundamentals in previous years. And now we're continuing to get the benefit of additional restructuring to support our growth as a new company.

Arun Nayar

And Ajay, delivering double-digit margins across Europe while we are growing [indiscernible].

Ajay Kejriwal - FBR Capital Markets & Co., Research Division

Of course. And then in the context of portfolio review, maybe update on 2 things. First, the stake you have in TEMP. And then I know you have very nice guarding businesses in Korea and South Africa. So how should we be thinking about those 2 businesses in light of the divestiture here in North America?

George R. Oliver

Well, I'll start by -- we look at all of our business units all the time looking at the strategic nature of the business, and as we think about our growth strategy, how they fit within that growth strategy. So we're constantly looking at our businesses, which led to the divestiture that we announced within North America of our guarding business. And so what I would say is we're going to be constantly looking at that to make sure that the assets that we have support the overall growth that we're trying to achieve as a new Tyco. Now I'll turn it over to Arun to talk a little bit about TEMP, and then we can talk about how we think about any other assets.

Arun Nayar

Yes. So Ajay, on the TEMP, as you know, it was December, Q1 of 2011, when we spun off 50% of TEMP to CD&R. And so we have a slightly under 50% interest in that company. And the intention was that when there is a resurrection of the nonresi commercial market, that business would pick up and we would, at that point in time, sell our interest either to CD&R or to a third party. And we continue to evaluate that. The market hasn't recovered as quickly, as we all know, as we had expected. And at that time, it's appropriate, we will -- that's something we have as an option to divest at the appropriate time at the appropriate value.

George R. Oliver

And then relative to your question about South Africa and Korea. The difference there is that the guarding business is part of a business that actually has very attractive recurring revenue. And so as we look at all of our assets, we make sure that the businesses that -- a big part of our strategy is being positioned to accelerate service growth, which accelerates the ability to be able to deliver returns to our shareholders. And so as we look at these businesses, that's what we're looking for.

Operator

The next question is from Deane Dray with Citi Research.

Deane M. Dray - Citigroup Inc, Research Division

I was hoping to get a little more color on the mix in your security orders. Can you talk a bit about what you're seeing in terms of contribution from new products? Visonic has been a big success, we can see. But are there any themes that you're seeing playing out, conversion to digital and maybe adoption of wireless?

George R. Oliver

Well, what I would say, I mean, I think you saw some of the success that we've had with the new products we brought to market at the ISC West. And I think in line with that, there is a trend, right, to being more digital, to being more IP, of the ability to be able to integrate multiple capabilities to provide solutions that get at what customers want, that drive value for our customers, drive security. So there is a trend. And what we're doing within our platforms is making sure that we've got the platforms, not only to bring the individual technology within specific products but be able to be successful in integrating those technologies into broader solutions. And so I think there is a trend with that happening in the investments, Deane. The investments we've made in our security products platform, as you know, we've made some significant investments over the last 3 or 4 years organically in the intrusion platform, as well as we made the Visonic acquisition to complement the organic investments that we've made. And we're getting very nice returns on the combination of those investments.

Arun Nayar

And in the security products, Deane, both orders and revenues growing at solid double-digit growth rate.

Deane M. Dray - Citigroup Inc, Research Division

And do you have a sense -- I'm unsure whether you've started measuring the vitality. So how much of these orders are being reflected of these new products?

George R. Oliver

We have -- we look at vitality across all of our Global Products. And there's about 1/3 of our revenue that are tied to investments we've made over the last 3 years. Now the security products has a higher vitality because of the nature of the business being electronic and our fire products business has a lower vitality. But on average, Deane, it's about 1/3 of our products are tied to investments we've made over the last 3 years.

Deane M. Dray - Citigroup Inc, Research Division

Great. And then just last for me. For Arun, can you comment on the payback on this additional restructuring? And then I might have missed this. On the environmental remediation, is that charge net of expected insurance proceeds? And what is the insurance factor in the charge that you're taking?

Arun Nayar

Yes. There are 2 questions there, Deane. The first one in terms of the payback period, everything that we do on a -- for restructuring in the organization has a payback of 2 years or less. And that's a discipline that we deploy in every dollar that we spend for that matter. On the environmental matter, the -- sorry, what was your question on the environmental matter?

Deane M. Dray - Citigroup Inc, Research Division

It wasn't clear whether there was -- the charge you're taking is net of expected insurance.

Arun Nayar

Yes, sorry, on the insurance coverage. Yes, Deane. No, this is -- there are no insurance recoveries on this matter. The insurance has been exhausted completely.

Deane M. Dray - Citigroup Inc, Research Division

Oh, I see. So it's exhausted. Do you get -- is it an opportunity for a Superfund?

Arun Nayar

No, it is not.

Operator

The next question is from Shannon O'Callaghan with Nomura.

Shannon O'Callaghan - Nomura Securities Co. Ltd., Research Division

First, can you just clarify a little bit on the available cash here? I mean, you're talking about the $8 million -- $800 million, sorry, of adjusted free cash, you have the $300 million dividend. But now, I guess, you would probably have higher cash restructuring and also the environmental. So can you give us like sort of -- I mean, is there really a spare $500 million? Or are you going to take a little more debt on the balance sheet? Or just maybe walk me through that.

Arun Nayar

We're still looking at the spare $500 million to be spent between acquisitions and share buybacks, Shannon. Keep in mind that we had a slightly larger than expected opening balance when we started on October 1 as the new Tyco. We were expecting a balance of $400 million. We actually started with $800 million. And so that incremental $400 million is available for things like the environmental issue here, things like the separation cash flow that we need to cover for the expenses that we took in 2012, but the cash is flowing out in 2013 and for other legacy matters, particularly we talked about the tax legacy payment that we expect to pay around $175 million for.

Shannon O'Callaghan - Nomura Securities Co. Ltd., Research Division

Okay. Great. That helps. And then on Global Products, just a few questions. The margin expectation for the year now, what is that? And what are you assuming for this ramp in R&D and sales within that number? And also if you have the organic order growth for products this quarter.

George R. Oliver

Yes. Let me start by saying, as you know, in these businesses we've been over the last -- it's been 4 or 5 years, we continue to increase our investments in R&D. And we're seeing the resulting success with double-digit growth here over the last couple of years and very strong growth this year. Now when you look at the investments this year, it's about an incremental $30 million. And a lot of that -- it was heavier in the first half than what it's going to be in the second half. So that will have an impact on the second half performance. Also when you look at the mix, we're going to have a higher mix of higher-margin security, as well as life safety products in the latter part of the second half. So when you look at our performance that we're projecting for third and fourth quarter, we'll continue sequentially to increase the margin each quarter. And then with the volume and leverage we get also in the second half of the year, that will also contribute to being positioned to be able to deliver margins for the year, about 18%. And that also is being assisted, when you think about the productivity, the sourcing initiative focusing on the $4 billion buy, that impacts all of the 3 segments. We're getting benefits that are enabling all 3 segments. And so that, combined with some of the additional restructuring also is going to make sure that we're going to be positioned to deliver on the 18% for the year.

Shannon O'Callaghan - Nomura Securities Co. Ltd., Research Division

Okay. And then did you have the order, organic...

Arun Nayar

So we expect the continuation of the order intake at the mid-single-digits that we talked about. Both orders and revenue should be in that mid-single-digits.

Shannon O'Callaghan - Nomura Securities Co. Ltd., Research Division

And that's what they were this quarter, too?

Arun Nayar

They were as well. This quarter is 7%, is the organic growth on the revenue side and the same on orders.

Antonella Franzen

Operator, I believe that concludes our call.

Operator

Thank you. This does conclude today's conference. Thank you very much for joining. You may disconnect at this time.

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