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Call Start: 8:30

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Tyco International Ltd. (TYC)

F1Q10 (Qtr End 12/31/09) Earnings Call

January 28, 2010 8:30 am ET

Executives

Edward D. Breen – Chairman of the Board, Chief Executive Officer

Edward C. Arditte - Senior Vice President

Christopher J. Coughlin - Chief Financial Officer, Executive Vice President

Analysts

Deane Dray - FBR Capital Markets

John Inch - Bank of America Merrill Lynch

Scott Davis - Morgan Stanley

Nigel Coe - Deutsche Bank

Steven Winoker – Sanford Bernstein

Steve Tusa - JPMorgan

Gotham Kanna (ph) - Cohen

Operator

Welcome to the Tyco first quarter earnings call. (Operator's Instructions) I'll now turn the call over to Mr. Ed Arditte. Sir you may begin.

Edward C. Arditte

Good morning, ladies and gentlemen. Thanks for joining our conference call to discuss Tyco's first quarter results for fiscal year 2010 and the press release issued earlier this morning. With me today on are call are Tyco's Chairman and Chief Executive Officer Ed Breen, and our Chief Financial Officer Chris Coughlin.

Let me remind you that during the course of the call we will be providing certain forward looking information. We ask you to look at today's press release and read through the forward looking cautionary informational statements that we've included in the press release. In addition we will use certain non-GAAP measures in our discussions and we ask you to 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 the conference call slides can be found on the investor relations portion of our website at www.tyco.com . Now let me quickly re-cap this quarter's results.

Revenue in the quarter of $4.25 billion declined 4% over the prior year, with an organic revenue decline of 9.6%. Earnings per share from continuing operations attributable to Tyco common shareholders was $0.63 and included $0.02 for weighted special items. Before special items earnings per share was $0.65.

Now with that let me turn the call over to Ed Breen.

Edward D. Breen

Thanks, Ed, and good morning, everyone. I'm pleased with our results this quarter and with the hard work of our team around the globe whose efforts helped us achieve better than expected earnings, despite the challenging economic environment.

Our results for the quarter continue to be driven by our cost management and restructuring efforts as well as the continued strength of our service and recurring revenue business which represents over 40% of our total revenue. It is these actions coupled with the growth of our service business which have largely offset the impact of lower revenue in our product businesses and in our systems installation activities at ADT and Fire.

While we have started to see the rate of revenue decline slow, this portion of our business continues to be soft. As a result we continue to actively work both our restructuring activities and tighter cost management. These efforts were reflected in our operating margin this quarter. Despite a $400 million organic revenue decline, we maintained our operating margin year over year.

Now let me make a quick comment or two about each of our businesses, and Chris will provide you with more detail in a few minutes.

Starting with ADT our income performance of the quarter was strong. Similar to the last few quarters, growth in recurring revenue helped to partially offset declines in our systems installation and service revenue. We also saw continued improvement in our operating margin both sequentially and year over year as growth in the higher margin recurring revenue business combined with the benefits of cost containment initiatives and restructuring more than offset the decline in volume.

Additionally, a number of our team metrics, particularly growth in our account base and average revenue per user continued their positive momentum. Next we continue to see soft conditions in flow control as we enter the low point of our cycle. While we have improved productivity and implemented cost containment initiatives, these actions can only partially offset the impact of volume de-leveraging on the operating margin.

We will continue to see pressure in flow control through the first half of the year but we expect that the improvements we have made in the business over the last few years and a modest pickup in the second half of the year should improve our performance. Additionally the continued stabilization of our backlogs is also encouraging.

Turning to Fire, revenue was better than expected and the operating margin benefited from cost containment initiatives. We continue to focus on growing our service revenue and maintaining our strong position in key vertical markets.

In Safety Products, the sequential revenue decline was offset with product mix and cost savings, resulting in operating margin performance similar to the fourth quarter. Our order activity has stabilized and we feel good about our ability to strengthen our margins when the revenue environment improves.

And finally, Electrical and Metal products performed as expected. Although demand for steel and copper building products remains soft, both steel and copper prices are beginning to increase which is expected to improve our operating performance in the second half of the year.

Before I turn it over to Chris, I want to comment on our operation areas of focus for 2010. First we are continuing to invest in our businesses to strengthen our long-term competitive capabilities, and our initiatives are both product and service focused. As we indicated, our intention is to maintain our long term investment plan, despite the economic environment.

Secondly we are carefully managing our cost structure and continue to look for cost reduction opportunities. We have aggressively executed restructuring actions over the last year, which are expected to provide incremental savings of $175 million in 2010 and we will implement additional restructuring actions throughout the course of this year.

Next, the last year and a half has shown the importance of maintaining a strong balance sheet. Our cash position is strong and we will deploy our cash to fund our internal growth initiatives, as well as productivity and restructuring plans. As we generate excess cash, we will invest in areas that generate the best return for our shareholders which will include both on acquisitions on security, fire and flow control as well as share repurchase.

In December we announced the acquisition of two privately held resilient valve manufacturers, which expands and compliments the flow control product offerings in Brazil, and gives Tyco a leadership position in the Brazilian market, a market we have continued to target. As you all know, we announced last week that we have entered into a definitive agreement to purchase Brinks Home Security which operates as Broadview security. These acquisitions are being funded in a balanced tax efficient way that keeps our balance sheet strong, and we expect them to contribute nicely to earnings and cash flow and generate solid returns on capital.

Finally we recently announced a proposed dividend increase that our shareholders will vote on at our annual general meeting in March. The proposed dividend represents a 5% increase over the $0.80 per share dividend approved by our shareholders in 2009. Now let me turn the call over to Chris to discuss our operating results in more detail.

Christopher J. Coughlin

Thanks, Ed and good morning, everyone. Let me start with ADT Worldwide. Revenue of $1.8 billion declined 3% organically as the 5% growth in recurring revenue was more than offset by a 13% organic revenue decline in Systems Installation and Service. Recurring revenue which represented over 55% of ADT's total revenue in the quarter, continues to perform well. However Systems Installation and Service revenue continues to be impacted by the weak economy.

Despite pressure on the top line, the operating margin before special items in the quarter of 14.4% improved 180 basis points over the prior year. Restructuring activities along with cost containment actions and growth in our higher margin recurring revenue business more than offset volume headwinds resulting in the year over year operating margin improvement.

From a regional perspective within ADT, our North American Residential and Small Business unit grew with recurring revenue 8% organically in the quarter, due to a strong account growth in the second half of 2009, which was partly attributable to opportunistic bulk account purchases. Additionally the operating margin before special items improved a full percentage point over the prior year. Recurring revenue currently represents more than 85% of our Residential and Small Business revenue and continues to provide steady and consistent performance.

On a year over year basis we grew our residential account base by almost 5% while increasing our average revenue per user by 3%. additionally our residential attrition rate improved by 10 basis points to 13.3% on a quarter sequential basis.

Turning to our North American commercial basis, the revenue mix is quite different. While 40% of our revenue was recurring, the remaining 60% is related to Systems Installation and Service. Although our commercial end market continued to be impacted by economic downturn, the rate of organic revenue decline has slowed somewhat and was down 11% in the quarter. However the operating margin before special items improved 130 basis points year over year to 10.8% as a number of positives including the benefits of restructuring and cost containment initiatives offset the volume decline.

The attrition rate increased 20 basis points to 14% while orders remained relatively flat on a quarter sequential basis.

Moving onto the Europe, Middle East and Africa region. Organic revenue declined 8% however the benefits of our restructuring actions are taking hold and helped contribute to an improvement in the operating margin before special items which increased by more than two full percentage points over the prior year to 6.4%.

In the Asia Pacific and Latin America regions which are predominantly commercial organic revenue grew 2% on a combined basis. The operating margin before special items improved approximately 150 basis points year over year and remains in the low teens.

Turning next to some of our key metrics, our global account base grew 3% year over year to almost 7.5 million accounts. Excluding the impacts of foreign currency, our average revenue per user grew 1% to $46.32. Both our account base and average revenue per user have been steadily increasing throughout the global downturn. While the worldwide attrition rate increased 10 basis points to 13.5% on a quarter sequential basis it has consistently stayed in the mid-13% range for the last four quarters.

Now I'll turn to Flow Control which had revenue in the quarter of $923 million with an organic revenue decline of 14%. Valves declined 15%, water declined 10% and thermal controls declined 14% due to continued softness in capital spending in our in markets. Before special items, operating income was $118 million and the operating margin was 12.8%. the operating margin performance in the quarter was better than we had expected, due to product mix, particularly the season strength of thermal controls during the winter months. However the significant volume de-leveraging resulted in a 170 basis point decrease in the operating margin before special items. Year over year, as the benefits of cost containment action and restructuring activities were more than offset by the $130 million organic revenue decline.

Excluding currency, the year over year order rate decline slowed to 13% from 18% in the prior quarter. On a quarter sequential basis, orders remain relatively flat excluding the large pacific water project we booked in the fourth quarter. Although we continue to see a pickup in quoting activities, we are not yet seeing this translate into a meaningful change in our order levels. Backlog of $1.65 billion declined 2% on a n organic basis, the second consecutive quarter with minimal backlog decline.

Turning to our Fire Protection services, revenue for the quarter was $833 million and the organic revenue declined 6% as we continued to experience softness in Systems Installation revenue and to a much lesser degree in our service revenue. Service represents about half of Fire's revenue and declined 2% organically as growth in Inspection and Maintenance revenue was more than offset by customers delaying other service projects.

Systems Installation revenue declined by 10% organically in the quarter due to weaker demand in our in markets. The backlog of $1.2 billion remained flat on an organic basis which is encouraging. Before special items, operating income was $64 million and our operating margin was 7.7%. The benefits of cost containment and restructuring actions are helping to mitigate margin pressure from the lower revenue.

Moving on to Safety Products, revenue in the quarter was $358 million with an organic revenue decline of 14%. Organic revenue growth of 4% in Life Safety was more than offset by soft demand in our Fire Suppression and Electronic Security in markets. Organic revenue declined 22% in Fire Suppression and 10% in Electronic Security. Before special items, operating income was $53 billion and the operating margin was 14.8%. Better than expected operating income in the quarter resulted from product mix in particular higher margin Life Safety and Electronic Security products.

On a quarter sequential basis, the benefits of our cost containment initiatives and restructuring actions essentially offset the continuing revenue headwinds as well as it increased investment in sales and marketing capabilities and research and development.

Lastly, Electrical and Metal Products had revenue of $297 million in the quarter with an organic revenue decline of 30%. The revenue decline was primarily due to significantly lower selling prices for both steel and copper products. Decreased volume also contributed to the decline, although to a much lesser extent. Operating income before special items of $23 million was about what we had expected. On a year over year basis, lower revenue was almost fully offset by improved steel strengths.

Looking ahead to the second quarter, we expect revenue and operating income before special items to be similar to the first quarter. Based on in-market demand and pricing activity in the quarter, as well as the seasonal lift we get in the summer months, we continue to expect that operating income before special items for the full year should approximate $120 million in our Electrical and Metal Products business.

Before I turn the call back over to Ed, let me touch on a few other important items. First, from a cash flow perspective, we had a good start to the year. Our free cash flow in the first quarter was $79 million and included $50 million of payments primarily for restructuring. This compares to a free cash outflow of $215 million in the prior year which included $25 million of payments primarily related to restructuring. Year over year increase in cash flow is primarily attributable to the management of working capital.

Next, corporate expense in the quarter was $98 million, which included $2 million in special items. This is somewhat lower than our previous guidance of $110 million, mostly due to the timing of certain expenses. In the second quarter, we expect corporate expense to approximate $110 million and continue to expect our full year corporate expense will approximate $430 million.

Next, other income in the quarter of $9 million related to an increase in receivables from Covidien and Tyco Electronics under the tax sharing agreement related to pre-separation taxes. This income was more than offset by a charge reflected in the tax balloon.

Finally our tax rate for the quarter was 14.9%. This was well below the annual guidance of 19%-20% due to the accounting timing of certain items. Although the tax rate can more around from quarter to quarter, we continue to expect both a second quarter and annual tax rate of 19%-20%.

Now let me turn the call back over to Ed Breen to wrap up this morning's call.

Edward D. Breen

Thanks Chris. Before we open up the lines for questions, I want to spend a few minutes on our guidance for the second quarter and our expectations for the second half of the year. Based on our current order rates and backlog we expect an organic revenue decline of approximately 6%-8% in the second quarter. Additionally, we expect that foreign exchange rates will favorably impact revenue by approximately 6% year over year. Therefore we expect total revenue in the second quarter, which is seasonally our lowest quarter to be approximately $4.1 billion.

From a business perspective, we see positive growth in ADT's recurring revenue in the 4% range offset by a revenue decline in Systems Installation and Service, which should result in a flattish organic revenue growth rate year over year. However we expect a sequential decline in operating margins before special items to 14% due to the seasonal nature of our retail business, which traditionally benefits in the first quarter from higher revenue and operating income.

Next we expect continued revenue headwind in Flow Control. We think the second quarter is likely to be our trough (ph) quarter with the year over revenue decline resulting in additional volume de-leveraging. In addition the first quarter benefited from the high margin mix of our seasonally strong thermal business.

For the second quarter we expect Flow Control revenue to approximately $900 million and the operating income before special items to approximate $100 million. Additionally, the seasonal decline in our Fire business is expected to result in revenue of approximately $800 million in the second quarter. Despite the revenue decline, we expect the operating margin before special items to be similar to the first quarter.

In Safety Products, we expect an organic revenue decline in the low teens and an operating margin before special items of approximately 14%.

Lastly, as Chris mentioned, we expect sequential headwinds related to an increase in both corporate expense and the tax rate in the second quarter in comparison to the first quarter. These increases will cost us approximately $0.08 per share sequentially. From an earnings perspective, this expected to result in earnings per share from continuing operations before special items in the range of $0.50-$0.52 per share.

As we look to the balance of the year, there are a few items that we expect to be tailwinds in the second half of the year versus the first half of the year. First, as Chris mentioned, Electrical and Metal Products should have a much better second half of the year due to more favorable volume and pricing for both steel and copper. As a result, the earnings contribution from this business should be much higher in the second half of the year.

Second, our other businesses, particularly ADT and Fire also have seasonal increases in revenue and income in the third and fourth quarter. Despite the economic environment, we expect both of these businesses to earn at a higher rate in the second half of the year, due to their customer base and when work is scheduled.

Lastly, we expect Flow Control to exit the low part of the cycle in the second half of the year, which will increase its earnings contribution. Based on our current order activity, which is performing as we expected and our specific business expectations for the remainder of the year, we continue to see our full year earnings per share before special items to be in the range of $2.30-$2.50.

Thanks for joining us one our conference call. Operator, let's open it up to any questions.

Question and Answer Session

Operator

Thank you. (Operator's Instructions) Our first question is from Deane Dray with FBR Capital Markets. Your line is now open.

Deane Dray - FBR Capital Markets

Thank you, good morning everyone. Can we follow up with hose comments on the second half seasonality for Tyco. We certainly didn't see much of a normal seasonality this year, or in 2009. Can you expand on what was typical seasonality in 2007/2008? Then within your guidance for this year, it still does not assume a significant economic pickup – so if we see some restocking and some economic activity coming back, how might that change your assumptions?

Edward D. Breen

You are absolutely right, we are not counting in this guidance on economic pickup. A very little bit in the second half of the year which would be in the Flow area, but not anything significant. So our guidance is truly based on orders staying at these levels. So you are correct, if we see pickup on order activity, that clearly will help the year out but we are not counting on that in the guidance.

If I go back – maybe I'll use 2008 which I think was a very typical trend year for the company, we definitely pick up in the second half of the year If I remember the numbers correctly, our revenue in the second half of that year was $800 million higher than in the first half of the year. I thought it was also interesting last year, although you didn't actually see it as much in the numbers, but as business was trending down for everyone last year, we actually did have some seasonal lift that occurred and our revenues were $90-$100 million higher in the second half of last year than in the first half, despite the decline we were going through. So we clearly see seasonality.

The biggest pieces as I mentioned a moment ago are in Fire and ADT. We do an awful lot of work in the spring and summer months when work is scheduled, number one because of warm weather but number two we have key verticals like the education vertical that want us to cram all of our work into the summer months when their campuses and schools are either closed or less busy, so we clearly see that happening. We normally do see some lift seasonally in our Flow Control business in the third and fourth quarter so we're expecting all of that to occur. Maybe to a lesser extent with the economy, but it will occur for us.

And then as Chris and I both mentioned, Electrical and Metal, I think just with all the trends we're seeing here will have a stronger second half of the year than first half of the year for us. So I think we're keying up nice, I would hope that would get us more towards the higher end of our guidance range. I think things would have to fall apart (inaudible) will have to (inaudible) the economy at this point for us to be down to the low end of the guidance range. Clearly getting off to a very good start in the quarter with the $0.65 builds my confidence that we are off to a good start to get there.

Christopher J. Coughlin

I might mention that in the second quarter specifically, if you look back, that quarter in particular is always our lowest quarter because of the seasonality that Ed mentioned with Retail and ADT trailing off in the first quarter. Strong thermal margins that we always have in the first quarter. And that's particularly when you look at that skewed temp that can move all over the place depending on where steel spreads are as well as our corporate expense.

Deane Dray - FBR Capital Markets

Great, and if I can just have clarification. It was interesting how you reported ADT this quarter, you're calling that the North America ADT business. I know in the past we've looked at U.S. My guess is this may be a recast, either reorganization or also an anticipation of integrating Brinks, because they (inaudible) basis, so just give some color about what that change is and if we were to look back at what U.S. might have been this quarter.

Christopher J. Coughlin

Specifically we'll be giving you the disconnect rate that some of the other key metrics on a North American basis as opposed to just a U.S. basis. In our numbers though that we've given you each quarter, it's really been on a mostly North American basis. As we move forward here obviously with the announcement last week to acquire the Brinks Broadview business it operates on a North American basis as well, and so once the transaction closes we'll be presenting you with North America, which is obviously very heavy U.S. and a little bit of Canada.

Edward C. Breen

And Canada's results are very similar to our U.S. results so you aren't seeing any variation there when we put that in.

Deane Dray - FBR Capital Markets

And the same profitability?

Edward C. Breen

About the same, yes.

Deane Dray - FBR Capital Markets

Thank you.

Operator

Thank you. Our next question is from John Inch with Bank of America Merrill Lynch. Your line is now open.

John Inch - Bank of America Merrill Lynch

Thank you. Firstly, why are we guiding this quarter to such a narrow range when the last couple of quarters you have basically beat by $0.10-$0.20. Just intuitively, shouldn't the range because of all these moving parts and the recent couple of quarters, shouldn't the range be wider?

Edward C. Breen

One of the reason that we had the quarter that we did in Q1 was the anomaly of the timing of accounting that we had in both tax and corporate. It's always difficult, particularly in the tax area because our tax rate is going to move significantly quarter to quarter, but we have a pretty good sense of where it's going to end up on a full year basis. So what we try to do is just sort of operationalize those areas that can move and realize that there can be a swing factor from quarter to quarter. I think operationally if you look at our second quarter the margins of most of our businesses are holding relatively steady. We do have a decline in the Flow business with a fairly significant drop in our organic revenue forecast that will reduce the operating margin in Q2 in the flow business so we're pretty comfortable with that range.

Christopher J. Coughlin

We typically have on a quarter a $0.02-$0.03 range really over the last several years, so I think it's also in keeping with what our pattern has been.

John Inch - Bank of America Merrill Lynch

So in other words, the way to think about this is that this is your operational view with a caveat or an asterisk that these other times like tax can actually swing the results. Is that what pretty much what you're saying?

Edward C. Breen

Absolutely.

John Inch - Bank of America Merrill Lynch

Okay. I actually just wanted to ask about ADT in Asia Pacific and Latin America. 2% organic growth and yet those economies, certainly in Asia and China are booming. Why is that business not growing more quickly, and do you think it will grow more quickly based on resources that are being allocated there?

Edward C. Breen

I think that business will pick up over the next 12 months from an organic standpoint, I think you're absolutely right. The global economy saw a global downturn. Our business there, remember, is mostly commercial so I think we saw a downdraft in orders there although they did stay positive in those regions. But we saw a down draft there and we're starting to see – and I think everyone else is economic activity rebounding in China and in India, so my gut is that we will benefit and our organic rates will pick up in some of those more emerging markets. The fact that they stayed positive for us felt good in this down turn but they were up around 10%-12% type numbers and my gut is that we will work our way back up there over some period of time.

Christopher J. Coughlin

Our margins in that group of businesses continued to be quite good, particularly given the mix of recurring and non-recurring that we have, and actually as we indicated in our remarks had better year over year margins on relatively low organic growth in the quarter.

John Inch - Bank of America Merrill Lynch

Lastly, if you take a step back and look at Tyco's history and where things are heading, there's now a shift toward M&A. Obviously Broadview was opportunistic but you're stepping up M&A in other areas, you did the Brazil flow deal. Can I ask you why within your portfolio – why does it make sense to be building the Flow business? How do you think of Flow in conjunction with what that has to do with Fire Security? I understand Fire Security but why do you want to build the Flow business versus maybe focus on building the Fire Security business disproportionately?

Edward C. Breen

If you step back, when we separated the company into three, our goal at Tyco International was to end up with these three global platforms that we have Flow being one of those three platforms, and then Fire and Security. We really like all three platforms. As I've mentioned before, one of the dynamics I like is they are global, they are all emerging markets. I think these businesses have nice growth rates in a decent economy. I also like the fact that we are a very fragmented industry, in Fire Security and Flow, so I think there's real opportunity for us, whether it's organic or bolt on for us to have nice organic growth come through there and therefore good returns to our shareholders if we're smart enough in how we go about it. So I view all three platforms - each one as important as the next one as far as our ability to grow and get good returns for our shareholders. Flow control, you know when done right is a nice steady business with very nice margins. If the economy hadn't turned down here I think you would have continued to see us make margin improvement in the business and I've been pretty impressed over the last year that we've actually maintained our margins where we have despite the downturn, so very important platform for us and we will continue to expand there and focus there just as much.

Let me clarify though, you did see us announce the Brazilian deal and obviously the Brinks Broadview deal the other week, but as I mentioned in my prepared remarks share repurchase will be a part of our future thought process here. We're not just turning the switch over. If there's something good we can bold on we'll put it on, but we're not just sitting here as a management team looking to do a series of deals just for the sake of doing that. If there's something good with good returns, we'll do it. It really makes sense for us on the global platform, but we're staying very focused on operating the company organically as you can tell from our results, our real intense focus on our operations, and we're not going to lose that momentum.

John Inch - Bank of America Merrill Lynch

And is it fair to say a very large deal in Flow is off the table? I think that perhaps has some folks a little concerned, I'm just curious as to your thoughts there.

Edward C. Breen

It goes back to my comments when we did the call a week or so ago on Broadview. As I mentioned in aggregate, if we do some bolt on deals over the next year, I think they would be somewhere in the range of $300-$500 million and that would be an aggregate.

John Inch - Bank of America Merrill Lynch

Thank you.

Operator

Scott Davis with Morgan Stanley, your line is now open.

Scott Davis - Morgan Stanley

Thank you. Good morning. I kind of share John's confusion for guidance on Q2 but I understand your

conservativeness. Can we move into Broadview a little bit. I was on the road when you did your call so excuse me if I'm duplicating some of the questions, but when I walk through the Broadview earnings model and it seems like the costs that can come out of there are substantially higher than what you are guiding to – can you talk a little bit about what can't come out and why to maybe help us understand the integration there.

Christopher J. Coughlin

Certainly what we can eliminate are things like duplicate functional costs, but what we want to maintain is obviously a large degree of the sales force that's generating new accounts, that we can then plug into our monitoring centers around the world in U.S. and Canada and get the synergy's there. Now also there will be some synergies in branch offices but we will also still need some of the installation capabilities that they bring. For the administrative we can consolidate and get synergies but again we want to be able to drive the growth aspect through their sales force and the additional installation capabilities that we get.

Edward C. Breen

As we outlined last week there are three buckets of savings. There's traditional savings which I think if you look at it relative to their operating costs are fairly significant. There are some other savings that effectively start to happen on day one from stopping the re-branding and stopping the royalty expense. And then given the way we are restructuring the deal there are some additional savings from a tax efficiency point of view and the combination of all three are what drives the economics of the deal. Finally, with respect to a good portion of these synergies they start to accrue on day one simply by making changes in what's being done in the way the deal's been structures.

Christopher J. Coughlin

When you look at this on a cash basis, because of the level of synergies that we get it's much more (inaudible) on a cash basis than it is on an accounting basis because under the accounting rules when we acquire it we will write up the value of the accounts. We will then take additional amortization of about $16 million over what Brinks would report today. So we think that the economics of this and with the synergies will generate very significant ongoing tax flow that's even in excess of the nice secretion (ph) that we get on an accounting basis in EPS.

Scott Davis - Morgan Stanley

Now I understand. It calcs out on your numbers to be about a 10% year one cash and cash return which would seem to me once you're able to take out some additional costs and add some additional synergies over time to clue with the sales floors that is substantially more attractive than buying back your own stock, so presumably you could do more deals like that it makes sense. Are there any restrictions you see as far as maybe DOJ or to going out and continuing to roll out the industry? I know by your measures I think combined now you will have something like 25%-26% market share but is there another way that the regulators may calc that that makes it more difficult for you to do more deals?

Christopher J. Coughlin

Well, Scott, we will always look at that, but I think you just laid out the numbers. I think in combo now, you know, we were around 21%, there 4%, so you are at 25% in total and, you know, there are hundreds and hundreds in competitors in each given region or market as you all know from where you live. So, I would think there is opportunities to, you know, add to the base over time, but just back to a point on the Broadview (inaudible) just mentioned, one of the things I do really like, I mean, I like the strategic fit obviously of the deal, but one of the things I like on the synergy side of this deal, is we really do get a big piece of the synergies literally on day one, which is very comforting. Then we will work really hard to get the operational ones of the first year. But, you know, to be able to get the rebranding out, to be able to get the payment back to the old parent out of the number right away, to be able to get day one the tax energy because of the way we structured the deal are all very big swings on the synergy side for us. I think we have a very good plan laid out to get the operational cost out, and we will be very focused on that over the next few months.

Edward D. Breen

Scott, I would also add that as I mentioned in my remarks, you know, we were able in 2009 to acquire some bulk accounts, and again, we have the resources to be able to do that if those are available at a good price and we get a very nice return. I think that is probably more likely if we see those kinds of opportunities than other sort of significant acquisitions of U.S. base residential entire security businesses.

Scott Davis - Morgan Stanley

That makes sense. Guys, one of the questions I am getting from people is just concerns about losing some of the Broadview salespeople and maybe some increased turn in the accounts. Is there any type of plan that can kind of retain these folks, and I assume that in the transition these accounts are still on full contracts and turn is less of an issue, but could you address both those questions?

Edward D. Breen

You know, Scott, obviously this is a bigger deal, but we have a lot of experience on bringing accounts in and bulk accounts. We did a bulk deal for 80,000 accounts as Chris mentioned that was in the second half of last year. We have a very good modeling of what occurs here, and I feel very confident we will hold on to the accounts. There will be some marketing to these accounts that will (inaudible) that will be real positive, I think. So, that I do not have a concern on. As Chris mentioned, we clearly do want the sales team at Brinks. They are an excellent group of people. They have done a great job, and we clearly want the installation people, they do a great job. We are going to need them, because we expect we will be able to generate the incremental leads that they have been generating over time. And by the way, We are both going to learn from each other here, some things we do better, some things they do better. So, net I think that should be helpful to us. We will have some programs to make sure people are not nervous during the interim period until we close the deal, typical things companies do and all that. So, we will make every move there to make sure there is stability.

Scott Davis - Morgan Stanley

Okay, fair enough. Thanks, guys.

Operator

Thank you. Nigel Coe of Deutsche Bank, your line is now open.

Nigel Coe - Deutsche Bank

Yes, thanks a million, guys (ph). So, I just wanted to dig in slow a little bit. I think you mentioned, Ed, that the flow of revenue has hit a trough in the second quarter, which is obviously very encouraging, but based on the backlog on your flow (ph) that you have seen so far, I mean, what happens in the second half. Do we see a pick up sequentially or do we start lying for three quarters?

Christopher J. Coughlin

You should see some gradual lift in the third and fourth quarter, and by the way, we do see that every year. What happens, as we mentioned, is we seem to get a stronger quarter in the quarter we reported because of Thermal. Thermal dips down in the second quarter, and then Thermal starts lifting again in the third and fourth quarter, which is part of the help also. Then we just see some natural lift in the order patterns of our customers in the business.

The two things, Nigel, I feel better about now, you know I have been a little hesitant here watching this one, is clearly now for two quarters in a row we have maintained our backlog level, which feels good. You know, when we are reporting some of these numbers we are taking a big project out we want in Pacific water, but by the way, Pacific water is a big project and it is all going to ship kind of in the second half of this year. So, you know, maybe we do ourselves a little disservice by x-ing (ph) it from the numbers when we talk to you , but that happens to be part of our second year lift that we know we will get. I think probably more encouraging thing, although again I am still holding my breath a little bit on this, is we are really seeing across the globe from our sales teams a pickup in bidding activity, projects that we are talking about. That is pretty uniform across all of our markets. So, I have got to think, and with the economy now improving some, I have got to think this little bit of longer cycle business, I think we are seeing the pattern here that may be we will start to see a little bit of a different trend in orders come in the future. We have not seen it yet, but it would appear that we are getting closer while we are maintaining the backlog.

Nigel Coe - Deutsche Bank

I just want to dig into the margins of this quarter. Obviously, we saw a $21 million drop down sequentially on the $56 (ph) million of revenue. I know the FX impacts that a lot, but if you look at that on constant counting basis (ph), what sort of detrimental did you see this quarter?

Edward D. Breen

In which business? You are talking about overall?

Nigel Coe - Deutsche Bank

Is low, yeah..

Christopher J. Coughlin

Again, in the flow of business I think it was, what are we, done at $12.8. And again, it was impacted on a favorable side by that Thermal business, which that quarter is their highest margin and that is why we see it going down closer to 11% with the deleveraging that we get. So we had again about a 14% organic revenue decline in the quarter, so we will look at our valves businesses, even our thermal business, while it is their highest quarter, it is not as high as it has been in the past because of the volume. So as we look toward the second quarter, we get, again, another hit where our expectations are, another sort of low team kind of operating of organic revenue decline that will cause some deleveraging as well.

Nigel Coe - Deutsche Bank

And that (inaudible) there (inaudible) without the trough margin based on the fact that you are looking for this to be a chalk revenue (ph) revenue for quarter, and you are getting some similar pick up in the second half of the year. I am just trying to think about the impact of the specific pipe projects, because I am assuming that is probably slightly low margin?

Christopher J. Coughlin

Those margins have been quite good over time, and again, I think by the size of those projects that we could expect that that would help to improve in the second half the overall margin from what you will see as we exit here Q1 and certainly through Q2. So I think that the mix of business will continue to improve. Again, it is sort of the low point. It is always Q2, and now we will see that start to rebound across the businesses as volume starts to pick up and Pacific will not hurt the margins.

Nigel Coe - Deutsche Bank

Okay. And then just a quick one on E&M. You maintained the full year outlook at about $120 million, but we have seen a big move in the field price in December and January since you gave the guidance in November and I just wondered I mean I am not assuming you project steel price, but have you foreseen some kind of move in steel price or does this move provide some upside potential to that number?

Christopher J. Coughlin

You know, Nigel, you know as well as I this is a very, very difficult business to forecast over time. I think we are looking at not dramatic changes in pricing from where we are today. We know where our cost base is and what we have acquired in terms of steel and then we do get that second half volume which is more seasonal which is a key driver to that so it is a combination of all those.

But I will say that is a volatile business, it could do better, and it could do somewhat worse depending on how those prices move and we have seen them move so fast and so significantly over the last two years that that is why we just lay it out for you in terms of what our current expectation is and then each quarter we will update you.

Edward D. Breen

Nigel, a little more to what Chris just said, we are saying this quarter will be similar to the first because we are moving through a steel layer that obviously we know exactly what our cost is because we have an inventory and we are moving it through, but one fact we do know is we are buying at some very nice prices and we do know our spreads are improving right now. We know pricing is going up and it has been holding.

So again to Chris's point, it's hard to project that out far, but the trends on both sides will get good with the inventory we'll bring in, in this quarter and next quarter and the pricing we're seeing.

Nigel Coe - Deutsche Bank

Understood, thanks.

Operator

Thank you. Our next question is from Steven Winoker of Sanford Bernstein.

Steven Winoker – Sanford Bernstein

Good morning. I am just trying to again get back to the guidance questions for the full year versus where you felt things were the last time you issued guidance. So you got the Q1 beat, you got the tax and corporate items, but then on the operational front and you talk about the concerns that you have, it still nonetheless mathematically implies a deterioration in those numbers for the other three quarters of the year, or have I got that wrong?

Edward D. Breen

Yeah, Steve. I don't believe that you're going to see a deterioration in the second half. In fact, I think as we've discussed we would see an uptick in our businesses in the second half as we also have a seasonal impact there. So again, as you mentioned, the corporate and tax items are just timing. They don't impact our yearly guidance so I don't — and again we have given what the numbers are for our temp business, but the other businesses I do believe we're going to see as we talk about slight upticks as we get through the second half.

Christopher J. Coughlin

Steve, maybe just on the numbers just to clarify your point. If you want to use the $0.65 for the quarter and use the midpoint of our guidance of 51, we'd be at $1.16 at the half year point and if you just times that by two, and that might not be the right way to look at it, but you'd already be at the low end of the range and we get lift in the second half of the year so I feel more confident after this quarter about our year and getting towards the upper end of our range than I did last quarter and when you simply just do the math on where we think the first the first half will end up at, I think you can walk your way there.

Edward D. Breen

And Steve let me just add because that second half lift that Ed referred to, what we're not embedding in that is an expectation of a meaningfully different economy. We're embedding in that just a fairly normal seasonal lift that we see in our third and fourth quarter compared to the first half of the year.

Steven Winoker – Sanford Bernstein

Right, and compared to the last time you issued guidance, really you're saying basically you gave the range before, but you were really talking more to the low end and now you have much more confidence to the high end of that guidance, is that how I should think about it?

Christopher J. Coughlin

Well, I would say I have much more confidence in the high end of the range now.

Steven Winoker – Sanford Bernstein

Okay. And then secondly and just a minor point, but if I think about the adjusted EPS going to GAAP guidance you gave for the second quarter, is the restructuring spend that you're anticipating this quarter, did you talk about that?

Christopher J. Coughlin

We did not specifically talk to a number for the quarter. What we have said is that we expect about $100-$150 million potentially in the full year. As you know it can be very difficult to determine exactly what quarter in meeting with all the criteria that you have, particularly when you're dealing with major locations outside the US so we don't break that down by quarter.

Steven Winoker – Sanford Bernstein

Okay. And then finally on the flow business and the safety products business, certainly for flow the quoting activity is up, but the orders are not yet there so should I interpret that as bids not moving forward yet or losing bids?

Edward D. Breen

Just not moving forward yet and I think, Steve, I just look at last quarter and we were seeing this same activity percolate. It's been going on, I don't know, for four months or so now. I think some of our other players in this business also saw the same thing and it wasn't translating into orders yet, but bidding activity is up.

Steven Winoker – Sanford Bernstein

Okay. And the capacity level that you're holding in flow control, again given this view that you have, does that mean you're also basically more or less continuing to reduce capacity or holding kind of where you are?

Edward D. Breen

Just slight reduction in capacity, but we're not taking that much out. The restructuring we're doing is more back office in that area with a little bit on the manufacturing footprint side. So I think I was asked this a quarter ago. When things rebound either in safety products which is our manufacturing arm there or in flow, the capacity is there on those businesses.

Steven Winoker – Sanford Bernstein

Right, is the same thing for safety?

Edward D. Breen

Yes.

Steven Winoker – Sanford Bernstein

Okay great, thanks.

Edward C. Arditte

Thanks, Steve. Operator, we're going to try to get in two more questions here before we wrap up.

Operator

Your next question is from Steve Tusa with JPMorgan.

Steve Tusa - JPMorgan

Hi, good morning.

Edward C. Arditte

Steve, I'm going to ask you to be quick so we can get two in.

Steve Tusa - JPMorgan

Sure. I just wanted to ask philosophically around your guidance. I mean, I can understand that you guys came out as a new public company a couple of years ago and you wanted to really put up conservative numbers, but beating by $0.10 every quarter just seems like is there a visibility concern that you have? I know you moved your reporting date up so that's a positive, but I'm just curious as to the philosophy around whether we should continue to expect conservatism here. I'm just curious how you feel about that.

Edward D. Breen

Yeah, Steve, let me comment. I think one of the things that you have seen where we have beaten by a significant number, it's really been driven first and foremost by tax and so clearly as we came out of the separation we had a negative tax synergy and have been uncertain as to how quickly we could implement those very complicated tax restructurings that we've done inside the business and there are timing issues as we've talked about in terms of accounting. So that has really been the key factor in driving that as well as our corporate expense. We have taken some aggressive actions there and so those have been sort of the two items that have driven some of the over performance if you will in terms of versus our guidance.

And if you look operationally they've been on a much tighter, tighter range. So I would say even going forward over the next year or so if we're going to see significant movements it still may be things like tax that will do it.

Steve Tusa - JPMorgan

Okay, thanks a lot.

Operator

Thank you. Our final question today is from Gotham Kanna (ph) with Cohen.

Gotham Kanna - Cohen

Hey, how are you doing? Thanks guys for taking my question. Just quickly could you characterize the pricing you're seeing on the incoming bid activity in the flow control business? And also while I got you, if you can update us on what your expectations are for free cash this year and where the IMIA ADT margins were in the quarter? Thanks.

Edward D. Breen

Yeah, on the cash, as typical for us I think we'll be very consistent on the cash front. I think we'll approximately somewhere around net income. Last year we were over that, this year our forecasts will be around the net income. Again by the way, I would actually rather see a pickup in business and we actually build some working capital and maybe get a little headwind there, but pending things kind of hanging where they are I would think we'll approximately net income. I would point out that as you saw, this was the best first quarter of cash performance the company has ever had so I feel like that put the year off to a good start from a cash standpoint, and again that was management of working capital that enabled that to happen.

On the pricing side, I think your question was specifically to flow. We are seeing a little bit of pockets of pressure here and there, but not significant. The place we've seen the pricing pressure really for the last I guess six months or so, build a little bit was on the systems installation side of our business in some of our regions and that doesn't surprise me because the business has been down fairly significantly double-digit organically for the last year and we have seen a little bit of pricing pressure there.

But to be honest with you, we're not seeing anything there that I don't feel we can't offset with good cost containment actions on the other side. So I think it won't be something that's a headwind that we can't take care of.

Christopher J. Coughlin

And just on the margin question for ADT IMIA, our margins moved from the last year's quarter at about 4.2% up to 6.4% as I mentioned in my remarks.

Gotham Kanna - Cohen

Okay, thanks guys.

Edward C. Arditte

Okay, thanks for joining us. Ladies and gentlemen, this will wrap up our first quarter conference call. We look forward to talking to you if you have any followup questions. Our second quarter earnings conference call will be scheduled obviously for the latter part of April and we look forward to talking to you soon. Thanks very much.

Operator

Thank you. This concludes today's conference. As a reminder, you may listen to a replay through February 4th 2010. Participants located in the United States may dial 866-395-9155. International participants may dial 203-369-0497. Thank you for joining, you may now disconnect.

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Source: Tyco International F1Q10 (Qtr End 12/31/09) Earnings Call Transcript
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