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Tyco International (NYSE:TYC)

Q2 2010 Earnings Call

April 27, 2010 8:30 am ET

Executives

Christopher Coughlin - Chief Financial Officer and Executive Vice President

Edward Breen - Chairman and Chief Executive Officer

Edward Arditte - Senior Vice President of Strategy & Investor Relations

Analysts

Scott Davis - Morgan Stanley

Nigel Coe - Deutsche Bank AG

John Inch - BofA Merrill Lynch

Gautam Khanna - Cowen and Company, LLC

Jeffrey T. Sprague - Citigroup

Robert Cornell - Barclays Capital

C. Stephen Tusa - JP Morgan Chase & Co

Steven Winoker - Sanford C. Bernstein & Co., Inc.

Operator

Welcome to the Tyco First Quarter Earnings Conference Call. [Operator Instructions] I'll now turn the call over to Mr. Ed Arditte, Senior Vice President, Strategy and Investor Relations. Sir, you may begin.

Edward Arditte

Thank you. Good morning, and thanks to everybody for joining our conference call to discuss Tyco's second quarter results for fiscal year 2010 and the press release that we issued early this morning. With me on today's call are Tyco's Chairman and Chief Executive Officer, Ed Breen; and our Chief Financial Officer, Chris Coughlin.

Let me start by reminding 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 there.

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 tyco.com.

Also, with regard to the pending Broadview acquisition, the discussion during today's conference call do not constitute an offer to sell or the solicitation of an offer to buy any securities or solicitation of any vote or approval. The subject matter discussed today related to the Broadview acquisition is addressed in the registration statement on Form S-4, containing a proxy statement and prospectus, which is publicly available and has been filed by Tyco with the SEC. We urge you to read it.

Now let me quickly recap this quarter's results. Revenue in the quarter of $4.2 billion, was up slightly year-over-year, with an organic revenue decline of 5.8%. Earnings per share from continuing operations attributable to Tyco common shareholders was $0.65 per share and included income of $0.06 per share from special items. Before special items, earnings per share was $0.59, and this compared to our guidance of $0.50 to $0.52 per share.

Before I turn the call over to Ed, let me quickly touch on the Broadview acquisition. We expect the transaction to close on May 14, pending the Brinks shareholder vote on May 12. We'll provide a detailed financial update on the acquisition in our next quarterly call.

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

Edward Breen

Thanks, Ed, and good morning, everyone. The second quarter was a good quarter for Tyco on a number of fronts. And importantly, we exited the quarter, feeling encouraged by both our performance and an improving tone in some of our end markets.

Our results for the quarter continued to be driven by our cost-containment efforts, coupled with the continued growth of our recurring revenue and service activities. In addition to our operating performance, the quarter also saw a number of other positive developments including: first, our agreement to acquire Broadview Security and combine it with ADT; second, the sale of our French Security business, which was a meaningful step in repositioning our ADT business in Europe; third, an increase in our annual dividend; and lastly, an upgrade in our debt rating from Standard & Poor's to A-.

Let me start off with a few overall operational comments and then a few thoughts on what we are seeing in each of our businesses. First, our teams continue to execute well on our cost-reduction and restructuring programs, and our restructuring actions will ramp up in the second half of the year. As you all know, we expect our organic revenue to be modestly negative in 2010, lower in the first half of the year, with improvement in the second half of the year. And managing our cost structure to match up with our revenue outlook has been a major focus for us. These efforts continue to pay off and are reflected in our operating margin performance, which was up nicely year-over-year.

We are also doing a nice job from an asset-management perspective. Our working capital performance continues to be solid, and we are in a strong position with respect to both receivables and inventory. In addition, our free cash flow generation continues to be strong, and we are almost $200 million ahead of the last year's number through the first half of the fiscal year. On a full year basis, we continue to expect free cash flow to approximate net income.

We are also continuing to fully fund our organic growth investment activities in Security, Fire and Flow Control. Year-to-date, our capital spending levels have grown modestly on a year-over-year basis, with a high percentage of our capital going to growth investments. We also continued the fund increases in R&D, particularly in our emerging-market R&D centers, and our R&D expense increased about 4% year-over-year.

From a balance sheet perspective, our cash balance was about $2.7 billion at the end of the quarter, and we expect to use some of this to fund the Broadview acquisition. We are also contemplating bolt-on acquisitions that would use up to an additional $500 million. Even with these cash uses, we will still be in a strong cash position. So we expect to resume repurchasing shares soon after we close the Broadview acquisition.

I also want to add that we continue to be pleased with everything we see in the Broadview integration planning process, and we have more than 10 functional teams who are actively working on integration planning. The acquisition will not have much impact on our fiscal 2010 EPS. We will only own Broadview for about 1½ quarters, but we continue to feel quite good about the $0.07 of EPS accretion for the first full year, going to $0.14 in year two, assuming a 70/30 equity cash split.

Broadview will increase the recurring revenue in ADT by approximately $500 million to nearly $4.4 billion, and increase the percentage of recurring revenue to about 60% of ADT's Worldwide revenue. The margin impact from the acquisition is also attractive and will ramp up, as we deliver on our cost synergies. We are estimating a 50 basis point margin increase to ADT Worldwide from the acquisition. And this is expected to increase to 150 basis points of impact by the second year.

Finally, we put out a second press release this morning, announcing our intention to do a tax-free spin of our Electrical and Metal products business to our shareholders. We expect to file documents with the SEC over the next few months and conclude the transaction in the first half of fiscal 2011.

As most of you know, Electrical and Metal products is a high-quality business, but its results are often volatile. We believe it has a bright future as a separate public company, and we believe we are entering the right environment to execute this move.

I want to now turn to each of our businesses and give you a bit of a feel for what we are seeing in our end markets. In ADT, our recurring revenue continues to perform well. Good account growth, good ARPU and improvement in the disconnect rate, all of which translated into 4% organic revenue growth.

Revenue in the systems installation business in North America and Europe continue to be soft. But we have seen a nice pick-up in activity in Asia-Pacific, where revenue grew 10% organically in the quarter. Our worldwide order activity in systems installation business was flat sequentially, but we did see good order growth in Asia-Pacific. We are also beginning to see some signs of life in our retailer business, with an improvement in order activity in the quarter. But this business is still significantly below the peak levels of 2007.

Lastly in ADT, we continue to make margin progress in our European operations and exited the quarter with an operating margin of 6.5%, as the benefits of our restructuring actions are taking hold. We would expect our European operating margin to improve by 100 basis points going forward, due to the divestiture of our Security business in France.

Turning to Flow Control, our revenue was in line with our forecast. However, our second quarter results were impacted by a charge for a loss related to a project that we retained as part of the 2008 divestiture of our Earth Tech business. Absent this, our operating margin was better than expected.

We think, the second quarter was the low point in the cycle, and we are seeing clear signs of improvement in some of our end markets. Backlog was flat on a sequential basis at $1.6 billion, and orders were up 3% year-over-year, excluding the impact of foreign currency. Importantly, our increased quoting activity has begun to translate into order activity, and our order outlook for the third quarter is for continued improvement.

It is important to remember that we usually have a six-to-nine-month order-to-revenue conversion cycle in Flow Control, so the pick-up in order activity will be more meaningful to 2011 than to our 2010 results. That said, we look to the second half of the year in Flow Control, we expect to see an improvement in our revenue and our income due to a seasonal lift and also due to revenue from the Australian water desalination project that we announced a few quarters ago.

Next, the revenue on our Fire business was about what we expected, and we did a nice job on cost and margins. As we indicated in the press release, backlog grew 1%, which is an encouraging development. Also the second half of the year is typically a seasonally stronger period for this business.

Next, Safety Products not only had a good quarter operationally, but also began to see an improvement in order activity. Orders grew 5% on a quarter-sequential basis and the tone of business has clearly improved.

Finally, Electrical and Metal products performed as expected in the quarter. We need a stronger second half to hit our full year forecast, and the strengthening of steel prices we are seeing, along with the seasonal volume increase, supports a stronger second half.

So overall, the second quarter was a good one for Tyco. I feel good about our cost focus, and I am encouraged by the improving order activity, which is in line with our expected modest pickup in the second half and sets the tone for solid improvement in fiscal 2011.

Now let me turn the call over to Chris to review our operational performance and a few financial items. And then we will review our outlook for the third quarter and full year.

Christopher Coughlin

Thanks, Ed, and good morning, everybody. Let me start with ADT Worldwide. Revenue of $1.8 billion declined 1.5% organically. Recurring revenue, which represented over 55% of ADT's total revenue in the quarter, continued to perform well, with organic revenue growth of 4%. However, systems installation and service revenue continued to be soft, with an organic revenue decline of 8% in the quarter.

Despite this pressure on the top line, the operating margin before special items in the quarter of 14.7% increased 230 basis points over the prior year, with improvement in all geographic regions. Restructuring activities, along with cost-containment actions and growth in our higher-margin recurring revenue business, more than offset the impact of lower systems installation volume.

From a regional perspective within ADT, our North American residential and small business unit grew its recurring revenue 7% organically in the quarter. The operating margin before special items improved two full percentage points over the prior year. On a year-over-year basis, we grew our residential account base by nearly 5% and increased our average revenue per user by 3%. Additionally, our residential attrition rate improved by 20 basis points on a quarter-sequential basis to 13.1%.

Turning to our North American commercial business, our end markets continued to be impacted by the economic downturn. Organic revenue declined 9% in the quarter, but we are starting to see signs of improvement, including sequential growth in orders from retailers. We are encouraged by the improved activity and expect these trends to continue. Our operating margin improved, despite the decline in organic revenue, as the benefits of restructuring and cost-containment actions more than offset the revenue headwind. Additionally, the North American commercial attrition rate improved 40 basis points to 13.6%.

Moving on to Europe, Middle East and Africa, organic revenue declined 6%. The operating margin before special items increased to 6.5%, compared to 3.1% a year ago, primarily due to the benefits of our restructuring actions. As Ed mentioned, we expect our European operating margin to improve by 100 basis points going forward, due to the divestiture of our Security business in France. In addition, there will likely be some further pruning of our European portfolio, but those transactions will be much smaller in size, compared to the Security business in France.

In the Asia-Pacific and Latin American regions, organic revenue grew 8% on a combined basis. Systems installations and service revenue grew 6% on an organic basis, after four consecutive quarters of an organic-revenue decline. Our operating margin before special items continue to be strong and improved 150 basis points year-over-year.

On a worldwide basis, our key metrics also continued their positive momentum. Our global account base grew 3% year-over-year to $7.4 million accounts and excluding the impact of foreign currency, our average revenue per user grew 1% to $45.91, with growth in all geographic regions. The worldwide attrition rate also improved nicely in the quarter, decreasing 30 basis points to 13.1% on a quarter-sequential basis.

Now let me turn to Flow Control, which had revenue in the quarter of $899 million and an organic revenue decline of 13%. Organic revenue growth in the Thermal Controls business of 2% was more than offset by a 19% organic revenue decline in Valves and Controls and a 7% organic revenue decline in Water.

Before special items, operating income was $101 million and we included a charge of $9 million for a loss related to a project we retained, as part of the Earth Tech divestiture in 2008. Although we are benefiting from cost-containment actions and restructuring activities, this was more than offset by the volume de-leveraging impact of the $120 million organic revenue decline, resulting in an operating margin before special items of 11.2%.

Order growth in the quarter turned positive, both year-over-year and on a sequential basis. Excluding currencies, orders increased 3% year-over-year and backlog of $1.63 billion remained flat on a quarter-sequential basis.

Looking ahead to the full year, we continue to expect an organic revenue decline in the high single digits, resulting in revenue of approximately $3.7 billion to $3.8 billion. The volume de-leveraging from this organic revenue decline is expected to result in an operating margin before special items of approximately 12.5% for the full year. It's important to keep in mind that the improving order activity will mostly impact our fiscal 2011.

Turning now to Fire Protection Services. Revenue in the quarter was $807 million and organic revenue declined 7%, as we continue to experience softness in systems installation revenue, and to a much lesser degree, our service revenue. Service declined 1% organically. However, the rate of decline has improved over the last few quarters, and we expect service revenue to grow modestly in the second half of the year. On the other hand, systems installation revenue declined 12% organically in the quarter.

Before special items, operating income was $66 million and our operating margin was 8.2%. The benefits of cost-containment initiatives and restructuring actions helped mitigate the margin pressure from the lower revenue. As Ed mentioned, backlog of $1.2 billion grew 1% on a quarter-sequential basis, excluding the impact of foreign currency. Due to the seasonal nature of our Fire business, we expect a stronger second half of the year.

Moving now to Safety Products. Revenue in the quarter was $360 million, with an organic revenue decline of 7%, which was a bit better than we expected. Organic revenue growth of 1% in Electronic Security was more than offset by an organic revenue decline of 12% in Fire Suppression and 3% in Life Safety. The rate of decline over the last few quarters has significantly slowed, and we are starting to see an improvement in our order activity.

Before special items, operating income was $52 million and the operating margin was 14.4%. Despite the continued revenue headwind, the operating margin remained relatively flat year-over-year due to the benefits of cost-containment initiatives, restructuring actions and better product mix.

Additionally, the incremental investment in sales and marketing capabilities and R&D cost us about 60 basis points of margin year-over-year. Although this investment is a headwind to our operating margin performance, our sales and marketing and R&D spend is positioning the business for accelerated revenue growth, as business conditions improve.

Lastly, Electrical and Metal products performed as expected. Revenue in the quarter was $336 million and organic revenue declined 3%. Operating income before special items improved to $26 million, a year-over-year improvement of $50 million, driven primarily by substantially lower material costs for steel products. As we look to the second half of the year, we expect to see a seasonal pick-up in volume. Coupled with increased prices for both steel and copper products, we continue to expect the operating income before special items for the full year should approximate $120 million. For the third quarter, we expect revenue of $380 million and operating income before special items of $35 million.

Before I turn the call back over to Ed Breen, let me touch on a few other important items. First, we continue to generate strong cash flow in the quarter. Our free cash flow was $349 million and included $48 million of payments for restructuring. Year-to-date, free cash flow of $428 million, compared to $239 million last year.

Next, corporate expense before special items in the quarter was $97 million. This was lower than our previous guidance of $110 million, mostly due to tighter cost containment and the timing of certain expenses. For the third quarter, we expect corporate expense to be approximately $105 million, and we now expect that our full year corporate expense will approximate $450 million.

Next, our tax rate, excluding special items was 16.6% in the quarter, as we continue to be successful in our tax-planning activities. We are now reducing our full year tax rate guidance to 17% to 18% from our previous range of 19% to 20%.

I also want to touch quickly on restructuring. To date, we have incurred approximately $32 million of restructuring charges, compared to our estimate of $100 million to $150 million for the year. As Ed mentioned, we'll be ramping up our restructuring spend in the second half of the year and expect that our full year restructuring charges will be toward the high end of the range. These actions provide very good payback and had significantly helped us reduce our cost structure and make our operations more efficient.

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

Edward Breen

Thanks, Chris. Now let's turn to our guidance for the third quarter. First, we expect revenue of approximately $4.25 billion, a modest increase over the second quarter. Although improving business conditions will result in a nice sequential improvement in our third quarter operating results, this will be partially offset by increased corporate expense and a higher tax rate.

Let me comment on a few of these moving pieces. As I said, we expect a sequential improvement in operations, particularly in ADT, due to the seasonal nature of our Security business, as well as a pick-up in Flow Control. Electrical and Metal products is also expected to contribute nicely. This operational improvement is expected to increase our earnings by approximately $0.06 on a quarter-sequential basis.

Second, the expected increase in corporate expense to $105 million in the third quarter, which compares to $97 million in the second quarter, will cost us about $0.01 per share. And finally, we are forecasting a 17% to 18% tax rate, adjusted for special items for the full year. Given the lower tax rate we had in the second quarter, this will result in a sequential headwind of approximately $0.03 per share.

When combined, these items result in a net increase to earnings of $0.02 per share on a quarter-sequential basis. Therefore, we expect earnings per share from continuing operations before special items in the third quarter to be in the range of $0.60 to $0.62.

Based on our year-to-date performance and our guidance for the third quarter, we are increasing our full year earnings guidance to a range of $2.50 to $2.58 per share, compared to our previous guidance of $2.30 to $2.50 share.

Our full year guidance incorporates better-than-expected operating results in the second half of our fiscal year, partially offset by increased corporate and tax expense when compared to the first half of fiscal 2010. We continue to expect full year revenue of approximately $17 billion despite the strengthening U.S. dollar over the last few months.

Given that Broadview will only be part of Tyco for a quarter and a half, we have excluded the impact of Broadview from our guidance numbers provided on this call. Additionally, Broadview will not have a meaningful impact on our full year 2010 EPS.

Finally, we feel good about the operational improvements we have made in our businesses and are encouraged by our increasing order activity. These items, along with the strategic actions we have made this year, should position Tyco for a stronger 2011.

Operator, with that, now let's open up the lines for any questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question today is from John Inch with Merrill Lynch.

John Inch - BofA Merrill Lynch

Just wanted to start off with perhaps a clarification. There've been some speculation that it may not be in Tyco's interest to have your stock trade above the high end of the collar range during this pricing period. Is there any reason you would not want Tyco shares to move higher over the next sort of eight, nine days?

Christopher Coughlin

No. I can't see any reason why a higher share price wouldn't be of value to all our shareholders. So that would be a good outcome.

John Inch - BofA Merrill Lynch

And then what does pricing in the backlog look like? And I guess, perhaps specifically for Flow, and given what's happening in raw materials, would you say that profit margins in the backlog are going to be comparable or how should we think about that?

Edward Breen

John, I would say, and we do analyze this, the margins, I think, in the backlog, will be about what we would have thought. We have not felt pressure there of any significance. I would point out that we've been telling you now for, I don't know, five, six months that we've seen this increased kind of quoting activity. And literally, all three months of this quarter, and as we mentioned, the quarter in aggregate, the orders were up about 3% year-over-year, by each quarter, or each month of the quarter was positive. And I did just see this morning, our order activity for April in the Flow Control business, and it was up 10% year-over-year. And our forecast says that our orders will be up around high single digits for the whole third quarter. So clearly, that part of our business is turning. And again, the margins that are going into the backlog we're seeing are about what we would expect.

John Inch - BofA Merrill Lynch

Is it a broad-based turn, Ed? Or is it...

Edward Breen

It is fairly broad-based. As you know, a lot of this business is in emerging markets. But it's been across our oil and gas, specifically, we're seeing, I would say, the largest pick-up. But it has been fairly broad-based on what we're seeing. And then I'm also making that comment of the quoting activity that's not all into our backlog yet. So that feels like we're starting to lift off of a bottom. Again, let me highlight, though, that both Chris and I had mentioned that the conversion in that business, because these are a lot of bigger projects and all, will really benefit 2011 more than it's going to this year, John, because we only have four and a half months left in our fiscal year.

John Inch - BofA Merrill Lynch

Just lastly, the upgrade by S&P on your debt. Does that come with any sort of a parameter, in your thinking, that would preclude you from maybe aggressively repurchasing your shares, post the Broadview transaction? And if not, what are your thoughts towards future share repurchases at this point?

Christopher Coughlin

Yes, John, certainly, the upgrade I think which was a positive for the company, but it does not restrict us in any way in terms of the use of our excess cash. So again, we believe we're in a strong cash position now that we have managed through this downturn well. And even with the acquisition of Broadview and the additional restructuring charges we'll have related to that transaction, we believe we'll have excess cash. We have about $900 million left on our authorization and we would expect to start purchasing against that here, post the closing of that transaction. And so I would expect that by the end of this fiscal year, we would probably acquire about half of that amount left, about $450 million, $500 million. That doesn't impact -- the credit rating doesn't impact that.

John Inch - BofA Merrill Lynch

So you're buying back maybe $400 million to $500 million over the course of the rest of the year post the deal?

Christopher Coughlin

Yes.

Operator

Our next question is from Jeff Sprague with Vertical Research Partners.

Jeffrey T. Sprague - Citigroup

First, on restructuring, Ed. Interesting to hear you say you're going to be at the high-end. It sounds like you're finding more to do, which maybe is a little counterintuitive as we kind of see some of this stuff starting to inflect out of the bottom. Just your thoughts on that and kind of benefits from restructuring going forward?

Edward Breen

Jeff, maybe kind of sequencing, I'd put it this way. We were very heavy last year and extremely heavy on restructuring actions in the back end for the year also. Our teams were digesting a lot, making sure we at least, I guess, elegantly execute it against that. So we were -- like we said, we were lower starting out this year but we have had the plans all along that we would spend this $100 million to $150 million. And we've had the significant reviews with our teams in the last weeks, and that's why we say we're pretty confident we're going to be near the high end of that range. These programs just still have very good paybacks. They average out just a little over a two-year payback. So you can extrapolate the tailwind that, that gives us with these extra actions we're taking. And Jeff, I would categorize most of these actions as back office simplification moves still that we're making within businesses and actually combining some things between businesses in geographic regions. So more on that side, not as much on the factory footprint side, which as you know is not as big in Tyco as many of the other industrial companies. So it's those types of actions.

Jeffrey T. Sprague - Citigroup

And then just switching to ADT, in North America specifically, the resi [residential] margins obviously sounds very impressive. Just wondering if you could give -- I would guess that's mostly ARPU driven, but if you could give us some complexion on just the dynamics there that are driving that kind of margin improvement and the sustainability of that?

Edward Breen

Yes. Well, Jeff, it is -- the ARPU is every single month continued to increase in the business. I wouldn't put this into today's thinking yet. But not too far down the road, one of the things that will hopefully benefit that to is when we move to this interactive platform at ADT. As you know, we've been test marketing this in quite a few markets. We're feeling positive about it. We're still working on what our pricing model will be for that. But that's also moving the consumer off to more options that are available and therefore, a higher ARPU to those that want to take the interactive service. So we're feeling good about the ARPU that we've had. But we're really trying to plan out the next couple of years as to how we keep that momentum going, which would obviously be a positive more on the margin side. I'd also point out a couple of things you heard Chris mention on North America. I'm not declaring we've turned a quarter here. But with the economy improving some and some of our internal actions, it was nice to see the disco rates start to drift down finally, globally and specifically on the North America, which is a nice help because that's high-margin business. When you lose it, it's margin you're losing. So having that start to drift down is a good sign.

Christopher Coughlin

So really, a combination of the RMR increasing by 7% and the lower disconnect rate, really is helping those margins, and we do think that's sustainable.

Jeffrey T. Sprague - Citigroup

And then just finally, Ed, the comment about bolt-on just sounded a little bit more specific and near-term than maybe we heard in the past that you have a active pipeline and kind of what should we think about timing and maybe kind of the segments of interest?

Edward Breen

Yes. Well, Jeff, any of the three segments would be of interest to us, whether it's Security, Fire or Flow. I would tell you maybe to relate back to the Broadview acquisition or anything we do with these bolt-ons would -- I think you would consider right down the middle of the plate strategically. So it's not directing often to some area that's kind of close to the business. This would be right down the middle. And just there's nothing more -- I don't want you to read into this anything more. There are one or two things that we are actively working on that the ball is pretty far down the road. But you never know if you're going to get them close or not.

Christopher Coughlin

And Jeff, that $500 million that we talked about, it's really over sort of a 12-month period. I didn't want to give people the impression that it's over the next four months.

Operator

Our next question is from Nigel Coe with Deutsche Bank.

Nigel Coe - Deutsche Bank AG

Just wanted to dig into the second half a little bit more. Ed, I think you mentioned that Flow was up 10% in April and you're looking for high-single digits increase for the balance of the year. Obviously, the comps gets easier as we go through the second half of the year. If we were to run rate that would be moving to the mid-teens rate for the growth rate?

Edward Breen

Nigel, could you repeat that last part?

Nigel Coe - Deutsche Bank AG

Yes, I mean, the comps have to get easier as we go through the year. So if we were to run rate April's orders to the second half of the year, would that 10% growth get to the mid-teens rate?

Edward Breen

For Flow?

Nigel Coe - Deutsche Bank AG

Yes.

Edward Breen

Our forecast, Nigel, it's hard to say in the fourth quarter. But if you look at our third quarter that we're in now, I would say by the time the quarter is done -- according to our forecast and by the way, reorders are a little tougher to forecast than revenue. You never know when pockets are going to come in. But it looks like we would be between 7% to 10% order growth in Flow for aggregate in the third quarter, and that's a year-over-year comment, so nice pickup. And by the way, the fact that April was 10%, I think bodes well that hopefully, we end somewhere in that range. I wouldn't want to put a forecast on fourth quarter orders yet. But these quotes are -- as we said, our quoting activity is pretty broad-based. We are bidding on some bigger projects that are out there that hadn't been around during the last year. I would hope that the growth rate would potentially be in that range again, but I don't know yet. But the order -- the quoting activity feels decent.

Edward Arditte

And Nigel, my only add to that would be as we said in our remarks, remember that the order to revenue conversion in Flow, typically, is in the six- to nine-month mark. So it does take a while for that to convert.

Nigel Coe - Deutsche Bank AG

Ann then looking at -- Ed, you mentioned as well that Broadview has an unusual impact on the second half. But how does that tick up between 3Q and 4Q? Do we got a bit of pinch [ph] (01:01:48) for 3Q and then some accretion in 4Q? Or how do you expect that unusual coming to be broadly -- even across the quarters?

Christopher Coughlin

Nigel, it's really going to have a very modest impact. I mean, you were talking $0.01 or $0.02 here or there for the year. So I wouldn't expect much in either the third or the fourth quarter in terms of EPS.

Edward Breen

I mean, it's so slight. But it might -- it's slightly -- that's a slight, slight headwind in the third quarter and a slight, slight tailwind in the fourth quarter.

Nigel Coe - Deutsche Bank AG

And then finally, there's been some rule changes to the Russell and S&P Indexes, potentially, bringing back some of the offshore companies, like yourself. Can you just talk about your perspective on that from any competitions you're having with S&P?

Edward Breen

Nigel, we -- and as a general rule, neither S&P nor the Russell people talk to companies. They make their own decisions. They have their own deliberations and then make their announcements. Clearly, we and folks like yourself and others, have followed the changes that each has made in their definitions of what type of companies can be included in the index. I think from my perspective, when we reincorporated in Switzerland and ourselves and a number of other companies that made similar moves were removed from the S&P and the Russell, I think they got a fair amount of feedback from their client base that they didn't think that was the right move. Each has now made some changes that based on our interpretation would allow them to include Tyco on a go-forward basis. When they make those decisions is really up to them. And I think people who follow this will closely monitor the things that they say to try to guess when that happens. Obviously, if they act in a positive way, we would obviously be pleased with that.

Operator

Our next question is from Scott Davis of Morgan Stanley.

Scott Davis - Morgan Stanley

Trying to get a sense of -- when you sell an asset like you did at the ADT French business, are the multiples comparable to kind of what you're buying in the U.S.? Meaning, is it dilutive to sell these assets or in the future, it's just better to redeploy the assets and the cash somewhere else?

Christopher Coughlin

Yes, again, this was a business that we've struggled with on the continent. The multiples are different. It really depends on the makeup of the business, its customer base, whether it's a commercial business or a residential type of business like I have in the U.S. But this will certainly be accretive with both margins and earnings going forward.

Scott Davis - Morgan Stanley

Okay, so fairly good sales prices. Are there other things to do? I mean, I don't think that's the only business that you have that has kind of a less attractive mix.

Christopher Coughlin

Yes, as I mentioned, Scott, in my remarks, we will continue to do some pruning of the portfolio, but nothing of the magnitude of an individual market in a core business like Security. So we will continue to look at pruning, as well as continuing to acquire some bolt-ons that we think have a better growth perspective in margin going forward.

Scott Davis - Morgan Stanley

You mean bolt-ons globally or bolt-ons in the U.S. or ADT?

Christopher Coughlin

Well, again, not just within ADT, across the three businesses that I've mentioned that I think we're looking at emerging markets as well to bolster our presence there through bolt-on acquisitions.

Scott Davis - Morgan Stanley

Can you guys talk a little bit about -- you've got this new product in ADT, which is coming out sooner than later, I think with some fanfare. I mean what -- what does this mean? I mean, does this mean you have to come out and you do a big ad campaign and there's kind of a fairly large upfront expense to hopefully get nice results down the road? Or is there something that's kind of rolled out slowly to the sales force? I mean, how do you kind of plan on growing the market with something like this?

Edward Breen

Yes, Scott, I think you're going back to my comment on the interactive platform at ADT. I think what you would see from us when we market it -- and by the way, we haven't made a full decision at all. One day, turn the switch and it's a national rollout, or we actually kind of market by region just to make sure we don't triple also. There's a couple of open issues there. Again, as I mentioned, we're looking at the pricing model where we price this at. But let me just say that's a positive, no matter where we end up because of what we have. And you would see initially, again, it depends if it's regional versus national. But I think you would see your advertising budget, especially our TV spend, go up during the first six, eight, nine months of a rollout. Again, whether it is regional or national, that will just change the numbers around a little, but you'll see a little bit of a lift on that side.

Edward Arditte

Scott, I would add to that, that as this rolls out, and as Ed mentioned, we're in the process of taking a look at how we roll it out. It will add nicely to the ROIs that we look at in terms of bringing on new accounts and will add nicely -- we haven't determined the final pricing, but it will add nicely to our average revenue per user and our recurring revenue. So there's some very, very positive attractive things about moving forward in interactive services.

Edward Breen

Yes, Scott,I just -- underlying what we always try to keep in mind in this business, and maybe I go to the disco rate, if these should end up being very high quality accounts that you bring in, these are accounts that want more options, are clearly willing to pay more for these features. And that always -- it translate by having more money upfront, that always translates into a better customer base. So I just -- the underlying basics behind this area should be very positive.

Scott Davis - Morgan Stanley

Just a quick clean-up item, can you just refresh my memory on the size of this Australian desal [desalination] contract and kind of over how many quarters you're shipping product into it?

Edward Arditte

It's about $120 million, and it'll be probably in a two to three quarter range.

Operator

Our next question is from Steve Winoker with Sanford Bernstein.

Steven Winoker - Sanford C. Bernstein & Co., Inc.

First question, just on the repurchase resumption that you talked about. You said $450 million to $500 million over the next 12 months, that was right?

Christopher Coughlin

No. What I -- sorry, Steve. What I meant was by the end of our fiscal year. So that's really during our third and fourth quarter.

Steven Winoker - Sanford C. Bernstein & Co., Inc.

And then if you think about that going forward from sort of a higher-level perspective, is your intention to at least offset the full amount of a transaction dilution or could you give us some sense for the strategy on that front?

Edward Breen

Yes, Steve, I don't want to comment fully on that yet. As Chris mentioned, we do have $900 million outstanding. So obviously, we're going to spend that against our authorization. And this will be a conversation we will actually have with our Board during our summer Board meetings to make a determination on kind of what this in fiscal 2011 look like past what we've just say here. So we'll have more to say in the next earnings call or end of the year earnings call.

Steven Winoker - Sanford C. Bernstein & Co., Inc.

And then on the Electrical & Metal products spend, how are you planning on accounting for that between now and the actual closing?

Christopher Coughlin

Yes, Steve, that'll be accounted for just as it is today. So that's under the accounting rules when you're planning a spend. It just stays in continuing operation until the spend actually -- transaction actually closes.

Steven Winoker - Sanford C. Bernstein & Co., Inc.

And on the Flow Control side, on margins, I know that a lot of it was due to volume deleveraging as you mentioned. But how much productivity did you get in the business? And how should we think about the fixed-cost base to that going forward as volumes starts to come back?

Edward Breen

Well, Steve, the margins, if you kind of look at the last, I guess, two years when we started to see some softness here, as I look back at it, we let's say, in fiscal 2008, we held the margins at 14 -- they were about 14.3% for the year. And then when we ended 2009, through all the restructuring actions and cost containment actions we took, by the time we ended 2009, the margins were still at 14.3% despite, a give or take, a $600 million decline in revenue. And now this year, we're having -- the first two quarters have been our, as we said, our trough quarters here with revenue declining even more. And so we've been having a harder time holding that margin there. So as Chris mentioned in the guidance, we think the margins for this year will be about 12.5%. So we just couldn't keep up with the fixed-cost base that we have in that business as much. But I think you can see that a lot of actions we took really held us in there, considering revenue has dropped from $4.4 billion at the peak to around $3.7 billion to $3.8 billion. And again, with the order activity turning, once you start pumping more revenue through that fixed-cost base, we should be in good shape. But maybe I give it to you one other way. If we're in the trough with margins around 12½%, that's 300 to 400 basis points better than the trough of this business back earlier in the decade and probably even more than that. So we've really toned down the overhead of this business. And hopefully, again, as revenue comes back, we'll get that benefit.

Steven Winoker - Sanford C. Bernstein & Co., Inc.

And last question, just at a higher level, this competitive strategy point from -- particularly with the interactive platform for ADT, are you seeing any more signals from new entrants cable companies and other subscription models out there that are trying to cross over in any way or collaborate with ADT or moving to your domain?

Edward Breen

We've talked with quite a few other players over the last couple of years. And there could be others that give us a try from a different angle. And by the way, they might be partnering opportunities for us, and that's what we've been talking to people about. But I think it's just too early, Steve, to tell on that, if there's -- someone wants to do it or not. It could be an interesting partnering opportunity, but I think it's just too early to know that.

Operator

Our next question is from Steve Tusa with JPMorgan.

C. Stephen Tusa - JP Morgan Chase & Co

I might've missed this, but what was the third quarter margin for Flow?

Edward Arditte

We didn't provide specific margin guidance. We did say that it would -- we'd see a nice improvement in Flow in the third quarter.

C. Stephen Tusa - JP Morgan Chase & Co

And then for the total company, is that kind of 50 bps per quarter, third and fourth quarter sequentially?

Edward Arditte

Steve, we didn't provide that specific guidance. I think when you go back, if you look at the slides and you take a look at the transcript of the call, there's a lot of detail. But we didn't specifically quantify the margin impact.

C. Stephen Tusa - JP Morgan Chase & Co

And then lastly, what was the order rate for the non-res businesses in April? What are you seeing there in some of your non-res installation stuff, the stuff that's non-recurring?

Edward Breen

Overall, Steve, it was flat. So we didn't see improvement. If you kind of go through the pieces, I give you the green shoots and I guess no green shoots yet, Flow clearly improved. Electrical & Metal improved somewhat of a very severe bottom. And our TSP business improved some. And that, I'm not surprised by that. I'm sure it's cycle manufacturing businesses that we have, so that didn't surprise me. Flow didn't surprise me only because of the order activity. But Flow, I would consider more mid than late cycle. But we are seeing it there. And the other area we're seeing it is in Asia across-the-board, even in the non-resi stuff we saw pick up as we mentioned. And we're seeing some pickup, I'd say modest, but pickup in our retailer business, which was severely impacted starting about two years ago or a year and a half ago. So that's kind of the green shooting areas where we're not seeing the lift yet and again, I'm not surprised by this. It's in the non-resi commercial installation businesses in North America and Europe, and I would think they would be the last ones to come back.

C. Stephen Tusa - JP Morgan Chase & Co

ForEx impact in the back half of the year, can you give us any kind of color on how that's stayed in your guidance at all?

Edward Arditte

Steve, let me give you -- I'm going to give you the full year and then maybe offline, I can look at the back half. But the full year, we came into the year thinking that revenue would benefit from about 5% tailwind for the full year based on how currencies have moved. We're now estimating that to be about a 4% tailwind. While many of you watched the euro and the euro has been impacted quite a bit, we have a fair amount of business in both Australia and Canada and those currencies have held up quite well, as well as a couple of other currencies where we do business. So overall, the revenue impact is a 5% tailwind down to a 4% tailwind.

Christopher Coughlin

That's just the headwind versus the last quarter when we talked.

Operator

Our next question is from Gautam Khanna from Cowen and Company.

Gautam Khanna - Cowen and Company, LLC

I want to just ask about the French ADT business. I mean, this was losing what? Like $15 million a year, is that right?

Christopher Coughlin

Yes, it was a money-losing operation.

Edward Breen

And in about in that range.

Gautam Khanna - Cowen and Company, LLC

And so was it in the numbers at all, in the Q2 numbers or was it totally excluded?

Christopher Coughlin

No, it was -- it is a continuing business. It will not be accounted for as a discontinued operations. So it is in our numbers through the majority of the quarter.

Gautam Khanna - Cowen and Company, LLC

Other EMEA ADT properties that are losing money in that kind of magnitude that you might jettison or is that...

Christopher Coughlin

No, not at all.

Edward Breen

No, there's not. But there a few pieces we do want to jettison. As Chris mentioned, not nearly of the magnitude of France, but we just think are going to be -- not hit our parameters for growth strategic fit and modestly profitable. So there'll be a little bit more pruning we're going to be doing.

Christopher Coughlin

And we come out from some of these markets [ph] (01:17:56) with some of our products in a different manner.

Gautam Khanna - Cowen and Company, LLC

And just quickly on Flow, the Valves business down 19%. Do you think a trough this quarter given kind of the order rates you're seeing in oil and gas? And could you see that actually turn positive, maybe by Q1 of next year, given the lead times in converting some of these orders?

Edward Breen

Well, I mean, when you look at the order rates, Gautam, the orders were up in the Valve business very nicely in the quarter, which helped that 10% order growth year-over-year. So again, by the time it hits revenue, it's six to eight to nine months down the road. So I don't know if it's first quarter next year. But it's clearly sometime in the first half of next year, we'll see some of that benefit.

Gautam Khanna - Cowen and Company, LLC

And lastly, with respect to restructuring, could you help us allocate it to the segments? I mean, where's the preponderance if dollar's going to be spent? And what types of actions are you contemplating? And then looking beyond '10, do you think restructuring at the Broadview integration will be dropping off from the 150 this year?

Edward Arditte

Let me try to answer that as best as I can here. If you take a look at where our restructuring spend has gone and the detailed schedules we give you, both in the press release as well as up on the website, give you a pretty good roadmap as to where our spend has gone. I think it's fair to conclude that what we'll do over the remainder of the year will, in large part, track where it has been. In other words, on a percentage basis, I wouldn't expect to see much in the way of deviation. And then your second question I think was thinking about next year?

Gautam Khanna - Cowen and Company, LLC

Yes.

Edward Arditte

And it was what?

Gautam Khanna - Cowen and Company, LLC

Do you think you're going to do 150 this year? Roughly next year, do you anticipate the number will be less ex the Broadview?

Edward Arditte

At this point, obviously, we'll give you a full detailed review when we get to our fourth quarter call in November. But I would expect the restructuring activity ex Broadview to come down very significantly next year.

Operator

And your final question today is from Bob Cornell with Barclays Capital.

Robert Cornell - Barclays Capital

There's a couple of big picture questions on the call, I mean, obviously, with Broadview and the French business, you made a statement about what you think about ADT. But I wonder with some of your customers going global, do you see a need down the road to expand the global footprint in that business?

Christopher Coughlin

We are really pretty much everywhere right now, Bob. So I don't think we need to expand to service our global customers. We may do this at a little bit different manner than we've had before in terms of more regional resources rather than having full integrated business in each and every market, no matter what the size. So that's where we're looking at consolidating some back office. You can do some installation work from different markets. So clearly, we are focused on maintaining that relationship and a unique competitive position that we have, and that we are just about everywhere in the world that can service these global partners of ours.

Edward Breen

Bob, our big focus also in ADT, just positioning for the future, is obviously, like every one of these emerging markets. And just to give you a field work [ph] (01:21:33), we doubled our offices, ADT offices in China last year in one year and we plan on making a big move again this year. Now again, that's mostly -- and that's not a residential business. That's the commercial business in most of these emerging markets. But we're making sure we're getting positioned there. And you'll see that promise, we're doing the same thing in India. We're doing the same thing in the Middle East, all those emerging markets.

Robert Cornell - Barclays Capital

You addressed this a couple of times over in the Q&A, but if you look at the number of businesses that serve non-res markets, I mean is it possible looking at the increase to detect when that fitness in the aggregate across a number of the end markets? When that goes positive in terms of sales?

Edward Breen

Well, I think you also have to look at it a little bit by vertical. Again, Bob, I'm not surprised. I think for us when you look at our mix, it will be the last piece of it that will come back. But I think you have to go geographically and by vertical. For instance, as we mentioned, the retail vertical is coming back, again, off of a very low base. But we're seeing lift there, and I'm not surprised by that. Retailers are doing better. You're seeing all the numbers they're posting. So they're opening up the walls a little bit. And then I think you have to look at it by geography. As we mentioned here and I'm actually a little bit surprised it bounced back the way it did, but the Asia region really came back nice on the non-resi side, which is again the commercial systems installation part of our business that came back very nice and the order activity looks good there. And then the emerging market activity and the other key emerging markets is starting to pick up. So I think the last two areas will see pickup, my opinion is the North America and the European part of our systems installation business.

Edward Arditte

Ladies and gentlemen, thanks for joining our second quarter conference call. We look forward to reviewing our third quarter results with you when we do our third quarter conference call in late July. Operator, I'll turn it over to you at this point to provide the replay instructions. Thanks for joining us.

Operator

Thank you. The replay of today's conference will be available starting later today through Monday, May 3. U.S. participants may dial 1(800)756-0715. Participants outside the U.S. may dial 1(203)369-3427. All callers will use the passcode of 6360 to access the recording. This concludes today's conference. Thank you for participating. You may now disconnect.

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