Tyco (TYC) Beats Q3 Earnings Estimates, Withdraws Outlook

Tyco International Ltd. (NYSE:TYC) reported third-quarter fiscal 2016 adjusted income from continuing operations of $231 million or 54 cents per share compared with $198 million or 46 cents per share in the prior-year quarter. Adjusted earnings beat the Zacks Consensus Estimate by a penny.

GAAP income from continuing operations increased to 56 cents per share from 44 cents per share in the prior-year quarter. Despite the fall in revenues, earnings increased due to lower cost of services.

Revenues decreased 2% to $2,449 million in the reported quarter from $2,489 million in the year-ago quarter. Revenues missed the Zacks Consensus Estimate of $2,457 million.

Organic revenues also improved 1.5%, but was negatively impacted by a stronger U.S. dollar by 3%.

Segment Performance

North America Integrated Solutions & Services: Revenues came in at $1,004 million, an increase from the prior-year figure of $972 million, as the positive impact of acquisition overrode the weak Canadian dollar. The segment witnessed modest 2.5% organic growth on the back of a 4% increase in integrated solutions revenues.

Backlog at the segment was $2.7 billion, up 5% year over year on a constant currency basis. Adjusted operating income came in at $148 million compared with $157 million in the prior-year quarter. Adjusted operating margin declined 150 basis points (bps) to 14.7% from 16.2% a year ago due to increased investments and higher installation costs.

Rest of World Integrated Solutions & Services: Revenues decreased 6% year over year to $794 million primarily due to an adverse impact from currency translation. Organic revenues were up 2% due to an increase in sales of integrated solutions.

However, a backlog of $1.94 billion reflected an increase of 14% year over year. Adjusted operating income came in at $92 million compared with $93 million in the prior-year quarter. Adjusted operating margin was 11.6% compared with 11.0% in the prior-year period. The 60 basis point improvement in operating margin was driven by revenue growth, improved execution and productivity benefits.

Global Products: Revenues were $651 million compared with $675 in the prior-year quarter. Organic revenues were flat on a year-over-year basis. Adjusted operating income came in at $115 million compared with $119 million last year. Adjusted operating margin increased marginally to 17.7% from 17.6% in the prior-year quarter due to product mix.

Merger Update

In the fiscal first quarter, Tyco signed a merger deal with the global diversified technology company, Johnson Controls (NYSE:JCI). Per the deal, Tyco will own 44% equity in the combined company. Post merger, the companies plan to strengthen their building products and technology, integrated solutions and energy storage portfolios. Tyco believes that this acquisition will help it in expanding its global footprint in the building-technology market, enhance shareholder value and launch innovative solutions. The combined company remains on track to achieve $1 billion in merger synergies and productivity initiatives.

Tyco looks forward to close the Johnson Controls acquisition by Sep 2, 2016.

Balance Sheet and Cash Flow

Exiting fiscal third quarter, the company had cash and cash equivalents of $345 million with long-term debt of $2,165 million.

Cash from operating activities totaled $191 million compared with $249 million in the year-ago quarter. Adjusted free cash flow generated during the quarter was $214 million compared with $230 million in the year-ago quarter.

Our Take

Going forward, the merger with Johnson Controls is expected to be a lucrative opportunity for Tyco. The combined entity will offer state-of-the-art product, technology and service capabilities to clients ranging from commercial buildings to small business and residential customers. Owing to the Irish and European rules and regulations related to the proposed merger, Tyco has withdrawn its earlier issued profit forecast.

Tyco currently has a Zacks Rank #2 (Buy). Some stocks worth a look include Allegion Plc (NYSE:ALLE) , Carlisle Companies Incorporated (NYSE:CSL) and Leucadia National Corporation (NYSE:LUK) . All three carry the same Zacks Rank as Tyco.