BOSTON – Tyco International Ltd. (TYC) on Tuesday cut its earnings outlook due to higher commodity costs and expected weakness in European automotive electronics, dragging its shares down 9 percent.
Quarterly earnings beat Wall Street views by a penny, but the lowered free cash flow and earnings outlook prompted investors to question Tyco's restructuring progress, which has driven earnings growth in recent quarters.
"Why are we getting the heads-up now?" said John Boland, principal at Maple Capital Management, which holds shares of Tyco (search). "I'm disappointed we're not seeing more progress on winnowing out of some of its assets."
The company, whose products range from hypodermic needles to plastic hangers, said it would explore the divestiture of its plastics and adhesives business segment because it does not fit with the company's strategy for the future.
Chief Executive Edward Breen, who was brought in as CEO after Dennis Kozlowski (search) was ousted in 2002 in a scandal, has already dumped assets and exited businesses, such as its fiber optic cable unit, under a restructuring plan designed to put the company back on track for growth.
Kozlowski, who had grown Tyco via a series of acquisitions, is currently standing trial for the second time on charges that he stole millions of dollars from the company. The first trial of Kozlowski and Mark Swartz (search), Tyco's former finance chief, ended in a mistrial.
Tyco's net profit in the fiscal second quarter ended March 31 fell to $192 million, or 9 cents per diluted share, from $783 million or 37 cents per share a year earlier.
Earnings from continuing operations excluding charges totaled 48 cents per share, versus 41 cents per share last year. Analysts, on average, had forecast second-quarter earnings of 47 cents a share, according to Reuters Estimates.
Quarterly revenue rose 6.5 percent to $10.46 billion, in line with Wall Street's expectations.
The company, based in Pembroke, Bermuda, said it now expects fiscal-year earnings per share excluding charges of up to $1.93, a nickel lower than its earlier estimate. Analysts were forecasting $1.97, according to Reuters Estimates.
Tyco also cut its full-year free cash flow forecast by about $500 million to $4.6 billion, excluding the impact of $625 million in dividends.
Breen, who has been a media darling and a favorite of the analyst community for his rescue of Tyco, said the company may have over-promised on efficiency improvements.
"We were too optimistic and we are dialing that back," said Breen in a conference call with analysts.
Tyco's third-quarter earnings estimate also fell below Wall Street's expectations. It sees earnings per share excluding charges to range between 47 cents and 49 cents. Analysts were forecasting 53 cents a share, according to Reuters Estimates.
Nicholas Heymann at Prudential Equity Group cut his rating on Tyco to "neutral" from "overweight" and lowered his price target to $34 from $45 after the earnings release, citing "diminished forward earnings."
"Tyco may have lost some focus here, but certainly a 10 percent drop in your shares will help refocus you," said Maple Capital's Boland.
Tyco shares fell $2.77 at $27.95 on the New York Stock Exchange, and were near a 16-month low of $26.90. The shares in January had risen as high as $36.45, the highest level since early 2002 before it unraveled on an accounting scandal.
Tyco also said it is in active discussions with the Securities and Exchange Commission (search) to resolve matters raised in SEC's accounting investigation that began in June 2002. It took a charge of $50 million, or 2 cents a share, in the second quarter to establish a reserve for possible fines by the SEC.
For the second quarter, Tyco's electronics business, its biggest operating segment, reported a 10 percent rise in revenue to $3.1 billion and a 31 percent increase in profit to $496 million.
The health-care segment posted a 4 percent rise in revenue to $2.37 billion and operating profit rose 19 percent to $689 million. The operating margin improved to 29.1 percent from 25.4 percent.
In addition to the charge for a possible SEC fine, Tyco took a charge of 26 cents a share for the early retirement of debt, and 9 cents a share to write down the plastics and adhesives assets that it plans to divest.
The plastics and adhesives business posted an operating loss of $187 million, including an asset write-down charge of $202 million. Revenue rose 8 percent to $463 million.
The company said it used $1.5 billion in cash to repurchase convertible debt, reducing its number of shares outstanding by 42 million shares, or about 2 percent of total shares outstanding.