Tyco Beats Estimates as Company Benefits from Low Tax Rate

Tyco International, which plans to split into three companies in coming weeks, reported lower quarterly earnings as restructuring costs reduced earnings, but results beat Wall Street expectations thanks to a low tax rate.

Tyco said it still aims to complete its break-up by the end of June, but could not set a definitive date while waiting for a response from regulators to its recent filings. The company plans investor roadshows for each of the three companies in the two weeks before the split-up.

Tyco did not provide earnings guidance, saying the volatility of tax rates makes forecasting difficult.

Net earnings fell 6.7% to $835 million, or 41 cents a share, in Tyco's fiscal second quarter ended March 30, from $895 million, or 43 cents a share, a year earlier.

Excluding discontinued operations and charges for Tyco's restructuring, earnings from continuing operations were 49 cents cents a share, beating analysts' average forecast by 2 cents, according to Reuters Estimates.

Revenue rose 7% to $10.84 billion, compared with Wall Street estimates for $10.76 billion.

Tyco, which plans to spin off its health care and electronics divisions into independent publicly traded companies, said each of its four segments reported higher quarterly sales, but all four had lower operating income and profit margins as restructuring charges, higher costs and other items cut into profits.

In its electronics segment, strong demand in Europe and Asia offset weakness in North America, but special items and higher material costs depressed segment profit.

Its fire and security business, the second-biggest in terms of sales, reported strong demand from nonresidential construction markets, but special items reduced operating profit.

A favorable tax rate offset weak margins, JP Morgan analyst Stephen Tusa said in a research note.

"Margins were light, at the low end of guidance, with each segment falling slightly short of our estimates," Tusa said. "The upside comes from a surprisingly low tax rate."

The boost from taxes, which added 3 cents to 4 cents a share according to analysts, raises questions about the quality of Tyco's earnings this quarter, said Mike McGarr, portfolio manager and analyst for Becker Capital Management in Portland, Ore.

"It was a quality-of-earnings issue. The tax rate was an item, but we don't really fault people for trying to get the best tax rate," he said.

McGarr said his company plans to hold its 1 million Tyco shares through the break-up, even though Tyco was "awfully vague" about the timing of the split.

Tyco shares traded down on the New York Stock Exchange.

The company, incorporated in Bermuda but with headquarters in New Jersey, said it expects third-quarter sales will be up 5.5% to 6.5%.

Tyco announced its break-up plan, which will cost up to $1.6 billion, in January 2006. Its previous CEO, Dennis Kozlowski, who is serving a prison sentence for looting the company, also floated a break-up plan shortly before Tyco became mired in scandal.

The conglomerate has said the split will allow each company to focus on building value by setting its own strategy for acquisitions, alliances and the use of resources.

Tyco Electronics has applied to trade under the symbol "TEL" on the New York and Bermuda exchanges, while Tyco Healthcare will be renamed Covidien and trade under the "COV" symbol.

Tyco International will retain the "TYC" ticker symbol and will encompass the company's fire and security and engineered products divisions. Current Chief Executive Ed Breen, who took over in 2002, will continue to lead Tyco International after the break-up.