Filer: Tyco International Ltd.
Pursuant to Rule 425 under the Securities Act of
1933 and deemed filed pursuant to Rule 14a-12
of the Securities Exchange Act of 1934
Subject Company: Sensormatic Electronics Corporation
Commission File No. 1-10739
Investors are advised to read the registration statement on Form S-4, the
Schedule TO, the preliminary and final prospectus and other documents relating
to the exchange offer that will be filed by Tyco with the Securities and
Exchange Commission. Sensormatic stockholders are also urged to read the related
solicitation/recommendation statement on Schedule 14D-9 that will be filed by
Sensormatic regarding the offer. Investors may obtain a free copy of these
documents after they are filed with the SEC and other documents filed by Tyco
and Sensormatic with the SEC at the SEC's web site at www.sec.gov. These
documents contain important information, which should be read carefully before
any decision is made with respect to the exchange offer and the merger. These
documents may also be obtained from Tyco or from Sensormatic by directing
requests to Tyco International Ltd., The Zurich Centre, Second Floor, 90 Pitts
Bay Road, Pembroke HM 08 Bermuda, tel: (441) 292-8674; or to Sensormatic
Electronics Corporation, 951 Yamato Road, Boca Raton, FL 33431-0700, tel : (561)
989-7000
TYCO INTERNATIONAL CONFERENCE CALL
August 3, 2001
9:00 a.m. EDT
Moderator Welcome to the Tyco International Conference Call. At this
time, all participants are in a listen-only mode. Later,
we will conduct a question and answer session.
Instructions will be given at that time.
As a reminder, today's conference is being recorded.
I would now like to turn the conference over to your host, Mr.
Dennis Kozlowski, Chairman and Chief Executive Officer of Tyco
International.
D. Kozlowski Good morning, everybody.
I'm here this morning in New Hampshire with Mark Swartz
and Jack Blackstock, as well as other members of Tyco's
management.
During this call, we'll be providing forward-looking
information. I suggest that you refer to our press release
and SEC filings for the cautionary language concerning
forward-looking statements.
This morning we announced the acquisition of Sensormatic for
roughly $2.3 billion. This will be an excellent deal for us
and broadens our product offerings in the security business.
It offers substantial cost synergies; it brings in-house
global leading manufacturing and technology; and it is
immediately accretive by at least $0.03 per share during the
first year of our ownership.
Before talking about Sensormatic, let me give you a brief
update on trends since our earnings conference call a few
weeks ago. Our organic growth in fire and security business
remains very strong, and we're achieving healthy, incremental
margin improvements on this growth. Health care is also very
healthy for us. It is not being impacted in any way by the
economic slow-down. Cost take outs at Mallinckrodt, combined
with the high, single-digit organic revenue growth will
deliver record results for us this quarter.
Tycom will show substantial capacity sales for the first time
this quarter now that the Atlantic leg of the system is fully
operational. On a different front for Tycom, we are concerned
about the visibility of Flag's financing for the Pacific
project. We believe that they may at least be delayed in the
financing or possibly not proceed at all. We are going to
assume the latter.
With that said, we are aggressively proceeding with the
project ourselves and remain very confident that the line will
be a large, financial success for us. Beyond that Tycom will
hit its bottom line number for the year, and we remain
comfortable with the projections for next year.
Our recent acquisitions, CIT and SecurityLink, are being
quickly integrated into Tyco, and we are seeing the cost
savings that we anticipated. On the CIT front, at the time we
announced the acquisition we talked about $30 million of cost
savings; to date, we have achieved about $110-120 million, and
will probably wind up with something in excess of $150 million
of cost savings, as well as accomplishing the other things
that we had spoken about on the
conference call. CIT is proceeding very, very well with us,
and that division will probably soon be known as Tyco
Financing or some other related name.
In electronics, the week to week orders continue to be
volatile. We continue to cut costs through plant
consolidations and re-engineering the business. We believe
that we are getting market share in a number of markets. That
said, we are anticipating, and our models plan, to have
revenue decline over the next few quarters due to market
conditions. However, all in all, we remain very comfortable
with our guidance of $2.77-2.78 per share for our fiscal '01,
which closes on September 30th of this year, which will
represent about a 27% increase versus last year.
For fiscal year 2002, we continue to believe that $3.45 per
share is a reasonable estimate, but as we said on the
conference call we will allow for a range between $3.20-3.60
depending upon whether the electronics industry declines more
sharply than we expect or if it should rebound a bit.
That's an update and a summary of Tyco's activities for now.
Now, let's get back to today's announcement.
We are buying Sensormatic for $24 per share, or roughly $2.3
billion. The deal is a stock for stock purchase, with the $24
price fixed. There is a walk-away at $46.25. This effectively
creates a floor exchange of 0.52 Tyco shares per Sensormatic
share were our stock to average less than $46.25 per share
during the measurement period.
We are assuming about $281 million of net debt and preferred
stock and anticipate about $150 million of purchase accounting
adjustments. We expect the transaction to close around the end
of October.
Let me briefly describe Sensormatic to you. The revenue mix -
roughly 55% comes from the US and 45% outside of the US,
primarily Europe. About 20-25% of revenues comes from pure
consumables and maintenance, while another 14% comes from the
sale of tags. Sensormatic operates in three major areas: one,
is electronic surveillance, or EAS, which is about 56% of
revenues. The company manufacturers sensing equipment placed
in stores as
well as tags and labels put on products. This is about a $1.5
billion market, growing at about 8-9% annually.
Sensormatic is a leader in the market, roughly two times
larger than the next largest competitors. Sensormatic is in
over 90,000 stores. The firm has leading technology such as
acoustical magnetic system and new RFID products. There is a
fair amount of embedded growth in this business. Based off
recent contract wins with enterprises like Coles Myer,
Staples, J Crew, Galleries Lafayette, and David Jones. Also
the company is now opening the door on a huge new market in
food retailing with a new agreement at Kroger markets.
Video surveillance is the second part of the company with
about 24% of revenues. Sensormatic manufactures a full line of
domes, controllers, multiplexers, and digital recorders.
Roughly half the business is tied to the retailing industry
with the remainder broadly spread with everything from
airports to hotels and casinos. This is about a $1.3 billion
market, and the company has roughly a 20% share.
The market is now shifting from analog to digital products,
which is creating demands for upgrades on top of general
growth. Access control is about 5%. Sensormatic is number two
in this highly fragmented market, having about a 12% market
share. The business is very complimentary with our Simplex
Access Control operation.
Cutting across all three business lines is about 15% of
services. Roughly half is recurring revenues and service.
In Sensormatic, the near-term financial returns from the deal
are quite attractive. But the real impetus behind the deal is
the long-term strategic opportunities created through the
merger. The deal vastly expands the distribution of
Sensormatic products through the use of our ADT sales force.
ADT has over 5,500 sales people, while Sensormatic has about
500. We believe there's a huge opportunity in smaller,
regional retailers that have not been addressed by either
Sensormatic or its competitors.
Sensormatic creates a fully integrated fire, security, and
access product line, which will clearly strengthen Tyco's
competitive position. This may also broaden the market by
creating less
expensive systems that can accomplish multiple tasks for the
smaller sized commercial customer.
Sensormatic also enhances our recurring revenue and monitoring
business. Sensormatic's video technology offers increased
opportunities for remote and mechanical monitoring. Also, we
should be able to improve the efficiency of our respective
service operation by increasing customer density.
Finally, the deal will move us into the business of
manufacturing security products on a leading platform with
top-notch technology. The move is somewhat akin to our
acquisition of Simplex early this year. Simplex brought
in-house the ability to manufacture electronic fire systems,
which was an obvious fit with our leading fire contracting
business.
Turning to the near-term financials, we expect Sensormatic to
add at least $0.03 per share to earnings, and $0.04 per share
to free cash flow during its first year with Tyco. We see the
opportunity to reduce costs in Sensormatic by over $160
million, with about 75% of this materializing within the first
12 months. There will be $85 million taken out of G & A cost.
This figure includes both headquarters' cost and the
substantial amount of redundant regional administration. For
example, we are likely to merge 25-30 of our field offices.
We'll reduce about $25 million from manufacturing and
distribution. For example, we have large distribution centers
in the US and Europe, which will be combined.
We have $20 million from in-sourcing equipment that we
previously purchased from other suppliers. We have $19 million
from combining our servicing networks, eliminating
redundancies and gaining density benefits. And we have about
$11 million in duplicative R & D activities that are taking
place at both Tyco and Sensormatic.
Another financial merger benefit, which is not in these
numbers at all, is the ability of CIT to improve Sensormatic's
asset efficiencies. Sensormatic uses CIT right now, and has
historically carried large, short and long term customer
receivables tied to various financing plans. Moving such
programs into CIT can release about $175 million in capital
for other uses. Please note,
however, that all the credit decisions will rest, as always,
with the people at CIT, making certain that there's an
arms-length credit worthy transaction here, and credit
decisions will not be made by Sensormatic or ADT sales people.
Finally, I want to anticipate the question why this is
structured as an equity deal as opposed to a cash transaction.
We used stock because, number one, the seller demanded it,
hoping for upside on the stock; two, it enhances our ability
to structure the deal in a tax efficient manner on an ongoing
basis, keeping Tyco's overall tax rate in the mid- to
lower-20's. And finally, with CIT, the improved balance sheet
only strengthens our position.
I'd like now to open this call up to any questions or comments
you may have on Tyco or the Sensormatic deal, in particular.
Moderator Our first question comes from the line of Jack Kelly with
Goldman Sachs.
J. Kelly Two questions: Who is number one, and what's their share in
access control?
And secondly, what in the last 2-3 years has been the organic
growth in Sensormatic, as in what do you think you can get it
to within some reasonable period of time?
D. Kozlowski Honeywell is probably number one is access control with
about 25% of the market, Jack. And on the organic side,
I'd say it's probably 6-7% over the last two years.
J. Kelly And where do you think you can get that to go, looking out
a year or so?
D. Kozlowski We think we can get it, certainly, into double-digits in the
10-12% kind of range as we expand on a worldwide basis and are
able to use the full complement of the ADT sales force all
over the world to be able to install and implement the
equipment that Sensormatic has.
J. Kelly You're still going to retain their full 500 in sales force?
D. Kozlowski Yes, positively.
Moderator Our next question is from the line of Bart Ware with Winslow
Capital.
B. Ware A couple of questions: Where is this going to be from a
management standpoint. What's the structure there?
D. Kozlowski That's coming under Jerry Boggess in our Fire and Security
business, and it will be combined with Mike Snyder and a
group of people at ADT.
B. Ware OK, so he's the leader?
D. Kozlowski Yes, he is.
B. Ware And as long as we have you, on the electronics side, can you
just--you said order rates are spotty. Would you characterize
them deteriorating in Europe or any more color, especially, on
the US side of the house as well?
D. Kozlowski We don't see them deteriorating any more to the guidance that
we previously gave you. It is spotty, Bart, where on one week
we'll exceed what we anticipated and the next week we will
fall short. July came in where we were on plan, and there were
no disappointments in July from our plan, and we continue to
watch it on a week to week basis.
B. Ware And then the third question on Sensormatic's, you said
recurring revenues is what percent?
D. Kozlowski It's about 20% of the business. That overall segment, if
you look at fire and security ...$10.5 billion before
Sensormatic, roughly half of the business is recurring
revenues. And this billion-one, billion-two in sales, it
will add to that. We'll probably still stay pretty close
to 50% of recurring revenues for the segment.
B. Ware And will you look at taking the service component up
higher...?
D. Kozlowski Yes, we will. That's a big emphasis of ours and that's the
direction that we'll be driving the business.
B. Ware Thank you very much.
Moderator Our next question is from the line of Robert Cornell with
Lehman Brothers.
R. Cornell This is the first sort of product type of acquisitions you
made in the security area, and you've indicated in the past
that indication to move, say, away from products. You can
buy products from a whole bunch of people, emphasize
recurring revenue. Does this mean you might look a little
more favorably about, for the products business to handle
the whole critical mass you mentioned?
D. Kozlowski Yes, if you really look back, Bob, Simplex has products in
the panel and other products on the security side, on the
safety side, anyway, where the products are obviously the
leader, where we can put some money into R & D and maintain
that leadership position, we are comfortable with the
products there. In some of the areas that, products that
we installed within ADT there is some jockeying around of
people, leapfrogging one over another with technology in
areas where there is no clear cut discernible market
leader.
But in this case, Sensormatic certainly is, and they certainly
are by a significant margin. They're leaders in electronic
surveillance equipment as well as in their video surveillance
equipment. So, we're really comfortable with the domes,
controllers, multiplexers, digital recorders, and the products
they are manufacturing. We will add to that, that the products
are getting smaller, they're getting less expensive, and
really fit right into our abilities to manufacture electronics
and then ultimately install monitoring and get recurring
revenues from them.
R. Cornell I understand. I have a question for you or Mark. When are
you guys going to start indicating that the appropriate
earnings for Tyco are the cash earnings as opposed to
earnings including goodwill. I mean, 3.20 to 3.60 is a
with goodwill number, yet I think beginning the March
quarter we're....
D. Kozlowski That's a good point. Bob.
M. Swartz We actually, beginning with our first quarter of fiscal
'02, which will be ending December 31, we'll be under the
new basis of accounting. We have an analyst's meeting set
up for the week of September 11th, and we'll be walking
everyone through the
differences between the old and new accounting. But as you
said, the number we're giving right now is prior to the
goodwill, which is an incremental, approximately $0.25-0.30
per share is the guidance we're giving.
D. Kozlowski So the $3.45 is really $3.75 for next year with the
goodwill.
R. Cornell Yes, so I mean, First Call at some point over the next couple
of months and for yourselves and others is going to have to
adjust those reported numbers, right?
All Right.
R. Cornell Because up until now you're still using guidance that
includes goodwill.
D. Kozlowski Correct.
M. Swartz And the only reason we're still doing that Bob is given that
the fourth quarter is not done yet and it will be under the
old basis, we want everything to be on an apples to apples
basis as people look at us.
R. Cornell So, the first quarter, the December quarter will be under
the new basis?
M. Swartz Yes, it will be.
D. Kozlowski And it will have $0.07-0.08 of incremental earnings in
there from the goodwill.
R. Cornell Interesting. Thank you.
Moderator Our next question is from the line of Ted Wheeler with
Buckingham Research.
T. Wheeler Good morning and congratulations.
Sensormatic has a position in radio frequency identification
technology. Have you looked into that? I know it's a down the
road sort of thing. But have you looked into it in context to
this deal and do you have any sense of how quickly that could
become a factor?
D. Kozlowski Yes, we have. Mark can give you some details on it.
M. Swartz We are very excited about the relationship they have on
RFID, and do believe that it will offer Sensormatic
additional growth opportunities as it goes forward. We
like that are on the acoustic magnetic side they are a
leader, that they have the opportunity on the technology
side with RFID, and what I think you're getting towards is
that is a future area that we see for growth and technology
usage. We believe Sensormatic will provide us nice base in
that area.
T. Wheeler There's several trials going on. Everyone's been pretty
secretive about it. Do you think those trials are going to be
expanded in the next 6 months or do you think anything will
come of a commercial adoption on this technology in that time
frame? Or is it years down the road?
M. Swartz We think with our moving in also into Sensormatic right now
and continuing to invest in that area and focus as we always
do on the R & D side that we will be able to see something in
that within the year to year-and-a-half time period. And we
are looking at making sure that Sensormatic will be a leader
in that area.
T. Wheeler Thanks. Great.
Moderator Our next question is from the line of Brian Langenberg with
First Union Securities.
B. Langenberg Good morning.
I want to explore a little bit in terms of the synergies.
Talking about national accounts and these smaller accounts,
first question is in looking in their "K" it says they serve
93 of the top 100 retailers. Just wondering if you have some
similar data on your existing security business, how much
synergy there is in large accounts and if the sale for these
types of products are sold to the same people that buy fire
and security in the large accounts.
And then when we talk about taking this into the smaller
retailer, wondering roughly what the up-front cost is, which
of course you can get financed anyway, for a smaller retailer.
And is there much
training that's going to be required to train your ADT sales
force to sell this third product?
M. Swartz First talking about where it ends up getting sold into,
it's similar to the same people that are buying our
existing ADT security products, as compared to the fire
protection side, which is a different area. So, we do see
in looking at the ADT here in the US, as well as worldwide,
having many similar customers on the large size. What we
are going to be able to do right now is expand upon the
sales force and also be able to offer a product one stop
service satisfaction level for customers and be able to
see, we believe, a much broader offering of our product.
When you go down to the small, mid-market area, that is an
area that ADT has been very successful with. Outside of the
United States we've been focusing on that and that is a sales
force that we have already invested in in the security side,
and now we see being able to allow them to offer this product
also.
We have tried this on a smaller basis in Germany where we did
make an EAS acquisition during the past year, and we have had
tremendous amount of synergy in that area as far as increasing
the number of units that are sold of the EAS to our existing
customer base, and the cross-selling has worked extremely
well. That is the test market where we ended up looking at it
on a day to day basis and Sensormatic is the leader in this
area, and we believe that by combining these two groups we'll
be able to improve the performance of both companies.
D. Kozlowski And the training is negligible .... We'll be able to get
our 5,500 sales people up to speed quite quickly, probably
within a few days of training. The sales force is
outsourcing some of these products now. We're not
aggressively pursuing because we don't do this, but at
times the contracts do call for a Sensormatic type of
product, especially, cameras and video surveillance such as
we've been doing at airports recently, the five airport
contracts we've gotten in the last couple of months. So, a
lot of these products will fall right in there and we'll be
able to get this sales force up to speed
immediately with Sensormatic's 500 person sales force.
Moderator Our next question is from the line of Harriet Baldwin with
Deutschebank.
H. Baldwin In terms of the overlap in R & D, is most of that on the
RFID side? Does MAcom have some technology that you could
use to accelerate Sensormatic's roll-out of that technology?
D. Kozlowski Possibly, Harriet. But that's not what we were really
referring to, to the R & D. The R & D we had was really in
some access control that we were doing at our ADT
operations where we have active R & D going on in that area.
We would be looking at MAcom for technology, but none of that
was thought about for the purposes of this call.
H. Baldwin OK. I know that recently Sensormatic made a little bit of an
adjustment to the timing of their sales. Just talk a little
bit, Mark, about how you guys got comfortable with what timing
should be in terms of your due diligence.
M. Swartz We did the same level of due diligence that we do on all the
acquisitions, and it included also revenue recognition. And
the issue with revenue recognition that's coming up with
Sensormatic is a result of SAB 101. And in that Sensormatic
had a June 30 fiscal year; they did adopt it, and came out
with that this week.
We spent time individually looking at the SAB 101 results, and
also talked to their auditors, PWC, and got very comfortable
that they did pick up the appropriate level for revenue
recognition under SAB 101 and the transition effect. And the
numbers that they gave earlier this week, when they talked
about their expected results, does include the effects of SAB
101, which was a negative for them of around $0.08-0.09, and
that is all reflected in the number they gave for guidance
next year, and then also, of course, what we are giving today.
H. Baldwin And it looked like on the top line the difference was a
little bit less extreme than it was on the net income
line. Is that the right way to think about that transition
impact?
M. Swartz Yes, due to some other issues that were going on at the same
time. The net effect, they had a pick-up also from goodwill
amortization that became part of that net transition effect
also.
H. Baldwin Thanks for the clarification.
Moderator Our next question comes from the line of Tom Van Buskirk with
Silverado Capital Management.
T. Van Buskirk Could you just go over a couple of details. Could you say
what regulatory approvals you require, particularly, any
you may require outside of the United States?
And second, I'm curious about the terms of the cap because the
language seems a little different in saying that if Tyco goes
below the trigger there's either a walk or Sensormatic must
accept a fixed ratio instead of it being an automatic feature.
Does anything special account for that difference, or do I
just not understand it?
M. Swartz No, nothing special accounts for that difference. It's
just an approach based on negotiation and where we ended up
as far as Tyco stock being below the 46.50.
As far as the regulatory approvals, it's all the ones that you
typically would expect, governmental approvals.
T. Van Buskirk So, you'd need Hart-Scott, obviously. But what about
overseas, outside of the US?
M. Swartz Yes, given the size we are and as far as the ... goes, we
do end up going for approval on just about every
acquisition.
Moderator Our next question is from the line of Steve Reneri with Soros
International.
S. Reneri Question answered. Thanks.
Moderator The next question is from Brett Patowski with Tiedeman
Group.
B. Patowski Hello. Congratulations.
When do you expect to launch the first exchange offer, and
when do you expect the first exchange offer to end?
M. Swartz I'm sure we'll move as quickly as possible in doing the
appropriate filings with the SEC and once we get through that
in a very
expeditious manner we'll go ahead and circulate documents. We
do believe closing in the October time period is reasonable.
B. Patowski Is the only overlap taking place in the access control
business?
D. Kozlowski Yes, and that's very, very small overlap. There's hardly
any overlap here at all. It's all very complimentary.
B. Patowski What's the combined market share in access control?
M. Swartz Minimal.
D. Kozlowski It's less than 20%.
B. Patowski And are you going to wait for proxy to get cleared before
you launch the exchange offer?
M. Swartz Most probably.
B. Patowlski OK, so it shouldn't launch for at least another 30-45 days
or so?
M. Swartz No way to know.
B. Patowski And just on the Bard transaction, what's the ratio on that.
M. Swartz We did finish the measurement period last night and I do
not have that with me today. However, I do believe there
is a call-in number that you can receive that information.
B. Patowski Thank you very much.
R. Cornell Dennis, you mentioned the pipeline for acquisitions was
relatively full last time we spoke on a conference call of
some sort--maybe earnings. Would you characterize the
constitution of that pipeline? Is the Street going to find
we've got complimentary deals like Sensormatic, or do we have
some surprises coming?
D. Kozlowski There's absolutely no surprises coming, Bob. Anything that we
have been looking at or are looking at, we'll talk about, will
be complimentary deals and real nice tuck-ins like you're
looking at here. So, there's nothing at all that's going to
surprise anybody.
R. Cornell A question for Mark, what's the status of the negotiation with
Thomas and Betts around the OEM products balance sheet. I
would have thought that the one-year fuse and that would have
been done and you'd be through arbitration and be close to an
answer there.
M. Swartz Unfortunately, we do not dictate how quickly arbitrators
end up looking at it. From everything we have found,
everything that has been argued, we continue to be
extremely comfortable that our position is the appropriate
one. It's approximately a $30 million difference--very
significant--for the Thomas and Betts folks, and that is why
I think it is being dragged out. However, we do believe
that at the end of the day we will be successful with that.
Also, I'm just jumping in right now, Bob. We did call the
number and the exchange rate for Bard, the ratio is 1.1280 for
anyone who is interested.
Moderator Our next question is from the line of Jeff Kessler with Lehman
Brothers.
J. Kessler I just want to say that from ADT to Sensormatic, you keep
buying all my companies out from me.
My main questions were around access control. They've been
mainly answered, but could you go into the overlap in access
control and what you bring to that area and what you think
Sensormatic brings to you?
D. Kozlowski Sensormatic brings products and a reputation in the field
of video surveillance, access control. We bring good
worldwide market coverage. As we spoke before of our over
5,500 sales people on a worldwide basis, we're going to be
able to pull the products, the three product lines of
Sensormatic, into our fire and security; give our customers
a one-stop solution for everything they need for security.
That's from access, surveillance, control.
We built a model for this in Germany recently and it works
quite well and we're going to be able to expand this model
that we had been working on in Germany on a worldwide basis
now with the high quality product lines and technology of
Sensormatic. Between Sensormatic, Simplex on the panel side,
ADT on the
monitoring side, we'll be able to tie all these into one,
neat, combined solution for our customers.
And we've done this on a staggered basis. We didn't try to do
all this at one particular point in time, and we've been able
to slowly integrate it. We do have the management capabilities
and availability to make all these things happen for our
customers.
J. Kessler Are you going to continue the, Sensormatic has gotten a
sponsorship. They're going to have a big presence at the
Winter Olympics. Are you going to brand this as
Sensormatic or is Tyco at the Winter Olympics?
D. Kozlowski I know Sensormatic has a commitment to the Winter Olympics.
They're the official security provider in Utah. I don't know
if we're going to parlay Tyco on that, it would be
Tyco-Sensormatic, or what have you. Since Sensormatic's
already paid for it, it's in there and we'll probably leverage
the Tyco name in some way.
Moderator Our next question is from the line of Barry Bannister with
Legg Mason.
B. Bannister Alot of my questions have been answered. A couple of quick
ones: First, is there an overlap in RFID between the MAcom
business and what Sensormatic already does? We've been talking
about access control overlap, but I hadn't heard anything
about RFID overlap.
D. Kozlowski We spoke about this a few minutes ago, Barry. We don't
know of, or think there's any overlap between MAcom and
RFID technology at Sensormatic, but we will be taking a
look at that.
B. Bannister And when I look at Sensormatic's growth plans and how they're
going to grow the top line to meet your goal, I'm trying to
get a handle, given the company's history of how they're going
to grow that fast.
It seems like you have a lot of opportunities. If I were to
describe them this way, would it sound about right to you, and
could you add some more if I'm wrong: One, you're going to
probably take this RFID into retailers and into other
applications like grocery and that's a high, value-added, more
expensive solution. And then second, you're going to go more
international, especially non-
Europe. And then third you're going to try to penetrate more
of the small retailers with these simple acoustic magnetic
systems. Is that sort of how you see the marketing?
D. Kozlowski Exactly, Barry. We are going to take the RFID into
retailers, as we talked about the Kroger supermarket.
That's a whole new area for Sensormatic and Sensormatic
products. And since we are already in a lot of grocery on
the ADT Tyco security side, we'll be able to pull that
product in we believe much more rapidly with our sales
force.
We will be expanding these product throughout Asia, and
Sensormatic is a player in Europe right now but we can make
them a more significant player in Asia. And with our 5,500
sales force, we'll be able to go to the smaller retailer and
hit a lot of places in the world that Sensormatic just has not
gotten to.
B. Bannister So, all three of those are viable.
D. Kozlowski That's correct.
Moderator Our next question is from the line of Brad Galko with Pioneer
Investments.
B. Galko Mark, given that there's been some accounting changes recently
at Sensormatic, could you just tell us what free cash the
business generated in the year just ended, and what you're
looking for in the first year?
M. Swartz The most recently completed year was just about $100 million
free cash flow. We look at more than doubling that over the
first year that we end up owning their business. And when you
look at the cost opportunities that we have with the business
and their base free cash flow, we think that's a very do-able
number.
We also have the one-time opportunity to pull down working
capital to a much more appropriate level from our perspective,
and that's about $150 million of one-time, above and beyond,
the free cash flow that will be generated from the business.
D. Kozlowski We have time here for one more question.
Moderator Our final question comes form the line of Jeffrey Sprague with
Salomon Smith Barney.
J. Sprague A couple of quick things: Dennis, you characterized July in
electronics being on plan. I assume that means roughly
down 15. I'm not sure if you were talking about sales or
orders. The reason I ask the question, I see Bishop is
actually reporting that some electronics guys are talking
about connector book to bills improving in July. I'm
trying to discern if there's some trends there, if you saw,
if you can compare and contrast your order activity versus
your sales activity in the month.
D. Kozlowski We were on plan. It wasn't down quite 15. But we met our sales
plans and our EBIT plans for the month, which is a good thing.
So, we're tracking comfortably toward where we need to get to
in order to produce the numbers that we said we'd make this
quarter.
We're very comfortable with where the downturn is on the
telecommunications side of electronics, and the business
progresses along with our plan.
There may be a tad more optimism in electronics now than there
has been but it's way too early to project out into any
tangible results.
J. Sprague But orders and sales would have roughly tracked each other
in the quarter as they are in the month, is that correct?
D. Kozlowski That's correct.
J. Sprague What form does service actually take in Sensormatic? Is that
keeping the underlying electronic equipment that monitors the
flow of these tags in and out of the store up and running, or
is there some other element of service.
D. Kozlowski That's an important part of the service, much the same way
we inspect fire sprinkler systems in other areas. We're
inspecting and servicing the equipment as well as providing
the consumable tags.
J. Sprague Right. I assume the consumables is actually the larger
part of what you're calling service? Or are there two,
distinct things that you're spiking out here when you talk
about service?
D. Kozlowski It's about half and half, Jeff. Half is service and about
half is consumable tags.
J. Sprague And so on your comment about Flag, I guess you were looking to
avoid about, I believe it was about $400 million in cap-ex
over the next year if you've collaborated with them. Should we
consider that $400 million kind of back on your books, or is
there something else there?
D. Kozlowski Up or down, I would consider it back on our books. And I
would consider us to be one of the last people standing
here in this business.
While our competitors are falling by the wayside here, which
is no big surprise from the time that we came out with the
IPO, because of their inability to get financing in this
market, we being the fully integrated provider, manufacturer,
having raised $2 billion for the systems and we're selling
circuits right now. We do have a third party backlog. Our
business is good and we continue to be optimistic about it.
We'll have a good year with it this year, and the next few
years I think are going to be very, very good for Tycom.
J. Sprague What do you think happens with that cable that's in the water
that belongs to people like 360 and the like that aren't
making it. Does it languish in the water? Or do folks like you
buy it at cents on the dollar at some point?
D. Kozlowski All those things are possibilities. It could languish or
it can be bought. I think all those options will be looked
at.
J. Sprague Thanks a lot.
D. Kozlowski Thank you very much for you time and attention this morning.
Just to reiterate, we're comfortable with Tyco's projections
for the quarter and the year. Our fire and security business
is doing very well, as well as are our health care business.
CIT is better than on-track for us. Tycom, even with some
disappointments in Flag financing, will make its year. And
we're well positioned to go ahead here. We remain very bullish
about next year. We feel good about where we are, primarily,
because of our strong recurring revenues and really coming on
strong Health care business for us, and Sensormatic will
certainly add to our success and our results for next year and
become an important part of our fire and security systems.
Thanks again for your time and attention this morning.