Description

TYC International Ltd. is no stranger to VIC members, so I will keep this discussion at a high level. Investors have been surprised and disappointed by TYC lowering cash flow and EPS guidance in the last two quarters. As a result, for a company of its size and quality, TYC has become cheap and is returning cash to shareholders.

TYC is comprised of 5 divisions: Fire and Security, Electronics, Healthcare, Engineered Products and Services, Plastics and Adhesives.

Fire and Security is about 28% of revenue and is growing low single digits. Operating margins are about 11% and account for 19% of total company profits. Worldwide Security represents 50% of segment revenue, Europe Security represents 7% of segment revenue, Worldwide Fire represents 33% of segment revenue, and Safety Products represents 10% of segment revenue. Fire and Security has been weaker than expected this year, and the performance in this division will be a key driver of value going forward.

Electronics is about 29% of revenue and is growing low single digits but a little faster than Fire and Security. Operating margins are about 15-16% and account for 29% of total company profits. Growth has been strong in the computer and consumer, energy, aerospace and wireless markets, but there has been weakness in the power systems and printed circuit board businesses.

Healthcare is about 23% of revenue and is growing mid single digits. Operating margins are about 27% and account for over 40% of total company profits. Healthcare is seeing strength in surgical, pharma, respiratory, and international, but it is seeing weakness in retail and medical.

Engineered Products and Services is about 15% of revenue and is growing mid single digits. Operating margins are about 10% and account for 10% of total company profits. Near term results have been hurt by rising steel costs.

Plastics and Adhesives is about 4% of revenue and is growing mid single digits. Operating margins are about 4% and account for just over 1% of total company profits. TYC has announced that this business is for sale.

All in all, TYC is growing revenue low to mid single digits. The company generates a 14-15% operating margin and is growing operating profits mid single digits. The tax rate should be 26-27% going forward.

Under the leadership of Ed Breen, TYC has been focused on stabilizing its operations, shoring up its capital structure, and returning cash to shareholders. The company should generate $6-7 billion in cash flow from operations each year for the next few years. Capital expenditures should equal $1.3-1.5 billion per year during this period. There will be some additional cash outlays for earn-out liabilities and the ADT dealer program. After these expenditures, free cash flow should equal $4-5 billion per year.

TYC will probably pay down $500 million more in debt. Aside from the debt paydown and select acquisitions/dispositions that will be small relative to the total size of TYC, the focus going forward will be on share repurchase. Share repurchase could be in excess of $3 billion in 2006 and increasing to more than $4 billion by 2008.

Including the impact of share repurchases, EPS should grow at a double digit rate. Yet TYC trades for under 13x EPS for 2006 and 12x free cash flow for 2006 with a strong balance sheet.

Catalyst

Improvement in Fire & Security business
Sale of Plastics & Adhesives business and other divestitures
Share repurchases