Operator: Welcome to the Tyco Second Quarter Earnings Conference Call. All participants have been placed on a listen-only mode until the question-and-answer session. Today's call is being recorded. If you have any objections, please disconnect at this time.
I will now turn the call over to Antonella Franzen, Vice President of Investor Relations. You may begin.
Antonella Franzen - IR: Good morning, and thank you for joining our conference call to discuss Tyco's second quarter results for fiscal year 2013 and the press release issued earlier this morning.
With me today are Tyco's Chief Executive Officer, George Oliver; and Chief Financial Officer, Arun Nayar.
I would like to remind you that during the course of today's call, we will be providing certain forward-looking information. We ask that you look at today's press release and read through the forward-looking, cautionary, informational statements that we've included there.
In addition, we will use certain non-GAAP measures including normalized earnings per share in our discussion, and we ask that you read through the sections of our press release that address the use of these items. The press release issued this morning and all related tables, as well as the conference call slides, which contain summary financial information, can be found on the Investor Relations portion of our website at tyco.com. Please also note that we will be filing our second quarter SEC Form 10-Q later today.
In discussing our segment operations, when we refer to changes in backlog and order activity, these figures exclude the impact of foreign currency. Additionally, references to operating margins during the call exclude special items making them non-GAAP metrics. These non-GAAP metrics are reconciled in the schedules attached to our press release.
Now, let me quickly recap this quarter's earnings. Earnings per share from continuing operations attributable to Tyco common shareholders was $0.16, and included charges of $0.26 related to special items. These charges related primarily to a legacy environmental matter as well as separation and restructuring activity.
Earnings per share from continuing operations before special item was $0.42 compared to the prior year quarter of $0.30. As we mentioned on our last earnings call, EPS this fiscal year is not directly comparable to the prior year as the prior year's results include corporate and interest expense associated with supporting the ADT and Flow Control businesses.
Additionally, our 2013 results are being impacted by the synergies associated with the separation of the commercial security operations in North America from ADT. Normalizing last year's results for these items, the comparable prior year earnings per share before special items would have been $0.35.
Now, let me turn the call over to George.
George R. Oliver - CEO: Thanks, Antonella, and good morning, everyone. I am pleased with our second quarter results and the progress we are making in executing our growth strategy. In our Installation & Services businesses, service revenue growth is accelerating, the margin in our installed business is improving, and backlog is growing.
In our Global Products businesses, we continue to benefit from our investments as revenue growth outpaces the market.
Overall, our second quarter results reflect strong operational performance with a year-over-year increase of 20% in earnings per share before special items on a normalized basis. Earnings growth during the quarter was driven by a better mix of revenue as well as the continued strong execution of actions to increase productivity and reduce our cost structure.
Service revenue in both North America and Rest of World increased as a percentage of total revenue and the overall growth rate for service accelerated from 2% last quarter to 3% this quarter.
As we continue to strengthen our discipline as an operating company, we are driving productivity and cost out and accelerating restructuring. Additionally, we are benefiting from the sourcing initiatives related to our $4 billion global buy.
As we discussed at our Investor Day back in September, we have consolidated 15 plus procurement groups into a single global organization and implemented a strategic sourcing process that leverages our scale to accelerate savings.
The combined benefit of productivity and sourcing is expected to contribute $150 million of gross savings on an annual basis, which will fund incremental organic investments and offset inflationary pressures for net savings of $50 million annually. For the quarter, the net impact of these savings was an incremental $0.02 year-over-year.
Overall, I'm very pleased with our progress over the last six months, as we continue to take a disciplined, focused approach to achieving our growth objectives and strengthening Tyco's position as a world-leading Fire & Security Company.
On the acquisition front, we have a very active pipeline of bolt-on acquisition opportunities that we are evaluating. As we have discussed before, we evaluate each deal against numerous metrics including, above all, strategic fit.
From a financial perspective, we are committed to remaining disciplined around the financial metrics of an acquisition. We look for strong growth potential, EPS accretion by year two, and an ROIC well in excess of our risk adjusted weighted average cost of capital.
For example, let's take a look at the two larger acquisitions we completed a little over a year ago, Chemguard and Visonic. Chemguard was acquired by our Fire Products business in September of 2011. The company is a leading provider of an extensive line of fire suppression products, services and specialty chemicals with strong R&D capabilities.
This acquisition strengthened our presence in the oil & gas vertical and in high growth markets. Today Chemguard is fully integrated with our Fire Products platform and has been a strong performer since the acquisition, delivering against high expectations.
The Visonic acquisition completed in December of 2011 in part of our security products platform expanded our wireless technology platform, while complementing our geographic presence in the intrusion market. I'm very pleased with the strong performance of Visonic and our ability to leverage Visonic's technology and geographic footprint to complement our existing intrusion business.
In fact, we have recently integrated Visonic's leading edge PowerG technology into our existing DSC intrusion product line and introduced our PowerSeries Neo hybrid intrusion detection platform, which was recently highlighted at ISC West.
This new platform redefined the intrusion security by providing a hybrid solution that combines the flexibility of a hardwired system with the simplicity of a wide range of wireless devices.
We continue to make good progress on acquisitions. In the quarter, we acquired First City Care, a U.K. based insulation service provider of access control, video surveillance, intruder alarms and security systems integration. This acquisition is being combined with our Installation & Services business in the U.K. strengthening our security expertise in the banking vertical. We expect this acquisition to add approximately $20 million of annual revenue.
Additionally, we signed a definitive agreement to acquire National Fire Solutions Group, or NFS, which is a leading provider of fire protection services, including installation, inspection and maintenance services in Australia. NFS provides us with the opportunity to strengthen our fire protection portfolio in Australia while advancing our strategy for growth in the global fire industry. This acquisition is expected to close in the third fiscal quarter and add approximately $65 million of revenue on an annual basis.
We continue to assess the strategic fit of all of our business units and we'll pursue divestitures that do not align with our long-term strategy. For example, we recently signed a definitive agreement to divest our guarding business in North America and expect to close the transaction in our fiscal third quarter.
Lastly, we also returned capital to shareholders during the quarter with $70 million in dividend payments and $150 million in share repurchases. As the remaining question is on project selectivity on the last earnings call, let me quickly address that before I turn to our business results for the quarter.
I want to be clear that project selectivity is not a new initiative. It is the way that we do business delivering profitable growth. As some of you may recall, we implemented project selectivity in SimplexGrinnell, our North America fire business in fiscal 2011 and within a three-year period we will have increased operating margins nearly 400 basis points.
During this time period, we established minimum margin target for all installation projects, implemented a second level of review for all large project to ensure that they could be executed at the expected margin rate and we focused on installation projects that would lead to long-term service.
Today, our SimplexGrinnell fire business is growing in line with the market. Installation projects are being executed above the margin backlog as resources are focused on the right opportunities. As we previously discussed, we have implemented the same playbook in our North America commercial security business.
In the short-term, this will result in revenue compression in our North America Installation & Services segment. But the end result is a more profitable service intensive mix of revenue which not only benefits operating income, but also our customers, as we focus on providing value-added design, Installation & Service.
Now let me turn to an overview of our segment results to give you a feel for the business environment in each of the segments. Then I will turn it over to Arun to provide you with more details regarding our quarterly results.
Starting with our North America Installation & Services segment, overall revenue was consistent with the prior year as growth in SimplexGrinnell was offset by a decline in commercial security. As expected, the revenue decline will accelerate in the second half of the year. More importantly, we expect the operating margin to improve on a quarter sequential basis in the back half of the year, as planned actions to reduce the cost structure are executed.
In Rest of World Installation & Services, we continued to see nice growth in service across Europe, Asia, Latin America, and South Africa. This growth has been partly offset by a decline in Installation revenue during the quarter.
Given our record high backlog, we expect Installation revenue to grow in the second half of the year, driven by Asia as well as other high-growth markets, which will offset the continued pressure on Installation revenue in Continental Europe and the U.K.
In Global Products, revenue continues to grow well in excess of GDP rates. Double-digit growth in the quarter included organic revenue growth of 7%, with the remainder attributable to acquisitions.
The operating margin, excluding special items, improved on a quarter sequential basis and we continue to expect improved sequential performance each quarter for the balance of the year.
Now, let me turn the call over to Arun to discuss the operating results in more detail.
Arun Nayar - EVP and CFO: Thank you George, and good morning, everyone. Let me start with an overview of our results for the second quarter and then go to the details of our segment performance.
Revenue in the second quarter was $2.6 billion, an increase of 3% overall and 2% on an organic basis. The Global Products business continues its strong growth trend with organic revenue up 7% in the quarter.
Service revenue accelerated to 3% in the quarter, while system installation revenue was down 3%, mainly due to continued weakness in Europe and implementing project selectivity in North America Security.
In the quarter, organic growth was supplemented by strategic bolt-on acquisitions, which added $28 million or about 1 percentage point. Embedded in our overall revenue increase this quarter is the continued strong performance in the growth markets, which grew 16% in the quarter and 11% on an organic basis. The growth was primarily driven by Latin America, Asia and the Middle East.
Segment operating income before special items was $321 million a 10% increase over the prior year on a normalized basis. Segment operating margin was 12.3%, which is a 90 basis point improvement over the prior year on a normalized basis. As George mentioned, a higher mix of service revenue, improved Installation margins and the benefits of productivity and restructuring initiatives drove the year-over-year operating margin improvement.
Now, let me get into the details of each of the segments. Starting first with North America Installation & Services. Revenue in the quarter of $953 million was consistent with the prior year.
We continue to see positive traction in our organic service revenue growth as we prioritize our efforts in this area. In fact, service revenue growth accelerated to 2% in the quarter from 1% in the prior quarter.
As expected Installation revenue declined 3%, due to the project selectivity in the commercial security business. Operating income before special items in the quarter was $104 million and the year-over-year operating margin increased 220 basis points on a normalized basis to 10.9% an increased mix of higher margin service revenue, improved execution on installations as well as sourcing and productivity savings drove the operating margin improvement.
Overall orders in North America Installation & Services were flat year-over-year with service orders growing 2% offset by Installation orders which declined 2%. Sequentially, the dollar value of Installation orders have stabilized and service orders have accelerated. As we mentioned last quarter, order rates in the Installation business can fluctuate extensively quarter-to-quarter as there can be a large order in the range of tens of millions of dollars that can skew the year-over-year compares. For example, last year, we had a retail order where the bulk of the order was booked in the third quarter, resulting in a 20% increase in Installation orders which will make for a tough compare in the third quarter of this year.
This is why backlog is the more important metric. For Q2, backlog was up 2% sequentially to $2.5 billion. As we move into the third quarter, we expect year-over-year revenue to decline 2% to 3% as the growth in SimplexGrinnell is offset by a decline in commercial security. On a sequential basis, we expect revenue to increase 2% to 3% and the operating margin to improve to 11.5% as we leverage the additional seasonal pick-up.
Given our performance in the first half of the year, we now expect revenue to decline 1% to 2% on a full year basis versus our original estimate of 2% to 3% decline. Additionally, given the accelerated benefits of our sourcing and productivity initiatives, we now expect the full year operating margin to be in the range of 11.5% to 11.8%, which is ahead of our prior full year guidance of 11.4%.
Turning to Rest of World Installation & Services; revenue of $1.1 billion, which was up 1% on both our reported and organic basis.
Growth in Service revenue accelerated to 5% on an organic basis, while Installation revenue declined by 4% due to continued weakness in the European markets.
In the quarter, acquisitions contributed 1% of revenue growth, which was offset by a 1% decline due to changes in foreign currency exchange rates.
Orders increased 2% year-over-year with Service orders up 4% and Installation orders declining by 1%. The decline in Installation orders was due to a tough compare with a large mining project in the prior year, as well as continued weakness in Europe.
Operating income before special items was $120 million and the operating margin was in line with the prior year at 11.1%. Backlog of $2.6 billion increased 5% on a quarter sequential basis.
As we look forward to the third quarter, we expect year-over-year organic revenue growth of 3% to 4% supported by the increased backlog. Additionally, given the expected close date of recent acquisitions, we expect an additional $25 million of revenue. We expect the operating margin for the third quarter to be similar to last year, as non-cash purchase accounting adjustments, which are typically higher in the first few months offer an acquisition offset leverage on increased volumes.
Turing to Global Products. Revenue grew 11% in the quarter to $578 million. Organically revenue was up 7% with a double-digit growth in our security products and life safety platforms. Acquisitions contributed 3 percentage points to growth in the quarter. Product orders increased 12% year-over-year, with growth across all three platforms.
Operating income before special items was $97 million and the operating margin was 16.8%, a nice sequential improvement. Year-over-year, the operating leverage on increased volumes was more than offset by 80 basis points of planned incremental growth investments in R&D and sales and marketing.
Looking ahead to the third quarter, we expect revenue to increase to a range of approximately $580 million to $600 million and the operating margin to increase to approximately 18.5% to 19%.
I also want to take a moment to discuss our legacy environmental matter at our Marinette, Wisconsin Global Products facility where we have been performing ongoing remediation. Prior to the acquisition of Ansul in 1990, this site manufactured arsenic-based agricultural herbicides, which resulted in significant soil and groundwater contamination on the site and in sediment in parts of the adjoining Menominee River.
During the second quarter of 2013, the results of a (feasibility) study indicated that additional river sediment would require treatment and off-site disposal to comply with the terms of an administrative consent order that Ansul entered into with the U.S. Environmental Protection Agency back in 2009. As a result, we recorded a charge of approximately $95 million on a pretax basis as a special item to increase the environmental reserve to reflect our best estimate of what will be needed to comply with the consent order. We expect that a large majority of the cost will be incurred within this calendar year.
Now let me touch on a few other important items. First, corporate expense before special items was $54 million in the quarter, a bit better than expected due to the timing of certain expenses. As many of you know, corporate expense tends to be higher in the second half of the year due to the timing of certain expenses and a number of actuarial valuations that we perform annually. Therefore, we expect corporate expense before special items in the third quarter to increase to approximately $60 million.
Next, our effective tax rate for the quarter before the impact of special items was 17.9%. We expect the third quarter effective tax rate to be approximately 19%.
Now let me talk on cash and our cash flow expectations for the year. This year, we continue to expect adjusted free cash flow to be around 90% of net income. Based on this conversion rate, we expect our adjusted free cash flow for this year to be approximately $800 million, with the bulk of that coming in the second half of the year. This free cash flow phasing is consistent with prior years and the normal seasonality of our business.
During this year, we expect to return about $300 million to shareholders in dividends and the remaining will be used to fund acquisitions or repurchase shares.
Lastly, we are aggressively executing on a plan to integrate our fire and security businesses to improve productivity and reduce our cost structure. We're simplifying, standardizing, and automating our operations as we bring together our fire and security footprint and execute branch-in-a-box strategy.
In light of the progress, we have made, in identifying opportunities related to these initiatives, we are increasing our expectations around restructuring and repositioning charges for the year to a range of $75 million to a $100 million from our original estimate of approximately $50 million. The benefit of these actions will deliver significant shareholder value, as outlined in our three-year plan.
Now, let me turn things back over to George to wrap up this morning's call.
George R. Oliver - CEO: Thanks, Arun. Let's turn now to our overall earnings guidance for the third quarter and expectations for the full year. Based on our current order rates and backlog, we expect revenue in the third quarter to approach $2.7 billion with organic revenue growth of 1%.
In terms of bottom-line results, we expect to see a nice sequential improvement in the third quarter operating results across all three businesses, contributing $0.07 of earnings on a quarter sequential basis.
We expect this to be partly offset by an increase in corporate expense in a higher tax rate in the third quarter which when combined will cost us about $0.03 per share. In total, these items are expected to result in a net increase of about $0.04 per share on a quarter sequential basis.
With an expected average share count of approximately 472 million shares, we expect earnings per share before special items in the third quarter to be in a range of $0.45 to $0.47.
Now, let me update you on our full year guidance. Based on current exchange rates, we now have a $75 million headwind to our original revenue estimate, which is expected to be offset by the impact of recent acquisitions. Therefore, we continue to expect revenue for the full year to be in a range of $10.6 billion to $10.7 billion.
From the time we originally gave our full year EPS guidance of $1.75 to $1.85, we now have a $0.05 headwind primarily related to changes in foreign currency exchange rates and share count. Despite these headwinds and the uncertainty in the economic environment, we are increasing the low-end of our guidance as we are confident in our ability to deliver on our second half expectations.
We now expect full year earnings per share before special items to be in a range of $1.80 to $1.85, which represents an earnings per share increase of 12% to 15% over fiscal 2012's normalized base of $1.60.
Thanks for joining us on the conference call this morning. With that operator please open the line for questions.
Operator: Jeffrey Sprague, Vertical Research.
Jeffrey Sprague - Vertical Research: George, just to elaborate a little bit more on the outlook. Obviously, you have always kind of the seasonally backend loaded year. It seems like this year is maybe a little bit less back loaded than normal, I guess, because of the selectivity thing, but just give us a little bit more color on how that plays out Q3 versus Q4 and where are kind of the upside versus downside to your guidance might be?
George R. Oliver - CEO: Yes, what I'll do, I'll start by saying, Jeff, when you look at our performance quarterly and then look at first half to second half, typically when you normalize our performance, it's about 45% in the first half, 55% in the second half. Now, when you look at this year's third and fourth quarter, when you look at our full year guidance of the $1.80 to $1.85, it's wrapped around the consensus of $1.83. What's important here as you look at the underlying operations going forward in the third quarter that really we're driving very strong operational performance. Now, in the third quarter this year, we do have –when you look at last year during the third quarter, we had a very strong retail quarter with high margins and when you at the compare there year-on-year, we have a mix of about $0.01 to $0.012 that's given us a little bit of a headwind in the third quarter. Typically, last year when you look at our third and fourth quarter, typically our fourth quarter is the highest. Last year during the third quarter, we had a very strong third quarter because of that retail business. So, typically, we do get the lift in the fourth quarter. So it's a little bit of anomaly last year, but I think we're positioned very well in spite of the economic environment with the productivity and cost out there that we're achieving that in addition to the restructuring and it's being completed. We're going to be very well-positioned to be able to deliver on our guidance.
Jeffrey Sprague - Vertical Research: I was also just wondering on the acceleration that you are seeing in some of the service revenue numbers. What's actually behind that? Is it prior installed business that's now coming into the service stream? Is it people picking back-up on service they deferred, is there any kind of common theme there to takeaway and what does it imply for the next year or so as we look out?
George R. Oliver - CEO: I'll start with the project selectivity, so if you go back and really think about our project selectivity that we've had in place now in fire for the last couple years and we're implementing that within commercial security, that in itself yields projects that have higher service revenue attached to those projects over the life cycle of the projects. So when you look at our split between install and service, we're growing service 3% with install slightly down. That suggest we're getting a higher level of service for the installed on the install projects that we're performing. In addition, Jeff, that we're increasing our capabilities in service and expanding our footprint, so when you look at our service sales reps year-over-year, we're up 8%, and so we're investing similar to what we're doing in our products business reinvesting in technology; in service, we're investing in capabilities in footprint to make sure that we're going to be positioned to be able to accelerate the service growth. So, it's really the combination of those two that has positioned us well to accelerate service 3% to 4% this year and I think we'll be well-positioned for next year to get to the 5% service growth.
Operator: Nigel Coe, Morgan Stanley.
Nigel Coe - Morgan Stanley & Co Inc: The backlog trends were somewhat better than I expected in both North America and Rest of World and I’m wondering if maybe you could just add some color in terms of the end market conditions and are we seeing some more product activity breaking free, but maybe a bit more retrofit activity. Any color on the end markets, this quarter versus previous quarters, would be very helpful.
George R. Oliver - CEO: Sure. Let me start with the global GDP. I think we're seeing what everyone else is seeing with that global GDP down about 30 basis points. Now, as we look at our business – is a big element of our business non-residential construction, it has a big impact on us. Now, when you look at that space, the ABI, The Architectural Billings Index is a lead indicator and over the last it’s been about six or seven months Nigel that it’s been improving. So we’re seeing some of that with the activity that we see in the market. But little bit of a concern that it has slowed over the last couple of months. What’s important to us is that in spite of what’s happening within the macroeconomic environment, we’re driving very strong productivity and cost out, controlling what we can control to make sure that we’re going to be positioned to be able to deliver on our commitments. So when you look at that, I think the reason why the backlog going back to the initial part of your question, when you look at backlog on our install orders were up about 2% in total. Now that’s a similar type performance within North America and Rest of World. Now as you look at our backlog the sequential – sequentially we increased our backlog 3%. We expect based on our order activity, we expect that to continue to increase in Q3. What’s important now is, knowing what’s within that backlog that we’re going to be able to be positioned not only to deliver on the growth in the second half, but also being able to deliver on the margin commitment over the next two quarters also.
Nigel Coe - Morgan Stanley & Co Inc: Then maybe one for Arun. I guess, I wasn’t expecting to hear the word arsenic on the Tyco call. Just to what extent you believe that this is sort of capping the liability and that this won't escalate from where you result this quarter?
Arun Nayar - EVP and CFO: Well, Nigel first of all you’re right. This is something that goes back to the '40s and '50s just part of the acquisition that we actually did in the 1990, but the work – the arsenic work and producing the herbicides was done very early last, very early in last century actually. So in terms of the second question that you had, the point is that, we'll finish the feasibility study with an extensive work and coming up with the reserves that we have put on the books right now, and keep in mind that this work is going to be completed in the next 12 months. So it’s not a very long tail here that we are looking and that's what gives us the confidence that we should be able to get this done within the reserves that we have put up.
Operator: Steven Winoker, Sanford C. Bernstein.
Steven Winoker - Sanford C. Bernstein: First question, if you did look at the project selectivity, sometimes you have some thoughts about how much that actually did holdback organic growth in the timeframe and I think it's often been a couple of points. What do you – if you had to take a look, what do you think, how much do you think that probably took away from growth this quarter?
Arun Nayar - EVP and CFO: So, Steve, the way that I would look at this is that, as we've discussed before that we have capacity to do design and be able to spec job that are more strategic to what we're trying to accomplish which is the service growth. So it's really – it's refocusing that activity, that resource with much more discipline around the projects that we put that capacity on, which then positions us to be able to get the recurring revenue longer term. So a lot of that is really just a reallocation of our resources in making sure that we are focused on the right spaces that drive those type of project that create a service base for us longer term. So I think in line with what we're seeing from a non-residential construction standpoint, you would say that our overall installed performance is in line or maybe a little bit above what we're seeing from a non-residential construction standpoint.
Steven Winoker - Sanford C. Bernstein: But – and surely it would have been higher otherwise, I guess, is just what I'm trying to get at?
Arun Nayar - EVP and CFO: I think if you think about it, Steve, our Fire business like George has said before as well is growing in line with market. As you look at what we are trying to do is get a security business in the same pace. So once we get through this lapping issues, we should be going the security in line with market, and today our market is around the 2% to 3% if you look at U.S. GDP.
Steven Winoker - Sanford C. Bernstein: Then the other question is on, you used to talk about gross and net cost efficiencies of somewhere about, I think it was something like $170 million to $100 million and reinvesting about half of that in growth investments. Another quarter in some acceleration taking additional restructuring, how are you thinking about those sorts of numbers now?
George R. Oliver - CEO: What I'd say Steve is across the board we're seeing good results on all of our initiatives. Productivity cost out and then the (branching of box) and simplifying our infrastructure. We're very confident in the goals that we laid out back in September to get the $150 million plus of gross savings. We're putting a lot of that back into the organic investments, as we've discussed in R&D and then positioning to make sure that we have a service franchise the can accelerate growth. We're offsetting the inflationary pressures and then the net result is $50 million is being generated that's going to the bottom line. What I would say is on the sourcing side of that activity and the $4 billion buy, we're seeing now accelerated progress. We now have the single global sourcing organization in place. We're strategically going after each category. We're getting the accelerations now of savings within each category. That's going very well. The (bridging of box) on the infrastructure, this is something that's going to take a little bit longer term. We're in the early innings of (branching a box), but I would say, we're making great progress. As far as how do we take the commercial security businesses combined with what we had within the fire protection businesses, it really began to synergize that footprint and that capability, so that we're going to be positioned more competitively to be able to accelerate growth.
Operator: Scott Davis, Barclays Capital Inc.
Scott Davis - Barclays Capital: You spend a fair amount of time at the beginning of the presentation, just talking about acquisitions and cash redeployment and such, obviously that's very important in low-growth environment, but when you think about your pipeline, I mean you announced a couple of smaller deals. Do you have enough of a pipeline and the confidence that you can move the needle, and I guess kind of how I would define moving the needle is probably adding $300 million or more to revenues per year?
George R. Oliver - CEO: Let me take that, when we look at our pipeline, we're focused on acquisitions that enhance our technology capabilities, filling the gaps that we have within our products. We look to strengthen our service capability, extend our service footprint globally and making sure that we've got the right footprint within the emerging markets. That's really the focus of our acquisition and we continue to be very disciplined on the returns that we expect on these acquisitions. So, we have a pipeline that's very robust. We have historically been able to complete acquisitions that -- I think if you look at last year, we had about $400 million of revenue that were associated to the acquisition that we had done in the previous 12 months and we're in a similar range within the pipeline that we are pursuing today. Now, I would say that we've recently looked at a large acquisition that we walked away from because it didn’t meet our financial hurdles, and then knowing that acquisitions tend to be lumpy, they are not linear over the course of the year that would not – we’ve also said we're not (going to sit) on cash. So, in the quarter, we did $150 million of share buybacks and we still have $600 million of share repurchase authority in place.
Scott Davis - Barclays Capital: Just to be – just to back up a little bit, I know the selectivity issue was very topical last quarter. When you look at these numbers, it really didn’t influence the results hardly at all really. I mean it was fairly muted. I mean is this more of the type of, I guess, another way to say it is selectivity is a little less selective now or is it just that you got through one really tough quarter last quarter and from here on it's a modest hit to the top line but not the kind of magnitude we saw last quarter?
George R. Oliver - CEO: Let me start by saying, not at all. I mean we are very disciplined, very focused in how we are growing our Installation business, positioning ourselves to be able to accelerate service and then being able to execute on those Installation projects as planned. Now, as we have said, the orders are very lumpy. Now as we look into the third quarter, as Arun mentioned during his comments that we have a very large retail order that we had last year in third quarter and we showed 20% order growth last year. That was in the prior year. Now, as we look at third quarter this year without being able to repeat a similar order, we are going to have some pressure on our order rate in the third quarter, right? So they tend to be lumpy. What's most important is that you focus on backlog. What's very attractive here is our backlog continues to increase. We have increased 3% on a core sequential basis and we do expect with the order activity that we see today that we expect that the backlog will continue to increase in the third quarter.
Operator: Stephen Tusa, JPMC.
Stephen Tusa - JPMC: Just for the fourth quarter, I guess, to get to the – I kind of understand the third quarter bridge, but I guess just looking at the way consensus stacks up. You've got – you're little bit below consensus for the third quarter, but you're like revising your estimates higher for the rest of the year, which means the fourth quarter is going to be revised up substantially when it comes to consensus. So I'm just curious, I think the high-end of the range gets you to like $0.57 using the midpoint or something like that for the third quarter. Is there another moving part like the tax rate a little bit lower now for the year to bump that number up? I know you beat by couple of pennies this this quarter. So maybe I'm just – just struggling a little bit with the kind of the fourth quarter dynamics and what's implied there?
George R. Oliver - CEO: So let me start by looking at the third quarter. So third quarter as we said will – we have $0.07 additional earnings from operations on a quarter sequential basis. So we're making some real nice progress operationally quarter-to-quarter sequentially and that will continue third to fourth quarter. Now in the third quarter as I said, we have a little bit of a headwind, because of the retail revenue that we had last year, which is about $0.01 to $0.02 impact and then we also have the negative swing in corporate and below the line items, which is about 3% impact. So the net sequential improvement was about $0.04. Now when you look at our guidance to the midpoint of our guidance, it would assume $0.54 in the fourth quarter. Based on our performance and the plans that we have in place with the revenue and the orders that we have in place for the remainder of the year, extremely confident that we're going to be able to deliver not only on the revenue, but be able to deliver the improvement in operating margin for the total year.
Stephen Tusa - JPMC: So what would be now the annual corporate and tax rate guidance?
Arun Nayar - EVP and CFO: So Steve the tax rate is – we're guiding still to the 19% to 20%. We expect we'd probably end up in the lower end of the 19% to 20%, but that's – the guidance is still the 19% to 20%. In terms of corporate, we maybe a little bit higher than the 225 that we had guided to, but keep in mind that the interest expense will be a little bit lower than what we had guided to, so the two together should be in the same as a combination should be the same as before.
Stephen Tusa - JPMC: Is there anything in the revenue comps for these businesses that swings around a little better or it's pretty much in line with expectations? I mean, is there just product pick up? It looks like products picks up a little bit in the fourth quarter, is there anything there? I am just backing (in way) you use for the annual guidance?
George R. Oliver - CEO: No, we were right in line with the annual guidance as far as the split between segments, Steve, is that what you are asking?
Stephen Tusa - JPMC: Yes.
George R. Oliver - CEO: We're pretty much – Arun talked a little bit that we're maybe a little bit better in North America, but on average, we're are right in line with the guidance that we provided and in line with – and the margin rates also with the activity that we have with the productivity cost out of restructuring that supports that for the remainder of the year.
Antonella Franzen - IR: Steve, the only thing I would add in the comment that both George and Arun made is that you will continue to see sequential improvement in the margins across the board in all three segments going into the third quarter and going into the fourth quarter.
George R. Oliver - CEO: Steve, one thing to note there is with the restructuring, based on the current economic environment and positioning not only for the second half, but for next year, we've accelerated some of the restructuring programs.
Operator: Gautam Khanna, Cowen & Co., LLC.
Gautam Khanna - Cowen & Co., LLC: Can you calibrate us on what percentage of the revenues today come from new non-resi and maybe some color on the verticals in non-resi, where you are seeing more RFP activity and when those might convert to orders?
George R. Oliver - CEO: When we look at our install business, in the downturn there was much higher percentage that was tied to upgrades, repairs and that type of business. Now as we go forward with the new-new business, we will start to see shift in that, but we really haven't seen a change in that mix since the downturn, recognized that the non-resi construction space really hasn't had much of a recovery, and then therefore, we're anticipating that we’re going to start to see a pickup, but it's a bottom line with what historically you've seen over the last couple of years.
Gautam Khanna - Cowen & Co., LLC: Then in terms of kind of RFP activity which verticals are you starting to see kind of the ABI stuff, actually manifest and coating activity?
George R. Oliver - CEO: So, little bit across the board, there is some commercial, on the commercial vertical, we’re trying to see activity, oil and gas is another that we're trying to see activity, health care is one that we have depending on where we are, we've got a strong position. So it's going to be one that you would expect given the activity in the market.
Gautam Khanna - Cowen & Co., LLC: George, just one last one. Can you remind us when you're going to realign the sales force incentives to align with that project selectivity initiative? Was it in the September quarter? Was it at the end of it, so the optic for improve when, in the December quarter with respect to year-over-year orders?
George R. Oliver - CEO: Yeah, we changed the incentives. As we planned for the combined company starting in September, we planned our incentive systems in line with our strategy and that's when we have the full implementation of project selectivity and commercial security. Now, we continue to work to get as we think about the combination of Fire & Security to have very common standardized incentives plans in place across the globe for 2014.
Gautam Khanna - Cowen & Co., LLC: So we lap December will be the first kind of clean quarter we have.
Antonella Franzen - IR: There might be some comparability variability in the first quarter, because we implemented all of this in the first quarter of this year, but clearly as we progressed through the other quarters of '14, clearly the lapping issues were behind us.
George R. Oliver - CEO: Just recognize, we had two different structures before. So we had a commercial security structure and a fire structure, there were incentive systems in place. Within those systems we realigned those to the strategy of project selectivity driving revenue growth, or driving profitable growth, both revenue and margin. So now as we think about the combination of the businesses, as we have discussed, we've begun to now integrate these businesses regionally, so now we are going to one standard platform that enables us to be able to incentivize no matter where our people are with the same system, with the same metrics to be able to deliver on our growth strategy.
Operator: Ajay Kejriwal, FBR Capital Markets.
Ajay Kejriwal - FBR Capital Markets: So, maybe if you can talk a little bit about service in Europe, we saw both NetScaler and Chubb kind of seeing pressure here, but it looks like your service revenues were up nicely. So maybe talk about what you're seeing there and is there any favorable shift in share for you know?
George R. Oliver - CEO: I'd start out, Ajay, by saying, overall, we continue to perform very well relative to the economic environment that I think everyone is seeing. So when you look at our overall performance, organic growth was down just modestly in the second quarter. What's pleasing to us is that the growth in service is plus 3, so a 3% and products was also positive 3, which was offset by a decline in Installation, which was high single digits. Now what I would say is that the combination of the strategy, the focus on project selectivity and making sure that we are focused on the end markets and the type of projects that lead to service revenue is a big part of this success. We've all been investing in new products and new platforms within our products business to be able to serve the European market and the combination of the two really have positioned us well in spite of the economic environment to be successful. I also would say is that, if you go back three, four, five years, there was a lot of restructuring that took place within the old Tyco and really getting the fundamentals of these businesses back in line is that we would be positioned to be able to reinvest in the businesses to be able to accelerate growth. So it's a combination of those activities.
Ajay Kejriwal - FBR Capital Markets: So you did in terms of restructuring, what your competitors are doing now a couple of years ago, so you're much better positioned. Is that kind of what's helping you?
George R. Oliver - CEO: Absolutely. I'd say, we've done a lot of restructuring and now in the combination – with the combination we have with commercial security in fire, we're continuing to do more restructuring, but I would say that we restructured the businesses to get to very attractive fundamentals in previous years and now we're continuing to get the benefit of additional restructurings to support our growth as a new company.
Arun Nayar - EVP and CFO: Ajay, delivering double-digit margins across Europe, (multiple speakers).
Ajay Kejriwal - FBR Capital Markets: Of course. Then in the context of portfolio review, maybe update on two things. First, the stake you have in TEMP, and then I know you have very nice guarding businesses in Korea and South Africa. So how should we be thinking about those two businesses in light of the divestiture here in North America?
George R. Oliver - CEO: I'll start by – we look at all of our business units all the time looking at the strategic nature of the business and as we think about our growth strategy, how they fit within that growth strategy. So we're constantly looking at our businesses, which led to the divestiture that we announced within North America of our guarding business. So what I would say is, we're going to be constantly looking at that to make sure that the assets that we have support the overall growth that we're trying to achieve as a new Tyco. Now, I'll turn it over to Arun to talk a little bit about TEMP and then we can talk about how we think about any other assets.
Arun Nayar - EVP and CFO: Yeah, so Ajay on the TEMP, as you know, was it – December, Q1 of 2011 when we spun off 50% of TEMP to CD&R. So we have a slightly under 50% interest in that company. The intention was that when there is a resurrection of the non-resi commercial market, that business would pick up and we would at that point in time sell our interest either to CD&R or to a third-party. We continue to evaluate that. The market hasn’t recovered as quickly, as we all know, as we had expected and at that time it’s appropriate, we will – that's something we have as an option to divest at the appropriate time, at the appropriate value.
George R. Oliver - CEO: Then relative to your question about South Africa and Korea, the difference there is that the guarding business is part of a business that actually has very attractive recurring revenue. So, as we look at all of our assets, we make sure that the businesses, that a big part of our strategy is being positioned to accelerate service growth, which accelerates the ability to be able to returns to our shareholders. So as we look at these businesses, that's what we are looking for.
Operator: Deane Dray, Citi Research.
Deane Dray - Citi Research: I was hoping to get a little more color on the mix in your security orders. Can you talk a bit about what you're seeing in terms of contribution from new products? Visonic has been a big success, we can see. But are there any themes that you are seeing playing out conversion to digital and maybe adoption of wireless?
George R. Oliver - CEO: Well, what I would say, I mean, I think you saw some of the success that we’ve had with the new products we brought to market at the ISC West, and I think in line with that, there is a trend, right, to be more digital, to being more IP, the ability to be able to integrate multiple capabilities to provide solutions that get at what customers want that drive value for our customers, drive security. So, there is a trend, and what we're doing within our platforms is making sure that we've got the platforms not only to bring the individual technology within specific products, but be able to be successful in integrating those technologies into broader solutions. So I think there is a trend with that happening in the investments, Deane, the investments we've made in our security products platform, as you know, we made some significant investments over the last three or four years organically in the intrusion platform as well as we made the Visonic acquisition to complement the organic investments that we made and we are getting very nice returns on the combination of those investments.
Arun Nayar - EVP and CFO: In the security products, Deane, both orders and revenues growing at solid double-digit growth rate.
Deane Dray - Citi Research: Do you have a sense – (I'm not sure) whether you have started measuring the vitality. So how much of these orders are being reflected of these new products?
George R. Oliver - CEO: We look at vitality across all of our Global Products. There is about a third of our revenues that are tied to investments we've made over the last three years. Now the security product has a higher vitality, because of the nature of the business being electronic and our products business has a lower vitality, but on average, Deane, it's about a third of our products are tied to investments we have made over the last three years.
Deane Dray - Citi Research: Then, just last for me for Arun. Can you comment on the payback on this additional restructuring? Then I might had missed this, the environmental remediation, is that charge net of expected insurance proceeds? What is the insurance factor in the charge you could take?
Arun Nayar - EVP and CFO: There are two questions here, Deane. The first one in terms of the payback period, everything that we do for restructuring in the organization has a payback of two years or less. That’s a discipline that we deploy in every dollar that we spend for that matters. On the environmental matter?
Deane Dray - Citi Research: It wasn’t clear whether there was – the charge you’re taking is net of expected…?
Arun Nayar - EVP and CFO: Yes, sorry on the insurance recoveries, no, this is – there are no insurance recoveries on this matter.
George R. Oliver - CEO: The insurance has been exhausted completely.
Deane Dray - Citi Research: So it's exhausted, so you get – is an opportunity for Superfund?
Arun Nayar - EVP and CFO: No it is not.
Operator: Shannon O'Callaghan, Nomura Securities International.
Shannon O'Callaghan - Nomura Securities International: First, can you just clarify a little bit on the available cash here? I mean you’re talking about the $800 million sorry of adjusted free cash, the $300 million dividend, but now I guess you would probably have higher cash restructuring and also the environmental. So, can you give us likes is there really a spare $500 million, are you going to take little bit more debt on the balance sheet or just maybe walk me through that?
Arun Nayar - EVP and CFO: We’re still looking at the spare $500 million to be spent between acquisitions and share buyback Shannon. Keep in mind that we had a slightly larger than expected opening balance when we started on October 1 as the new Tyco. We were expecting a balance of $400 million, we actually started with $800 million. So that incremental $400 million is available for things like the environmental issue here, things like the separation cash flow that we need to cover for the expenses that we took in 2012, but the cash is flowing out in 2013 and for other legacy matters particularly we talked about the tax legacy payment that we expect to pay around $175 million for.
Shannon O'Callaghan - Nomura Securities International: Then on Global Products, just a few questions. The margin expectation for the year now what is that, and what are you assuming for this ramp in R&D and sales within that number and also if you have the organic order growth for products this quarter?
George R. Oliver - CEO: Let me start by saying as you know in these businesses, we've been over the last – we spend four or five years, we continued to increase our investments in R&D and we're seeing the resulting success with double-digit growth there over the last couple of years and very strong growth this year. Now when you look at the investments this year, it's about incremental $30 million and a lot of that, it was heavier in the first half than what it's going to be in the second half, so that will have an impact on the second half performance. Also, when you look at the mix, you're going to have a higher mix of higher margin security as well as life safety products in the latter part of the second half. So when you look at our performance that we're projecting for third and fourth quarter, we'll continue sequentially to increase the margin each quarter, and then with the volume and leverage we get also in the second half of the year, that will also contribute to be in position to be able to deliver margins for the year about 18% and that also is being assisted when you think about the productivity, the sourcing initiative focusing on the $4 billion buy, that impacts all of the three segments. We're getting benefits that are enabling all three segments. So that combine with some of the additional restructuring also is going to make sure that we're going to positioned to deliver on the 18% for the year.
Shannon O'Callaghan - Nomura Securities International: Did you have that order…?
Arun Nayar - EVP and CFO: So we expect the continuation of the order intake at the mid-single digits that we talked about, both orders and revenue should be in that mid-single digits
Shannon O'Callaghan - Nomura Securities International: That's what they were this quarter too?
Arun Nayar - EVP and CFO: They were as well this quarter – this quarter a 7% is the organic growth on the revenue side and the same on orders.
Antonella Franzen - IR: Operator, I believe that concludes our call.
Operator: Thank you. This does conclude today’s conference. Thank you very much for joining. You may disconnect at this time.