Further accounting problems at Tyco prompted the scandal-hit conglomerate to announce a big charge and a loss for its second quarter.
The group took a $1.37bn pre-tax charge to earnings, after an internal audit uncovered irregularities, some dating back to 1997, and new management adopted a more conservative accounting policy.
Edward Breen, Tyco’s chief executive, told investors that the group had identified “all, or nearly all of the remaining legacy issues”, inherited from the management of Dennis Kozlowski, the former chief executive who resigned just over a year ago, plunging the group into scandal.
He said more employees would be sacked as a result of the new problems identified by the audit.
But Mr Breen also said Tyco had achieved an “outstanding” improvement in free cash flow. Based on the group’s old definition for the figure, free cash flow reached $1.1bn in the quarter, $350m higher than the group?s most optimistic expectations at an analysts’ conference in March. That helped underpin the share price, after the stock fell following a report in the Wall Street Journal about the new accounting problems. Tyco shares closed at $15.60, up 23 cents, or 1.5 per cent.
Tyco reported a loss of 23 cents a share for continuing operations for the quarter, compared with a loss of $1.03 per share in the second quarter of the last fiscal year.
Analysts originally forecast that the group would earn 32 cents in the last quarter, according to Multex, but Tyco took a charge of 55 cents a share after tax.
Mr Kozlowski, former chief executive, and Mark Swartz, former chief financial officer, have been indicted for allegedly looting more than $170m from Tyco.
After taking the helm last July, Mr Breen initiated an in-depth probe of the books, led by lawyer David Boies.
The report, completed this year, appeared to give Tyco a clean bill of health and helped the group complete more than $4bn of new financing in January.
But in March, Mr Breen was forced to announce a first round of charges – included in yesterday?s total charge after discovering further irregularities at Tyco’s fire and security systems division.
Speaking ahead of the conference call, John Boland, portfolio manager with NL Capital Management, which owns Tyco stock, said the new charges announced on Wednesday appeared to be “a sign of just how little grasp they [management] have of their business”.
But, on the call, Mr Breen said he was trying to put the group’s problems behind it, and that he expected the company to meet the lower end of its forecast for second-half earnings of 77 cents to 84 cents per share.
The overall charge of $1.37bn includes the charges announced in March of $265m-$325m, plus a further $672m-$730m of new charges, putting right discrepancies found by the internal audit and applying a more conservative approach to estimates of reserves, accruals and valuations of investments.
At the same time, the group took $372m of new charges after changing its amortisation of investments in its ADT security alarm systems, and changing the accounting of ADT connection fees. The Securities and Exchange Commission had raised questions about the accounting treatment at ADT.