Tyco looking at redefining free cash flow

Saturday, March 1, 2003

PEMBROKE, Bermuda - After a period where its accounting practices have come under harsh public criticism, Tyco International is looking at the way it defines free cash flow.

One of the main changes that the company is likely to put in place is that it will now deduct the funds used for the acquisition of customer accounts from its ADT security alarm business.

According to Tyco spokesperson Gary Holmes, the company plans to announce the changes at an analyst meeting on March 13.

Tyco defines free cash flow as all cash generated from its various operations minus capital expenditures, such as the funds from the ADT dealer program.

According to Holmes, the company spent approximately $1.3 billion to acquire ADT alarm accounts last year.

By excluding funds like the ADT dealer funds, Holmes said Tyco’s stockholders would be able to get a clearer snapshot of the company’s financial health.

“We’re taking a fresh look at the definition of free cash flow so we can be more transparent with our investors so they can better understand what the cash flow situation of the company is,” said Holmes.

According to Holmes, the changes to Tyco’s cash flow definition are not directly related to pending criminal charges against former top executives accusing them of misappropriating company funds.

“It’s just a reflection of the fact that there is new management,” he explains.

Holmes said new Tyco Chief Executive Officer Edward Breen, “wants to take a new look at everything, make sure everything is accounted for accurately and as transparently as possible.”

Analyst Jack Mallon, managing director at Mallon Capital, said he feels that in fact, the new cash flow definition is a direct offshoot of the problems suffered by Tyco recently.

“The investors, the institutions, the regulators are all taking a closer look at the accounting of Tyco,” said Mallon. “By and large (they) are being encouraged to be more conservative in their accounting. So there’s no question that it’s driven by the events of the last 18 months or so.”

Mallon said the redefinition of Tyco’s cash flow is an indicator the company is reanalyzing their accounting practices, with an eye toward taking a more conservative course.