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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
001-13836
(COMMISSION FILE NUMBER)
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TYCO INTERNATIONAL LTD.
(Exact name of Registrant as specified in its charter)
BERMUDA 04-2297459
(Jurisdiction of Incorporation) (I.R.S. Employer Identification Number)
THE ZURICH CENTRE, SECOND FLOOR, 90 PITTS BAY ROAD, PEMBROKE, HM 08, BERMUDA
(Address of Registrant's principal executive office)
441-292-8674
(Registrant's telephone number)
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports to
be filed by Section 13 or 15 (d) of the Securities Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes /X/ No / /
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes /X/ No / /
The number of common shares outstanding as of May 6, 2003 was 1,996,886,178.
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TYCO INTERNATIONAL LTD.
INDEX TO FORM 10-Q
PAGE
--------
PART I -- FINANCIAL INFORMATION:
Item 1 -- Financial Statements
Consolidated Statements of Operations (Unaudited) for the
quarters and six months ended March 31, 2003 and 2002....... 1
Consolidated Balance Sheets (Unaudited) as of March 31, 2003
and September 30, 2002...................................... 2
Consolidated Statements of Cash Flows (Unaudited) for the
six months ended March 31, 2003 and 2002.................... 3
Notes to Consolidated Financial Statements (Unaudited)...... 4
Item 2 -- Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 43
Item 3 -- Quantitative and Qualitative Disclosures About Market
Risk........................................................ 86
Item 4 -- Controls and Procedures..................................... 86
PART II -- OTHER INFORMATION
Item 1 -- Legal Proceedings........................................... 89
Item 4 -- Submission of Matters to a Vote of Security Holders......... 96
Item 6 -- Exhibits and Reports on Form 8-K............................ 97
99
Signatures.............................................................
PART I--FINANCIAL INFORMATION
ITEM 1--FINANCIAL STATEMENTS
TYCO INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
FOR THE QUARTERS FOR THE SIX MONTHS
ENDED MARCH 31, ENDED MARCH 31,
-------------------- ---------------------
2003 2002 2003 2002
-------- --------- --------- ---------
Revenue from product sales.................................. $7,199.7 $ 7,000.0 $14,369.9 $13,977.6
Service revenue............................................. 1,780.6 1,611.4 3,549.8 3,212.5
-------- --------- --------- ---------
NET REVENUES................................................ 8,980.3 8,611.4 17,919.7 17,190.1
Cost of product sales....................................... 4,922.4 4,838.1 9,713.9 9,266.9
Cost of services............................................ 964.8 791.9 1,903.5 1,597.5
Selling, general and administrative expenses................ 3,234.1 1,887.1 5,334.2 3,852.4
Restructuring and other (credits) charges, net.............. (59.6) 403.8 (63.1) 423.7
Charges for the impairment of long-lived assets............. 23.3 2,351.7 23.3 2,351.7
-------- --------- --------- ---------
OPERATING (LOSS) INCOME..................................... (104.7) (1,661.2) 1,007.9 (302.1)
Interest income............................................. 21.8 29.5 47.6 49.1
Interest expense............................................ (299.8) (255.1) (588.8) (463.9)
Other expense, net.......................................... (61.4) (143.4) (40.0) (147.7)
Adjustment to net gain on sale of common shares of a
subsidiary................................................ -- -- -- (39.6)
-------- --------- --------- ---------
(Loss) income from continuing operations before income taxes
and minority interest..................................... (444.1) (2,030.2) 426.7 (904.2)
Income taxes................................................ (22.8) (23.2) (267.4) (216.0)
Minority interest........................................... (1.0) (1.6) (1.7) (0.1)
-------- --------- --------- ---------
(LOSS) INCOME FROM CONTINUING OPERATIONS.................... (467.9) (2,055.0) 157.6 (1,120.3)
-------- --------- --------- ---------
Loss from discontinued operations of Tyco Capital, net of
tax of $65.8 and $188.2 for the quarter and six months
ended March 31, 2002, respectively........................ -- (4,323.0) -- (4,058.3)
-------- --------- --------- ---------
(Loss) income before cumulative effect of accounting
change.................................................... (467.9) (6,378.0) 157.6 (5,178.6)
Cumulative effect of accounting change, net of tax of
$58.8..................................................... -- -- (206.7) --
-------- --------- --------- ---------
NET LOSS.................................................... $ (467.9) $(6,378.0) $ (49.1) $(5,178.6)
======== ========= ========= =========
BASIC (LOSS) INCOME PER COMMON SHARE:
(Loss) income from continuing operations.................. $ (0.23) $ (1.03) $ 0.08 $ (0.56)
Loss from discontinued operations of Tyco Capital, net of
tax..................................................... -- (2.17) -- (2.05)
(Loss) income before cumulative effect of accounting
change.................................................. (0.23) (3.20) 0.08 (2.61)
Cumulative effect of accounting change, net of tax........ -- -- (0.10) --
Net loss per common share................................. (0.23) (3.20) (0.02) (2.61)
DILUTED (LOSS) INCOME PER COMMON SHARE:
(Loss) income from continuing operations.................. $ (0.23) $ (1.03) $ 0.08 $ (0.56)
Loss from discontinued operations of Tyco Capital, net of
tax..................................................... -- (2.17) -- (2.05)
(Loss) income before cumulative effect of accounting
change.................................................. (0.23) (3.20) 0.08 (2.61)
Cumulative effect of accounting change, net of tax........ -- -- (0.10) --
Net loss per common share................................. (0.23) (3.20) (0.02) (2.61)
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic..................................................... 1,994.5 1,991.5 1,994.6 1,983.1
Diluted................................................... 1,994.5 1,991.5 1,998.9 1,983.1
See Notes to Consolidated Financial Statements (Unaudited).
1
TYCO INTERNATIONAL LTD.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN MILLIONS, EXCEPT SHARE DATA)
MARCH 31, SEPTEMBER 30,
2003 2002
---------- --------------
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 3,965.2 $ 6,186.8
Restricted cash........................................... 460.3 196.2
Accounts receivable, less allowance for doubtful accounts
($681.1 at March 31, 2003 and $629.1 at September 30,
2002)................................................... 5,828.2 5,848.6
Inventories............................................... 4,660.7 4,716.0
Deferred income taxes..................................... 1,005.1 1,338.1
Other current assets...................................... 1,797.8 1,464.1
--------- ---------
Total current assets.................................... 17,717.3 19,749.8
Tyco Global Network, Net.................................... 644.5 581.6
Property, Plant and Equipment, Net.......................... 9,835.7 9,969.5
Goodwill.................................................... 26,031.2 26,093.2
Intangible Assets, Net...................................... 5,844.5 6,562.6
Other Assets................................................ 3,425.2 3,457.7
--------- ---------
TOTAL ASSETS.......................................... $63,498.4 $66,414.4
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Loans payable and current maturities of long-term debt.... $ 4,386.8 $ 7,719.0
Accounts payable.......................................... 2,824.2 3,170.0
Accrued expenses and other current liabilities............ 4,655.8 5,270.8
Contracts in process--billings in excess of cost.......... 477.7 522.1
Deferred revenue.......................................... 723.4 731.3
Income taxes payable...................................... 2,327.5 2,218.9
--------- ---------
Total current liabilities............................... 15,395.4 19,632.1
Long-Term Debt.............................................. 17,442.7 16,486.8
Other Long-Term Liabilities................................. 5,244.3 5,462.1
--------- ---------
TOTAL LIABILITIES..................................... 38,082.4 41,581.0
--------- ---------
Commitments and Contingencies (Note 12)
Minority Interest........................................... 30.1 42.8
Shareholders' Equity:
Preference shares, $1 par value, 125,000,000 shares
authorized, one share outstanding at March 31, 2003 and
September 30, 2002...................................... -- --
Common shares, $0.20 par value, 4,000,000,000 shares
authorized; 1,996,784,160 and 1,995,699,758 shares
outstanding, net of 22,222,812 and 22,522,250 shares
owned by subsidiaries at March 31, 2003 and
September 30, 2002, respectively........................ 399.4 399.1
Capital excess:
Share premium........................................... 8,149.4 8,146.9
Contributed surplus, net of deferred compensation of
$52.9 at March 31, 2003 and $51.2 at September 30,
2002................................................... 15,083.0 15,042.7
Accumulated earnings...................................... 2,695.3 2,794.1
Accumulated other comprehensive loss...................... (941.2) (1,592.2)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY............................ 25,385.9 24,790.6
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............ $63,498.4 $66,414.4
========= =========
See Notes to Consolidated Financial Statements (Unaudited).
2
TYCO INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN MILLIONS)
FOR THE SIX MONTHS
ENDED MARCH 31,
---------------------
2003 2002
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) from continuing operations.................... $ 157.6 $(1,120.3)
Adjustments to reconcile (loss) income from continuing
operations to net cash provided by operating activities:
Non-cash restructuring and other (credits) charges........ (33.7) 322.0
Charges for the impairment of long-lived assets........... 23.3 2,351.7
Sale of common shares of subsidiary....................... -- 39.6
Loss on investments....................................... 75.6 141.0
Depreciation.............................................. 728.1 731.5
Intangible assets amortization............................ 659.1 255.9
Deferred income taxes..................................... 180.7 (135.8)
Debt and refinancing cost amortization.................... 63.4 78.3
Charges related to prior periods (Note 1)................. 434.5 222.0
Other non-cash items...................................... 102.1 26.4
Changes in assets and liabilities, net of the effects of
acquisitions and divestitures:
Accounts receivable..................................... 279.4 915.2
Decrease in sale of accounts receivable programs........ (96.5) (28.0)
Contracts in progress................................... (50.5) (176.2)
Inventories............................................. 57.4 (193.9)
Other current assets.................................... (0.8) (129.8)
Accounts payable........................................ (420.7) (610.1)
Accrued expenses and other current liabilities.......... (184.0) (97.5)
Income taxes............................................ 111.2 19.0
Deferred revenue........................................ (9.0) (43.7)
Other................................................... 77.2 110.1
--------- ---------
Net cash provided by operating activities from
continuing operations................................ 2,154.4 2,677.4
Net cash provided by operating activities from
discontinued operations.............................. -- 924.6
--------- ---------
Net cash provided by operating activities............. 2,154.4 3,602.0
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment, net.............. (595.0) (988.3)
Construction in progress--Tyco Global Network............... (89.0) (817.4)
Acquisition of businesses, net of cash acquired............. (34.6) (1,664.5)
Acquisition of customer accounts............................ (358.3) (678.2)
Cash paid for purchase accounting and holdback/earn-out
liabilities............................................... (189.5) (376.4)
Disposal of businesses...................................... 5.4 --
Cash invested in short-term investments..................... (278.1) --
Net sale (purchase) of long-term investments................ 54.5 (11.9)
Increase in restricted cash................................. (310.7) --
Other....................................................... 81.4 (178.7)
--------- ---------
Net cash used in investing activities from continuing
operations........................................... (1,713.9) (4,715.4)
Net cash provided by investing activities from
discontinued operations.............................. -- 2,251.2
--------- ---------
Net cash used in investing activities................. (1,713.9) (2,464.2)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments of) proceeds from debt...................... (2,660.5) 5,181.7
Proceeds from exercise of options........................... 2.6 181.3
Dividends paid.............................................. (50.4) (49.7)
Repurchase of Tyco common shares............................ (0.4) (765.8)
Capital contribution to Tyco Capital........................ -- (200.0)
Other....................................................... (5.0) 15.0
--------- ---------
Net cash (used in) provided by financing activities
from continuing operations........................... (2,713.7) 4,362.5
Net cash used in financing activities from
discontinued operations.............................. -- (1,762.8)
--------- ---------
Net cash (used in) provided by financing activities... (2,713.7) 2,599.7
--------- ---------
Effect of currency translation on cash...................... 51.6 (31.0)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (2,221.6) 3,706.5
TYCO CAPITAL'S CASH AND CASH EQUIVALENTS TRANSFERRED TO
DISCONTINUED OPERATIONS................................... -- (1,451.3)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 6,186.8 1,779.2
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 3,965.2 $ 4,034.4
========= =========
See Notes to Consolidated Financial Statements (Unaudited).
3
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
BASIS OF PRESENTATION--The unaudited Consolidated Financial Statements
include the consolidated accounts of Tyco International Ltd., a company
incorporated in Bermuda, and its subsidiaries (hereinafter "we," the "Company"
or "Tyco").
The financial statements have been prepared in accordance with the
instructions to Form 10-Q and do not include all the information and note
disclosures required by generally accepted accounting principles ("GAAP") in the
United States. These statements should be read in conjunction with the Company's
Annual Report on Form 10-K for the fiscal year ended September 30, 2002.
The Consolidated Financial Statements have not been audited by independent
accountants in accordance with generally accepted auditing standards, but in the
opinion of management, such financial statements include all adjustments,
consisting only of normal recurring adjustments, other than the matters
discussed below, necessary to summarize fairly the Company's financial position
and results of operations. Certain prior period amounts have been reclassified
to conform with the current period presentation. All references in this
Form 10-Q to "$" are to U.S. dollars.
CHANGES IN ACCOUNTING METHODS--As discussed in the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 2002, the Company purchases
residential security monitoring contracts from an external network of
independent dealers who operate under ADT's authorized dealer program (the
"dealer program"). The purchase price of these customer contracts is recorded as
an intangible asset (i.e., contracts and related customer relationships), and
historically has been amortized on a straight-line method generally over a
ten-year period. During the quarter ended March 31, 2003, the Company concluded
a comprehensive review of its amortization policy with respect to these dealer
customer account costs. This review included a detailed attrition study of the
dealer program customer base conducted by an independent appraiser using data
through March 31, 2003.
The Company generally divides its electronic security assets into three
asset pools: internally generated residential systems, internally generated
commercial systems and accounts acquired through our dealer program. After
evaluating various methods that would reflect the most recent attrition pattern
of the accounts acquired through the dealer program, the Company concluded that
the most appropriate amortization method would be an accelerated method that
approximates the allocation of costs to the revenue curve generated by our
actual attrition data. The estimated life of a dealer account pool generated
from the results of the appraiser's lifing study is approximately twelve years.
The Company believes that the change to this method is appropriate based on its
actual attrition data that indicates an increase in the rate of customer
attrition following the expiration of the initial three-year term of monitoring
contracts with customers. The accelerated method that presently best achieves
the matching objective described above is the double-declining balance method
based on a ten-year life for the first eight years of the estimated life of the
customer relationships, converting to the straight-line method of amortization
to completely amortize the asset pool by the end of the twelfth year. This
method of amortization will be periodically reviewed and compared to observed
actual attrition.
Adoption of the declining-balance method together with the related change in
expected asset life prevents the Company from distinguishing the effect of the
change in method (straight-line to declining-balance) from the change in
estimated life. In such cases, generally accepted accounting principles require
that the effect of such a change be recognized in operations in the period of
the change, rather than as a cumulative effect of a change in accounting
principle. Accordingly, the effect of the change increased amortization expense
reported in the second quarter by $364.5 million, $315.5 million of which
relates to the cumulative adjustment as of January 1, 2003 and $49.0 million of
which relates to the second quarter of fiscal 2003.
4
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. BASIS OF PRESENTATION (CONTINUED)
The Company also undertook a comprehensive review of its depreciation policy
with respect to security monitoring systems installed in residential and
commercial customer premises. The costs of these systems are combined in
separate pools for internally generated residential and commercial account
customers, and generally depreciated over ten years. Based on the results of
this review, the Company concluded that for residential and commercial account
pools the straight-line method of amortization over a ten-year period continues
to be appropriate given the observed actual attrition data for these pools.
In addition to the change in method of amortization for its dealer account
pool, the Company also changed its method of accounting for the non-refundable
charge associated with its dealer program. For detailed information on this
accounting change, see Note 8--"Cumulative Effect of Accounting Change."
CHARGES RELATED TO CURRENT PERIOD CHANGES IN ESTIMATES--During the quarter
ended March 31, 2003, the Company intensified a process whereby internal audits
and detailed controls and operating reviews were conducted. As a result of this
process, the Company recorded $471.4 million of pre-tax charges relating to new
information and changes in facts and circumstances occurring during the quarter.
The process included assessing the continued recoverability of assets, including
accounts receivable, inventory and installed security systems and equity
investments, and the estimates of costs relating to legal, environmental and
insurance obligations. The assessments were based primarily on an analysis of
recent events and more detailed experience that occurred during the quarter.
Concurrent with this review process and resulting assessments by management
during the quarter, decisions were made to discontinue existing product lines
and terminate information technology systems implementation projects. As a
result of these decisions, inventory and other asset balances were written down
to their net realizable value.
The charges of $471.4 million include $165.0 million related to increased
cost estimates for environmental, legal and product liability, workers
compensation and general liability insurance accruals, $107.8 million related to
accounts receivable and inventory reserve valuations, $84.1 million related to
an other than temporary decline in the value of investments, $36.6 million for
account write-offs, where management concluded that the recoverability of
various asset balances which had become doubtful, and $77.9 million for other
accounting estimate changes. The Company also recorded an expense of $91.5
million for a retroactive, incremental premium on prior period directors and
officers insurance coverage negotiated with its third party insurance carriers
during the quarter (see Note 12).
CHARGES RELATING TO PRIOR YEARS AND QUARTERS RECORDED IN THE QUARTER ENDED
MARCH 31, 2003--As a result of the Company's intensified internal audits and
detailed controls and operating reviews, the Company identified and recorded
pre-tax charges of $434.5 million for charges related to prior periods. These
charges resulted from capitalizing certain selling expenses to property, plant
and equipment and other non-current assets, mostly in the Fire and Security
Services segment and reconciliation items relating to balance sheet accounts
where certain account analysis or periodic reconciliations were deficient,
resulting in adjustments primarily related to the Engineered Products and
Services segment. Additionally, charges related to the correction of balances
primarily related to corporate pension and deferred compensation accruals as of
September 30, 2002 and other accounting adjustments (e.g. purchase price
accounting accruals, deferred commissions, accounting related to leases in the
Fire and Security Services and Engineered Products and Services segments).
Management has concluded that the effect of these adjustments, as well as those
adjustments relating to prior years recorded in the quarter
5
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. BASIS OF PRESENTATION (CONTINUED)
ended December 31, 2001 (see below), are not material individually or in the
aggregate to prior periods. Accordingly, prior period financial statements have
not been restated.
CHARGES RELATING TO PRIOR YEARS RECORDED IN THE QUARTER ENDED DECEMBER 31,
2001--As discussed in the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 2002, during the fourth quarter of fiscal 2002, the
Company identified various adjustments relating to prior year financial
statements. At the time the fiscal 2002 financial statements were issued,
management concluded the effects of these adjustments, as well as any unrecorded
proposed audit adjustments, were not material individually or in the aggregate
to fiscal 2002 or any year prior. Accordingly, prior year financial statements
were not restated. Instead, these adjustments that aggregate $261.6 million on a
pre-tax income basis or $199.7 million on an after-tax income basis were
recorded effective October 1, 2001. The nature and amounts of these adjustments
are principally as follows:
- The Company determined the amounts reimbursed from dealers under its
dealer program exceeded the costs actually incurred. The cumulative effect
of reimbursements recorded in years prior to fiscal 2002 in excess of
costs incurred, net of the effect of the deferred credit, which would have
been amortized as described in Note 1 to the Company's Form 10-K for the
year ended September 30, 2002 is $185.9 million. This amount is included
on the selling, general and administrative expenses line in the
December 31, 2001 Consolidated Statement of Operations.
- The Company determined that the net gain of $64.1 million on the issuance
of TyCom shares previously reported for fiscal 2001 should have been lower
by $39.6 million. The $39.6 million associated with the sale of common
shares of TyCom is included on a separate line in the December 31, 2001
Consolidated Statement of Operations.
- As described in Note 1 to the Company's Form 10-K for the year ended
September 30, 2002, the Company identified several adjustments, both as a
result of the Phase 2 review and the recording of previously unrecorded
audit adjustments, which are more appropriately recorded as expenses,
rather than as part of the Company's acquisition accounting. The
cumulative effect of the adjustments necessary to revise the prior
accounting is a pre-tax charge of $36.1 million, $25.4 million of which is
included in selling, general and administrative expenses and
$10.7 million of which is included in cost of sales in the December 31,
2001 Consolidated Statement of Operations.
IMPACT ON PRIOR PERIODS--The tables below present the pre-tax charges for
the following items in the periods to which the charges relate: (i) the
$261.6 million charge relating to prior periods recorded during the quarter
ended December 31, 2001; (ii) the $434.5 million charge relating to prior years
and quarters recorded in the quarter ended March 31, 2003; and (iii) certain
other adjustments that represent timing differences between periods comprised of
$16.0 million relating to the recognition of revenue at one of the Company's
business units (TyCom) and $154.3 million relating to the settlement of
litigation and related subsequent transactions with respect to the Healthcare
segment.
6
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. BASIS OF PRESENTATION (CONTINUED)
($ IN MILLIONS)
(INCREASE) DECREASE IN INCOME
QUARTER ENDED
PRIOR TO DECEMBER 31,
TYPE OF ADJUSTMENT FISCAL 2000 FISCAL 2000 FISCAL 2001 FISCAL 2002 2002
- ------------------ ------------- ---------------- ----------- ----------- -------------
Charges relating to prior years recorded
in the quarter ended December 31, 2001:
ADT dealer reimbursements............... $ 33.6 $ 53.5 $ 98.8 $(185.9) $ --
Gain on issuance of shares of TyCom..... -- -- 39.6 (39.6) --
Other adjustments....................... 22.7 26.4 (13.0) (36.1) --
------ ------- ------ ------- -----
56.3 79.9 125.4 (261.6) --
TyCom network transaction................. -- -- 16.0 (16.0) --
Healthcare divestiture transaction(1)..... -- -- 154.3 (154.3) --
Charges relating to prior years and
quarters recorded in the quarter ended
March 31, 2003:
Capitalized costs....................... 59.2 42.6 33.0 45.4 3.4
Reconciliation items.................... 53.3 2.2 51.4 24.5 0.8
Adjustments to accrual balances......... -- (1.8) -- 18.5 (0.3)
Asset reserve adjustments............... -- -- -- 0.8 13.7
Other accounting adjustments............ 10.3 19.9 31.0 23.3 3.3
------ ------- ------ ------- -----
Total charges relating to prior periods... $179.1 $ 142.8 $411.1 $(319.4) $20.9
====== ======= ====== ======= =====
QUARTER ENDED
MARCH 31, SIX MONTHS ENDED
TYPE OF ADJUSTMENT 2002 MARCH 31, 2002
- ------------------ ------------- ----------------
Charges relating to prior years
recorded in the quarter ended
December 31, 2001:
ADT dealer reimbursements........ $ -- $(185.9)
Gain on issuance of shares of
TyCom.......................... -- (39.6)
Other adjustments................ -- (36.1)
------ -------
-- (261.6)
TyCom network transaction.......... (53.0) (16.0)
Healthcare divestiture
transaction(1)..................... (4.2) (8.4)
Charges relating to prior years and
quarters recorded in the quarter
ended March 31, 2003:
Capitalized costs................ 8.7 18.4
Reconciliation items............. 3.0 10.3
Adjustments to accrual
balances....................... -- --
Asset reserve adjustments........ -- --
Other accounting adjustments..... 4.2 8.6
------ -------
Total charges relating to prior
periods............................ $(41.3) $(248.7)
====== =======
- ------------------------------
(1) The adjustment for the Healthcare divestiture transaction is subjective in
regards to a judgmental assessment of the assigned value of an intangible
asset (and related amortization), which was not subjected to a
contemporaneous appraisal and was subsequently sold as part of a business
divestiture. The Company had assigned a value of $166.8 million to the
intangible asset relating to the settlement of litigation. The analysis
above presents the adjustment that would be necessary if there were zero
value assigned to the intangible asset. Management believes that the
intangible asset was worth more than zero. However, because it was not
subjected to a contemporaneous appraisal, the Company could not substantiate
the value. As such the table above reflects the necessary adjustment as if
it had zero value.
7
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. BASIS OF PRESENTATION (CONTINUED)
The table below discloses the impact the above adjustments would have had on
income or loss from continuing operations and net income or loss for each period
presented.
AS IF
AS REPORTED ADJUSTED
----------- ----------
FISCAL 2000
Income from continuing operations........................... $ 4,519.9 $ 4,416.7
Net income.................................................. $ 4,519.9 $ 4,416.7
FISCAL 2001
Income from continuing operations........................... $ 4,401.5 $ 4,064.4
Net income.................................................. $ 3,970.6 $ 3,633.5
FISCAL 2002
Loss from continuing operations............................. $(3,070.4) $(2,825.5)
Net loss.................................................... $(9,411.7) $(9,166.8)
QUARTER ENDED MARCH 31, 2002
Loss from continuing operations............................. $(2,055.0) $(2,022.8)
Net loss.................................................... $(6,378.0) $(6,345.8)
SIX MONTHS ENDED MARCH 31, 2002
Loss from continuing operations............................. $(1,120.3) $ (930.7)
Net loss.................................................... $(5,178.6) $(4,989.0)
QUARTER ENDED MARCH 31, 2003
(Loss) from continuing operations........................... $ (467.9) $ (139.9)
Net loss.................................................... $ (467.9) $ (139.9)
SIX MONTHS ENDED MARCH 31, 2003
Income from continuing operations........................... $ 157.6 $ 470.6
Net (loss) income........................................... $ (49.1) $ 263.9
Both the estimated life and method of amortization relating to the dealer
account pool, as well as the Company's accounting for the non-refundable charge
relating to the dealer program discussed above have been the subject of an
ongoing process of responding to the Staff of the SEC Division of Corporation
Finance inquiries regarding the dealer program and certain other accounting
matters. Also, subjects of this ongoing process have been the charges related to
current period changes in estimates and charges related to prior years and
quarters discussed above. The Company has not completed such discussions. The
Company cannot predict the outcome of its discussions with the SEC or that such
outcome will not necessitate further amendments or restatements of the Company's
previously filed periodic reports. The Company hopes to resolve all issues
raised by the ongoing SEC Division of Corporation Finance review during its
fiscal third quarter.
8
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. BASIS OF PRESENTATION (CONTINUED)
SHORT-TERM INVESTMENTS--Short-term investments consist of fixed income
securities with maturities of greater than three months and less than one year.
The Company's short-term investments are restricted as they are currently being
used as collateral.
ACCOUNTING PRONOUNCEMENTS--Effective October 1, 2002, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations." SFAS No. 143 addresses accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. The adoption of this new standard did not
have a material impact on our results of operations or financial position.
Effective October 1, 2002, the Company adopted SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets," which is effective for fiscal
years beginning after December 15, 2001. The provisions of this statement
provide a single accounting model for impairment of long-lived assets. The
adoption of this new standard did not have a material impact on our results of
operations or financial position.
During the quarter ended December 31, 2002, the Company adopted the
disclosure provisions of FASB Interpretation No. ("FIN") 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees." FIN 45 requires
increased disclosure of guarantees, including those for which likelihood of
payment is remote, and product warranty information (see Note 17). FIN 45 also
requires that guarantors recognize a liability for certain types of guarantees
equal to the fair value of the guarantee upon its issuance, effective for the
quarter ending March 31, 2003. The adoption of FIN 45 did not have a material
impact on our results of operations or financial position.
Effective January 1, 2003, the Company adopted SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities," which is effective for exit
or disposal activities that are initiated after December 31, 2002. This
statement nullifies Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." This statement
requires that liabilities associated with exit or disposal activities be
recognized and measured at fair value when incurred as opposed to at the date an
entity commits to the exit or disposal plans. The adoption of this new standard
did not have a material impact on our results of operations or financial
position.
Effective January 1, 2003, the Company adopted SFAS No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure," which amends SFAS
No. 123, "Accounting for Stock-Based Compensation" to provide transition methods
for a voluntary change to measuring compensation cost in connection with
employee share option plans using a fair value based method. The Statement also
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures about the method of accounting for compensation cost associated with
employee share option plans, as well as the effect of the method used on
reported results. The Company adopted the disclosure requirements of SFAS
No. 148 and has not changed its method for measuring the compensation cost of
share options.
Tyco continues to use the intrinsic value based method and does not
recognize compensation expense for the issuance of options with an exercise
price equal to or greater than the market price at the time of grant. As a
result, the adoption of SFAS No. 148 had no impact on our results of operations
or financial position. Had the fair value based provisions of SFAS No. 123 been
adopted by
9
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. BASIS OF PRESENTATION (CONTINUED)
Tyco, the effect on net income and earnings per common share for quarter and six
months ended March 31, 2003 and 2002 would have been as follows ($ in millions):
FOR THE QUARTERS FOR THE SIX MONTHS
ENDED MARCH 31, ENDED MARCH 31,
-------------------- --------------------
2003 2002 2003 2002
-------- --------- -------- ---------
Net loss--as reported................................. $(467.9) $(6,378.0) $ (49.1) $(5,178.6)
Less: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of tax(1)............................... (78.6) (149.5) (139.9) (285.2)
------- --------- ------- ---------
Net loss--pro forma................................... $(546.5) $(6,527.5) $(189.0) $(5,463.8)
======= ========= ======= =========
Loss per share:
Basic--as reported.................................. $ (0.23) $ (3.20) $ (0.02) $ (2.61)
Basic--pro forma.................................... (0.27) (3.28) (0.09) (2.76)
Diluted--as reported................................ (0.23) (3.20) (0.02) (2.61)
Diluted--pro forma.................................. (0.27) (3.28) (0.09) (2.76)
- ------------------------------
(1) The fair value was calculated using the Black-Scholes option pricing model
with a volatity of 64% for the quarter and six months ended March 31, 2003.
All other assumptions are consistent with those disclosed in the Company's
Annual Report on Form 10-K for the fiscal year ended September 30, 2002.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities." This interpretation clarifies the application of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," relating to consolidation
of certain entities. FIN 46 requires identification of the Company's
participation in variable interest entities (VIE), which are defined as entities
with a level of invested equity that is not sufficient to fund future activities
to permit them to operate on a stand alone basis, or whose equity holders lack
certain characteristics of a controlling financial interest. For entities
identified as VIE, FIN 46 sets forth a model to evaluate potential consolidation
based on an assessment of which party to the VIE, if any, bears a majority of
the risk to its expected losses, or stands to gain from a majority of its
expected returns. FIN 46 applies immediately to variable interest entities
created or acquired after January 31, 2003. We have not created any variable
interest in any variable interest entities subsequent to January 31, 2003. FIN
46 also sets forth certain disclosures regarding interests in VIE's that are
deemed significant, even if consolidation is not required. For variable interest
entities in which the Company holds a variable interest acquired on or before
January 31, 2003, the Company will adopt FIN 46's accounting provisions on
July 1, 2003. See Note 16 for further discussion of the impact of FIN 46.
2. ACQUISITIONS AND DIVESTITURES
During the first six months of fiscal 2003, the Company purchased five
businesses within the Healthcare, Engineered Products and Services, and
Electronics segments for an aggregate cost of $34.6 million in cash, net of
$1.3 million of cash acquired. During the first six months of fiscal 2003, the
Company paid $113.2 million of cash for utilization of purchase accounting
liabilities related to prior years' acquisitions. In addition, the Company paid
cash of approximately $76.3 million relating to holdback and earn-out
liabilities related to certain prior period acquisitions. Holdback liabilities
represent a portion of the purchase price withheld from the seller pending
finalization of the
10
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. ACQUISITIONS AND DIVESTITURES (CONTINUED)
acquisition balance sheet. Certain acquisitions have provisions that would
require Tyco to make additional "earn-out" payments to the sellers if the
acquired company achieves certain milestones subsequent to its acquisition by
Tyco. These earn-out payments are tied to certain performance measures, such as
revenue, gross margin or earnings growth and are generally treated as additional
purchase price. In addition, the Company paid $358.3 million (after adjusting
for the impact of the change in accounting discussed in Note 8) of cash during
the six months ended March 31, 2003, to acquire approximately 377,500 customer
contracts for electronic security services through the Company's dealer program.
The cash portions of acquisition costs for the business and customer contracts
were funded utilizing cash from operations. The results of operations of the
acquired companies have been included in Tyco's consolidated results from their
respective acquisition dates.
The Company purchased all of the voting equity interests in each of the
businesses acquired. At the time each purchase acquisition is made, the Company
records each asset acquired and each liability assumed at its estimated fair
value, which amount is subject to future adjustment when appraisals or other
valuation data are obtained. The excess of (i) the total consideration paid for
the acquired company over (ii) the fair value of tangible and intangible assets
acquired less liabilities assumed and purchase accounting liabilities
established is recorded as goodwill. As a result of acquisitions completed
during the first six months of fiscal 2003, and adjustments to the fair values
of assets and liabilities and purchase accounting liabilities recorded for
acquisitions completed prior to fiscal 2003, Tyco recorded a net decrease of
$373.3 million in goodwill and an additional $59.0 million in other intangible
assets during the six months ended March 31, 2003. The net decrease in goodwill
includes $383.6 million associated with prior years' acquisitions, primarily
Sensormatic Electronics Corporation ("Sensormatic"), acquired in November 2001,
Mallinckrodt, Inc. ("Mallinckrodt"), acquired in October 2000, and Lucent
Technologies' Power Systems ("LPS"), acquired in December 2000, slightly offset
by an increase of $10.3 million due to current year acquisitions. Adjustments
for Sensormatic primarily relate to fair value adjustments as well as the
finalization of deferred tax adjustments related to previously recorded purchase
accounting liabilities. Adjustments for LPS and Mallinckrodt primarily relate to
reductions in purchase accounting liabilities due to actual costs being less
than originally estimated. See roll forward of purchase accounting accruals
below. The increase in intangible assets is due to adjustments associated with
prior years' acquisitions.
Acquisitions were an important part of Tyco's growth during the past few
years. When Tyco made acquisitions it sought to complement existing products and
services, enhance the Company's product lines and/or expand its customer base.
Tyco determined what it was willing to pay for an acquisition partially based on
its expectation that it could cost effectively integrate the products and
services of an acquired company into Tyco's existing infrastructure and improve
earnings by removing overhead costs in areas where there are duplicate sales,
administrative or other facilities and functions. In addition, the Company
utilized existing infrastructure (e.g., established sales force, distribution
channels, customer relations, etc.) of acquired companies to cost effectively
introduce Tyco's products to new geographic areas. The Company also targeted
companies that were perceived to be experiencing depressed financial
performance. All these factors contributed to acquisition prices in excess of
the fair value of net assets acquired and the resultant goodwill. However, the
Company expects to complete significantly fewer acquisitions as compared to the
past few years due to its focus on enhancing internal growth within its existing
businesses.
The following table shows the fair values of assets and liabilities recorded
for purchase acquisitions completed in the first six months of fiscal 2003,
adjusted to reflect changes in the fair values of assets
11
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. ACQUISITIONS AND DIVESTITURES (CONTINUED)
and liabilities and purchase accounting liabilities and holdback/earn-out
liabilities recorded for purchase acquisitions completed prior to fiscal 2003 ($
in millions):
Accounts receivable......................................... $ 29.3
Inventories................................................. 19.2
Prepaid expenses and other current assets................... 11.3
Deferred income taxes....................................... (91.4)
Property, plant and equipment, net.......................... 41.0
Goodwill.................................................... (373.3)
Intangible assets........................................... 59.0
Other assets................................................ 11.5
-------
(293.4)
-------
Accounts payable............................................ 0.8
Accrued expenses and other current liabilities.............. (277.1)
Holdback/earn-out liabilities............................... 8.5
Deferred income taxes....................................... (73.9)
Other long-term liabilities................................. 5.1
Fair value of debt assumed.................................. 8.6
-------
(328.0)
-------
Cash consideration paid (net of $1.3 million of cash
acquired)................................................. $ 34.6
=======
Purchase accounting liabilities recorded during the first six months of
fiscal 2003 in connection with fiscal 2003 purchase acquisitions were
immaterial.
The following table summarizes the purchase accounting liabilities recorded
in connection with fiscal 2002 purchase acquisitions ($ in millions):
SEVERANCE FACILITIES-RELATED DISTRIBUTOR &
-------------------- --------------------- SUPPLIER
NUMBER OF NUMBER OF CANCELLATION OTHER
EMPLOYEES ACCRUAL FACILITIES ACCRUAL FEES ACCRUAL TOTAL
--------- -------- ---------- -------- ------------- -------- --------
Balance at September 30, 2002........ 1,453 $39.1 82 $51.8 $3.1 $7.4 $101.4
Additions to fiscal 2002 acquisition
reserves........................... 549 15.0 17 3.3 0.3 3.1 21.7
Fiscal 2003 utilization.............. (325) (16.2) (12) (5.8) (0.9) (3.4) (26.3)
Foreign currency translation
adjustment......................... -- 0.8 -- 0.5 0.2 0.1 1.6
Reclassifications.................... -- (0.2) -- 0.1 (1.2) 0.9 (0.4)
Reductions of estimates of fiscal
2002 acquisition reserves.......... (497) (4.4) (32) (2.3) -- (2.3) (9.0)
----- ----- --- ----- ---- ---- ------
Balance at March 31, 2003............ 1,180 $34.1 55 $47.6 $1.5 $5.8 $ 89.0
===== ===== === ===== ==== ==== ======
During the six months of fiscal 2003, the Company recorded additions to
purchase accounting liabilities as it continued to formulate the integration
plans of fiscal 2002 acquisitions, such as Paragon (integrated within the
Healthcare segment) and Eberle (integrated within the Electronics segment).
Finalization of components of integration plans associated with acquisitions
resulted in additional
12
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. ACQUISITIONS AND DIVESTITURES (CONTINUED)
purchase accounting liabilities of $21.7 million and a corresponding increase to
goodwill and deferred tax assets. These additions reflect the termination of an
additional 549 employees, the closure of an additional 17 facilities, additional
distributor and supplier cancellation fees and other acquisition related costs
consisting primarily of professional fees and other costs.
During the first six months ended March 31, 2003, the Company reduced its
estimate of purchase accounting liabilities relating to fiscal 2002 acquisitions
by $9.0 million primarily because actual costs were less than originally
estimated since the Company severed 497 fewer employees and closed 32 fewer
facilities than originally anticipated due to revisions to integration plans.
Goodwill and related deferred tax assets were reduced by an equivalent amount.
Tyco has not yet finalized all of its business integration plans for fiscal
2002 acquisitions. Accordingly, purchase accounting liabilities are subject to
revision in future quarters. However, we do not expect any resulting adjustments
to be significant.
The following table summarizes the purchase accounting liabilities recorded
in connection with the fiscal 2001 purchase acquisitions ($ in millions):
SEVERANCE FACILITIES-RELATED DISTRIBUTOR &
-------------------- --------------------- SUPPLIER
NUMBER OF NUMBER OF CANCELLATION OTHER
EMPLOYEES ACCRUAL FACILITIES ACCRUAL FEES ACCRUAL TOTAL
--------- -------- ---------- -------- ------------- -------- --------
Balance at September 30, 2002........ 2,196 $129.7 100 $207.5 $28.7 $29.1 $395.0
Fiscal 2003 utilization.............. (741) (38.2) (37) (26.7) (9.3) (6.4) (80.6)
Foreign currency translation
adjustment......................... -- 6.0 -- (0.2) 0.3 0.5 6.6
Reclassifications.................... -- (0.7) -- 0.7 (0.3) (0.4) (0.7)
Reductions of estimates of fiscal
2001 acquisition reserves.......... (518) (49.3) (21) (76.8) (13.3) (6.3) (145.7)
----- ------ --- ------ ----- ----- ------
Balance at March 31, 2003............ 937 $ 47.5 42 $104.5 $ 6.1 $16.5 $174.6
===== ====== === ====== ===== ===== ======
During the first six months of fiscal 2003, the Company reduced its estimate
of purchase accounting liabilities relating to fiscal 2001 acquisitions by
$145.7 million primarily because actual costs were less than originally
estimated since the Company severed 518 fewer employees and closed 21 fewer
facilities than originally anticipated due to revisions to integration plans.
Goodwill and related deferred tax assets were reduced by an equivalent amount.
At March 31, 2003, there remained a total of $24.5 million in reserves
related to fiscal 2000 and prior acquisitions. These liabilities primarily
relate to facility-related costs (principally for rents under non-cancelable
leases for vacated premises), employee severance (principally for payments to
employees already terminated with severance paid out over time), and other
costs. Tyco expects that the termination of employees and consolidation of
facilities related to all acquisitions will be substantially complete within two
years of the related dates of acquisition, except for certain long-term
contractual obligations.
At March 31, 2003, holdback/earn-out liabilities of $216.9 million remained
on the Consolidated Balance Sheet, of which $100.8 million are included in
accrued expenses and other current liabilities and $116.1 million are included
in other long-term liabilities. In addition, a total of $288.1 million of
purchase accounting liabilities related to all acquisitions remained on the
Consolidated Balance Sheet,
13
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. ACQUISITIONS AND DIVESTITURES (CONTINUED)
of which $158.6 million are included in accrued expenses and other current
liabilities and $129.5 million are included in other long-term liabilities. At
March 31, 2003, the Company had a contingent liability of $80 million related to
the fiscal 2001 acquisition of Com-Net by the Electronics segment. The
$80 million is the maximum amount payable to the former shareholders of Com-Net
only after the construction and installation of a communications system for the
State of Florida is finished and the State has approved the system based on the
guidelines set forth in the contract. The $80 million is not accrued at
March 31, 2003, as the outcome of this contingency cannot be reasonably
determined.
During the six months ended March 31, 2003, the Company sold certain of its
businesses within the Healthcare segment for net proceeds of approximately
$5.4 million in cash.
In accordance with SFAS No. 141, "Business Combinations," the following
unaudited pro forma data summarizes the results of operations for the periods
indicated as if fiscal 2003 acquisitions, fiscal 2002 acquisitions and the
amalgamation with TyCom had been completed as of the beginning of the periods
presented. The pro forma data give effect to actual operating results prior to
the acquisitions and adjustments to interest expense and income taxes. No effect
has been given to cost reductions or operating synergies in this presentation.
These pro forma amounts do not purport to be indicative of the results that
would have actually been achieved if the acquisitions and amalgamation had
occurred as of the beginning of the periods presented or that may be achieved in
the future.
FOR THE SIX MONTHS
ENDED MARCH 31,
---------------------
2003(1) 2002(2)
--------- ---------
(IN MILLIONS, EXCEPT
PER SHARE DATA)
Net revenues................................................ $17,919.7 $17,671.4
Income (loss) from continuing operations.................... 157.5 (1,138.0)
Net loss.................................................... (49.2) (5,196.3)
Basic earnings (loss) per common share:
Income (loss) from continuing operations.................. 0.08 (0.57)
Net loss.................................................. (0.02) (2.60)
Diluted earnings (loss) per common share:
Income (loss) from continuing operations.................. 0.08 (0.57)
Net loss.................................................. (0.02) (2.60)
- ------------------------------
(1) Includes $434.5 million of charges related to prior periods recorded in the
quarter ended March 31, 2003, restructuring and other credits of
$76.2 million, of which $13.1 million is included in cost of sales and
charges for the impairment of long-lived assets of $23.3 million.
(2) Includes restructuring and other charges of $680.8 million, of which
$257.1 million is included in cost of sales, charges for the impairment of
long-lived assets of $2,351.7 million primarily related to the write-down of
the Tyco Global Network ("TGN") and charges related to prior years of $261.6
recorded in the quarter ended December 31, 2001.
3. CONSOLIDATED SEGMENT DATA
During fiscal 2003, a change was made to the Company's internal reporting
structure such that the operations of Tyco's plastics and adhesives businesses
(previously reported within the Healthcare and Specialty Products segment) now
comprise the Company's new Plastics and Adhesives reportable segment. The
Company has conformed its segment reporting accordingly and has reclassified
14
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. CONSOLIDATED SEGMENT DATA (CONTINUED)
comparative prior period information to reflect this change. In addition, during
the quarter ended March 31, 2003, management began evaluating segment
performance based upon operating results calculated in accordance with GAAP as
opposed to on an adjusted basis. Accordingly, operating (loss) income by segment
shown below has been presented in accordance with GAAP. Prior year amounts have
been conformed accordingly, and as such, include the charges for amounts
previously excluded from management's internal reporting. These items are
footnoted below the table.
Selected information for the Company's five segments is presented in the
following table.
FOR THE QUARTERS FOR THE SIX MONTHS
ENDED MARCH 31, ENDED MARCH 31,
----------------------- ------------------------
2003 2002 2003 2002
-------- --------- --------- ---------
($ IN MILLIONS) ($ IN MILLIONS)
NET REVENUES:
Fire and Security Services................ $2,778.9 $ 2,569.5 $ 5,538.3 $ 5,049.8
Electronics............................... 2,502.0 2,493.9 5,030.3 5,311.2
Healthcare................................ 2,137.3 1,968.3 4,142.7 3,738.7
Engineered Products and Services.......... 1,073.6 1,101.2 2,269.3 2,172.9
Plastics and Adhesives.................... 488.5 478.5 939.1 917.5
-------- --------- --------- ---------
Net revenues from external customers...... $8,980.3 $ 8,611.4 $17,919.7 $17,190.1
======== ========= ========= =========
OPERATING (LOSS) INCOME:
Fire and Security Services................ $ (702.6)(1) $ 337.6 (7) $ (443.3)(12) $ 739.7 (15)
Electronics............................... 348.6 (2) (2,588.4)(8) 641.2 (13) (2,062.7)(8)
Healthcare................................ 520.7 (3) 448.7 (9) 968.1 (14) 917.9 (9)
Engineered Products and Services.......... (73.0)(4) 152.7 (10) 64.3 (4) 296.5 (16)
Plastics and Adhesives.................... 20.4 (5) 47.9 (11) 64.6 (5) 141.5 (11)
-------- --------- --------- ---------
114.1 (1,601.5) 1,294.9 32.9
Less: Corporate expenses.................... (218.8)(6) (59.7) (287.0)(6) (335.0)(17)
-------- --------- --------- ---------
Consolidated operating (loss) income........ $ (104.7) $(1,661.2) $ 1,007.9 $ (302.1)
======== ========= ========= =========
- ------------------------------
(1) Includes a charge of $364.5 million reflecting a change in the method of
amortization used for dealer program account assets, a charge of
$7.0 million resulting from the change in method of accounting for the
non-refundable charge associated with the dealer program, a charge of
$270.4 million related to prior periods (of which $2.5 million is included
in impairment of long-lived assets), a charge of $10.2 million for the
impairment of property, plant and equipment, and a restructuring credit of
$2.0 million due to costs being less than anticipated.
(2) Includes a restructuring credit of $54.8 million, of which $12.9 million is
included in cost of sales.
(3) Includes a restructuring credit of $4.7 million.
(4) Includes a charge of $118.9 million related to prior periods.
(5) Includes a charge of $20.7 million related to prior periods and a
restructuring credit of $0.4 million due to costs being less than
anticipated.
(6) Includes charges of $24.5 million related to prior years, a restructuring
credit of $10.6 million due to costs being less than anticipated, and a
charge of $10.6 million for the impairment of property, plant and equipment.
(7) Includes restructuring charges of $14.3 million primarily related to
severance associated with the closure of existing facilities that had
become redundant due to acquisitions and a charge of $13.8 million related
to the write-up of inventory under purchase accounting, which is included in
cost of revenue.
15
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. CONSOLIDATED SEGMENT DATA (CONTINUED)
(8) Includes charges for the impairment of property, plant and equipment of
$2,346.0 million primarily related to the write-down of the TGN (See
Note 5) and the closure of certain facilities. Also includes restructuring
charges of $611.5 million, of which $237.5 million is included in cost of
revenue, related to the write-down of inventory and certain facility
closures.
(9) Includes a charge of $7.8 million related to the write-off of legal fees
and other deal costs associated with an acquisition that was not completed.
(10) Includes restructuring and other charges of $6.8 million primarily related
to the closure of facilities and charges of $5.7 million for the impairment
of property, plant and equipment primarily related to the termination of
employees and the write-down of inventory associated with exiting a product
line.
(11) Includes a restructuring charge of $0.9 million related to the write-off of
legal fees and other deal costs associated with an acquisition that was not
completed.
(12) Includes a charge of $364.5 million reflecting a change in the method of
amortization used for dealer program account assets, a charge of
$18.5 million resulting from the change in method of accounting for the
non-refundable charge associated with the dealer program, a charge of
$270.4 million related to the prior periods (of which $2.5 million is
included in impairment of long-lived assets), a charge of $10.2 million for
the impairment of property, plant and equipment, and a restructuring credit
of $2.0 million due to costs being less than anticipated.
(13) Includes a restructuring credit of $56.5 million, of which $12.9 million is
included in cost of sales.
(14) Includes a restructuring credit of $6.7 million, of which $0.2 million is
included in cost of sales.
(15) Includes restructuring charges of $22.1 million primarily related to
severance associated with the closure of existing facilities that had
become redundant due to acquisitions and a charge of $13.8 million related
to the write-up of inventory under purchase accounting, which is included in
cost of revenue.
(16) Includes restructuring and other charges of $24.7 million, of which
$5.8 million is included in cost of sales and charges of $5.7 million for
the impairment of property, plant and equipment primarily related to the
termination of employees and the write-down of inventory associated with
exiting a product line.
(17) Includes charges related to prior years of $222.0 million (see Note 1).
4. RESTRUCTURING AND OTHER (CREDITS) CHARGES, NET
Restructuring and other (credits) charges, net, are as follows ($ in
millions):
FOR THE QUARTERS FOR THE SIX MONTHS
ENDED MARCH 31, ENDED MARCH 31,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Fire and Security Services................................. $ (2.0) $ 28.1 $ (2.0) $ 35.9
Electronics................................................ (54.8) 611.5 (56.5) 611.5
Healthcare................................................. (4.7) 7.8 (6.7) 7.8
Engineered Products and Services........................... -- 6.8 -- 24.7
Plastics and Adhesives..................................... (0.4) 0.9 (0.4) 0.9
Corporate.................................................. (10.6) -- (10.6) --
------ ------- ------ -------
(72.5) 655.1 (76.2) 680.8
Inventory related amounts charged to cost of sales......... 12.9 (251.3) 13.1 (257.1)
------ ------- ------ -------
Restructuring and other (credits) charges, net............. $(59.6) $ 403.8 $(63.1) $ 423.7
====== ======= ====== =======
2003 CREDITS
During the first six months of fiscal 2003, the Electronics segment recorded
restructuring credits of $56.5 million, of which $12.9 million is included in
cost of sales, the Healthcare segment recorded restructuring credits of
$6.7 million, of which $0.2 million is included in cost of sales, the Fire and
Security Services segment recorded restructuring credits of $2.0 million and the
Plastics and Adhesives segment recorded restructuring credits of $0.4 million,
related to a revision of estimates of prior years' restructuring charges.
Additionally, credits of $10.6 million were recorded due to costs being less
than anticipated.
16
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
4. RESTRUCTURING AND OTHER (CREDITS) CHARGES, NET (CONTINUED)
2002 CHARGES AND CREDITS
The disclosures in the Company's fiscal 2002 Annual Report on Form 10-K
discuss net restructuring and other charges of $1,954.3 million recorded during
fiscal 2002 and the related activity with respect to these charges through
September 30, 2002. The following tables provide a summary by segment of the
remaining balances as of September 30, 2002 related to these charges and the
activity with respect to these charges during the six months ended March 31,
2003 ($ in millions):
SEVERANCE FACILITIES-RELATED
--------------------- --------------------- SUPPLIER
NUMBER OF NUMBER OF CONTRACT OTHER
FIRE AND SECURITY SERVICES SEGMENT EMPLOYEES ACCRUAL FACILITIES ACCRUAL FEES ACCRUAL TOTAL
- ---------------------------------- ---------- -------- ---------- -------- -------- -------- --------
Remaining balance at September 30, 2002.......... 1,346 $ 19.4 103 $12.1 $ 0.5 $ 31.4 $ 63.4
Fiscal 2003 reversals............................ -- (0.6) -- -- -- -- (0.6)
Fiscal 2003 utilization.......................... (539) (10.1) (4) (2.4) (0.4) (5.9) (18.8)
Foreign currency translation adjustments......... -- 0.9 -- 0.3 -- 0.5 1.7
Balance sheet reclassifications.................. -- 0.2 -- (0.2) -- (25.6) (25.6)
----- ------ --- ----- ----- ------ ------
Balance at March 31, 2003........................ 807 $ 9.8 99 $ 9.8 $ 0.1 $ 0.4 $ 20.1
===== ====== === ===== ===== ====== ======
SEVERANCE FACILITIES-RELATED
--------------------- --------------------- SUPPLIER
NUMBER OF NUMBER OF CONTRACT OTHER
ELECTRONICS SEGMENT EMPLOYEES ACCRUAL FACILITIES ACCRUAL FEES ACCRUAL TOTAL
- ------------------- ---------- -------- ---------- -------- -------- -------- --------
Remaining balance at September 30, 2002.......... 4,304 $116.0 17 $154.3 $325.8 $122.5 $ 718.6
Fiscal 2003 reversals............................ (815) (5.8) (3) 2.8 (20.5) -- (23.5)
Fiscal 2003 utilization.......................... (1,607) (52.9) (10) (25.4) (98.2) (0.3) (176.8)
Foreign currency translation adjustments......... -- 2.5 -- 0.1 -- (0.1) 2.5
Balance sheet reclassifications.................. -- -- -- -- -- (100.3) (100.3)
------ ------ --- ------ ------ ------ -------
Balance at March 31, 2003........................ 1,882 $ 59.8 4 $131.8 $207.1 $ 21.8 $ 420.5
====== ====== === ====== ====== ====== =======
During fiscal 2002, the Electronics segment incurred charges of
$608.2 million for inventory write-downs, of which $143.1 million was scrapped
as of September 30, 2002. The remaining $465.1 million is comprised of a lower
of cost or market write-down of $166.1 million and a write-down related to
inventory to be scrapped of $299.0 million. Of the $299.0 million,
$204.7 million of inventory was
17
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
4. RESTRUCTURING AND OTHER (CREDITS) CHARGES, NET (CONTINUED)
scrapped during the six months ended March 31, 2003. We expect the remaining
$94.3 million to be scrapped over the next three months.
SEVERANCE FACILITIES-RELATED
--------------------- ---------------------
NUMBER OF NUMBER OF
HEALTHCARE SEGMENT EMPLOYEES ACCRUAL FACILITIES ACCRUAL TOTAL
- ------------------ ---------- -------- ---------- -------- --------
Remaining balance at September 30, 2002..................... 274 $13.8 4 $11.9 $ 25.7
Fiscal 2003 reversals....................................... (41) (1.2) -- (4.8) (6.0)
Fiscal 2003 utilization..................................... (225) (10.5) (4) (5.1) (15.6)
Foreign currency translation adjustments.................... -- 0.1 -- 1.0 1.1
---- ----- ---------- ----- ------
Balance at March 31, 2003................................... 8 $ 2.2 -- $ 3.0 $ 5.2
==== ===== ========== ===== ======
SEVERANCE FACILITIES-RELATED
--------------------- ---------------------
NUMBER OF NUMBER OF OTHER
ENGINEERED PRODUCTS AND SERVICES SEGMENT EMPLOYEES ACCRUAL FACILITIES ACCRUAL ACCRUAL TOTAL
- ---------------------------------------- ---------- -------- ---------- -------- -------- --------
Remaining balance at September 30, 2002..................... 505 $ 8.0 21 $ 2.6 $ 0.8 $11.4
Fiscal 2003 reversals....................................... (62) -- -- -- -- --
Fiscal 2003 utilization..................................... (166) (6.9) (13) (1.1) (0.6) (8.6)
Foreign currency translation adjustments.................... -- 0.4 -- 0.8 0.1 1.3
---- ----- --- ----- ----- -----
Balance at March 31, 2003................................... 277 $ 1.5 8 $ 2.3 $ 0.3 $ 4.1
==== ===== === ===== ===== =====
SEVERANCE FACILITIES-RELATED
--------------------- ---------------------
NUMBER OF NUMBER OF
PLASTICS AND ADHESIVES SEGMENT EMPLOYEES ACCRUAL FACILITIES ACCRUAL TOTAL
- ------------------------------ ---------- -------- ---------- -------- --------
Remaining balance at September 30, 2002..................... 274 $ 4.0 4 $ 3.0 $ 7.0
Fiscal 2003 reversals....................................... (33) -- -- (0.3) (0.3)
Fiscal 2003 utilization..................................... (222) (2.3) (1) (0.7) (3.0)
Foreign currency translation adjustments.................... -- -- -- 0.1 0.1
---- ----- ---------- ----- -----
Balance at March 31, 2003................................... 19 $ 1.7 3 $ 2.1 $ 3.8
==== ===== ========== ===== =====
In addition to the above segment liabilities, a total of $7.4 million
remained on the balance sheet at March 31, 2003 related to 2002 corporate
restructuring and other charges. These liabilities primarily relate to severance
and other items associated with the termination of employees at the corporate
headquarters.
At March 31, 2003, there remained a total of $461.1 million in reserves
related to fiscal 2002 restructuring and other charges on the Consolidated
Balance Sheet, of which $309.8 million is included in accrued expenses and other
current liabilities and $151.3 million is included in other long-term
liabilities. The Company currently anticipates that the restructuring activities
related to the fiscal 2002 total charges will be substantially completed within
fiscal 2003, except for certain long-term contractual obligations.
2001 CHARGES AND CREDITS
The disclosures in the Company's fiscal 2002 Annual Report on Form 10-K
discuss net restructuring and other charges of $418.5 million recorded during
fiscal 2001 and the related activity with respect to these charges through
September 30, 2002. The following tables provide a summary by
18
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
4. RESTRUCTURING AND OTHER (CREDITS) CHARGES, NET (CONTINUED)
segment of the remaining balances as of September 30, 2002 related to these
charges and the activity with respect to these charges during the quarter ended
March 31, 2003 ($ in millions):
SEVERANCE FACILITIES-RELATED
--------------------- --------------------- SUPPLIER
NUMBER OF NUMBER OF CONTRACT OTHER
FIRE AND SECURITY SERVICES SEGMENT EMPLOYEES ACCRUAL FACILITIES ACCRUAL FEES ACCRUAL TOTAL
- ---------------------------------- ---------- -------- ---------- -------- -------- -------- --------
Remaining balance at September 30, 2002.......... 211 $ 2.3 23 $ 24.2 $ 0.2 $ 8.4 $ 35.1
Fiscal 2003 reversals............................ -- (1.3) -- (0.1) -- -- (1.4)
Fiscal 2003 utilization.......................... (202) (0.2) (4) (4.0) -- (0.9) (5.1)
Foreign currency translation adjustments......... -- 0.1 -- 0.1 -- (0.1) 0.1
Balance sheet reclassifications.................. -- -- -- -- -- (7.2) (7.2)
------ ------ ------ ------ ------ ------ ------
Balance at March 31, 2003........................ 9 $ 0.9 19 $ 20.2 $ 0.2 $ 0.2 $ 21.5
====== ====== ====== ====== ====== ====== ======
SEVERANCE FACILITIES-RELATED
--------------------- ---------------------
NUMBER OF NUMBER OF OTHER
ELECTRONICS SEGMENT EMPLOYEES ACCRUAL FACILITIES ACCRUAL ACCRUAL TOTAL
- ------------------- ---------- -------- ---------- -------- -------- --------
Remaining balance at September 30, 2002..................... 258 $ 9.6 2 $ 15.5 $ 7.1 $ 32.2
Fiscal 2003 reversals....................................... (153) (1.3) (2) (0.6) (0.8) (2.7)
Fiscal 2003 utilization..................................... (57) (5.1) -- (5.7) (3.2) (14.0)
Foreign currency translation adjustments.................... -- 0.2 -- 0.1 -- 0.3
Balance sheet reclassifications............................. -- -- -- 0.6 -- 0.6
------ ------ ------ ------ ------ ------
Balance at March 31, 2003................................... 48 $ 3.4 -- $ 9.9 $ 3.1 $ 16.4
====== ====== ====== ====== ====== ======
SEVERANCE FACILITIES-RELATED
--------------------- ---------------------
NUMBER OF NUMBER OF
HEALTHCARE SEGMENT EMPLOYEES ACCRUAL FACILITIES ACCRUAL TOTAL
- ------------------ ---------- -------- ---------- -------- --------
Remaining balance at September 30, 2002..................... -- $ 0.5 -- $ 0.2 $ 0.7
Fiscal 2003 reversals....................................... -- -- -- (0.3) (0.3)
Fiscal 2003 utilization..................................... -- (0.4) -- 0.1 (0.3)
------ ------ ------ ------ ------
Balance at March 31, 2003................................... -- $ 0.1 -- $ -- $ 0.1
====== ====== ====== ====== ======
SEVERANCE FACILITIES-RELATED
--------------------- ---------------------
NUMBER OF NUMBER OF OTHER
ENGINEERED PRODUCTS AND SERVICES SEGMENT EMPLOYEES ACCRUAL FACILITIES ACCRUAL ACCRUAL TOTAL
- ---------------------------------------- ---------- -------- ---------- -------- -------- --------
Remaining balance at September 30, 2002..................... 13 $ 0.4 -- $ 0.1 $ 19.1 $ 19.6
Fiscal 2003 reversals....................................... (11) -- -- -- -- --
Fiscal 2003 utilization..................................... (2) -- -- (0.1) (3.3) (3.4)
Balance sheet reclassifications............................. -- -- -- -- (15.0) (15.0)
------ ------ ------ ------ ------ ------
Balance at March 31, 2003................................... -- $ 0.4 -- $ -- $ 0.8 $ 1.2
====== ====== ====== ====== ====== ======
At March 31, 2003, there remained a total of $39.2 million in liabilities
related to fiscal 2001 restructuring and other charges on the Consolidated
Balance Sheet, of which $23.4 million is included in accrued expenses and other
current liabilities and $15.8 million is included in other long-term
liabilities. These remaining liabilities primarily relate to future payments on
certain long-term contractual obligations.
19
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
4. RESTRUCTURING AND OTHER (CREDITS) CHARGES, NET (CONTINUED)
2000 AND PRIOR YEARS' CHARGES AND CREDITS
At March 31, 2003, there remained a total of $6.8 million in liabilities
related to fiscal 2000 and prior years' restructuring and other charges on the
Consolidated Balance Sheet, of which $4.5 million is included in accrued
expenses and other current liabilities and $2.3 million is included in other
long-term liabilities. These liabilities primarily relate to certain long-term
obligations.
5. CHARGES FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews the recoverability of the carrying value of long-lived
assets, including property, plant and equipment, intangible assets as well as
the TGN, for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be fully recoverable. The Company
evaluates the recoverability of long-lived assets relying on a number of factors
including operating results, business plans, economic projections and
anticipated future cash flows. An impairment in the carrying value of an asset
is recognized whenever anticipated future cash flows (undiscounted) from an
asset are estimated to be less than its carrying value. When indicators of
impairment are present, the carrying values of the assets are evaluated in
relation to the operating performance and future undiscounted cash flows of the
underlying business. The net book value of an asset is adjusted to fair value if
its expected future undiscounted cash flows is less than book value. Fair values
are based on assumptions concerning the amount and timing of estimated future
cash flows and assumed discount rates, reflecting varying degrees of perceived
risk.
During the six months ended March 31, 2003, the Company recorded total
charges for the impairment of long-lived assets in continuing operations of
$23.3 million. Of this charge, $12.7 million was recorded within the Fire and
Security Services segment related to the impairment of property, plant and
equipment associated with the termination of a software development project. In
addition, $10.6 million was recorded as a corporate expenses related to the
impairment of property, plant and equipment.
During the six months ended March 31, 2002, the Company recorded total
charges for the impairment of long-lived assets in continuing operations of
$2,351.7 million, of this charge, $2,346.0 million was recorded by the
Electronic segment related to the impairment of the TGN ($2,181.4 million), as
well as the impairment of property, plant and equipment ($164.6 million)
associated with restructuring activities and the related closure of facilities.
The entire TGN placed in service and a portion of construction in progress of
the TGN was written off. The remaining charge of $5.7 million was recorded
within the Engineered Products and Services segment related to the write-off of
property, plant and equipment associated with acquisitions.
20
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
6. OTHER EXPENSE, NET
Other expense, net is as follows ($ in millions):
FOR THE SIX
FOR THE QUARTERS MONTHS
ENDED MARCH 31, ENDED MARCH 31,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Income (loss) from early retirement of debt................. $ 22.7 $ (2.4) $ 24.1 $ (6.7)
Loss on investments......................................... (75.6) (141.0) (75.6) (141.0)
Equity investee guarantee................................... (8.5) -- (8.5) --
Restitution payment......................................... -- -- 20.0 --
------ ------- ------ -------
$(61.4) $(143.4) $(40.0) $(147.7)
====== ======= ====== =======
Tyco has repurchased some debt prior to scheduled maturities. During the
quarter and six months ended March 31, 2003, the Company recorded other income
from the early retirement of debt totaling $22.7 million and $24.1 million,
respectively, as compared to expense of $2.4 million and $6.7 million during the
quarter and six months ended March 31, 2002, respectively.
During the quarter and six months ended March 31, 2003, the Company
recognized a $75.6 million loss on various equity investments when it became
evident that the declines in the fair value of the investments were other than
temporary, primarily due to the continuing depressed economic conditions
specifically within the telecommunications industry. During the quarter and six
months ended March 31, 2002, the Company recognized a $141.0 million loss on
equity investments, primarily related to its investments in FLAG Telecom
Holdings when it became evident that the declines in the fair value of FLAG and
other investments were other than temporary.
During the quarter and six months ended March 31, 2003, the Company
recognized other expense of $8.5 million in connection with a bank guarantee on
behalf of an equity investee (see Note 17).
During the six months ended March 31, 2003, the Company recorded other
income of $20.0 million related to the return of an unauthorized payment to a
former director of the Company in connection with the acquisition of The CIT
Group, Inc.
7. DISCONTINUED OPERATIONS OF TYCO CAPITAL (CIT GROUP INC.)
On July 8, 2002, the Company completed the sale of 100% of the common shares
of CIT Group Inc., a wholly-owned subsidiary, through an initial public
offering. Operating results from the
21
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
7. DISCONTINUED OPERATIONS OF TYCO CAPITAL (CIT GROUP INC.) (CONTINUED)
discontinued operations of Tyco Capital for the quarter and six months ended
March 31, 2002 were as follows ($ in millions):
FOR THE QUARTER FOR THE SIX MONTHS
ENDED MARCH 31, 2002 ENDED MARCH 31, 2002
--------------------- ---------------------
Finance income......................................... $ 1,106.7 $ 2,304.7
Interest expense....................................... 352.0 725.0
--------- ---------
Net finance income..................................... 754.7 1,579.7
Depreciation on operating lease equipment.............. 310.2 648.7
--------- ---------
Net finance margin..................................... 444.5 931.0
Provision for credit losses............................ 195.0 307.9
--------- ---------
Net finance margin, after provision for credit
losses............................................... 249.5 623.1
Other income........................................... 232.0 477.1
--------- ---------
Operating margin....................................... 481.5 1,100.2
Selling, general, administrative and other costs and
expenses............................................. 234.2 472.8
Goodwill impairment.................................... 4,512.7 4,512.7
--------- ---------
Loss before income taxes and minority interest......... (4,265.4) (3,885.3)
Income taxes........................................... (65.8) (188.2)
Minority interest...................................... (2.7) (5.0)
--------- ---------
Loss as previously reported............................ (4,333.9) (4,078.5)
Corporate overhead costs allocated..................... 7.2 15.4
Intercompany interest expense.......................... 3.7 4.8
--------- ---------
Loss from discontinued operations...................... $(4,323.0) $(4,058.3)
========= =========
During the quarter ended March 31, 2002, Tyco experienced disruptions to its
business surrounding its announced break-up plan, a downgrade in its credit
ratings, and a significant decline in its market capitalization. During this
same time period, CIT also experienced credit downgrades and a disruption to its
historical funding base.
Further, market-based information used in connection with the Company's
preliminary consideration of the proposed IPO of CIT indicated that CIT's book
value exceeded its estimated fair value as of March 31, 2002. As a result, the
Company performed a SFAS 142 first step impairment analysis as of March 31, 2002
and concluded that an impairment charge was warranted at that date.
Management's objective in performing the SFAS 142 first step analysis was to
obtain relevant market-based data to calculate the estimated fair value of CIT
as of March 31, 2002 based on its projected earnings and market factors expected
to be used by market participants in ascribing value to CIT in the planned
separation of CIT from Tyco. Management obtained relevant market data from
financial advisors regarding the range of price to earnings multiples and market
condition discounts applicable to CIT as of March 31, 2002 and applied these
market data to CIT's projected annual earnings as of March 31, 2002 to calculate
an estimated fair value and any resulting goodwill impairment. The estimated
fair value was compared to the corresponding carrying value of CIT at March 31,
2002. The Company's Consolidated Financial Statements for the quarter ended
March 31, 2002 reflect an impairment for the decline in the estimated fair value
of CIT at that time, resulting in
22
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
7. DISCONTINUED OPERATIONS OF TYCO CAPITAL (CIT GROUP INC.) (CONTINUED)
an estimated $4,512.7 million impairment charge as of March 31, 2002, which is
included in discontinued operations.
8. CUMULATIVE EFFECT OF ACCOUNTING CHANGE
As discussed in the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 2002, the Company incurs costs associated with maintaining
and operating its ADT authorized dealer program. Dealers reimburse the Company a
non-refundable amount for each of the contracts purchased representing their
reimbursement of such costs. The Company recognizes this non-refundable charge
at the time the contract is accepted for purchase. Prior to fiscal 2002, the
Company recognized in earnings the entire amount of reimbursements from dealers.
Commencing October 1, 2001, to the extent that the amount of dealer
reimbursement exceeded the actual costs incurred by the Company, the excess was
recorded as a deferred credit and amortized on a straight line-basis over ten
years. As described in the following paragraph, during the quarter ended
March 31, 2003, the Company has changed its method of accounting for these
reimbursements from dealers, retroactive to October 1, 2002.
The FASB's Emerging Issues Task Force ("EITF") recently issued EITF 02-16,
"Accounting by a Customer (Including a Reseller) for Certain Consideration
Received from a Vendor," which is applicable to the arrangement between the
Company and its authorized dealers for the electronic security services
business. The issues addressed in EITF 02-16 were brought to the EITF for the
purpose of addressing the wide diversity found in practice, across a variety of
arrangements and industries, in accounting for payments received by purchasers
of goods and services from vendors or suppliers. Pursuant to this consensus, the
consideration received by ADT relating to the non-refundable charge to each
dealer for reimbursement of ADT costs to support the dealer program should be
presumed to be a reduction in the cost to ADT of acquiring customer contracts.
Based on the transition rules of EITF 02-16, we are required to apply this new
consensus to all customer contracts acquired after December 31, 2002. As
permitted under EITF 02-16, during the second quarter of fiscal 2003, the
Company changed its method of accounting for the consideration received by ADT
for the non-refundable charge to dealers for reimbursement of ADT costs to
support the dealer program retroactive to the beginning of the fiscal year. This
was reported as a $206.7 million after-tax ($265.5 million pre-tax) charge for
the cumulative effect of change in accounting principle in the Consolidated
Statement of Operations for the six months ended March 31, 2003, retroactive to
October 1, 2002. The impact on the balance sheet of the cumulative adjustment is
a decrease in net intangible assets of $566.8 million and a decrease in
liabilities for the previously deferred non-refundable charge to dealers of
$301.4 million.
In addition to the charge for the cumulative effect of the change in
accounting described above, the impact of adopting this accounting change was to
decrease the purchase price of customer accounts acquired from the dealers by
$32.0 million and $74.0 million for the quarter and six months ended March 31,
2003, respectively. The impact of the change on results of operations for the
quarter ended March 31, 2003 was an increase to both loss from continuing
operations and net loss of $5.7 million ($7.0 million pre-tax). The change had
no effect on loss from continuing operations per common share or net loss per
common share for the quarter ended March 31, 2003. The impact of the change for
the six months ended March 31, 2003, before the charge for the cumulative effect
of the change discussed above, was a decrease to both income from continuing
operations and net income of $14.7 million ($18.5 million pre-tax) or $0.01 per
common share.
23
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
8. CUMULATIVE EFFECT OF ACCOUNTING CHANGE (CONTINUED)
The following statement of operations for the quarter ended December 31,
2002 reflects the change in accounting retroactive to the beginning of the
fiscal year, October 1, 2002 (in millions, except per share data):
FOR THE QUARTER ENDED
DECEMBER 31, 2002
-----------------------------------
RESTATED TO REFLECT
AS PREVIOUSLY THE CHANGE IN
REPORTED ACCOUNTING
------------- -------------------
NET REVENUES................................................ $8,939.4 $8,939.4
Cost of product sales....................................... 4,791.5 4,791.5
Cost of services............................................ 938.7 938.7
Selling, general and administrative expenses................ 2,088.6 2,100.1
Restructuring and other credits............................. (3.5) (3.5)
-------- --------
OPERATING INCOME............................................ 1,124.1 1,112.6
Interest income............................................. 25.8 25.8
Interest expense............................................ (289.0) (289.0)
Other income................................................ 21.4 21.4
-------- --------
Income from continuing operations before income taxes and
minority interest......................................... 882.3 870.8
Income taxes................................................ (247.1) (244.6)
Minority interest........................................... (0.7) (0.7)
-------- --------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE........ 634.5 625.5
Cumulative effect of accounting change, net of tax of
$58.8..................................................... -- (206.7)
-------- --------
NET INCOME.................................................. $ 634.5 $ 418.8
======== ========
BASIC EARNINGS PER COMMON SHARE:
Income before cumulative effect of accounting change...... $ 0.32 $ 0.31
Cumulative effect of accounting change, net of tax........ -- 0.10
Net income per common share............................... 0.32 0.21
DILUTED EARNINGS PER COMMON SHARE:
Income before cumulative effect of accounting change...... $ 0.32 $ 0.31
Cumulative effect of accounting change, net of tax........ -- 0.10
Net income per common share............................... 0.32 0.21
24
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
8. CUMULATIVE EFFECT OF ACCOUNTING CHANGE (CONTINUED)
The pro forma amounts shown below give effect to the retroactive application
of the change in accounting which would have been made had the new method been
in effect for the periods presented ($ in millions, except per share data).
FOR THE QUARTERS ENDED FOR THE SIX MONTHS ENDED
MARCH 31, 2002 MARCH 31, 2002
---------------------------------- ----------------------------------
PRO FORMA TO PRO FORMA TO
REFLECT THE REFLECT THE
RETROACTIVE RETROACTIVE
APPLICATION OF THE APPLICATION OF THE
AS PREVIOUSLY CHANGE AS PREVIOUSLY CHANGE
REPORTED IN ACCOUNTING REPORTED IN ACCOUNTING
------------- ------------------ ------------- ------------------
LOSS FROM CONTINUING OPERATIONS...... $(2,055.0) $(2,073.3) $(1,120.3) $(1,157.9)
Basic loss per common share from
continuing operations............ (1.03) (1.04) (0.56) (0.58)
Diluted loss per common share from
continuing operations............ (1.03) (1.04) (0.56) (0.58)
NET LOSS............................. $(6,378.0) $(6,396.3) $(5,178.6) $(5,216.2)
Basic loss per common share........ (3.20) (3.21) (2.61) (2.63)
Diluted loss per common share...... (3.20) (3.21) (2.61) (2.63)
9. EARNINGS (LOSS) PER COMMON SHARE
The reconciliations of basic and diluted earnings (loss) per common share
are as follows (in millions, except per share data):
FOR THE QUARTER FOR THE QUARTER
ENDED MARCH 31, 2003 ENDED MARCH 31