-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MwSJNFDwoiB0xMWrrJUN9xgcJqeCexk290H5g17UJCfKHNNp3DXKf/Twd01M2cnD 1AOojFyuptnCkLbMvhiFRw== 0001047469-02-008683.txt : 20021231 0001047469-02-008683.hdr.sgml : 20021231 20021230214015 ACCESSION NUMBER: 0001047469-02-008683 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20021231 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TYCO INTERNATIONAL LTD /BER/ CENTRAL INDEX KEY: 0000833444 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC CONNECTORS [3678] IRS NUMBER: 000000000 STATE OF INCORPORATION: D0 FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-13836 FILM NUMBER: 02872818 BUSINESS ADDRESS: STREET 1: 90 PITTS BAY ROAD STREET 2: THE ZURICH CENTRE SECOND FLOOR CITY: PEMROKE HM 08 BERMU STATE: D0 BUSINESS PHONE: 4412928674 MAIL ADDRESS: STREET 1: C/O TYCO INTERNATIONAL (US) INC STREET 2: ONE TYCO PARK CITY: EXETER STATE: NH ZIP: 03833 FORMER COMPANY: FORMER CONFORMED NAME: ADT LIMITED DATE OF NAME CHANGE: 19930601 10-Q/A 1 a2082338z10-qa.txt 10-Q/A - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 2 ON FORM 10-Q/A TO 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, 2002. OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
001-13836 (COMMISSION FILE NUMBER) ------------------------ 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 / / The number of common shares outstanding as of December 20, 2002 was 1,995,888,624. ------------------------ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INTRODUCTORY NOTE This Amendment No. 2 on Form 10-Q/A is being filed to restate certain amounts (see "Restatement" within Note 1 for discussion of significant changes) and to revise disclosure and presentation of the Company's Consolidated Financial Statements for the quarterly period ended March 31, 2002, in connection with an ongoing review by the accounting staff of the Division of Corporation Finance of the U.S. Securities and Exchange Commission. This filing should be read in conjunction with the Company's Amendment on Form 10-K/A for the fiscal year ended September 30, 2001. TYCO INTERNATIONAL LTD. INDEX TO FORM 10-Q/A
PAGE -------- PART I--FINANCIAL INFORMATION: Item 1--Financial Statements Consolidated Balance Sheets (Unaudited) as of March 31, 2002, as restated, and September 30, 2001............... 1 Consolidated Statements of Operations (Unaudited) for the quarters and six months ended March 31, 2002, as restated, and 2001...................................... 2 Consolidated Statements of Cash Flows (Unaudited) for the six months ended March 31, 2002, as restated, and 2001.................................................... 4 Notes to Consolidated Financial Statements (Unaudited).... 5 Item 2--Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 40 Item 3--Quantitative and Qualitative Disclosures About Market Risk............................................... 71 Item 4--Controls and Procedures............................. 71 Signatures.................................................. 72
PART I--FINANCIAL INFORMATION ITEM 1--FINANCIAL STATEMENTS TYCO INTERNATIONAL LTD. CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN MILLIONS) TYCO INTERNATIONAL LTD. AND CONSOLIDATED SUBSIDIARIES TYCO INDUSTRIAL TYCO CAPITAL --------------------------- --------------------------- --------------------------- MARCH 31, SEPTEMBER 30, MARCH 31, SEPTEMBER 30, MARCH 31, SEPTEMBER 30, 2002 2001 2002 2001 2002 2001 ----------- ------------- ----------- ------------- ----------- ------------- (RESTATED) (RESTATED) ASSETS Cash and cash equivalents........... $ 6,293.7 $ 2,587.2 $ 4,034.4 $ 1,779.2 $ 2,259.3 $ 808.0 Receivables, less allowance for doubtful accounts ($551.0 at March 31, 2002 and $550.4 at September 30, 2001 consolidated)............ 6,729.2 7,372.5 6,021.7 6,453.2 847.1 1,146.7 Inventories (Note 11)............... 5,272.3 5,101.3 5,272.3 5,101.3 -- -- Finance receivables, net............ 25,742.8 31,386.5 -- -- 25,742.8 31,386.5 Construction in progress--Tyco Global Network.................... 705.7 1,643.8 705.7 1,643.8 -- -- Tyco Global Network placed in service, net...................... -- 698.6 -- 698.6 -- -- Property, plant and equipment (including equipment leased to others), net (Note 11)............ 17,052.1 16,473.9 10,352.8 9,970.3 6,699.3 6,503.6 Investment in Tyco Capital.......... -- -- 6,803.2 10,598.0 -- -- Goodwill, net....................... 30,187.8 29,811.5 27,804.4 23,264.0 2,383.4 6,547.5 Intangible assets, net.............. 5,970.7 5,498.9 5,950.9 5,476.9 19.8 22.0 Other assets (Note 11).............. 10,247.8 8,190.4 3,788.6 3,616.7 6,579.2 4,573.7 Deferred income taxes (Note 11)..... 2,858.8 2,522.7 2,700.0 2,420.6 158.8 102.1 ---------- ---------- --------- --------- --------- --------- TOTAL ASSETS.................... $111,060.9 $111,287.3 $73,434.0 $71,022.6 $44,689.7 $51,090.1 ========== ========== ========= ========= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Loans payable and current maturities of long-term debt................. $ 20,454.2 $ 18,873.6 $ 6,670.6 $ 2,023.0 $13,783.6 $17,050.6 Accounts payable.................... 3,719.0 4,145.9 3,367.5 3,692.6 470.8 460.9 Accrued expenses and other current liabilities (Note 11)............. 9,427.8 10,599.5 6,419.4 7,019.0 3,028.7 3,600.3 Long-term debt...................... 40,657.4 38,243.1 20,706.1 19,596.0 19,951.3 18,647.1 Other long-term liabilities (Note 11)......................... 4,123.1 3,477.4 3,811.4 3,081.9 311.7 395.5 Income taxes........................ 2,004.8 1,922.7 1,923.0 1,845.0 81.8 77.7 Deferred income taxes (Note 11)..... 1,636.4 1,726.3 1,636.4 1,726.3 -- -- ---------- ---------- --------- --------- --------- --------- TOTAL LIABILITIES............... 82,022.7 78,988.5 44,534.4 38,983.8 37,627.9 40,232.1 ---------- ---------- --------- --------- --------- --------- Mandatorily redeemable preferred securities........................ 258.6 260.0 -- -- 258.6 260.0 Minority interest................... 56.3 301.4 56.3 301.4 -- -- Shareholders' Equity: Preference shares (Note 5)........ -- -- -- -- -- -- Common shares..................... 399.6 387.1 400.1 387.1 -- -- Capital in excess: Share premium................... 8,142.2 7,962.8 8,142.2 7,962.8 -- -- Contributed surplus............. 14,870.6 12,561.3 14,990.1 12,561.3 10,662.4 10,422.4 Accumulated earnings (deficit).... 7,077.1 12,305.7 7,077.1 12,305.7 (3,800.8) 252.4 Accumulated other comprehensive loss............................ (1,766.2) (1,479.5) (1,766.2) (1,479.5) (58.4) (76.8) ---------- ---------- --------- --------- --------- --------- TOTAL SHAREHOLDERS' EQUITY...... 28,723.3 31,737.4 28,843.3 31,737.4 6,803.2 10,598.0 ---------- ---------- --------- --------- --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......... $111,060.9 $111,287.3 $73,434.0 $71,022.6 $44,689.7 $51,090.1 ========== ========== ========= ========= ========= =========
See Notes to Consolidated Financial Statements (Unaudited) and, in particular, see Note 1 for definitions of Tyco Industrial and Tyco Capital. 1 TYCO INTERNATIONAL LTD. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN MILLIONS, EXCEPT PER SHARE DATA) TYCO INTERNATIONAL LTD. AND CONSOLIDATED SUBSIDIARIES TYCO INDUSTRIAL TYCO CAPITAL ------------------------- -------------------- ---------------- FOR THE QUARTERS ENDED FOR THE QUARTERS FOR THE QUARTER ENDED MARCH 31, MARCH 31, ENDED MARCH 31, ------------------------- -------------------- ---------------- 2002 2001 2002 2001 2002 ----------- ----------- --------- -------- ---------------- (RESTATED) (RESTATED) REVENUES AND OTHER INCOME (LOSS): Net revenue..................................... $ 8,611.4 $8,809.8 $8,611.4 $8,809.8 $ -- Finance income.................................. 1,106.7 -- -- -- 1,106.7 Other income.................................... 227.0 -- -- -- 232.0 Loss of Tyco Capital............................ -- -- (4,333.9) -- -- Non-operating loss on investments............... (141.0) (3.9) (141.0) (3.9) -- --------- -------- --------- -------- ---------- Total revenues and other income............... 9,804.1 8,805.9 4,136.5 8,805.9 1,338.7 COSTS AND EXPENSES: Cost of revenue................................. 5,630.0 5,514.5 5,630.0 5,514.5 -- Selling, general, administrative and other costs and expenses.................................. 2,419.3 1,611.1 1,879.9 1,611.1 544.4 Interest income................................. (33.0) (24.5) (33.0) (24.5) -- Interest expense and other financial charges.... 606.9 251.8 254.9 251.8 352.0 Provision for credit losses..................... 195.0 -- -- -- 195.0 Restructuring and other unusual charges (credits), net................................ 403.8 (52.8) 403.8 (52.8) -- Charges for the impairment of long-lived assets........................................ 2,351.7 17.7 2,351.7 17.7 -- Goodwill impairment............................. 4,512.7 -- -- -- 4,512.7 --------- -------- --------- -------- ---------- Total costs and expenses...................... 16,086.4 7,317.8 10,487.3 7,317.8 5,604.1 (LOSS) INCOME BEFORE INCOME TAXES, MINORITY INTEREST AND EXTRAORDINARY ITEMS.............. (6,282.3) 1,488.1 (6,350.8) 1,488.1 (4,265.4) Income taxes.................................... (90.7) (366.0) (24.9) (366.0) (65.8) Minority interest............................... (4.3) (11.7) (1.6) (11.7) (2.7) --------- -------- --------- -------- ---------- (Loss) income before extraordinary items........ (6,377.3) 1,110.4 (6,377.3) 1,110.4 (4,333.9) Extraordinary items, net of tax................. (0.7) (10.3) (0.7) (10.3) -- --------- -------- --------- -------- ---------- NET (LOSS) INCOME............................... $(6,378.0) $1,100.1 $(6,378.0) $1,100.1 $ (4,333.9) ========= ======== ========= ======== ========== BASIC (LOSS) EARNINGS PER COMMON SHARE: (Loss) income before extraordinary items...... $ (3.20) $ 0.63 Extraordinary items, net of tax............... -- (0.01) Net (loss) income............................. (3.20) 0.63 DILUTED (LOSS) EARNINGS PER COMMON SHARE: (Loss) income before extraordinary items...... $ (3.20) $ 0.63 Extraordinary items, net of tax............... -- (0.01) Net (loss) income............................. (3.20) 0.62 WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: Basic......................................... 1,991.5 1,748.9 Diluted....................................... 1,991.5 1,773.9 PRO FORMA RESULTS, EXCLUDING GOODWILL AMORTIZATION: Income before extraordinary items............. $1,227.2 Basic earnings per common share............... 0.70 Diluted earnings per common share............. 0.69 Net income.................................... $1,216.9 Basic net income per common share............. 0.70 Diluted net income per common share........... 0.69
See Notes to Consolidated Financial Statements (Unaudited) and, in particular, see Note 1 for definitions of Tyco Industrial and Tyco Capital. 2 TYCO INTERNATIONAL LTD. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN MILLIONS, EXCEPT PER SHARE DATA) TYCO INTERNATIONAL LTD. AND CONSOLIDATED SUBSIDIARIES TYCO INDUSTRIAL TYCO CAPITAL ----------------------- --------------------- ----------------- FOR THE SIX MONTHS FOR THE SIX MONTHS FOR THE SIX MONTHS ENDED ENDED MARCH 31, ENDED MARCH 31, MARCH 31, ----------------------- --------------------- ----------------- 2002 2001 2002 2001 2002 ---------- ---------- --------- --------- ----------------- (RESTATED) (RESTATED) REVENUES AND OTHER INCOME (LOSS): Net revenue............................................. $17,190.1 $16,838.8 $17,190.1 $16,838.8 $ -- Finance income.......................................... 2,304.7 -- -- -- 2,304.7 Other income............................................ 467.5 -- -- -- 477.1 Loss of Tyco Capital.................................... -- -- (4,078.5) -- -- Non-operating net (loss) on investments and gain on sale of businesses......................................... (141.0) 406.5 (141.0) 406.5 -- Non-operating net loss on sale of common shares of a subsidiary............................................ (39.6) -- (39.6) -- -- --------- --------- --------- --------- ---------- Total revenues and other income....................... 19,781.7 17,245.3 12,931.0 17,245.3 2,781.8 COSTS AND EXPENSES: Cost of revenue......................................... 10,864.4 10,488.9 10,864.4 10,488.9 -- Selling, general, administrative and other costs and expenses.............................................. 4,948.9 3,159.9 3,837.0 3,159.9 1,121.5 Interest income......................................... (53.7) (82.5) (53.7) (82.5) -- Interest expense and other financial charges............ 1,188.7 477.9 463.7 477.9 725.0 Provision for credit losses............................. 307.9 -- -- -- 307.9 Restructuring and other unusual charges (credits), net................................................... 423.7 (34.7) 423.7 (34.7) -- Write-off of purchased in-process research and development........................................... -- 184.3 -- 184.3 -- Charges for the impairment of long-lived assets......... 2,351.7 25.1 2,351.7 25.1 -- Goodwill impairment..................................... 4,512.7 -- -- -- 4,512.7 --------- --------- --------- --------- ---------- Total costs and expenses.............................. 24,544.3 14,218.9 17,886.8 14,218.9 6,667.1 (LOSS) INCOME BEFORE INCOME TAXES, MINORITY INTEREST, EXTRAORDINARY ITEMS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES.................................... (4,762.6) 3,026.4 (4,955.8) 3,026.4 (3,885.3) Income taxes............................................ (407.4) (891.0) (219.2) (891.0) (188.2) Minority interest....................................... (5.1) (24.2) (0.1) (24.2) (5.0) --------- --------- --------- --------- ---------- (Loss) income before extraordinary items and cumulative effect of accounting changes.......................... (5,175.1) 2,111.2 (5,175.1) 2,111.2 (4,078.5) Extraordinary items, net of tax......................... (3.5) (10.3) (3.5) (10.3) -- Cumulative effect of accounting changes, net of tax..... -- (683.4) -- (683.4) -- --------- --------- --------- --------- ---------- NET (LOSS) INCOME....................................... $(5,178.6) $ 1,417.5 $(5,178.6) $ 1,417.5 $ (4,078.5) ========= ========= ========= ========= ========== BASIC (LOSS) EARNINGS PER COMMON SHARE: (Loss) income before extraordinary items and cumulative effect of accounting changes............. $ (2.61) $ 1.21 Extraordinary items, net of tax....................... -- (0.01) Cumulative effect of accounting changes, net of tax... -- (0.39) Net (loss) income..................................... (2.61) 0.81 DILUTED (LOSS) EARNINGS PER COMMON SHARE: (Loss) income before extraordinary items and cumulative effect of accounting changes............. $ (2.61) $ 1.19 Extraordinary items, net of tax....................... -- (0.01) Cumulative effect of accounting changes, net of tax... -- (0.39) Net (loss) income..................................... (2.61) 0.80 WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: Basic................................................. 1,983.1 1,742.0 Diluted............................................... 1,983.1 1,768.0 PRO FORMA RESULTS, EXCLUDING GOODWILL AMORTIZATION: Income before extraordinary items and cumulative effect of accounting changes........................ $ 2,342.4 Basic earnings per common share....................... 1.34 Diluted earnings per common share..................... 1.33 Net income............................................ $ 1,648.7 Basic net income per common share..................... 0.95 Diluted net income per common share................... 0.93
See Notes to Consolidated Financial Statements (Unaudited) and, in particular, see Note 1 for definitions of Tyco Industrial and Tyco Capital. 3 TYCO INTERNATIONAL LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN MILLIONS) TYCO INTERNATIONAL LTD. AND CONSOLIDATED SUBSIDIARIES TYCO INDUSTRIAL TYCO CAPITAL ----------------------- --------------------- ---------------- FOR THE SIX MONTHS FOR THE SIX MONTHS FOR THE SIX ENDED MARCH 31, ENDED MARCH 31, MONTHS ENDED MARCH 31, ----------------------- --------------------- ---------------- 2002 2001 2002 2001 2002 ---------- ---------- --------- --------- ---------------- (RESTATED) (RESTATED) CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income........................................... $(5,178.7) $ 1,417.5 $(5,178.6) $ 1,417.5 $(4,078.5) Adjustments to reconcile net (loss) income to net cash provided by operating activities: Loss retained by Tyco Capital............................. -- -- 4,078.5 -- -- Non-cash restructuring and other unusual charges, net..... 322.0 33.1 322.0 33.1 -- Write-off of purchased in-process research and development............................................. -- 184.3 -- 184.3 -- Charges for the impairment of long-lived assets........... 2,351.7 25.1 2,351.7 25.1 -- Goodwill impairment....................................... 4,512.7 -- -- -- 4,512.7 Cumulative effect of accounting changes, net of tax....... -- 683.4 -- 683.4 -- Minority interest in net income of consolidated subsidiaries............................................ 5.1 24.2 0.1 24.2 5.0 Net loss on investments and (gain) on sale of businesses.............................................. 141.0 (406.5) 141.0 (406.5) -- Net loss on sale of common shares of a subsidiary......... 39.6 -- 39.6 -- -- Charges related to prior years (see Note 1)............... 222.0 -- 222.0 -- -- Gain on sale of financing assets.......................... (118.2) -- -- -- (118.2) Depreciation.............................................. 1,394.3 619.1 731.5 619.1 662.8 Goodwill and intangible assets amortization............... 255.9 404.4 255.9 404.4 -- Provision for credit losses............................... 307.9 -- -- -- 307.9 Deferred income taxes..................................... (192.5) 80.0 (135.9) 80.0 (56.7) Debt and refinancing cost amortization.................... 78.3 32.2 78.3 32.2 -- Other non-cash items...................................... 26.3 90.1 26.3 90.1 -- Changes in assets and liabilities, net of the effects of acquisitions and divestitures: Accounts receivable................................... 845.4 (67.4) 915.2 (67.4) -- Payments on sale of accounts receivable............... (28.0) -- (28.0) -- -- Inventories........................................... (193.9) (632.3) (193.9) (632.3) -- Other assets.......................................... (332.6) 65.9 (306.0) 65.9 (26.6) Accounts payable, accrued expenses and other liabilities......................................... (918.7) (368.6) (707.6) (368.6) (218.7) Income taxes.......................................... 19.6 333.9 19.0 333.9 0.6 Deferred revenue...................................... (43.7) 44.4 (43.7) 44.4 -- Other................................................. 75.6 (29.5) 79.1 (29.5) (3.5) --------- --------- --------- --------- --------- Net cash provided by operating activities........... 3,591.1 2,533.3 2,666.5 2,533.3 986.8 --------- --------- --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Net decrease in Tyco Capital financing and leasing assets (Note 12)................................................. 2,265.6 -- -- -- 2,203.4 Purchase of property, plant and equipment, net.............. (1,002.7) (910.6) (988.3) (910.6) (14.4) Construction in progress-Tyco Global Network................ (817.4) (707.8) (817.4) (707.8) -- Acquisition of businesses, net of cash acquired............. (2,342.7) (5,271.6) (2,342.7) (5,271.6) -- Cash paid for purchase accounting and holdback/earn-out liabilities............................................... (376.4) (317.4) (376.4) (317.4) -- Disposal of businesses, net of cash sold.................... -- 898.7 -- 898.7 -- Net purchases of investments................................ (11.9) (128.3) (11.9) (128.3) -- Other....................................................... (178.7) (132.1) (178.7) (132.1) -- --------- --------- --------- --------- --------- Net cash (used in) provided by investing activities....................................... (2,464.2) (6,569.1) (4,715.4) (6,569.1) 2,189.0 --------- --------- --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from (repayments of) debt...................... 3,218.9 5,838.9 5,181.7 5,838.9 (1,962.8) Proceeds from exercise of options........................... 181.3 349.5 181.3 349.5 -- Dividends paid.............................................. (49.7) (43.6) (49.7) (43.6) -- Repurchase of Tyco common shares............................ (765.8) (1,096.9) (765.8) (1,096.9) -- Repurchase of minority interest shares of subsidiary........ -- (39.0) -- (39.0) -- Net capital contribution to Tyco Capital.................... -- -- (257.5) -- 257.5 Short-term advances from Tyco Capital....................... -- -- 19.2 -- (19.2) Other....................................................... (5.1) (10.2) (5.1) (10.2) -- --------- --------- --------- --------- --------- Net cash provided by (used in) financing activities....................................... 2,579.6 4,998.7 4,304.1 4,998.7 (1,724.5) --------- --------- --------- --------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS................... 3,706.5 962.9 2,255.2 962.9 1,451.3 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 2,587.2 1,264.8 1,779.2 1,264.8 808.0 --------- --------- --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 6,293.7 $ 2,227.7 $ 4,034.4 $ 2,227.7 $ 2,259.3 ========= ========= ========= ========= =========
See Notes to Consolidated Financial Statements (Unaudited) and, in particular, see Note 1 for definitions of Tyco Industrial and Tyco Capital. 4 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 ("Tyco"), and its subsidiaries (Tyco and all its subsidiaries, hereinafter "we" or the "Company"). The Company's unaudited Consolidated Financial Statements are presented along with the unaudited Consolidating Financial Statements of Tyco Industrial and Tyco Capital in order to provide a more comprehensive analysis of our business. The Company includes this presentation because the businesses within the Tyco Industrial operations (diversified manufacturing) and the Tyco Capital operations (financial services) are significantly different from one another with different key performance indicators for their respective industries. The consolidating separate financial statements of Tyco Industrial and Tyco Capital are unaudited and have not been reviewed in accordance with SAS 71. The discussion and financial data presented herein are furnished separately for each of the following: - Tyco Industrial--This represents Tyco and all its subsidiaries other than Tyco Capital, and includes the results of operations of Tyco Capital from June 2, 2001 on the equity method of accounting. - Tyco Capital--This represents CIT Group Inc. ("CIT") and all its subsidiaries and reflects their results of operations from June 2, 2001. In addition, Tyco Capital includes certain international subsidiaries that were sold by CIT Group Inc. to a non-U.S. subsidiary of Tyco on September 30, 2001 and were repurchased by CIT Group Inc. in February 2002, and certain holding companies. - Consolidated--This represents Tyco Industrial and Tyco Capital on a consolidated basis. The consolidated amounts as of September 30, 2001 are derived from our audited Consolidated Financial Statements included in our Form 10-K/A for the year ended September 30, 2001. Information presented in the Notes to Consolidated Financial Statements (Unaudited) refers to Tyco and all its consolidated subsidiaries unless otherwise indicated. 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 in the United States. These statements should be read in conjunction with the Company's Annual Report on Form 10-K/A for the fiscal year ended September 30, 2001. The Consolidated Financial Statements have not been examined 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, 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/A to "$" are to U.S. dollars. RESTATEMENT--As described in Note 1 to the Company's Consolidated Financial Statements in its Form 10-K/A for the year ended September 30, 2001, the Company is reimbursed by dealers for certain costs incurred by the Company under ADT's authorized dealer program. The Company has restated its Consolidated Financial Statements and the related disclosures for the quarter and six months ended March 31, 2002 to record as a deferred credit the amount by which dealer reimbursements exceed the actual costs incurred by the Company during these periods (resulting in decreases to net income of 5 TYCO INTERNATIONAL LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. BASIS OF PRESENTATION (CONTINUED) $26.9 million and $55.2 million, respectively). The deferred credit is being amortized on a straight-line basis over ten years. Financial statements for periods prior to fiscal 2002 have not been restated. However, we have recorded the effect of the charge related to prior years as well as certain other charges, as discussed below in "Charges Relating to Prior Years Recorded in Fiscal 2002" (resulting in an increase in other income of $199.7 million in the quarter ended March 31, 2002 and a decrease to net income of $160.1 million for the six months ended March 31, 2002). In addition, the Company has restated its Consolidated Financial Statements and the related disclosures to reflect the elimination of certain inter-company sales and the associated margin between Tyco Infrastructure and Tyco Electronics (resulting in decreases to revenues of $50.1 million and $101.0 million and increases to net income of $27.4 million and $3.8 million for the quarter and six months ended March 31, 2002, respectively), and to adjust the amount of capitalized interest (resulting in a decrease to interest expense and a decrease to TGN impairment of $16.1 million for the quarter ended March 31, 2002). The Company has also restated its financial statement disclosures to reflect a reduction of operating income of $42.0 million in the Electronics segment, offset by a reduction of corporate operating expenses for the same amount (resulting in no change to net income) for the six months ended March 31, 2002. The Company also restated its loss on the write-off of investments due to the reduction in book value of an investment by $39.6 million in the quarter ended March 31, 2002. The restatement results in an aggregate decrease to revenues and other income of $10.5 million and $101.0 million and a decrease in net loss of $40.1 million in the quarter and an increase in net loss of $211.5 million, respectively, for the six months ended March 31, 2002. 6 TYCO INTERNATIONAL LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. BASIS OF PRESENTATION (CONTINUED) The impact of the restatement on the Consolidated Statements of Operations and Consolidated Balance Sheet is as follows ($ in millions, except per share data):
TYCO INTERNATIONAL LTD. AND CONSOLIDATED SUBSIDIARIES ------------------------------------------------------- QUARTER ENDED SIX MONTHS ENDED MARCH 31, 2002 MARCH 31, 2002 -------------------------- -------------------------- AMOUNT AMOUNT PREVIOUSLY PREVIOUSLY REPORTED(1) AS RESTATED REPORTED(1) AS RESTATED ------------ ----------- ------------ ----------- (UNAUDITED) (UNAUDITED) CONSOLIDATED STATEMENTS OF OPERATIONS: Total revenues and other income.............. $ 9,814.6 $ 9,804.1 $19,882.7 $19,781.7 Total costs and expenses..................... 16,130.3 16,086.4 24,353.3 24,544.3 (Loss) income before income taxes............ (6,315.7) (6,282.3) (4,470.6) (4,762.6) Net loss..................................... (6,418.1) (6,378.0) (4,967.1) (5,178.6) Diluted loss per common share................ (3.22) (3.20) (2.50) (2.61) CONSOLIDATED BALANCE SHEET: Goodwill, net................................ $29,979.5 $30,187.8 Total assets................................. 110,848.8 111,060.9 Total liabilities............................ 81,834.6 82,022.7 Accumulated earnings......................... 7,288.7 7,077.1 Total shareholders' equity................... 28,699.3 28,723.3
- ------------------------------ (1) The Company previously restated its Consolidated Financial Statements and the related disclosures for the quarterly period ended March 31, 2002 to reflect an impairment of goodwill in the Tyco Capital segment in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," resulting in a $4.5 billion estimated impairment charge. The effect of this restatement was to increase the originally reported net loss for the quarter ended March 31, 2002 from $1.9 billion to $6.4 billion and for the six months ended March 31, 2002 from $0.5 billion to $5.0 billion. Net loss per share increased from $0.96 to $3.22 and from $0.23 to $2.50 for the quarter and six months ended March 31, 2002, respectively. This restatement had no impact on previously reported revenues or net cash provided by operating activities for any periods. See Note 14, "Goodwill and Other Intangible Assets," for further information regarding the goodwill impairment. CHARGES RELATING TO PRIOR YEARS RECORDED IN FISCAL 2002--During the fourth quarter of fiscal 2002, the Company identified various adjustments relating to prior year financial statements. Management concluded the effects of these adjustments, as well as any unrecorded proposed audit adjustments, were not material individually or in the aggregate to the current year or any prior year. Accordingly, prior year financial statements have not been 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 have been 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 ADT's authorized 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, 7 TYCO INTERNATIONAL LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. BASIS OF PRESENTATION (CONTINUED) which would have been amortized as described in Note 1 to the Company's Form 10-K/A for the year ended September 30, 2001 is $185.9 million. - 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. - As described in Note 1 to the Company's Form 10-K for the year ended September 30, 2002 which is being filed concurrently with this Form 10-Q/A, 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 $36.1 million. The fiscal years to which the charges relate are as follows ($ in millions):
PRIOR TO TYPE OF ADJUSTMENT FISCAL 1999 FISCAL 2000 FISCAL 2001 TOTAL - ------------------ ----------- ----------- ----------- -------- 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 ----- ----- ------ ------ Totals............................. $56.3 $79.9 $125.4(1) $261.6 ===== ===== ====== ======
- ------------------------ (1) Of the $125.4 million pre-tax charges relating to fiscal 2001, $22.9 million and $44.1 million relates to the quarter and six months ended March 31, 2001. 2. ACQUISITIONS AND DIVESTITURES During the first six months of fiscal 2002, the Company purchased businesses for an aggregate cost of $4,402.0 million, consisting of $2,342.7 million in cash, net of $155.3 million of cash acquired, and the issuance of approximately 47.6 million common shares valued at $1,911.4 million, plus the fair value of stock options and pre-existing put option rights assumed of $147.9 million ($22.2 million of which put option rights have been paid in cash). The Company purchased all of the voting equity interests in each of the businesses acquired. Tyco also issued approximately 17.7 million common shares valued at $819.9 million in connection with its amalgamation with TyCom. In addition, the Company recorded $235.6 million for the fair value of shares issued and options assumed in connection with the fiscal 2001 acquisition of Mallinckrodt. Fair value of debt of acquired companies aggregated $775.7 million. During the six months, the Company paid $318.4 million of cash for purchase accounting liabilities related to current and prior years' acquisitions. In addition, the Company paid cash of approximately $58.0 million relating to holdback and earn-out liabilities primarily related to certain prior period acquisitions. Holdback liabilities represent a portion of the purchase price withheld from the seller pending finalization of the acquired company's net assets, or purchase price paid over time. "Earn-out" liabilities are payments to the sellers that are the result of the acquired company having achieved certain milestones subsequent to its acquisition by Tyco. The Company also issued 44,139 common shares valued at $2.3 million relating to earn-out liabilities during the six months. The value of these common shares is based upon fair value. These earn-out payments are tied to certain performance 8 TYCO INTERNATIONAL LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. ACQUISITIONS AND DIVESTITURES (CONTINUED) measures, such as revenue, gross margin or earnings growth over a specified period of time, and are accrued when the milestones are met and contingent consideration becomes determinable and distributable. At March 31, 2002, the Company had a contingent liability of $100 million related to the acquisition of Com-Net by the Electronics segment. The Company is required to pay $20 million on May 14, 2002 only if the State of Florida does not cancel the contract for the construction of a communications system prior to that date. The remaining $80 million is payable to the former shareholders of Com-Net only after the construction and installation of the communications system is finished and the State of Florida has approved the system based on the guidelines set forth in the contract. The $100 million was not accrued at March 31, 2002, as the outcome of these contingencies cannot be reasonably determined. The cash portions of acquisition costs were funded utilizing net proceeds from the issuance of long-term debt. The results of operations of the acquired companies have been included in Tyco's consolidated results from their respective acquisition dates. In connection with fiscal 2002 acquisitions, the Company recorded purchase accounting liabilities of $182.2 million for transaction costs and the costs of integrating the acquired companies within Tyco's business segments. At the time each 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 assets acquired less liabilities assumed and purchase accounting liabilities established is recorded as goodwill. As a result of acquisitions completed in the first six months of fiscal 2002, and adjustments to the fair values of assets and liabilities and purchase accounting liabilities recorded for acquisitions completed prior to fiscal 2002, Tyco recorded approximately $4,873.1 million in goodwill and $759.6 million in other intangible assets during the six months ended March 31, 2002. These amounts include $883.5 million and a negative $24.0 million for adjustments to goodwill and other intangible assets, respectively. The adjustments to goodwill relate primarily to Fiscal 2001 acquisitions of The CIT Group Inc. ("CIT"--acquired in June 2001), Lucent Technologies' Power Systems ("LPS"--acquired in December 2000), Edison Select ("Edison"--acquired in August 2001), Deutsche Armaturen AG ("DAAG"--acquired in September 2001) and Scott Technologies ("Scott"--acquired in May 2001). Upon the acquisition of CIT, management planned the strategic exiting of certain of its existing portfolios, including franchise finance, manufactured housing, inventory and automotive finance, and recreational vehicle as well as the reorganization of European operations. These activities were finalized during the six months ended March 31, 2002. Adjustments to goodwill for LPS relate to the closure of a manufacturing plant and the adjustment of certain opening balance sheet items to fair value. Finalization of the exit plan was completed during the quarter ended December 31, 2002. Adjustments to goodwill for Edison primarily relate to the adjustment of certain opening balance sheet items to fair value. Adjustments to goodwill for DAAG primarily relate to facility closures and related severance, and the adjustment of certain opening balance sheet items to fair value. Adjustments to goodwill for Scott primarily relate to the accrual of an environmental reserve resulting from the finalization of the environmental study during the six months ended March 31, 2002. Downward adjustments to intangible assets of $24.0 million relate to fair value adjustments primarily associated with the acquisition of SecurityLink and Edison. These adjustments were partially offset by technology acquired in other acquisitions. Acquisitions were an important part of Tyco's growth during the first six months of fiscal 2002. Tyco makes acquisitions that complement existing products and services, enhance the Company's 9 TYCO INTERNATIONAL LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. ACQUISITIONS AND DIVESTITURES (CONTINUED) product lines and/or expand its customer base. The Company begins formulating exit plans as part of the acquisition approval process. Tyco determines what it is willing to pay for an acquisition partially based on its expectation that it can 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 utilizes 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 targets companies that are perceived to be experiencing depressed financial performance. All of these factors contribute to acquisition prices in excess of the fair value of identifiable net assets acquired and the resultant goodwill. However, the Company expects to complete fewer acquisitions prospectively due to its focus on enhancing internal growth within its existing businesses. The following table shows the fair values of assets and liabilities and purchase accounting liabilities recorded for all acquisitions completed in the first six months of fiscal 2002 and the TyCom amalgamation, adjusted to reflect changes in fair values of assets and liabilities and purchase accounting liabilities and holdback/earn-out liabilities recorded for acquisitions completed prior to fiscal 2002 ($ in millions): Receivables................................................. $ 173.4 Inventories................................................. 317.8 Property, plant and equipment, net.......................... 409.7 Goodwill.................................................... 5,108.7 Intangible assets........................................... 759.6 Other assets................................................ 576.2 -------- 7,345.4 -------- Accounts payable............................................ 221.6 Accrued expenses and other current liabilities.............. 915.4 Holdback/earn-out liability................................. 86.7 Fair value of debt assumed.................................. 775.7 Other long-term liabilities................................. 137.4 Minority interest........................................... (248.9) -------- 1,887.9 -------- $5,457.5 ======== Cash consideration paid (net of $155.3 million of cash acquired)................................................. $2,342.7 Share consideration paid and fair value of stock options and pre-existing put option rights assumed.................... 3,114.8 -------- $5,457.5 ========
- ------------------------------ (1) The value of common shares issued is based upon the average of the volume-weighted average trading prices on the New York Stock Exchange for three days before and three days after the measurement date. The stock options assumed relate to the acquisition of Sensormatic in the first quarter of fiscal 2002 and the acquisition of Mallinckrodt in fiscal 2001. The value of the stock options was determined using the Black-Scholes valuation model based on the following assumptions: 39.0% volatility for Sensormatic and 36.0% volatility for Mallinckrodt; two-year expected life for in-the-money options and three-year expected life for out-of-the-money options, except if the remaining term of the options was less, in which case one-half of the remaining term was used; annual dividends of $0.05; and risk-free interest rates based on U.S. stripped Treasuries. 10 TYCO INTERNATIONAL LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. ACQUISITIONS AND DIVESTITURES (CONTINUED) Fiscal 2002 acquisitions include, among others, SBC/Smith Alarm Systems ("Smith Alarm") and Century Tube Corporation ("Century") in October 2001; Sensormatic Electronics Corporation ("Sensormatic"), Transpower Technologies, DSC Group and Water & Power Technology ("Water & Power") in November 2001; Linq Industrial Fabrics, Inc. ("Linq") and the purchase of the remaining minority public interest of TyCom in December 2001; Paragon Trade Brands, Inc. ("Paragon") and Communications Instruments, Inc. ("CII") in January 2002; and Clean Air Systems in February 2002. Smith Alarm, a security monitoring company for both residential and commercial customers, was purchased for $78.2 million in cash and has been integrated within the Fire and Security Services segment. Century, a manufacturer of steel tubing, was purchased for $125.5 million in cash and has been integrated within the Electronics segment. Sensormatic, a leading supplier of electronic security solutions to the retail, commercial and industrial market places, was purchased for approximately 47.6 million Tyco common shares valued at $1,911.4 million, plus the fair value of stock options and pre-existing put option rights assumed of $147.9 million, and has been integrated within the Fire and Security Services segment. The primary reason for the Sensormatic acquisition was that Sensormatic presented Tyco with an opportunity to expand Tyco's security product range to include electronic article surveillance systems of which Sensormatic was the recognized market leader in this sector. Additionally, the acquisition allowed us to expand our presence in the access control and video systems businesses. Sensormatic was a global company with approximately $1.1 billion in revenue with a talented workforce including an established research and development group. The acquisition presented us with many synergy opportunities in each of our operating regions around the world. Transpower Technologies, a designer and manufacturer of inductors and isolation transformers, was purchased for $62.6 million in cash and has been integrated within the Electronics segment. The DSC Group, a manufacturer of security alarms, fire alarms and panels, was purchased for $90.6 million in cash and has been integrated within the Fire and Security Services segment. Water & Power, a provider of water treatment products and services, was purchased for $39.1 million in cash and has been integrated within the Fire and Security Services segment. Linq, a manufacturer of flexible intermediate bulk containers, was purchased for $34.2 million in cash and has been integrated within the Healthcare and Specialty Products segment. TyCom is a leading provider of undersea fiber optic networks and services. In December 2001, the Company completed its amalgamation with TyCom, and TyCom shares not already owned by Tyco were converted into approximately 17.7 million Tyco common shares valued at $819.9 million. Paragon, a global supplier of infant disposable diapers and other absorbent personal care products, was purchased for $706.8 million in cash and has been integrated within the Healthcare and Specialty Products segment. The primary reason for the Paragon acquisition was to acquire a leader in the global supply of disposable absorbent personal care products. Additionally, the acquisition allowed us to expand our presence in the disposable private label diapers and training pants sectors. The acquisition presented us with many synergy opportunities such as consolidation of manufacturing facilities and administrative functions and elimination of duplicate sales and marketing overhead. CII, a provider of advanced control electronic solutions in high performance relays, contractors, general-purpose relays, transformers, and EMI/RFI filters, was purchased for $214.0 million in cash and has been integrated within the Electronics segment. Clean Air Systems, a manufacturer of pollution control systems in industrial plants and products including industrial valves, controls and pneumatics, was purchased for $31.8 million in cash and has been integrated within the Fire and Security Services segment. 11 TYCO INTERNATIONAL LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. ACQUISITIONS AND DIVESTITURES (CONTINUED) In addition to the acquisitions listed above, Tyco paid cash of $678.2 million to acquire approximately 690,000 customer contracts for electronic security services through its dealer program and acquired approximately 100 other smaller companies and business lines for an aggregate gross cost of $437.0 million in cash. The acquisitions were comprised primarily of businesses which: manufacture fire and security products and valves and related products; manufacture a broad range of electronic products; manufacture a wide range of products used in the disposable medical products industry as well as other plastic products; and provide electronic security services. All acquisitions were integrated within the Electronics, Fire and Security Services, or Healthcare and Specialty Products segments. The following table summarizes the purchase accounting liabilities recorded in connection with the fiscal 2002 purchase acquisitions ($ in millions):
DISTRIBUTOR & SUPPLIER SEVERANCE FACILITIES CANCELLATION FEES OTHER -------------------- --------------------- ----------------- -------- NUMBER OF NUMBER OF EMPLOYEES RESERVE FACILITIES RESERVE RESERVE RESERVE TOTAL --------- -------- ---------- -------- ----------------- -------- -------- Fiscal 2002 acquisition liabilities..................... 3,995 $ 85.8 127 $ 60.3 $12.9 $ 23.2 $182.2 Fiscal 2002 utilization........... (1,699) (33.6) (38) (10.5) (0.2) (12.0) (56.3) ------ ------ --- ------ ----- ------ ------ Balance at March 31, 2002......... 2,296 $ 52.2 89 $ 49.8 $12.7 $ 11.2 $125.9 ====== ====== === ====== ===== ====== ======
Purchase accounting liabilities recorded during fiscal 2002 consist of $85.8 million for severance and related costs; $60.3 million for costs associated with the shut down and consolidation of certain facilities, including unfavorable leases, lease terminations and other related fees, and other costs; $12.9 million for distributor and supplier contractual cancellation fees; and $23.2 million for transaction and other costs. In connection with fiscal 2002 purchase acquisitions, Tyco began to formulate plans at the date of each acquisition for workforce reductions and the closure and consolidation of an aggregate of 127 facilities. The costs of employee terminations relate to the elimination of 2,423 positions in the United States, 551 positions in Europe, 525 positions in Canada, 334 positions in Latin America, and 162 positions in the Asia-Pacific region, consisting primarily of administrative, sales and marketing, manufacturing and distribution, and technical personnel. Facilities designated for closure include 73 facilities in the United States, 33 facilities in Europe, 17 facilities in the Asia-Pacific region, 3 facilities in Canada, and 1 facility in Latin America, consisting primarily of manufacturing plants, sales offices and administrative offices. At March 31, 2002, 1,699 employees had been terminated and 38 facilities had been closed or consolidated related to fiscal 2002 acquisitions. In connection with the purchase acquisitions consummated during fiscal 2002, liabilities for approximately $52.2 million for severance and related costs, $49.8 million for the shutdown and consolidation of acquired facilities, $12.7 million for distributor and supplier contractual cancellation fees and $11.2 million in transaction and other direct costs remained on the Consolidated Balance Sheet at March 31, 2002. The Company expects that the termination of employees and consolidation of facilities related to all such acquisitions will be substantially complete within one year of plan finalization, except for certain long-term contractual obligations. 12 TYCO INTERNATIONAL LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. ACQUISITIONS AND DIVESTITURES (CONTINUED) The following table summarizes the purchase accounting liabilities recorded in connection with the fiscal 2001 purchase acquisitions excluding CIT ($ in millions):
DISTRIBUTOR & SUPPLIER SEVERANCE FACILITIES CANCELLATION FEES OTHER -------------------- --------------------- ----------------- -------- NUMBER OF NUMBER OF EMPLOYEES RESERVE FACILITIES RESERVE RESERVE RESERVE TOTAL --------- -------- ---------- -------- ----------------- -------- -------- Balance at September 30, 2001.... 2,069 $162.9 177 $261.3 $ 85.6 $ 51.5 $ 561.3 Additions to fiscal 2001 acquisition liabilities........ 6,928 152.4 370 62.0 24.5 37.6 276.5 Fiscal 2002 utilization.......... (4,581) (93.7) (278) (35.9) (26.6) (37.4) (193.6) Reclassifications................ -- 3.7 -- (19.8) -- (6.3) (22.4) Reduction of estimates of fiscal 2001 acquisition liabilities... (279) (6.9) (92) (7.2) (10.0) (4.4) (28.5) ------ ------ ---- ------ ------ ------ ------- Balance at March 31, 2002........ 4,137 $218.4 177 $260.4 $ 73.5 $ 41.0 $ 593.3 ====== ====== ==== ====== ====== ====== =======
The following table summarizes the purchase accounting liabilities recorded in connection with the CIT acquisition ($ in millions):
DISTRIBUTOR & SUPPLIER SEVERANCE FACILITIES CANCELLATION FEES OTHER -------------------- --------------------- ----------------- -------- NUMBER OF NUMBER OF EMPLOYEES RESERVE FACILITIES RESERVE RESERVE RESERVE TOTAL --------- -------- ---------- -------- ----------------- -------- -------- Balance at September 30, 2001..... -- $ 27.0 -- $ -- $ -- $ 3.0 $ 30.0 Additions to fiscal 2001 acquisition liabilities......... 1,143 58.5 19 20.7 -- -- 79.2 Fiscal 2002 utilization........... (674) (44.0) -- (0.1) -- -- (44.1) ------ ------ --- ------ ----- ------ ------ Balance at March 31, 2002......... 469 $ 41.5 19 $ 20.6 $ -- $ 3.0 $ 65.1 ====== ====== === ====== ===== ====== ======
During the six months of fiscal 2002, we recorded additions to purchase accounting liabilities as we continue to formulate the integration plans of fiscal 2001 acquisitions, such as LPS, Tyco Capital and SecurityLink, among others. These changes in estimates resulted in additional purchase accounting liabilities of $355.7 million and a corresponding increase to goodwill and deferred tax assets. These additions reflect the elimination of an additional 5,257 positions in the United States, 1,831 positions in Europe, 500 positions in the Asia-Pacific region, 184 positions in Latin America, and 299 positions in Canada, consisting of administrative, manufacturing, technical, and sales and marketing personnel. Additional facilities designated for closure include 153 facilities in the United States, 181 facilities in Europe, 38 facilities in the Asia-Pacific region, 4 facilities in Latin America, and 13 facilities in Canada, consisting primarily of sales and administrative offices and manufacturing plants. During the six months ended March 31, 2002, the Company reduced its estimate of purchase accounting liabilities relating to fiscal 2001 acquisitions by $28.5 million primarily because actual costs were less than originally estimated since the Company severed fewer employees and closed fewer 13 TYCO INTERNATIONAL LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. ACQUISITIONS AND DIVESTITURES (CONTINUED) facilities than originally anticipated due to revisions to integration plans. Goodwill and related deferred tax assets were reduced by an equivalent amount. As a result of the reduction in headcount by 279 and facilities by 92, we reduced our original estimates. Also during the six months ended March 31, 2002, we reclassified certain fair value adjustments related to the write-down of assets for fiscal 2001 acquisitions out of purchase accounting accruals and into the appropriate asset or liability account. In addition, we reclassified certain amounts in the preceding table related to fiscal 2001 acquisitions to separately classify distributor and supplier cancellation fees and to correct the categorization of other accruals. These reclassifications had no effect on the amount of goodwill that was recorded. The following table summarizes the purchase accounting liabilities recorded in connection with the fiscal 2000 and prior years purchase acquisitions ($ in millions):
DISTRIBUTOR & SUPPLIER SEVERANCE FACILITIES CANCELLATION FEES OTHER -------------------- --------------------- ----------------- -------- NUMBER OF NUMBER OF EMPLOYEES RESERVE FACILITIES RESERVE RESERVE RESERVE TOTAL --------- -------- ---------- -------- ----------------- -------- -------- Balance at September 30, 2001..... 1,886 $ 48.5 69 $ 48.8 $ 7.6 $ 35.9 $140.8 Fiscal 2002 utilization........... (667) (11.8) (20) (5.3) -- (7.5) (24.6) Reclassifications................. -- 2.2 -- (1.0) -- (2.6) (1.4) Reduction of estimates of all prior years acquisition liabilities..................... (591) (9.3) (17) (9.5) -- -- (18.8) ------ ------ --- ------ ----- ------ ------ Balance at March 31, 2002......... 628 $ 29.6 32 $ 33.0 $ 7.6 $ 25.8 $ 96.0 ====== ====== === ====== ===== ====== ======
During the six months ended March 31, 2002, the Company reduced its estimate of purchase accounting liabilities relating to fiscal 2000 acquisitions by $18.8 million primarily because actual costs were less than originally estimated since the Company severed fewer employees and closed fewer facilities than originally anticipated due to revisions to integration plans. Goodwill and related deferred tax assets were reduced by an equivalent amount. As a result of the reduction in headcount by 591 and facilities by 17, we reduced our original estimates. Also during the six months ended March 31, 2002, we reclassified certain fair value adjustments related to the write-down of assets for fiscal 2000 acquisitions out of purchase accounting liabilities and into the appropriate asset or liability account. In addition, we reclassified certain amounts in the preceding table related to fiscal 2000 acquisitions to separately classify distributor and supplier cancellation fees and to correct the categorization of other accruals. These reclassifications had no effect on the amount of goodwill that was recorded. Tyco has not yet finalized its business integration plans for recent acquisitions and, accordingly, purchase accounting liabilities are subject to revision in future quarters. There are approximately 75 acquisitions, with estimated purchase accounting liabilities additions aggregating approximately $180 million, for which business integration plans have not been finalized. Individually, other than Sensormatic, Paragon, Microser S.L., DAAG, CII, Protector Technologies and SecurityLink, none of these acquisitions are expected to have increases in purchase accounting liabilities in excess of 14 TYCO INTERNATIONAL LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. ACQUISITIONS AND DIVESTITURES (CONTINUED) $5 million as of March 31, 2002. With regards to Sensormatic, Paragon, Microser S.L., DAAG, CII, Protector Technologies and SecurityLink, approximately $55 million, $30 million, $15 million, $13 million, $6 million, $6 million, and $5 million, respectively, of additional purchase accounting liabilities will be recorded for additional severance, facility closures and other costs related to the finalization of the integration plans. As part of the finalization of business plans, the Company has engaged third-party valuation firms to independently appraise the fair value of certain assets acquired. Tyco is still in the process of obtaining independent valuations in order to finalize estimates for the fair values of assets acquired and liabilities assumed. At March 31, 2002, holdback/earn-out liabilities of $270.7 million remained on the Consolidated Balance Sheet, of which $136.6 million are included in accrued expenses and other current liabilities and $134.1 million are included in other long-term liabilities. In addition, a total of $880.3 million of purchase accounting reserves remained on the Consolidated Balance Sheet, of which $600.3 million are included in accrued expenses and other current liabilities and $280.0 million are included in other long-term liabilities. 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. The following unaudited pro forma data summarize the results of operations for the periods indicated as if 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. The pro forma data presented for the six months ended March 31, 2002 has been restated to reflect the restatement items described in Note 1. The pro forma data for the six months ended March 31, 2001 15 TYCO INTERNATIONAL LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. ACQUISITIONS AND DIVESTITURES (CONTINUED) has been restated to reflect the effect of businesses acquired during fiscal 2001. This restatement has no effect on the historical consolidated financial statements of the Company.
FOR THE SIX MONTHS ENDED MARCH 31, --------------------------------------------------- 2002(1) 2001(2) ------------------------ ------------------------ AMOUNT AMOUNT PREVIOUSLY PREVIOUSLY REPORTED AS RESTATED REPORTED AS RESTATED (IN MILLIONS, EXCEPT PER SHARE DATA) ---------- ----------- ---------- ----------- Total revenues and other income........... $20,389.3 $20,280.7 $18,725.8 $19,799.2 (Loss) income before extraordinary items and cumulative effect of accounting changes................................. (4,989.1) (5,197.8) 2,143.1 2,206.0 Net (loss) income......................... (4,992.6) (5,201.3) 1,449.4 1,512.3 Basic (loss) earnings per common share: (Loss) income before extraordinary items and cumulative effect of accounting changes............................... (2.46) (2.60) 1.19 1.22 Net (loss) income....................... (2.46) (2.60) 0.80 0.83 Diluted (loss) earnings per common share: (Loss) income before extraordinary items and cumulative effect of accounting changes............................... (2.46) (2.60) 1.17 1.20 Net (loss) income....................... (2.46) (2.60) 0.79 0.82
- ------------------------------ (1) Includes a net loss on investments of $141.0 million; impairment charges and restructuring and other unusual charges of $7,640.2 million (including a $4,512.7 million estimated goodwill impairment charge); charges related to prior years of $261.6 million (see Note 1); and extraordinary items of $3.5 million. (2) Includes a net gain on sale of businesses and investments of $406.5 million; impairment, restructuring and other unusual charges totaling $246.1 million; extraordinary items of $10.3 million; and cumulative effect of accounting changes of $683.4 million. Excludes charge of $184.3 million for the write-off of purchased in process research and development associated with the acquisition of Mallinckrodt discussed in Note 7. On December 20, 2001, a subsidiary of Tyco entered into an agreement to acquire McGrath RentCorp, a leading rental provider of modular offices and classrooms and electronic test equipment, for cash and Tyco common shares. The transaction is valued at approximately $370 million. It is subject to customary regulatory review. During fiscal 2001, Tyco entered into an agreement to acquire C.R. Bard, Inc., a healthcare products manufacturer. On February 6, 2002, Tyco and C.R. Bard, Inc. mutually terminated the merger agreement. Each party bore its own costs, and no break up fee was paid. In October 2000, the Company sold its ADT Automotive business to Manheim Auctions, Inc., a wholly-owned subsidiary of Cox Enterprises, Inc., for approximately $1.0 billion in cash. The Company recorded a net gain on the sale of businesses and investments of $406.5 million, consisting of $410.4 million net gain principally related to the sale of ADT Automotive, partially offset by a loss of $3.9 related to the write-down of an investment. The gain is net of direct and incremental costs of the transaction, including $60.7 million of special, non-recurring bonuses paid to key employees. 16 TYCO INTERNATIONAL LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. DEBT
MARCH 31, SEPTEMBER 30, 2002 2001 ---------- -------------- Short-term debt is as follows ($ in millions): TYCO INDUSTRIAL Commercial paper--U.S....................................... $ 13.4 $ -- Fixed-rate senior notes..................................... 1,021.9 1,347.2 Variable-rate unsecured bank credit facilities.............. 5,355.0 -- Note payable to Tyco Capital................................ -- 200.0 Other....................................................... 280.3 475.8 --------- --------- 6,670.6 2,023.0 TYCO CAPITAL(1) Commercial paper U.S....................................................... 636.4 8,515.1 Non-U.S................................................... 73.5 354.1 Variable-rate unsecured bank credit facilities.............. 4,033.4 -- Variable-rate senior notes.................................. 5,837.0 5,725.0 Fixed-rate senior notes..................................... 3,203.3 2,356.4 Fixed-rate subordinated notes............................... -- 100.0 --------- --------- 13,783.6 17,050.6 Eliminations................................................ -- (200.0) --------- --------- CONSOLIDATED LOANS PAYABLE AND CURRENT MATURITIES OF LONG-TERM DEBT............................................ $20,454.2 $18,873.6 ========= ========= Long-term debt is as follows ($ in millions): TYCO INDUSTRIAL Commercial paper U.S....................................................... $ -- $ 3,909.5 Non-U.S................................................... -- 80.7 Variable-rate senior notes.................................. 498.8 498.4 Fixed-rate senior notes..................................... 11,982.0 8,902.4 Variable-rate unsecured bank credit facilities.............. 2,000.0 -- Zero coupon convertible senior debentures................... 5,805.0 5,771.8 Zero coupon convertible subordinated debentures............. 29.9 30.8 Other....................................................... 390.4 402.4 --------- --------- 20,706.1 19,596.0 TYCO CAPITAL(1) Variable-rate unsecured bank credit facilities.............. 4,485.0 -- Variable-rate senior notes.................................. 2,863.5 3,889.6 Fixed-rate senior notes..................................... 12,602.8 14,757.5 --------- --------- 19,951.3 18,647.1 --------- --------- CONSOLIDATED LONG-TERM DEBT................................. $40,657.4 $38,243.1 ========= =========
- ------------------------------ (1) Tyco Capital's senior notes and commercial paper have priority position over its other debt obligations. Tyco Capital's debt is not an obligation of Tyco Industrial, and Tyco International Ltd. has not guaranteed this debt. 17 TYCO INTERNATIONAL LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. DEBT (CONTINUED) TYCO INDUSTRIAL In October 2001, Tyco International Group S.A. ("TIG"), a wholly-owned subsidiary of Tyco, sold $1,500.0 million 6.375% notes due 2011 under its $6.0 billion shelf registration statement in a public offering. The notes are fully and unconditionally guaranteed by Tyco. The net proceeds of approximately $1,487.8 million were used to repay borrowings under TIG's commercial paper program. In November 2001, TIG sold E500.0 million 4.375% notes due 2005, E685.0 million 5.5% notes due 2009, L200.0 million 6.5% notes due 2012 and L285.0 million 6.5% notes due 2032, utilizing capacity available under TIG's European Medium Term Note Programme established in September 2001. The notes are fully and unconditionally guaranteed by Tyco. The net proceeds of all four tranches were the equivalent of $1,726.6 million and were used to repay borrowings under TIG's commercial paper program. In January 2002, TIG entered into a $1.5 billion bridge loan, which is fully and unconditionally guaranteed by Tyco, with a variable LIBO-based rate, which was 3.70% as of March 31, 2002. TIG repaid $645.0 million in April 2002. The remaining balance is due in June 2002. In February 2002, TIG borrowed the available $2.0 billion of capacity under its 5-year unsecured revolving credit facility, which had been maintained as liquidity support for its commercial paper program. The facility, which expires in February 2006, is fully and unconditionally guaranteed by Tyco and has a variable LIBO-based rate, which was 3.53% as of March 31, 2002. Also, in February 2002, TIG borrowed $3.855 billion under its 364-day unsecured revolving credit facility and exercised its option to convert this facility into a term loan expiring on February 6, 2003. The loan, which is fully and unconditionally guaranteed by Tyco, has a variable LIBO-based rate, which was 3.52% as of March 31, 2002. Proceeds from the bridge loan and credit facilities were used to pay off maturing commercial paper at the scheduled maturities and to provide additional available capital for Tyco Industrial. Tyco has repurchased some high interest rate debt of acquired companies prior to their scheduled maturities. In the quarter and six months ended March 31, 2002, the Company recorded extraordinary items totaling $0.7 million and $3.5 million, net of tax, as compared to $10.3 million, net of tax, for the quarter and six months ended March 31, 2001, respectively, which represents the excess of payments made to debtholders over the recorded book value of the debt repurchased. TYCO CAPITAL In February 2002, Tyco Capital drew down its $8.5 billion unsecured bank credit facilities and is using the proceeds to satisfy its outstanding commercial paper obligations at the scheduled maturities. The credit facilities are made up of four variable-rate instruments. Two of the instruments mature in March 2003, with one totaling $3.72 billion at LIBOR plus 28 basis points and the other is $0.5 billion (Canadian dollar) at Prime plus 5 basis points as of March 31, 2002. The remaining two variable rate credit instruments consist of $3.72 billion at LIBOR plus 30 basis points that matures in March 2005 and $0.765 billion at LIBOR plus 45 basis points that matures in April 2005 as of March 31, 2002. 18 TYCO INTERNATIONAL LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. DEBT (CONTINUED) In April 2002, Tyco Capital completed a $2.5 billion public unsecured bond offering as part of the previously announced strategy to strengthen its liquidity position. This debt offering was comprised of $1.25 billion aggregate principal amount of 7.375% senior notes due April 2, 2007 and $1.25 billion aggregate principal amount of 7.750% senior notes due April 2, 2012. The proceeds will be used to repay a portion of Tyco Capital's existing term debt at maturity. 4. (LOSS) EARNINGS PER COMMON SHARE The reconciliations of basic and diluted (loss) earnings per common share are as follows (in millions, except per share data):
FOR THE QUARTER ENDED FOR THE QUARTER ENDED MARCH 31, 2002 (RESTATED) MARCH 31, 2001 -------------------------------- ------------------------------- (LOSS) PER SHARE PER SHARE INCOME SHARES AMOUNT INCOME SHARES AMOUNT --------- -------- --------- -------- -------- --------- BASIC (LOSS) EARNINGS PER COMMON SHARE: (Loss) income before extraordinary items................................... $(6,377.3) 1,991.5 $(3.20) $1,110.4 1,748.9 $0.63 Stock options............................. -- -- -- 21.7 Exchange of convertible debt due 2010..... -- -- 0.3 3.3 --------- ------- -------- ------- DILUTED (LOSS) EARNINGS PER COMMON SHARE: (Loss) income before extraordinary items, giving effect to dilutive adjustments... $(6,377.3) 1,991.5 $(3.20) $1,110.7 1,773.9 $0.63 ========= ======= ======== =======
FOR THE SIX MONTHS FOR THE SIX MONTHS ENDED MARCH 31, 2002 (RESTATED) ENDED MARCH 31, 2001 -------------------------------- ------------------------------- (LOSS) PER SHARE PER SHARE INCOME SHARES AMOUNT INCOME SHARES AMOUNT --------- -------- --------- -------- -------- --------- BASIC (LOSS) EARNINGS PER COMMON SHARE: (Loss) income before extraordinary items and cumulative effect of accounting changes................... $(5,175.1) 1,983.1 $(2.61) $2,111.2 1,742.0 $1.21 Stock options.......................... -- -- -- 22.6 Exchange of convertible debt due 2010................................. -- -- 0.4 3.4 --------- ------- -------- ------- DILUTED (LOSS) EARNINGS PER COMMON SHARE: (Loss) income before extraordinary items and cumulative effect of accounting changes, giving effect to dilutive adjustments................. $(5,175.1) 1,983.1 $(2.61) $2,111.6 1,768.0 $1.19 ========= ======= ======== =======
The computation of diluted loss per common share in the quarter and six months ended March 31, 2002 excludes the effect of the assumed exercise of stock options to purchase approximately 13.4 million and 17.7 million shares, respectively, and the assumed exchange of convertible debt due 2010 of 2.9 million and 3.0 million, respectively, because the effect would be anti-dilutive. The computation of diluted earnings per common share in the quarter and six months ended March 31, 2001 excludes the effect of the assumed exercise of options to purchase approximately 11.1 million and 19 TYCO INTERNATIONAL LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 4. (LOSS) EARNINGS PER COMMON SHARE (CONTINUED) 9.4 million stock options, respectively, because the effect would be anti-dilutive. Diluted (loss) earnings per common share also excludes 48.0 million and 26.4 million shares related to the Company's zero coupon convertible debentures due 2020 and 2021, respectively, because conversion conditions have not been met. 5. SHAREHOLDERS' EQUITY Tyco has authorized 2,500,000,000 common shares, par value of $.20 per share, 1,997,761,717 and 1,935,464,840 of which were outstanding, net of 24,890,311 and 17,026,256 shares owned by subsidiaries, at March 31, 2002 and September 30, 2001, respectively. Included within Tyco's outstanding common shares at March 31, 2002 and September 30, 2001 are 3,409,768 and 4,243,108 common shares, respectively, representing the assumed exchange of 4,936,684 and 6,143,199 exchangeable shares (at 0.6907 of a Tyco common for each exchangeable share) of CIT Exchangeco Inc., a wholly-owned subsidiary of CIT Group Inc. Tyco also has authorized 125,000,000 preference shares, par value of $1 per share, at March 31, 2002 and September 30, 2001, of which one such share has been issued and designated a special voting preference share. This preference share provides a mechanism by which the holders of outstanding exchangeable shares exercise their voting, dividend and liquidation rights, which are equivalent to those of Tyco common shareholders, except that each exchangeable share is equivalent to 0.6907 of a Tyco common share. Contributed surplus includes $160.8 million and $85.3 million in deferred compensation at March 31, 2002 and September 30, 2001, respectively. Tyco paid a quarterly cash dividend of $0.0125 per common share in each of the first two quarters of fiscal 2002 and fiscal 2001. 6. RESTRUCTURING AND OTHER UNUSUAL CHARGES The following table summarizes activity with respect to Tyco Industrial's restructuring and other unusual charges (excluding impairments of long-lived assets and goodwill which are discussed in Notes 8 and 14) for the first six months of fiscal 2002 ($ in millions):
SEVERANCE FACILITIES INVENTORY OTHER -------------------- --------------------- --------- -------- NUMBER OF NUMBER OF EMPLOYEES RESERVE FACILITIES RESERVE RESERVE RESERVE TOTAL --------- -------- ---------- -------- --------- -------- -------- Balance at September 30, 2001........ 6,045 $ 144.8 161 $ 92.0 $ -- $103.4 $ 340.2 Fiscal 2002 charges.................. 7,495 149.0 27 261.3 257.1 13.4 680.8 Fiscal 2002 utilization.............. (7,683) (140.0) (85) (77.7) (25.8) (32.0) (275.5) ------ ------- --- ------- ------- ------ ------- Balance at March 31, 2002............ 5,857 $ 153.8 103 $ 275.6 $ 231.3 $ 84.8 $ 745.5 ====== ======= === ======= ======= ====== =======
20 TYCO INTERNATIONAL LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 6. RESTRUCTURING AND OTHER UNUSUAL CHARGES (CONTINUED) During the six months ended March 31, 2002, Tyco Industrial recorded restructuring and other unusual charges of $680.8 million related primarily to the closure of manufacturing plants, administrative offices, warehouses and sales offices and the write-down of inventory within the Electronics segment. The Electronics segment has experienced continued softness in demand in certain end markets, especially in the communications marketplace. In addition, Tyco Telecommunications (formerly TyCom) has experienced a weakness in demand for both new cable construction and capacity sales on the Tyco Global Network ("TGN"). As a result, management implemented plans within this segment during the quarter ended March 31, 2002 to reduce the number of manufacturing plants, warehouses and sales/ administrative offices, along with the related employees, to a size appropriate for the current business environment. Included in the facility related costs of $261.3 is $173.7 million of various contract cancellations, $69.9 million of facility closure costs and $17.7 million related to a lease commitment. The contract cancellations of $173.7 million primarily relate to raw material purchase commitments at our manufacturing facilities and the exiting of a building construction contract to build a telexchange center for the TGN. Facility closure costs of $69.9 million primarily represent lease commitments related to 24 facilities to be exited, mainly manufacturing plants and sales and administrative offices. The equipment charges of $17.7 million relate to machinery and equipment lease commitments on machinery used in the communications businesses that we expect to dispose of as a result of diminished capacity requirements. Included within the charges of $680.8 million are inventory write-downs of $243.3 million and unusual charges of $13.8 million, both of which have been included in cost of sales. The $243.3 million is principally made up of a $237.5 million inventory write-downs, primarily raw materials, within the Electronics segment. The inventory write-downs are due to excess inventory levels and discontinued product lines which resulted from the continued slow down in the communications market and the canceling and reconfiguring of segments of the TGN. Of the $243.3 million, $12.0 million of inventory has been scrapped as of March 31, 2002. The remaining $231.3 million of written-off inventory will be scrapped in the next three to twelve months. There were no significant sales of previously written-down or written-off inventory during the period ended March 31, 2002. The $13.8 million relates to the sale of inventory, which had been written-up under purchase accounting by the Fire and Security Services segment. During the six months ended March 31, 2001, Tyco Industrial recorded a net restructuring and other unusual credit of $2.3 million. The net credit is comprised of an unusual credit of $166.8 million related to the settlement of litigation in which Tyco was provided with an ongoing OEM arrangement valued at $166.8 million, offset by restructuring and other unusual charges of $164.5 million, of which a charge of $32.4 million related to inventory was included in cost of revenue, primarily related to the closure of several manufacturing plants, sales offices, warehouses and administrative offices and charges for an environmental remediation project. In addition, the Company incurred an unusual charge of $39.0 million related to the sale of inventory, which had been written-up under purchase accounting, and has been included in cost of revenue. At March 31, 2002, there remained a total of $745.5 million in reserves for restructuring and other unusual charges on Tyco Industrial's Balance Sheet, of which $613.3 million is included in accrued 21 TYCO INTERNATIONAL LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 6. RESTRUCTURING AND OTHER UNUSUAL CHARGES (CONTINUED) expenses and other current liabilities and $132.2 million is included in other long-term liabilities. The Company currently anticipates that the restructuring activities to which all of the above charges relate will be substantially completed within one year, except for certain long-term contractual obligations. During the six months ended March 31, 2002, Tyco Capital recorded an unusual charge of $95.0 million relating to the economic reforms instituted by the Argentine government that converted Tyco Capital's dollar-denominated receivables into peso-denominated receivables. The $95.0 million charge has been included in the provision for credit losses. 7. WRITE-OFF OF PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT In connection with Tyco's acquisition of Mallinckrodt Inc. during the quarter ended December 31, 2000, the Company wrote-off the fair value of purchased in-process research and development ("IPR&D") of various projects for the development of new products and technologies in the amount of $184.3 million. Management determined the valuation of the IPR&D using, among other factors, appraisals. The value was based primarily on the discounted cash flow method. This amount was written off during the quarter ended December 31, 2000 because the IPR&D was considered not technologically feasible as of the acquisition date. 8. IMPAIRMENTS The Company periodically evaluates the net realizable value of long-lived assets, including property, plant and equipment, as well as the Tyco Global Network ("TGN"), 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 when the fair value of the asset is less that its carrying value. During the six months ended March 31, 2002, the Electronics segment recorded a charge of $2,351.7 million primarily related to the impairment of the TGN ($2,181.4 million), and property, plant and equipment ($170.3 million) related to the closure of facilities as discussed in Note 6. The fiberoptic capacity available in the market continues to significantly exceed overall market demand, creating sharply declining prices and reduced cash flows. Further, based on available industry outlook information published in February 2002, prices are expected to decline at a greater rate than previously projected. The Company has assessed the carrying value of the TGN using an analysis that employs significant estimates as to current and future market pricing, demand and network completion costs and is highly sensitive to changes in those estimates. Based upon management's estimates as of March 31, 2002, the Company has concluded that the value of its fiberoptic network, which is carried at cost, was impaired and consequently recorded an impairment charge. The amount of the impairment was based upon the difference between the carrying value of each asset group and the estimated fair value of those assets groups as of March 31, 2002. The estimated fair value of each asset group was determined using an income (discounted cash flow) approach. The cash flows forecasts were prepared using the fifteen year estimated weighted average useful life of each of the TGN asset groups. Probability factors were applied to various scenarios weighing the likelihood of each possible outcome. Then, each cash flow forecast was discounted using a weighted average cost of capital of 15% similar to that used for SFAS 142 purposes, which was prepared by an independent appraiser as part of services rendered in evaluating the Company's enterprise value. Based upon these analyses, the sum of the expected future 22 TYCO INTERNATIONAL LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 8. IMPAIRMENTS (CONTINUED) discounted cash flows was subtracted from the carrying values of the asset groups resulting in an impairment loss for the TGN. The entire TGN placed in service was written-off and a portion of construction in progress of the TGN was written-off. Accordingly, $705.7 million remained on the Consolidated Balance Sheet at March 31, 2002, as compared to $2,342.4 million at September 30, 2001. Also during the quarter ended March 31, 2002, the Company recognized a $141.0 million loss, primarily related to its investment in FLAG Telecom Holdings Ltd. ("FLAG"), when it became evident that the declines in fair value of FLAG and other investments were other than temporary. During the six months ended March 31, 2001, certain segments recorded charges totaling $25.1 million related primarily to the impairment of property, plant and equipment associated with the closure of a manufacturing plant discussed in Note 6. See Note 14, "Goodwill and Other Intangible Assets," for further information regarding the $4,512.7 million estimated impairment of goodwill during the quarter ended March 31, 2002. 9. COMPREHENSIVE (LOSS) INCOME Total comprehensive (loss) income and its components are as follows ($ in millions):
FOR THE QUARTERS FOR THE SIX MONTHS ENDED MARCH 31, ENDED MARCH 31, --------------------- --------------------- 2002 2001 2002 2001 ---------- -------- ---------- -------- (RESTATED) (RESTATED) Net (loss) income................. $(6,378.0) $1,100.1 $(5,178.6) $1,417.5 Unrealized gain (loss) on securities, net of tax........ 88.1 (517.3)(1) 142.5 (988.3)(1) Changes in fair values of derivatives qualifying as cash flow hedges................... 20.9 (1.3) 32.4 (0.9) Foreign currency translation adjustment.................... (195.9) (353.3) (461.6) (296.4) --------- -------- --------- -------- Total comprehensive (loss) income.......................... $(6,464.9) $ 228.2 $(5,465.3) $ 131.9 ========= ======== ========= ========
- ------------------------------ (1) Primarily related to Tyco's investment in 360networks Inc. 10. CONSOLIDATED SEGMENT DATA During the first quarter of fiscal 2002, the Company changed its internal reporting structure (due to the repurchase of the remaining shares of TyCom not already owned by Tyco) such that the operations of the former Telecommunications segment are now reported as part of the Electronics segment. The Company has conformed its segment reporting accordingly and has reclassified comparative prior period information to reflect this change. Selected information for the Company's three industrial segments and the Tyco Capital segment is presented in the following table. The segment profit measure for Tyco Industrial's businesses is operating profit (earnings before interest, corporate expenses, 23 TYCO INTERNATIONAL LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 10. CONSOLIDATED SEGMENT DATA (CONTINUED) goodwill amortization and income taxes). The segment profit measure for Tyco Capital is earnings before income taxes.
FOR THE QUARTERS FOR THE SIX MONTHS ENDED MARCH 31, ENDED MARCH 31, -------------------------- --------------------------- 2002(19) 2001 2002(19) 2001 ---------- -------- ---------- --------- ($ IN MILLIONS) (RESTATED) (RESTATED) REVENUES AND OTHER INCOME: Tyco Industrial Electronics........................... $ 2,834.7 $4,159.9 $ 5,966.3 $ 8,025.8 Fire and Security Services............ 3,329.9 2,430.0 6,567.6 4,597.4 Healthcare and Specialty Products..... 2,446.8 2,219.9 4,656.2 4,215.6 Tyco Capital segment.................... 1,338.7 -- 2,781.8 -- Eliminations............................ (5.0) -- (9.6) -- --------- -------- --------- --------- Total revenues from external customers.... 9,945.1 8,809.8 19,962.3 16,838.8 Corporate items......................... (141.0)(1) (3.9)(2) (180.6)(3) 406.5(4) --------- -------- --------- --------- CONSOLIDATED REVENUES AND OTHER INCOME.... $ 9,804.1 $8,805.9 $19,781.7 $17,245.3 ========= ======== ========= ========= SEGMENT (LOSS) PROFIT: Tyco Industrial segments Electronics........................... $ 419.6(5) $1,002.3(10) $ 990.2(5) $ 1,944.1(10) Fire and Security Services............ 480.4(6) 404.3(11) 1,007.1(14) 759.9(16) Healthcare and Specialty Products..... 505.3(7) 493.8(12) 1,068.1(7) 914.5(17) --------- -------- --------- --------- Total Tyco Industrial operating (loss) profit..................... 1,405.3 1,900.4 3,065.4 3,618.5 Tyco Capital segment loss before income taxes................................. 342.3(8) -- 722.4(8) -- --------- -------- --------- --------- Total segment (loss) profit......... 1,747.6 1,900.4 3,787.8 3,618.5 Corporate expenses, net................. (52.5)(9) (41.5)(13) (97.6)(15) (108.7)(18) Goodwill amortization................... -- (128.3) -- (248.4) Net restructuring and other unusual charges............................... (7,755.5) (15.2) (7,781.2) 160.4 Charges related to prior years (see Note 1)............................... -- -- (261.6) -- Tyco Industrial interest expense, net... (221.9) (227.3) (410.0) (395.4) Consolidated provision for income taxes................................. (90.7) (366.0) (407.4) (891.0) Consolidated minority interest.......... (4.3) (11.7) (5.1) (24.2) --------- -------- --------- --------- CONSOLIDATED (LOSS) INCOME BEFORE EXTRAORDINARY ITEMS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES............ $(6,377.3) $1,110.4 $(5,175.1) $ 2,111.2 ========= ======== ========= =========
- ------------------------------ (1) Represents a loss on the write-off of an investment in FLAG and other equity investments totaling $141.0 million. (2) Represents a loss on the write-off of an investment of $3.9 million. (3) Represents a loss on the write-off of an investment in FLAG and other equity investments totaling $141.0 million and a loss on the sale of common shares of a subsidiary of $39.6 million. (4) Represents a net gain on the sale of businesses of $410.4 million, primarily related to ADT Automotive, and a loss on the write-off of an investment of $3.9 million. 24 TYCO INTERNATIONAL LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 10. CONSOLIDATED SEGMENT DATA (CONTINUED) (5) Excludes charges for the impairment of property, plant and equipment of $2,351.7 million primarily related to the write-down of the TGN and the closure of certain facilities. Also excludes restructuring charges of $615.0 million, of which $237.5 million is included in cost of revenue, related to the write-down of inventory and certain facility closures. (6) Excludes restructuring and other unusual charges of $17.6 million primarily related to severance associated with the closure of existing facilities that had become redundant due to acquisitions and an unusual charge of $13.8 million related to the write-up of inventory under purchase accounting, which is included in cost of revenue. (7) Excludes a charge of $8.7 million related to the write-off of legal fees and other deal costs associated with acquisitions that were not completed. (8) Excludes a charge of $95.0 million, which is included in provision for credit loss, related to economic reforms instituted by the Argentine government that converted Tyco Capital's dollar-denominated receivables into peso-denominated receivables. Also excludes a $4,512.7 million estimated goodwill impairment charge. (9) Excludes a loss on the write-off of an investment in FLAG and other equity investments totalling $141.0 million. (10) Excludes restructuring and other unusual charges of $119.7 million, of which $28.2 million is included in cost of revenue, primarily related to severance associated with the closure of facilities, and a charge of $14.0 million related to the write-up of inventory under purchase accounting, which is included in cost of revenue. Also excludes charges for the impairment of property, plant and equipment of $14.2 million associated with the closure of these facilities. (11) Excludes restructuring charges of $20.5 million primarily related to the closure of manufacturing plants, warehouses, sales offices and administrative offices in the valves and controls business. Also excludes charges for the impairment of property, plant and equipment of $1.3 million primarily associated with the closure of these facilities. (12) Excludes restructuring and other unusual charges of $6.2 million, of which $4.2 million is included in cost of revenue, primarily related to the closure of a manufacturing plant. Also excludes charges for the impairment of property, plant and equipment of $2.2 million primarily associated with the closure of this plant. (13) Excludes a credit of $166.8 million related to the settlement of litigation and a loss on the write-off of an investment of $3.9 million. (14) Excludes restructuring and other unusual charges of $43.3 million, of which $5.8 million is included in cost of revenue, primarily related to severance associated with the closure of existing facilities that had become redundant due to acquisitions and the write-down of inventory. Also excludes a charge of $13.8 million related to the write-up of inventory under purchase accounting, which is included in cost of revenue. (15) Excludes a loss on the write-off of an investment in FLAG and other equity investments totalling $141.0, a loss on the sale of common shares of a subsidiary of $39.6 million and charges related to prior years of $261.6 million (see Note 1). (16) Excludes restructuring and other unusual charges of $32.4 million primarily related to the closure of manufacturing plants, warehouses, sales offices and administrative offices in the valves and controls business and an environmental remediation project. Also excludes charges for the impairment of property, plant and equipment of $1.3 million primarily associated with the closure of these facilities. (17) Excludes the write-off of purchased in-process research and development of $184.3 million, a charge of $25.0 million related to the write-up of inventory under purchase accounting, and restructuring and other unusual charges of $9.0 million, of which $4.2 million is included in cost of revenue, related to the closure of manufacturing plants. Also excludes charges of $9.6 million primarily related to the impairment of property, plant and equipment associated with the closure of these plants. (18) Excludes a net gain on the sale of businesses of $410.4 million primarily related to ADT Automotive, an unusual credit of $166.8 million related to the settlement of litigation, a loss on the write-off of an investment of $3.9 million and an unusual charge of $3.4 million related to severance. (19) As described in Note 1, certain adjustments have been made to previously reported amounts for the quarter and six months ended March 30, 2002. The resulting impact to the segments for the quarter ended March 30, 2002 is as follows: a decrease in Fire and Security Services revenue of $50.1 million; a decrease in profit of $4.0 million for Electronics, an increase in 25 TYCO INTERNATIONAL LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 10. CONSOLIDATED SEGMENT DATA (CONTINUED) profit of $0.2 million for Healthcare and Specialty Products, a decrease in profit of $47.2 million for Fire and Security Services, and an increase in corporate expenses of $0.2 million. The resulting impact to the segments for the six months ended March 30, 2002 is as follows: a decrease in Fire and Security Services revenue of $101.0 million; a decrease in profit of $54.7 million for Electronics, an increase in profit of $5.5 million for Healthcare and Specialty Products, a decrease in profit of $86.6 million for Fire and Security Services, and a decrease in corporate expenses of $20.8 million. 11. SUPPLEMENTARY BALANCE SHEET INFORMATION Tyco Industrial's inventories, other assets, deferred income tax asset, accrued expenses and other current liabilities, other long-term liabilities, and deferred income tax liability are as follows ($ in millions):
MARCH 31, SEPTEMBER 30, 2002 2001 ---------- -------------- (RESTATED) Purchased materials and manufactured parts............ $1,397.7 $1,552.0 Work in process....................................... 1,056.9 1,110.2 Finished goods........................................ 2,817.7 2,439.1 -------- -------- Inventories....................................... $5,272.3 $5,101.3 ======== ======== Contracts in process.................................. $ 393.5 $ 580.1 Prepaid expenses and other current assets............. 1,013.3 952.2 Long-term investments................................. 558.9 597.9 Other non-current assets.............................. 1,822.9 1,486.5 -------- -------- Other assets...................................... $3,788.6 $3,616.7 ======== ======== Current portion of deferred income taxes.............. $ 390.1 $ 980.2 Non-current portion of deferred income taxes.......... 2,309.9 1,440.4 -------- -------- Deferred income tax asset......................... $2,700.0 $2,420.6 ======== ======== Contracts in process--billings in excess of costs..... $ 630.1 $ 935.0 Accrued expenses...................................... 5,051.1 5,110.5 Deferred revenue--current portion..................... 738.2 973.5 -------- -------- Accrued expenses and other current liabilities.... $6,419.4 $7,019.0 ======== ======== Deferred revenue--non-current portion................. $1,152.5 $1,115.0 Other................................................. 2,658.9 1,966.9 -------- -------- Other long-term liabilities....................... $3,811.4 $3,081.9 ======== ======== Current portion of deferred income taxes.............. $ 84.4 $ 71.3 Non-current portion of deferred income taxes.......... 1,552.0 1,655.0 -------- -------- Deferred income tax liability..................... $1,636.4 $1,726.3 ======== ========
26 TYCO INTERNATIONAL LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 11. SUPPLEMENTARY BALANCE SHEET INFORMATION (CONTINUED) Net property, plant and equipment (including equipment leased to others) is as follows ($ in millions):
MARCH 31, SEPTEMBER 30, 2002 2001 ---------- -------------- TYCO INDUSTRIAL Land................................................. $ 541.3 $ 534.1 Buildings............................................ 2,615.6 2,557.7 Subscriber systems................................... 4,311.7 3,998.5 Machinery and equipment.............................. 8,422.4 8,226.6 Leasehold improvements............................... 331.8 325.0 Construction in progress............................. 1,012.7 920.4 Accumulated depreciation............................. (6,882.7) (6,592.0) --------- --------- 10,352.8 9,970.3 --------- --------- TYCO CAPITAL Buildings and equipment, net......................... 95.3 100.8 Equipment leased to others, net Commercial aircraft................................ 2,623.3 2,017.2 Railcars and locomotives........................... 1,325.2 1,242.5 Communications..................................... 579.0 799.5 Information technology............................. 511.0 702.1 Business aircraft.................................. 378.6 359.6 Manufacturing...................................... 297.1 315.7 Other.............................................. 889.8 966.2 --------- --------- 6,699.3 6,503.6 --------- --------- CONSOLIDATED......................................... $17,052.1 $16,473.9 ========= =========
12. SUPPLEMENTARY CASH FLOW INFORMATION Tyco Capital's net decrease in financing and leasing assets consists of the following for the six months ended March 31, 2002 ($ in millions): Loans extended.............................................. $(24,588.4) Collections on loans........................................ 21,398.1 Proceeds from asset and receivable sales.................... 6,743.2 Purchases of assets to be leased............................ (1,020.9) Net increase in short-term factoring receivables............ 157.1 Purchase of finance receivable portfolios................... (365.5) Net repayment of non-recourse leveraged lease debt.......... (120.2) ---------- $ 2,203.4 ==========
27 TYCO INTERNATIONAL LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 13. CUMULATIVE EFFECT OF ACCOUNTING CHANGES In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), in which the SEC Staff expressed its views regarding the appropriate recognition of revenue with respect to a variety of circumstances, some of which are relevant to the Company. As required under SAB 101, the Company modified its revenue recognition policies with respect to the installation of electronic security systems. In addition, in response to SAB 101, the Company undertook a review of its revenue recognition practices and identified certain provisions included in a limited number of sales arrangements that delayed the recognition of revenue under SAB 101. During the fourth quarter of fiscal 2001, the Company changed its method of accounting for these items retroactive to the beginning of the fiscal year to conform to the requirements of SAB 101. This was reported as a $653.7 million after-tax ($1,005.6 million pre-tax) charge for the cumulative effect of change in accounting principle in the Consolidated Statement of Operations for the first quarter of fiscal 2001. During the six months ended March 31, 2002, the Company recognized $139.6 million of revenue that had previously been included in the SAB 101 cumulative effect adjustment recorded as of October 1, 2000. The impact of SAB 101 on total revenues in the first six months of fiscal 2001 was a net decrease in revenues of $79.9 million, reflecting the deferral of $257.3 million of revenues, partially offset by the recognition of $177.4 million of revenue that was included in SAB 101 deferred revenue as of September 30, 2001. In addition, during the first quarter of fiscal 2001, the Company recorded a cumulative effect adjustment, a $29.7 million loss, net of tax, in accordance with the transition provisions of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." 14. GOODWILL AND OTHER INTANGIBLE ASSETS The Company periodically reviews and evaluates its goodwill and other intangible assets for potential impairment. Effective October 1, 2001, the beginning of Tyco's fiscal year 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets," under which goodwill is no longer amortized but instead is assessed for impairment at least annually. Under the transition provisions of SFAS No. 142, there was no goodwill impairment at October 1, 2001. However, during the quarter ended March 31, 2002, circumstances developed that could potentially impair the value of goodwill with respect to our Tyco Telecommunications reporting unit and our Tyco Capital segment. During the quarter ended March 31, 2002, the Electronics segment recorded a charge of $2,181.4 million related to the impairment of the TGN, as a result of the fiberoptic capacity available in the market place continuing to significantly exceed overall market demand, creating sharply declining prices and reduced cash flows. For additional information on the impairment charge, see Note 8. Since the TGN represents a significant asset group within the Telecommunications reporting unit, an updated valuation was completed as of March 31, 2002 for Tyco Telecommunications. The valuation was completed using an income approach based upon the present value of future cash flows of the reporting unit as of March 31, 2002. However, this first step analysis resulted in no impairment of the Telecommunications reporting unit's goodwill at that date. Additional impairments in value of the TGN or other significant asset groups within this reporting unit, among other factors, could result in a charge for goodwill in future periods. 28 TYCO INTERNATIONAL LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 14. GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED) During the quarter ended March 31, 2002, Tyco experienced disruptions to its business surrounding its announced break-up plan, a downgrade in its credit rating, and a significant decline in its market capitalization. During this same time period, our subsidiary, CIT, also experienced credit downgrades and a disruption to its historical funding base. The Company prepared valuations of its CIT subsidiary, utilizing a discounted cash flows approach updated for current information and considering various marketplace assumptions, which indicated a range of values from impairment of $750 million to excess fair value of $1.5 billion. Based on management's belief that CIT would be separated from Tyco, receive an increase in its credit ratings, and regain access to the unsecured credit markets, the Company initially concluded that CIT had an excess of fair market value over net book value of approximately $1.5 billion. Accordingly, management did not believe that there was an impairment of goodwill of CIT as of March 31, 2002. However, market-based information used in connection with the Company's preliminary consideration of the potential initial public offering for 100% of CIT indicated that CIT's book value exceeded its estimated fair value as of March 31, 2002. As a result, the Company has performed a step 1 SFAS 142 impairment analysis as of March 31, 2002 and concluded that an impairment charge was warranted at that date. Accordingly, management's objective in performing the SFAS 142 step 1 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 our financial advisors regarding the range of price to earnings multiples and market condition discounts applicable to CIT as of March 31, 2002 and applied this 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 resulting in an estimated $4.5 billion impairment charge as of March 31, 2002. SFAS 142 requires a second step analysis whenever the reporting unit book value exceeds estimated fair value. This analysis requires the Company to estimate the fair value of each reporting unit's individual assets and liabilities to complete the analysis of goodwill as of March 31, 2002. The Company has not yet completed this analysis due to the recently revised fair value of CIT. The Company will complete this second step analysis in the quarter ending June 30, 2002 for CIT to determine if any adjustment to the estimated goodwill impairment charge previously recorded is needed. Subsequent to March 31, 2002, CIT experienced further downgrades and the business environment and other factors continue to negatively impact the value for the proposed IPO of CIT. As of June 11, 2002, based on further analysis, including market related data, we believe the estimated range of IPO proceeds for CIT is between $5.0 and $5.8 billion. If the proposed IPO closes on or prior to June 30, 2002, the Company expects to record the difference between the IPO proceeds and the $6.5 billion carrying value, adjusted for the completion of the March 31, 2002 step 2 analysis referred to above, as a loss on disposal. If the IPO is not completed prior to June 30, 2002, the Company will assess remaining goodwill for potential additional impairment based on the indicators of further decline in value. 29 TYCO INTERNATIONAL LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 14. GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED) Following is a reconciliation of previously reported financial information to pro forma amounts excluding goodwill amortization for the quarter and six months ended March 31, 2001 ($ in millions, except per share data):
FOR THE QUARTER FOR THE SIX MONTHS ENDED MARCH 31, 2001 ENDED MARCH 31, 2001 -------------------------------- -------------------------------- BASIC DILUTED BASIC DILUTED EARNINGS EARNINGS EARNINGS EARNINGS EARNINGS PER SHARE PER SHARE EARNINGS PER SHARE PER SHARE -------- --------- --------- -------- --------- --------- Income before extraordinary items and cumulative effect of accounting changes.................................. $1,110.4 $0.63 $0.63 $2,111.2 $1.21 $1.19 Goodwill amortization expense, net of tax...................................... 116.8 0.07 0.07 231.2 0.13 0.13 -------- -------- PRO FORMA INCOME BEFORE EXTRAORDINARY ITEMS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES.................................. $1,227.2 0.70 0.69 $2,342.4 1.34 1.33 ======== ======== Net income................................. $1,100.1 $0.63 $0.62 $1,417.5 $0.81 $0.80 Goodwill amortization expense, net of tax...................................... 116.8 0.07 0.07 231.2 0.13 0.13 -------- -------- PRO FORMA NET INCOME....................... $1,216.9 0.70 0.69 $1,648.7 0.95 0.93 ======== ========
The changes in the carrying amount of goodwill for the six months ended March 31, 2002, as restated, are as follows ($ in millions):
HEALTHCARE AND FIRE AND SPECIALTY SECURITY ELECTRONICS PRODUCTS SERVICES TYCO CAPITAL TOTAL ----------- -------------- --------- ------------ --------- Balance as of September 30, 2001.... $8,649.0 $6,584.0 $ 7,988.3 $6,569.5 $29,790.8 Reclassification of intangible assets............................ -- 42.7 -- (22.0) 20.7 -------- -------- --------- -------- --------- Balance as of September 30, 2001 after reclassification............ 8,649.0 6,626.7 7,988.3 6,547.5 29,811.5 Goodwill related to acquisitions.... 1,223.4 834.5 2,702.2 348.6 5,108.7 Goodwill impairment................. -- -- -- (4,512.7) (4,512.7) Impact of charges related to prior years, net of tax (see Note 1).... (9.9) (7.7) (4.3) (5.4) (27.3) Currency translation adjustments.... (45.7) (9.9) (136.8) -- (192.4) -------- -------- --------- -------- --------- Balance as of March 31, 2002........ $9,816.8 $7,443.6 $10,549.4 $2,378.0 $30,187.8 ======== ======== ========= ======== =========
30 TYCO INTERNATIONAL LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 14. GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED) All of the Company's intangible assets (other than goodwill) are subject to amortization. The following table sets forth the gross carrying amount and accumulated amortization of the Company's intangible assets ($ in millions):
AT MARCH 31, 2002 AT SEPTEMBER 30, 2001 -------------------------------------- -------------------------------------- WEIGHTED WEIGHTED GROSS AVERAGE GROSS AVERAGE CARRYING ACCUMULATED AMORTIZATION CARRYING ACCUMULATED AMORTIZATION AMOUNT AMORTIZATION PERIOD AMOUNT AMORTIZATION PERIOD -------- ------------ ------------ -------- ------------ ------------ Contracts and related customer relationships... $3,602.1 $ 666.0 10 years $2,978.8 $514.6 10 years Intellectual property...... 3,051.4 349.3 23 years 2,991.6 297.9 23 years Other...................... 396.5 64.0 20 years 393.1 52.1 19 years -------- -------- -------- ------ Total.................... $7,050.0 $1,079.3 16 years $6,363.5 $864.6 17 years ======== ======== ======== ======
The contracts and related customer relationships are being amortized on a straight-line basis over a range of less than one year to 40 years. Intellectual property consists primarily of patents and unpatented technology, which are being amortized on a straight-line basis over a range of less than one year to 40 years. Intangible asset amortization expense for the quarters ended March 31, 2002 and 2001 was $134.8 million and $85.8 million, respectively. Intangible asset amortization expense for the six months ended March 31, 2002 and 2001 was $255.9 million and $156.0 million, respectively. Amortization expense on intangible assets currently owned by the Company is expected to be approximately $500 million for each of the next five fiscal years. 15. TYCO INTERNATIONAL GROUP S.A. TIG has issued public and private debt securities, which are fully and unconditionally guaranteed by Tyco. In accordance with SEC rules, the following presents condensed consolidating financial information for TIG and its subsidiaries. Condensed financial information for Tyco and TIG on a stand-alone basis are presented using the equity method of accounting for subsidiaries in which they own or control twenty percent or more of the voting shares. The consolidating financial information for the quarter and six months ended March 31, 2002 has been restated to reflect the restatement items described in Note 1. In addition, the consolidating financial information as of March 31, 2002 and September 30, 2001 and for the quarters and six months ended March 31, 2002 and 2001 have been restated to revise the application of the equity method of accounting by Tyco and TIG to their investments in subsidiaries. The adjustments to revise the application of the equity method of accounting have no effect on the consolidated financial statements of the Company. Following each consolidating balance sheet and statement of operations presented below are the previously reported amounts for selected line items in the consolidating financial information. 31 TYCO INTERNATIONAL LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 15. TYCO INTERNATIONAL GROUP S.A. (CONTINUED) CONSOLIDATING BALANCE SHEET MARCH 31, 2002 (RESTATED)
TYCO TYCO INTERNATIONAL INTERNATIONAL OTHER CONSOLIDATING LTD. GROUP S.A. SUBSIDIARIES ADJUSTMENTS TOTAL ($ IN MILLIONS) ------------- ------------- ------------ ------------- ---------- ASSETS Cash and cash equivalents.................... $ 36.3 $ 1,411.9 $ 4,845.5 $ -- $ 6,293.7 Receivables, net............................. 1.3 -- 6,727.9 -- 6,729.2 Inventories.................................. -- -- 5,272.3 -- 5,272.3 Finance receivables, net..................... -- -- 25,742.8 -- 25,742.8 Intercompany receivables..................... 328.7 10.7 5,141.6 (5,481.0) -- Construction in progress--Tyco Global Network.................................... -- -- 705.7 -- 705.7 Property, plant and equipment (including equipment leased to others), net........... 6.2 0.7 17,045.2 -- 17,052.1 Goodwill and other intangible assets, net.... -- 0.7 36,157.8 -- 36,158.5 Investment in subsidiaries................... 45,006.2 32,399.8 -- (77,406.0) -- Intercompany loans receivable................ 218.3 22,219.4 9,315.0 (31,752.7) -- Other assets................................. 77.4 68.6 12,960.6 -- 13,106.6 --------- --------- ---------- ----------- ---------- TOTAL ASSETS............................. $45,674.4 $56,111.8 $123,914.4 $(114,639.7) $111,060.9 ========= ========= ========== =========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY: Loans payable and current maturities of long-term debt............................. $ -- $ 6,390.3 $ 14,063.9 $ -- $ 20,454.2 Accounts payable............................. 0.4 1.2 3,717.4 -- 3,719.0 Accrued expenses and other current liabilities................................ 30.7 207.3 9,189.8 -- 9,427.8 Intercompany payables........................ 4,089.4 1,052.2 339.4 (5,481.0) -- Long-term debt............................... 3,515.6 16,011.8 21,130.0 -- 40,657.4 Intercompany loans payable................... 9,315.0 -- 22,437.7 (31,752.7) -- Other liabilities............................ -- 20.8 7,743.5 -- 7,764.3 --------- --------- ---------- ----------- ---------- TOTAL LIABILITIES........................ 16,951.1 23,683.6 78,621.7 (37,233.7) 82,022.7 --------- --------- ---------- ----------- ---------- Mandatorily redeemable preferred securities................................. -- -- 258.6 -- 258.6 Minority interest............................ -- -- 56.3 -- 56.3 Shareholders' Equity: Subsidiary preference shares............... -- -- 4,680.0 (4,680.0) -- Common shares.............................. 404.6 -- (5.0) -- 399.6 Other shareholders' equity................. 28,318.7 32,428.2 40,302.8 (72,726.0) 28,323.7 --------- --------- ---------- ----------- ---------- TOTAL SHAREHOLDERS' EQUITY............... 28,723.3 32,428.2 44,977.8 (77,406.0) 28,723.3 --------- --------- ---------- ----------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................................. $45,674.4 $56,111.8 $123,914.4 $(114,639.7) $111,060.9 ========= ========= ========== =========== ========== AS PREVIOUSLY REPORTED: Investment in subsidiaries................. $51,616.2 $20,236.3 $ -- $ (71,852.5) $ -- Total Assets............................... 52,284.4 43,948.3 124,939.1 (110,323.0) 110,848.8 Total Shareholders' Equity................. 35,333.3 20,264.7 46,911.6 (73,810.3) 28,699.3
32 TYCO INTERNATIONAL LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 15. TYCO INTERNATIONAL GROUP S.A. (CONTINUED) CONSOLIDATING BALANCE SHEET SEPTEMBER 30, 2001 (RESTATED)
TYCO TYCO INTERNATIONAL INTERNATIONAL OTHER CONSOLIDATING LTD. GROUP S.A. SUBSIDIARIES ADJUSTMENTS TOTAL ($ IN MILLIONS) ------------- ------------- ------------ ------------- ---------- ASSETS Cash and cash equivalents.................... $ 1.4 $ 37.0 $ 2,548.8 $ -- $ 2,587.2 Receivables, net............................. 4.2 -- 7,368.3 -- 7,372.5 Inventories.................................. -- -- 5,101.3 -- 5,101.3 Finance receivables, net..................... -- -- 31,386.5 -- 31,386.5 Intercompany receivables..................... 520.5 8.3 5,035.3 (5,564.1) -- Construction in progress-Tyco Global Network.................................... -- -- 1,643.8 -- 1,643.8 Tyco Global Network placed in service, net............................... -- -- 698.6 -- 698.6 Property, plant and equipment (including equipment leased to others), net........... 6.4 0.7 16,466.8 -- 16,473.9 Goodwill and other intangible assets, net.... -- 0.7 35,309.7 -- 35,310.4 Investment in subsidiaries................... 48,324.8 31,608.4 -- (79,933.2) -- Intercompany loans receivable................ 218.3 16,672.3 9,610.1 (26,500.7) -- Other assets................................. 97.6 80.8 10,534.7 -- 10,713.1 --------- --------- ---------- ----------- ---------- TOTAL ASSETS............................. $49,173.2 $48,408.2 $125,703.9 $(111,998.0) $111,287.3 ========= ========= ========== =========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY: Loans payable and current maturities of long-term debt............................. $ -- $ 1,106.5 $ 17,767.1 $ -- $ 18,873.6 Accounts payable............................. -- 0.2 4,145.7 -- 4,145.9 Accrued expenses and other current liabilities................................ 30.1 127.3 10,442.1 -- 10,599.5 Intercompany payables........................ 4,296.2 739.1 528.8 (5,564.1) -- Long-term debt............................... 3,499.4 14,843.3 19,900.4 -- 38,243.1 Intercompany loans payable................... 9,610.1 -- 16,890.6 (26,500.7) -- Other liabilities............................ -- 5.4 7,121.0 -- 7,126.4 --------- --------- ---------- ----------- ---------- TOTAL LIABILITIES........................ 17,435.8 16,821.8 76,795.7 (32,064.8) 78,988.5 --------- --------- ---------- ----------- ---------- Mandatorily redeemable preferred securities................................. -- -- 260.0 -- 260.0 Minority interest............................ -- -- 301.4 -- 301.4 Shareholders' Equity: Subsidiary preference shares............... -- -- 1,710.0 (1,710.0) -- Common shares.............................. 390.5 -- (3.4) -- 387.1 Other shareholders' equity................. 31,346.9 31,586.4 46,640.2 (78,223.2) 31,350.3 --------- --------- ---------- ----------- ---------- TOTAL SHAREHOLDERS' EQUITY............... 31,737.4 31,586.4 48,346.8 (79,933.2) 31,737.4 --------- --------- ---------- ----------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................................. $49,173.2 $48,408.2 $125,703.9 $(111,998.0) $111,287.3 ========= ========= ========== =========== ========== AS PREVIOUSLY REPORTED: Investment in subsidiaries................. $55,841.9 $18,792.4 $ -- $ (74,634.3) $ -- Total Assets............................... 56,690.3 35,592.2 126,469.7 (107,464.9) 111,287.3 Total Shareholders' Equity................. 39,254.5 18,770.4 49,772.4 (76,059.9) 31,737.4
33 TYCO INTERNATIONAL LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 15. TYCO INTERNATIONAL GROUP S.A. (CONTINUED) CONSOLIDATING STATEMENT OF OPERATIONS QUARTER ENDED MARCH 31, 2002 (RESTATED)
TYCO TYCO INTERNATIONAL INTERNATIONAL OTHER CONSOLIDATING LTD. GROUP S.A. SUBSIDIARIES ADJUSTMENTS TOTAL ($ IN MILLIONS) ------------- ------------- ------------ ------------- --------- REVENUES AND OTHER (LOSS) INCOME: Net revenue............................. $ -- $ -- $ 8,611.4 $ -- $ 8,611.4 Equity in net (loss) income of unconsolidated subsidiaries........... (6,234.4) 548.3 -- 5,686.1 -- Finance income.......................... -- -- 1,106.7 -- 1,106.7 Other income............................ -- -- 227.0 -- 227.0 Non-operating loss on investments....... (1.2) -- (139.8) -- (141.0) --------- ------- --------- -------- --------- Total revenues and other (loss) income.............................. (6,235.6) 548.3 9,805.3 5,686.1 9,804.1 COSTS AND EXPENSES: Cost of revenue......................... -- -- 5,630.0 -- 5,630.0 Selling, general, administrative and other costs and expenses.............. 7.3 (1.7) 2,413.7 -- 2,419.3 Interest and other financial charges, net................................... 19.7 213.3 340.9 -- 573.9 Provision for credit losses............. -- -- 195.0 -- 195.0 Restructuring and other unusual charges............................... -- -- 403.8 -- 403.8 Charges for the impairment of long-lived assets................................ -- -- 2,351.7 -- 2,351.7 Goodwill impairment..................... -- -- 4,512.7 -- 4,512.7 Intercompany interest and fees.......... 115.4 (211.7) 96.3 -- -- --------- ------- --------- -------- --------- Total costs and expenses.............. 142.4 (0.1) 15,944.1 -- 16,086.4 (LOSS) INCOME BEFORE INCOME TAXES, MINORITY INTEREST AND EXTRAORDINARY ITEMS................................. (6,378.0) 548.4 (6,138.8) 5,686.1 (6,282.3) Income taxes............................ -- -- (90.7) -- (90.7) Minority interest....................... -- -- (4.3) -- (4.3) --------- ------- --------- -------- --------- (Loss) income before extraordinary items................................. (6,378.0) 548.4 (6,233.8) 5,686.1 (6,377.3) Extraordinary items, net of tax......... -- -- (0.7) -- (0.7) --------- ------- --------- -------- --------- NET (LOSS) INCOME....................... $(6,378.0) $ 548.4 $(6,234.5) $5,686.1 $(6,378.0) ========= ======= ========= ======== ========= AS PREVIOUSLY REPORTED: Equity in net (loss) income of unconsolidated subsidiaries......... $(6,249.0) $ 547.8 $ -- $5,701.2 $ -- (Loss) income before extraordinary items............................... (6,392.6) 547.9 (6,248.4) 5,675.7 (6,417.4) Net (loss) income..................... (6,392.6) 547.9 (6,249.1) 5,675.7 (6,418.1)
34 TYCO INTERNATIONAL LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 15. TYCO INTERNATIONAL GROUP S.A. (CONTINUED) CONSOLIDATING STATEMENT OF OPERATIONS QUARTER ENDED MARCH 31, 2001 (RESTATED)
TYCO TYCO INTERNATIONAL INTERNATIONAL OTHER CONSOLIDATING LTD. GROUP S.A. SUBSIDIARIES ADJUSTMENTS TOTAL ($ IN MILLIONS) ------------- ------------- ------------ ------------- -------- REVENUES AND OTHER INCOME (LOSS): Net revenue.............................. $ -- $ -- $8,809.8 $ -- $8,809.8 Equity in net income of unconsolidated subsidiaries........................... 1,125.8 635.8 -- (1,761.6) -- Non-operating loss on investments........ -- -- (3.9) -- (3.9) -------- ------- -------- --------- -------- Total revenues and other income.......... 1,125.8 635.8 8,805.9 (1,761.6) 8,805.9 COSTS AND EXPENSES: Cost of revenue.......................... -- -- 5,514.5 -- 5,514.5 Selling, general, administrative and other costs and expenses............... 5.5 7.2 1,598.4 -- 1,611.1 Interest and other financial charges, net.................................... 12.9 188.8 25.6 -- 227.3 Restructuring and other unusual credits, net.................................... -- -- (52.8) -- (52.8) Charges for the impairment of long-lived assets................................. -- -- 17.7 -- 17.7 Intercompany interest and fees........... 7.3 (202.1) 194.8 -- -- -------- ------- -------- --------- -------- Total costs and expenses............... 25.7 (6.1) 7,298.2 -- 7,317.8 INCOME BEFORE INCOME TAXES, MINORITY INTEREST AND EXTRAORDINARY ITEMS....... 1,100.1 641.9 1,507.7 (1,761.6) 1,488.1 Income taxes............................. -- -- (366.0) -- (366.0) Minority interest........................ -- -- (11.7) -- (11.7) -------- ------- -------- --------- -------- Income before extraordinary items........ 1,100.1 641.9 1,130.0 (1,761.6) 1,110.4 Extraordinary items, net of tax.......... -- -- (10.3) -- (10.3) -------- ------- -------- --------- -------- NET INCOME............................... $1,100.1 $ 641.9 $1,119.7 $(1,761.6) $1,100.1 ======== ======= ======== ========= ======== AS PREVIOUSLY REPORTED: Equity in net income of unconsolidated subsidiaries......................... $1,218.0 $ 635.8 $ -- $(1,853.8) $ -- Income before extraordinary items...... 1,192.3 641.9 1,222.2 (1,946.0) 1,110.4 Net income............................. 1,192.3 641.9 1,211.9 (1,946.0) 1,100.1
35 TYCO INTERNATIONAL LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 15. TYCO INTERNATIONAL GROUP S.A. (CONTINUED) CONSOLIDATING STATEMENT OF OPERATIONS SIX MONTHS ENDED MARCH 31, 2002 (RESTATED)
TYCO TYCO INTERNATIONAL INTERNATIONAL OTHER CONSOLIDATING LTD. GROUP S.A. SUBSIDIARIES ADJUSTMENTS TOTAL ($ IN MILLIONS) ------------- ------------- ------------ ------------- --------- REVENUES AND OTHER (LOSS) INCOME: Net revenue............................. $ -- $ -- $17,190.1 $ -- $17,190.1 Equity in net (loss) income of unconsolidated subsidiaries........... (4,865.1) 1,282.8 -- 3,582.3 -- Finance income.......................... -- -- 2,304.7 -- 2,304.7 Other income............................ -- -- 467.5 -- 467.5 Non-operating loss on investments....... (1.2) -- (139.8) -- (141.0) Non-operating net loss on sale of common shares of a subsidiary................ -- -- (39.6) -- (39.6) --------- -------- --------- --------- --------- Total revenues and other (loss) income.............................. (4,866.3) 1,282.8 19,782.9 3,582.3 19,781.7 COSTS AND EXPENSES: Cost of revenue......................... -- -- 10,864.4 -- 10,864.4 Selling, general, administrative and other costs and expenses.............. 13.3 (1.5) 4,937.1 -- 4,948.9 Interest and other financial charges, net................................... 39.3 399.8 695.9 -- 1,135.0 Provision for credit losses............. -- -- 307.9 -- 307.9 Restructuring and other unusual charges............................... -- -- 423.7 -- 423.7 Charges for the impairment of long-lived assets................................ -- -- 2,351.7 -- 2,351.7 Goodwill impairment..................... -- -- 4,512.7 -- 4,512.7 Intercompany interest and fees.......... 259.7 (398.5) 138.8 -- -- --------- -------- --------- --------- --------- Total costs and expenses.............. 312.3 (0.2) 24,232.2 -- 24,544.3 (LOSS) INCOME BEFORE INCOME TAXES, MINORITY INTEREST AND EXTRAORDINARY ITEMS................................. (5,178.6) 1,283.0 (4,449.3) 3,582.3 (4,762.6) Income taxes............................ -- (0.2) (407.2) -- (407.4) Minority interest....................... -- -- (5.1) -- (5.1) --------- -------- --------- --------- --------- (Loss) income before extraordinary items................................. (5,178.6) 1,282.8 (4,861.6) 3,582.3 (5,175.1) Extraordinary items, net of tax......... -- -- (3.5) -- (3.5) --------- -------- --------- --------- --------- NET (LOSS) INCOME....................... $(5,178.6) $1,282.8 $(4,865.1) $3,582.3 $(5,178.6) ========= ======== ========= ========= ========= AS PREVIOUSLY REPORTED: Equity in net (loss) income of unconsolidated subsidiaries......... $(4,592.4) $1,494.3 $ -- $ 3,098.1 $ -- (Loss) income before extraordinary items............................... (7,312.5) 1,494.3 (4,588.9) 5,443.5 (4,963.6) Net (loss) income..................... (7,312.5) 1,494.3 (4,592.4) 5,443.5 (4,967.1)
36 TYCO INTERNATIONAL LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 15. TYCO INTERNATIONAL GROUP S.A. (CONTINUED) CONSOLIDATING STATEMENT OF OPERATIONS SIX MONTHS ENDED MARCH 31, 2001 (RESTATED)
TYCO TYCO INTERNATIONAL INTERNATIONAL OTHER CONSOLIDATING LTD. GROUP S.A. SUBSIDIARIES ADJUSTMENTS TOTAL ($ IN MILLIONS) ------------- ------------- ------------ ------------- --------- REVENUES AND OTHER INCOME: Net revenue............................. $ -- $ -- $16,838.8 $ -- $16,838.8 Equity in net income of unconsolidated subsidiaries.......................... 1,430.8 891.3 -- (2,322.1) -- Non-operating net gain on sale of businesses and loss on investments.... -- -- 406.5 -- 406.5 -------- -------- --------- --------- --------- Total revenues and other income....... 1,430.8 891.3 17,245.3 (2,322.1) 17,245.3 COSTS AND EXPENSES: Cost of revenue......................... -- -- 10,488.9 -- 10,488.9 Selling, general, administrative and other costs and expenses.............. 7.4 10.3 3,142.2 -- 3,159.9 Interest and other financial charges, net................................... 14.1 358.2 23.1 -- 395.4 Restructuring and other unusual credits, net................................... -- -- (34.7) -- (34.7) Write-off of purchased in-process research and development.............. -- -- 184.3 -- 184.3 Charges for the impairment of long-lived assets................................ -- -- 25.1 -- 25.1 Intercompany interest and fees.......... (8.2) (398.4) 406.6 -- -- -------- -------- --------- --------- --------- Total costs and expenses.............. 13.3 (29.9) 14,235.5 -- 14,218.9 INCOME BEFORE INCOME TAXES, MINORITY INTEREST, EXTRAORDINARY ITEMS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES............................... 1,417.5 921.2 3,009.8 (2,322.1) 3,026.4 Income taxes............................ -- (0.2) (890.8) -- (891.0) Minority interest....................... -- -- (24.2) -- (24.2) -------- -------- --------- --------- --------- Income before extraordinary items and cumulative effect of accounting changes............................... 1,417.5 921.0 2,094.8 (2,322.1) 2,111.2 Extraordinary items, net of tax......... -- -- (10.3) -- (10.3) Cumulative effect of accounting changes, net of tax............................ -- (29.7) (653.7) -- (683.4) -------- -------- --------- --------- --------- NET INCOME.............................. $1,417.5 $ 891.3 $ 1,430.8 $(2,322.1) $ 1,417.5 ======== ======== ========= ========= ========= AS PREVIOUSLY REPORTED: Equity in net income of unconsolidated subsidiaries........................ $1,560.8 $ 891.3 $ -- $(2,452.1) $ -- Income before extraordinary items and cumulative effect of accounting changes............................. 1,547.5 921.0 2,224.8 (2,582.1) 2,111.2 Net income............................ 1,547.5 891.3 1,560.8 (2,582.1) 1,417.5
37 TYCO INTERNATIONAL LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 15. TYCO INTERNATIONAL GROUP S.A. (CONTINUED) CONSOLIDATING STATEMENT OF CASH FLOWS SIX MONTHS ENDED MARCH 31, 2002 (RESTATED)
TYCO TYCO INTERNATIONAL INTERNATIONAL OTHER CONSOLIDATING LTD. GROUP S.A. SUBSIDIARIES ADJUSTMENTS TOTAL ($ IN MILLIONS) ------------- ------------- ------------ ------------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net cash (used in) provided by operating activities................. $(161.8) $ 414.4 $ 3,338.5 $ -- $ 3,591.1 ------- --------- --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Net decrease in Tyco Capital financing and leasing assets..................... -- -- 2,265.6 -- 2,265.6 Purchase of property, plant and equipment, net......................... -- -- (1,002.7) -- (1,002.7) Construction in progress-Tyco Global Network................................ -- -- (817.4) -- (817.4) Acquisition of businesses, net of cash acquired............................... -- -- (2,342.7) -- (2,342.7) Cash paid for purchase accounting and holdback/earn-out liabilities.......... -- -- (376.4) -- (376.4) Net purchase of investments.............. 1.8 -- (13.7) -- (11.9) Increase in intercompany loans........... -- (5,496.7) -- 5,496.7 -- Net increase in investment in subsidiaries........................... (10.0) -- -- 10.0 -- Other.................................... -- -- (178.7) -- (178.7) ------- --------- --------- --------- --------- Net cash used in investing activities........................... (8.2) (5,496.7) (2,466.0) 5,506.7 (2,464.2) ------- --------- --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (repayments of) proceeds from debt... (10.1) 6,457.2 (3,228.2) -- 3,218.9 Proceeds from sale of common shares for acquisitions........................... 501.6 -- (501.6) -- -- Proceeds from exercise of options........ 58.2 -- 123.1 -- 181.3 Dividends paid........................... (49.7) -- -- -- (49.7) Repurchase of Tyco common shares......... -- -- (765.8) -- (765.8) Financing from parent.................... -- -- 5,496.7 (5,496.7) -- Repayment of intercompany note payable... (295.1) -- 295.1 -- -- Capital contributions.................... -- -- 10.0 (10.0) -- Other.................................... -- -- (5.1) -- (5.1) ------- --------- --------- --------- --------- Net cash provided by financing activities........................... 204.9 6,457.2 1,424.2 (5,506.7) 2,579.6 ------- --------- --------- --------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS............................ 34.9 1,374.9 2,296.7 -- 3,706.5 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................................. 1.4 37.0 2,548.8 -- 2,587.2 ------- --------- --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD................................. $ 36.3 $ 1,411.9 $ 4,845.5 $ -- $ 6,293.7 ======= ========= ========= ========= =========
38 TYCO INTERNATIONAL LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 15. TYCO INTERNATIONAL GROUP S.A. (CONTINUED) CONSOLIDATING STATEMENT OF CASH FLOWS SIX MONTHS ENDED MARCH 31, 2001 (RESTATED)
TYCO TYCO INTERNATIONAL INTERNATIONAL OTHER CONSOLIDATING LTD. GROUP S.A. SUBSIDIARIES ADJUSTMENTS TOTAL ($ IN MILLIONS) ------------- ------------- ------------ ------------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net cash provided by (used in) operating activities.............................. $ 1,774.4 $ (392.4) $ 1,151.3 $ -- $ 2,533.3 --------- --------- --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment, net....................................... (0.1) -- (910.5) -- (910.6) Construction in progress-Tyco Global Network................................... -- -- (707.8) -- (707.8) Acquisition of businesses, net of cash acquired.................................. -- -- (5,271.6) -- (5,271.6) Cash paid for purchase accounting and holdback/ earn-out liabilities............ -- -- (317.4) -- (317.4) Disposal of businesses, net of cash sold.... -- -- 898.7 -- 898.7 Net purchases of investments................ 4.4 -- (132.7) -- (128.3) Decrease (increase) in intercompany loans... 30.2 (2,896.9) -- 2,866.7 -- (Increase) decrease in investment in subsidiaries.............................. (5,271.4) -- 4,785.0 486.4 -- Other....................................... -- -- (132.1) -- (132.1) --------- --------- --------- --------- --------- Net cash used in investing activities..... (5,236.9) (2,896.9) (1,788.4) 3,353.1 (6,569.1) --------- --------- --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from (repayments of) debt...... 3,374.9 3,287.8 (823.8) -- 5,838.9 Proceeds from exercise of options........... 160.5 -- 189.0 -- 349.5 Dividends paid.............................. (43.6) -- -- -- (43.6) Repurchase of Tyco common shares............ -- -- (1,096.9) -- (1,096.9) Repurchase of minority interest shares of subsidiary................................ -- -- (39.0) -- (39.0) Financing from parent....................... -- -- 2,866.7 (2,866.7) -- Capital contributions....................... -- -- 486.4 (486.4) -- Other....................................... -- -- (10.2) -- (10.2) --------- --------- --------- --------- --------- Net cash provided by financing activities.............................. 3,491.8 3,287.8 1,572.2 (3,353.1) 4,998.7 --------- --------- --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................... 29.3 (1.5) 935.1 -- 962.9 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.................................... 34.2 3.6 1,227.0 -- 1,264.8 --------- --------- --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................................... $ 63.5 $ 2.1 $ 2,162.1 $ -- $ 2,227.7 ========= ========= ========= ========= =========
16. SUBSEQUENT EVENTS On April 25, 2002, the Company terminated its previously announced plan to separate into four independent, publicly traded companies. In addition, the Company announced its plan to divest of CIT Group Inc. through an initial public offering ("IPO") of all of CIT's outstanding shares, although the Company is considering other alternatives, including the sale of CIT. The Company will retain the remaining Tyco businesses. Subsequent to the end of the quarter, CIT Group Inc. (Del) filed a registration statement on Form S-1 with the SEC relating to the sale of all of CIT's common shares through an IPO. Tyco will receive the proceeds from the offering. If the underwriters exercise their over-allotment option, CIT will receive the proceeds from that sale. 39 ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESTATEMENT--As described in Note 1 to the Company's Consolidated Financial Statements in its Form 10-K/A for the year ended September 30, 2001, the Company is reimbursed by dealers for certain costs incurred by the Company under ADT's authorized dealer program. The Company has restated its Consolidated Financial Statements and the related disclosures for the quarter and six months ended March 31, 2002 to record as a deferred credit the amount by which dealer reimbursements exceed the actual costs incurred by the Company during these periods (resulting in decreases to net income of $26.9 million and $55.2 million, respectively). The deferred credit is being amortized on a straight-line basis over ten years. Financial statements for periods prior to fiscal 2002 have not been restated. However, we have recorded the effect of the charge related to prior years as well as certain other charges, as discussed below in "Charges Relating to Prior Years Recorded in Fiscal 2002" (resulting in an increase in other income of $39.6 million in the quarter ended March 31, 2002 and a decrease to net income of $199.7 million for the six months ended March 31, 2002). In addition, the Company has restated its Consolidated Financial Statements and the related disclosures to reflect the elimination of certain inter-company sales and the associated margin between Tyco Infrastructure and Tyco Electronics (resulting in decreases to revenues of $50.1 million and $101.0 million and increases to net income of $27.4 million and $3.8 million for the quarter and six months ended March 31, 2002, respectively), and to adjust the amount of capitalized interest (resulting in a decrease to interest expense and a decrease to TGN impairment of $16.1 million for the quarter ended March 31, 2002). The Company has also restated its financial statement disclosures to reflect a reduction of operating income of $42.0 million in the Electronics segment, offset by a reduction of corporate operating expenses for the same amount (resulting in no change to net income) for the six months ended March 31, 2002. The Company also restated its loss on the write-off of investments due to the reduction in book value of an investment by $39.6 million in the quarter ended March 31, 2002. The restatement results in an aggregate decrease to revenues and other income of $10.5 million and $101.0 million and a decrease in net loss of $40.1 million in the quarter and an increase in net loss of $211.5 million, respectively, for the six months ended March 31, 2002. 40 The impact of the restatement on the Consolidated Statements of Operations and Consolidated Balance Sheet is as follows ($ in millions, except per share data):
TYCO INTERNATIONAL LTD. AND CONSOLIDATED SUBSIDIARIES ------------------------------------------------------- QUARTER ENDED SIX MONTHS ENDED MARCH 31, 2002 MARCH 31, 2002 -------------------------- -------------------------- AMOUNT AMOUNT PREVIOUSLY PREVIOUSLY REPORTED(1) AS RESTATED REPORTED(1) AS RESTATED ------------ ----------- ------------ ----------- (UNAUDITED) (UNAUDITED) CONSOLIDATED STATEMENTS OF OPERATIONS: Total revenues and other income.............. $ 9,814.6 $ 9,804.1 $19,882.7 $19,781.7 Total costs and expenses..................... 16,130.3 16,086.4 24,353.3 24,544.3 (Loss) income before income taxes............ (6,315.7) (6,282.3) (4,470.6) (4,762.6) Net loss..................................... (6,418.1) (6,378.0) (4,967.1) (5,178.6) Diluted loss per common share................ (3.22) (3.20) (2.50) (2.61) CONSOLIDATED BALANCE SHEET: Goodwill, net................................ $29,979.5 $30,187.8 Total assets................................. 110,848.8 111,060.9 Total liabilities............................ 81,834.6 82,022.7 Accumulated earnings......................... 7,288.7 7,077.1 Total shareholders' equity................... 28,699.3 28,723.3
- ------------------------------ (1) The Company previously restated its Consolidated Financial Statements and the related disclosures for the quarterly period ended March 31, 2002 to reflect an impairment of goodwill in the Tyco Capital segment in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," resulting in a $4.5 billion estimated impairment charge. The effect of this restatement was to increase the originally reported net loss for the quarter ended March 31, 2002 from $1.9 billion to $6.4 billion and for the six months ended March 31, 2002 from $0.5 billion to $5.0 billion. Net loss per share increased from $0.96 to $3.22 and from $0.23 to $2.50 for the quarter and six months ended March 31, 2002, respectively. This restatement had no impact on previously reported revenues or net cash provided by operating activities for any periods. See Note 14, "Goodwill and Other Intangible Assets," for further information regarding the goodwill impairment. CHARGES RELATING TO PRIOR YEARS RECORDED IN FISCAL 2002--During the fourth quarter of fiscal 2002, the Company identified various adjustments relating to prior year financial statements, Management concluded the effects of these adjustments, as well as any unrecorded proposed audit adjustments, were not material individually or in the aggregate to the current year or any prior year. Accordingly, prior year financial statements have not been 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 are 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 ADT's authorized 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/A for the year ended September 30, 2001 is $185.9 million. - 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. - As described in Note 1 to the Company's Form 10-K for the year ended September 30, 2002 which is being filed concurrently with this Form 10-Q/A, 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 41 Company's acquisition accounting. The cumulative effect of the adjustments necessary to revise the prior accounting is a pre-tax charge of $36.1 million. The fiscal years to which the charges relate are as follows ($ in millions):
PRIOR TO TYPE OF ADJUSTMENT FISCAL 1999 FISCAL 2000 FISCAL 2001 TOTAL - ------------------ ----------- ----------- ----------- -------- 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 ----- ----- ------ ------ Totals............................ $56.3 $79.9 $125.4(1) $261.6 ===== ===== ====== ======
- ------------------------ (1) Of the $125.4 million pre-tax charges relating to fiscal 2001, $22.9 million and $44.1 million relates to the quarter and six months ended March 31, 2001. INTRODUCTION The discussion of results of operations, liquidity and capital resources is presented separately for Tyco Industrial and Tyco Capital in order to provide a more comprehensive analysis of the components of our business. The Company includes this presentation because the businesses within our Tyco Industrial operations (diversified manufacturing) and our Tyco Capital operations (financial services) are significantly different from one another with different key performance indicators for their respective industries. The discussion and financial data presented herein are furnished separately for each of the following: - Tyco Industrial--This represents Tyco and all its subsidiaries other than Tyco Capital, and includes the results of operations of Tyco Capital from June 2, 2001 on the equity method of accounting. - Tyco Capital--This represents CIT Group Inc. ("CIT") and all its subsidiaries and reflects their results of operations from June 2, 2001. In addition, Tyco Capital includes certain international subsidiaries that were sold by CIT Group Inc. to a non-U.S. subsidiary of Tyco on September 30, 2001 and were repurchased by CIT Group Inc. in February 2002, and certain holding companies. - Consolidated--This represents Tyco Industrial and Tyco Capital on a consolidated basis. The consolidated amounts as of September 30, 2001 are derived from our audited Consolidated Financial Statements included in our Form 10-K/A for the year ended September 30, 2001. RESULTS OF OPERATIONS TYCO INDUSTRIAL OVERVIEW Our results for the quarter and six months ended March 31, 2002 were adversely affected by softness in demand in the telecommunications and electronics markets and by our previously announced break-up plan, rumors and negative publicity, all of which distracted employees, customers and vendors. Revenues and operating margins were negatively impacted and substantial costs were incurred across all segments. Our results of operations also reflect improvements in the Fire and Security Services and Healthcare and Specialty Products segments, the impact of restructuring and other unusual charges, and the impact of a lower effective tax rate. Our strategy and near-term actions focus on enhancing internal growth within existing Tyco businesses. New product innovation, increased service and continued geographic expansion are the 42 means by which we plan to achieve this goal. Acquisitions have been an important part of Tyco's growth in recent years. While we will continue to make selected complementary acquisitions, we anticipate reducing the number of acquisitions we complete prospectively, and, therefore, expect that our growth rate in revenues and earnings from acquisitions will also be reduced as compared to prior quarters. Although management has historically considered earnings per share ("EPS") and free cash flow to be the most significant measures of Tyco's performance, we will begin to explicitly focus on return on capital ("ROC") as a management measure along with EPS and free cash flow. Accordingly, Tyco's management compensation plan will be revised to include enhanced ROC targets. Furthermore, our focus on ROC supports our decision not to sell Tyco Plastics and Adhesives due to the business unit's ability to generate returns and free cash flow, which can be deployed in other Tyco businesses. As evidenced by the restructuring charges recorded during the quarter and six months ended March 31, 2002, primarily related to our Electronics segment, we will continue to implement cost-cutting initiatives in order to improve earnings and margins on a prospective basis. Information for all periods presented below reflects the grouping of Tyco Industrial's businesses into three segments, consisting of Electronics, Fire and Security Services, and Healthcare and Specialty Products. During the first quarter of fiscal 2002, the Company changed its internal reporting structure (due to the repurchase of the remaining shares of TyCom not already owned by Tyco) such that the operations of the former Telecommunications segment are now reported as part of the Electronics segment. The Company has conformed its segment reporting accordingly and has reclassified comparative prior period information to reflect this change. On April 25, 2002, the Company announced that it had changed its segment management reporting structure and would therefore add an additional reporting segment effective with the quarter ending June 30, 2002. The segment, to be known as Tyco Engineered Products and Services, will consist of the flow control businesses and the environmental engineering business that are currently reported within the Fire and Security Services segment, and the electrical and metal products business that is currently reported within the Electronics segment. Tyco Industrial segment revenues decreased 2.3% during the quarter ended March 31, 2002 to $8,611.4 million from $8,809.8 million in the quarter ended March 31, 2001. Tyco Industrial had a loss before extraordinary items of $6,377.3 million for the quarter ended March 31, 2002, as compared to income before extraordinary items of $1,110.4 million in the quarter ended March 31, 2001. Loss before extraordinary items for the quarter ended March 31, 2002 included charges totaling $7,755.5 million ($7,620.3 million after-tax) consisting of the following: (i) an estimated goodwill impairment charge of $4,512.7 million and a $95.0 million charge related to the Argentine peso, included in the earnings of Tyco Capital, recorded under the equity method of accounting; (ii) impairment charges of $2,351.7 million primarily related to the write-down of the Tyco Global Network ("TGN"); (iii) restructuring and other unusual charges of $655.1 million, of which $251.3 million is included in cost of revenue, primarily related to the write-down of inventory and facility closures within our Electronics segment; and (iv) a loss on the write-off of investments of $141.0 million. Income before extraordinary items for the quarter ended March 31, 2001 included a net charge of $15.2 million ($8.0 million after-tax charge) consisting of the following: (i) restructuring and other unusual charges of $160.4 million, of which $46.4 million is included in cost of revenue, primarily related to certain electronics, valves and controls and healthcare businesses; (ii) impairment charges of $17.7 million primarily associated with the closure of certain manufacturing plants; (iii) a loss on the write-down of an investment of $3.9 million; and (iv) an unusual credit of $166.8 million related to the settlement of litigation. Tyco Industrial segment revenues increased 2.1% during the six months ended March 31, 2002 to $17,190.1 million from $16,838.8 million in the six months ended March 31, 2001. Tyco Industrial had a 43 loss before extraordinary items and cumulative effect of accounting changes of $5,175.1 million in the six months ended March 31, 2002, as compared to income before extraordinary items and cumulative effect of accounting changes of $2,111.2 million in the six months ended March 31, 2001. Loss before extraordinary items for the six months ended March 31, 2002 included charges totaling $8,042.8 million ($7,837.7 million after-tax), consisting of the following: (i) an estimated goodwill impairment charge of $4,512.7 million and a $95.0 million charge related to the Argentine peso, included in the earnings of Tyco Capital, recorded under the equity method of accounting; (ii) impairment charges of $2,351.7 million primarily related to the write-down of the TGN; (iii) restructuring and other unusual charges of $680.8 million, of which $257.1 million is included in cost of revenue, primarily related to the write-down of inventory and facility closures within our Electronics segment; (iv) a loss on the write-off of investments of $141.0 million; and (v) charges related to prior years of $261.6 million (see Note 1). Income before extraordinary items and cumulative effect of accounting changes for the six months ended March 31, 2001 included a net credit of $160.4 million ($4.1 million after-tax net credit) consisting of the following: (i) a write-off of purchased in-process research and development related to the acquisition of Mallinckrodt Inc. ("Mallinckrodt") of $184.3 million; (ii) restructuring and other unusual charges of $203.5 million, of which $71.4 million is included in cost of revenue, related primarily to the closure of certain facilities within the electronics, valves and controls and healthcare businesses and the write-up of inventory under purchase accounting; (iii) a loss on the write-down of an investment of $3.9 million; (iv) a net gain on sale of businesses of $410.4 million, principally related to the sale of ADT Automotive; (v) an unusual credit of $166.8 million related to the settlement of litigation. Results before impairment, restructuring and other unusual items are commonly used as a basis for measuring operating performance, but they should not be considered an alternative to operating income determined in accordance with generally accepted accounting principles ("GAAP"). For more information on impairment, restructuring and other unusual charges (credits), see Note 10 to the Consolidated Financial Statements. 44 The following table summarizes statement of operations activity for the quarters and six months ended March 31, 2002 and 2001 ($ in millions):
FOR THE QUARTERS ENDED FOR THE SIX MONTHS MARCH 31, ENDED MARCH 31, ---------------------- ---------------------- 2002 2001 2002 2001 ---------- --------- ---------- --------- (RESTATED) (RESTATED) (UNAUDITED) (UNAUDITED) TOTAL TYCO INDUSTRIAL SEGMENT REVENUES............. $ 8,611.4 $8,809.8 $17,190.1 $16,838.8 ========= ======== ========= ========= Restructuring and other unusual (charges) credits, net.............................................. $ (655.1) $ 6.4 $ (680.8) $ (36.7) Write-off of purchased in-process research and development...................................... -- -- -- (184.3) Charges for the impairment of long-lived assets.... (2,351.7) (17.7) (2,351.7) (25.1) Charges related to prior years (see Note 1)........ -- -- (222.0) -- --------- -------- --------- --------- Total charges included in operating income......... $(3,006.8) $ (11.3) $(3,254.5) $ (246.1) Tyco Industrial operating (loss) income before goodwill amortization............................ (1,654.0) 1,847.6 (286.7) 3,263.7 Amortization of goodwill........................... -- (128.3) -- (248.4) --------- -------- --------- --------- Total Tyco Industrial operating (loss) income...... (1,654.0) 1,719.3 (286.7) 3,015.3 Net (loss) on investments and gain on sale of businesses....................................... (141.0) (3.9) (141.0) 406.5 Net loss on sale of common shares of subsidiary.... -- -- (39.6) -- Tyco Capital net loss.............................. (4,333.9) -- (4,078.5) -- Interest and other financial charges, net.......... (221.9) (227.3) (410.0) (395.4) --------- -------- --------- --------- (Loss) income before income taxes, minority interest, extraordinary items and cumulative effect of accounting changes..................... (6,350.8) 1,488.1 (4,955.8) 3,026.4 Income taxes....................................... (24.9) (366.0) (219.2) (891.0) Minority interest.................................. (1.6) (11.7) (0.1) (24.2) --------- -------- --------- --------- (LOSS) INCOME BEFORE EXTRAORDINARY ITEMS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES.......... (6,377.3) 1,110.4 (5,175.1) 2,111.2 Extraordinary items, net of tax.................... (0.7) (10.3) (3.5) (10.3) Cumulative effect of accounting changes, net of tax.............................................. -- -- -- (683.4) --------- -------- --------- --------- TYCO INDUSTRIAL NET (LOSS) INCOME.................. $(6,378.0) $1,100.1 $(5,178.6) $ 1,417.5 ========= ======== ========= =========
Total Tyco Industrial segment revenues decreased $198.4 million, or 2.3%, to $8,611.4 million for the quarter and increased $351.3 million, or 2.1%, to $17,190.1 million in the six months ended March 31, 2002, respectively. Tyco Industrial's operating income decreased $3,373.3 million in the quarter ended March 31, 2002 and $3,302.0 million in the six months ended March 31, 2002. The decrease in revenue for the quarter was due to a significant decrease in our Electronics segment, offset in part by increased revenues in our Fire and Security Services segment and, to a lesser extent, in our Healthcare and Specialty Products segment. For the six month period ended March 31, 2002, the increases in revenue at Fire and Security Services and Healthcare and Specialty Products in the aggregate were somewhat greater than the decrease in revenue in the Electronics segment, resulting in a modest overall increase in revenues. The net increases resulted primarily from acquisitions. Total operating income as a percentage of revenue was (19.2)% and 19.5% in the quarters ended March 31, 2002 and 2001, and (1.7)% and 17.9% in the six months ended March 31, 2002 and 2001, respectively. The decrease in the quarter was due to decreased margins in all three segments, particularly within our Electronics segment. The decrease in the six months was primarily due to 45 decreased margins in the Electronics segment and, to a lesser extent, in the Fire and Security Services segment. More detailed information by segment is provided further below. When we make an acquisition, the acquired company is immediately integrated with our existing operations. As part of our integration process, we often eliminate duplicate functions by closing corporate and administrative offices, and we attempt to make the combined companies more cost efficient by combining manufacturing processes, product lines, sales offices and marketing efforts. As a result of our integration processes, most acquired companies become no longer separately identifiable. Consequently, we do not separately track the post-acquisition financial results of acquired companies. The discussions following the tables below include percentages for revenue growth or decline that exclude increased revenue attributable to specified acquisitions and that eliminate the effects of period to period currency fluctuations. Revenue growth percentages excluding the specified acquisitions are pro forma estimates calculated by assuming the acquisitions were made at the beginning of the relevant fiscal periods by adding back pre-acquisition results of the specified acquired companies for both periods in the comparison. A majority of the companies that we acquire operate within the same industry as the segment into which the acquired company is integrated and, consequently, we assume that the companies that we acquire generally have a comparable organic growth percentage. We calculate pro forma segment growth using this methodology because we generally do not have the ability to capture post-acquisition revenues related to individual acquisitions since most companies are immediately integrated upon acquisition. The calculations of the pro forma growth analysis, excluding acquisitions discussed in the segment narratives below, include all acquisitions with a purchase price of $10 million or more in the pro forma calculation and do not include acquisitions with a purchase price of less than $10 million, due to the relative size of these smaller acquisitions compared to Tyco's operating results and the large number of acquisitions during the periods presented. These smaller acquisitions represent approximately 8% of the total purchase price for all acquisitions during the six months ended March 31, 2002. Since these pro forma estimates are based on pre-acquisition revenues, they are not necessarily indicative of post-acquisition results. This calculation is similar to the method used in calculating the acquisition-related pro forma results of operations in Note 2 to the Consolidated Financial Statements, pursuant to Statement of Financial Accounting Standards No. 141. In the discussions that follow, we describe the reasons for changes in results for each segment, although we do not quantify the impact of the various factors. In order to quantify each factor contributing to a change in operating income and margins, we would need to exclude the results of acquisitions. As previously noted, since acquisitions are generally integrated within our existing operations immediately upon acquisition, we do not have the ability to exclude the effect of acquired businesses when quantifying increases and decreases in operating income and margins. 46 QUARTER ENDED MARCH 31, 2002 COMPARED TO QUARTER ENDED MARCH 31, 2001 TYCO INDUSTRIAL REVENUE AND OPERATING (LOSS) INCOME AND MARGINS ELECTRONICS The following table sets forth revenue and operating (loss) income and margins for the Electronics segment ($ in millions):
FOR THE QUARTERS ENDED MARCH 31, ----------------------- 2002 2001 --------- -------- (UNAUDITED) Revenue................................................ $ 2,834.7 $4,159.9 Operating (loss) income................................ $(2,547.1) $ 854.4 Operating margins...................................... (89.9)% 20.5% Restructuring and other unusual charges................ $ (377.5) $ (91.5) Inventory charges...................................... (237.5) (42.2) Impairment of property, plant and equipment............ (2,351.7) (14.2) --------- -------- Total charges included in operating income............. $(2,966.7) $ (147.9) ========= ========
The 31.9% decrease in revenue in the quarter ended March 31, 2002 compared with the quarter ended March 31, 2001 for the segment resulted from continued softness in demand in the telecommunications, power systems, communications, printed circuit and computer and consumer electronics end markets across all geographic regions. The Electronics segment includes the electronics components group, as well as Tyco Telecommunications (formerly TyCom) and Tyco Electrical and Metal Products. Revenue at the electronics components group decreased $920.8 million, or 28.3%, reflecting softness in demand in certain end markets. Revenue at Tyco Electrical and Metal Products was essentially unchanged. Revenue at the segment's telecommunications business declined $403.7 million, or 71.3%, due to lack of demand for new cable construction and very weak demand for capacity sales on the TGN. Management believes that sales for the segment were also negatively impacted by the business distraction associated with the rumors and negative publicity surrounding the Company during the current quarter, as well as uncertainties arising from the Company's announced break-up plan, which distracted employees, customers and vendors. Excluding the $69.6 million decrease from foreign currency exchange fluctuations, the acquisitions of CIGI Investment Group, Inc. ("CIGI") in October 2000, Lucent Technologies' Power Systems business ("LPS") in December 2000, Century Tube Corporation ("Century") in October 2001, Transpower Technologies in November 2001, Communications Instruments, Inc. ("CII") in January 2002, and all other acquisitions with a purchase price of $10 million or more, pro forma revenue (calculated in a manner described above in "Overview") for the segment decreased an additional 2.0%. Although there has been some quarterly sequential growth in certain industries in which the segment operates, we expect our Electronics segment to continue to experience softness in demand as the current downturn in these end markets continues, particularly in our Telecommunications business, where the market is not expected to begin to show signs of recovery in the near term. As evidenced by the current quarter's restructuring charges, management has implemented plans within this segment to reduce the number of manufacturing plants and sales offices, along with the related employees, to a size appropriate for the current business environment, while attempting to maintain the flexibility needed for a potential upturn in these markets. The significant decrease in operating income and operating margins in the quarter ended March 31, 2002 compared with the quarter ended March 31, 2001 was primarily due to the decrease in revenue, decreased sales prices and lower manufacturing volume, which increased per unit costs, and 47 the charges discussed below. However, increased per unit costs were slightly offset by cost reduction initiatives implemented during the current fiscal year. The operating loss and margins in the quarter ended March 31, 2002 include restructuring and other unusual charges of $615.0 million, of which inventory write-downs of $237.5 million are included in cost of revenue, primarily related to facility closures. Of the $237.5 million, $6.2 million of inventory has been scrapped as of March 31, 2002. The remaining $231.3 million of written-off inventory will be scrapped in the next three to twelve months. There were no significant sales of previously written-down or written-off inventory during the six months ended March 31, 2002. Also included are charges of $2,351.7 million for the impairment of property, plant and equipment, primarily related to the TGN. Operating loss and margins for the quarter ended March 31, 2001 include restructuring and other unusual charges of $133.7 million primarily related to severance associated with the closure of facilities. Included within the charges of $133.7 million are inventory write-downs of $28.2 million and charges of $14.0 million related to the write-up of inventory under purchase accounting, both of which are included in cost of revenue. Operating loss and margins for the quarter ended March 31, 2001 also include a charge for the impairment of property, plant and equipment of $14.2 million associated with the facility closures. FIRE AND SECURITY SERVICES The following table sets forth revenue and operating income and margins for the Fire and Security Services segment ($ in millions):
FOR THE QUARTERS ENDED MARCH 31, --------------------- 2002 2001 ---------- -------- (RESTATED) (UNAUDITED) Revenue.................................................. $3,329.9 $2,430.0 Operating income......................................... $ 449.0 $ 382.5 Operating margins........................................ 13.5% 15.7% Restructuring and other unusual charges.................. $ (17.6) $ (20.5) Inventory charges........................................ (13.8) -- Impairment of property, plant and equipment.............. -- (1.3) -------- -------- Total charges included in operating income............... $ (31.4) $ (21.8) ======== ========
The 37.0% increase in revenue in the quarter ended March 31, 2002 over the quarter ended March 31, 2001 resulted primarily from higher sales volume and increased service revenue in both the worldwide fire protection business and the worldwide electronic security services business and, to a lesser extent, due to increased revenue at Tyco Valves and Controls and Tyco Infrastructure Services. The increases were due to acquisitions. A higher volume of recurring service revenue from our worldwide security business, increased sales of fire safety and video surveillance products and access control systems, and the introduction of new products were offset by weak market conditions and the business distractions that took place during the quarter, particularly for our worldwide valves and controls business. Acquisitions included Pyrotenax in March 2001, Scott Technologies, Inc. ("Scott") in May 2001, IMI Bailey Birkett ("IMI") in June 2001, the electronic security systems businesses of Cambridge Protection Industries, L.L.C. ("Security Link") and Sentry S.A. in July 2001, Edison Select in August 2001, SBC/Smith Alarm Systems ("Smith Alarm") in October 2001, DSC Group, Water & Power Technologies ("Water & Power") and Sensormatic in November 2001 and Clean Air Systems in February 2002. Excluding the $56.8 million decrease from foreign currency exchange fluctuations, our dealer program, the acquisitions listed above, and all other acquisitions with a purchase price of $10 million or more, pro forma revenue (calculated in the manner described above in "Overview") for 48 the segment increased an estimated 1.6%. We expect that the continued awareness of the need for fire and security products should offset any general market softness experienced by the segment. The 17.4% increase in operating income in the quarter ended March 31, 2002 over the quarter ended March 31, 2001 was primarily due to acquisitions and, to a lesser extent, to increased service volume in our worldwide electronic security services business. The decrease in operating margins for the segment was primarily a result of the business distractions, pricing pressures, and to a lesser extent, lower margins on newly acquired businesses and the restructuring and other unusual charges recorded during the quarter ended March 31, 2002. Operating income and margins in the quarter ended March 31, 2002 reflect restructuring and other unusual charges of $17.6 million primarily related to severance associated with the closure of existing facilities and a charge of $13.8 million related to the write-up of inventory under purchase accounting, which is included in cost of revenue. Operating income and margins after charges in the quarter ended March 31, 2001 include restructuring and other unusual charges of $20.5 million and charges of $1.3 million for the impairment of property, plant and equipment primarily related to the closure of facilities in the valves and controls business. HEALTHCARE AND SPECIALTY PRODUCTS The following table sets forth revenue and operating income and margins for the Healthcare and Specialty Products segment ($ in millions):
FOR THE QUARTERS ENDED MARCH 31, ------------------- 2002 2001 -------- -------- (UNAUDITED) Revenue.................................................. $2,446.8 $2,219.9 Operating income......................................... $ 496.6 $ 485.4 Operating margins........................................ 20.3% 21.9% Restructuring and other unusual charges.................. $ (8.7) $ (2.0) Inventory charges........................................ -- (4.2) Impairment of property, plant and equipment.............. -- (2.2) -------- -------- Total charges included in operating income............... $ (8.7) $ (8.4) ======== ========
The 10.2% increase in revenue in the quarter ended March 31, 2002 over the quarter ended March 31, 2001 was primarily the result of acquisitions and, to a lesser extent, increased revenue in our international healthcare business and Tyco Healthcare's introduction of new products. However, the overall increase was offset slightly by declines in sales of certain products due to competitive pricing pressure in certain business lines, the strategic exiting of certain business lines and the general distractions that took place during the current quarter. Excluding the $35.0 million decrease from foreign currency exchange fluctuations, the acquisitions of Mallinckrodt in October 2000, InnerDyne, Inc. in December 2000, Linq Industrial Fabrics, Inc. ("Linq") in December 2001, Paragon Trade Brands ("Paragon") in January 2002, and all other acquisitions with a purchase price of $10 million or more, pro forma revenue (calculated in the manner described above in "Overview") for the segment increased an estimated 5.8%. The healthcare market has not been significantly impacted by the current economic downturn, and we do not expect a lessening of demand for the products we offer. The 2.3% increase in operating income in the quarter ended March 31, 2002 compared to the quarter ended March 31, 2001 was due primarily to acquisitions, increased sales of higher margin products at Mallinckrodt and operating efficiencies realized from cost reductions. The decrease in operating margins within the segment was primarily due to volume shortfalls and unfavorable 49 manufacturing variances at Plastics and Adhesives during the current quarter and pricing issues related to the general business distraction, partially offset by higher margins at Mallinckrodt. Operating income and margins for the quarter ended March 31, 2002 reflect unusual charges of $8.7 million related to the write-off of legal fees and other deal costs associated with acquisitions that were not completed. Operating income and margins for the quarter ended March 31, 2001 include restructuring and other unusual charges totaling $6.2 million, of which inventory write-downs of $4.2 million are included in cost of revenue and charges for the impairment of property, plant and equipment of $2.2 million primarily related to the closure of a manufacturing plant. FOREIGN CURRENCY The effect of changes in foreign exchange rates for the quarter ended March 31, 2002 compared to the quarter ended March 31, 2001 was a decrease in revenue of approximately $161.4 million and a decrease in operating income of approximately $36.3 million. CORPORATE ITEMS Corporate expenses were $193.5 million and corporate income was $121.9 million in the quarters ended March 31, 2002 and 2001, respectively. Corporate expenses were $52.5 million (excluding an unusual charge of $141.0 million for the write-off of investments) in the quarter ended March 31, 2002 as compared to $41.5 million (excluding a net unusual credit of $163.4 million primarily for the settlement of litigation) in the quarter ended March 31, 2001. The increase in the quarter ended March 31, 2002 as compared to the quarter ended March 31, 2001 was due to higher costs associated with supporting and monitoring our expanded businesses and operations. INTEREST EXPENSE, NET Net interest expense was $221.9 million in the quarter ended March 31, 2002, as compared to $227.3 million in the quarter ended March 31, 2001. The decrease is a result of lower average interest rates in the current year, partially offset by higher average debt balances associated with borrowing to finance acquisitions and higher rates on debt assumed in acquisitions and an adjustment to capitalized interest to reflect a lower average interest rate. However, interest expense for the quarter ended March 31, 2002 is higher than that of the quarter ended December 31, 2001 due to our drawdown of higher rate bank credit facilities and our exit from the commercial paper market. We expect our interest expense to increase slightly for our third fiscal quarter due to the effect of higher rate bank debt outstanding for the entire quarter. ACCOUNTING POLICIES The preparation of consolidated financial statements in conformity with GAAP requires management to use judgment in making estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. The following accounting policies for Tyco Industrial include inherent risks and uncertainties related to judgments and assumptions made by management. Management's estimates are based on the relevant information available at the end of each period. Investments--Investments for which Tyco Industrial does not have the ability to exercise significant influence and for which there is not a readily determinable market value are accounted for under the cost method of accounting. Management uses judgment in determining when an unrealized loss is deemed to be other than temporary, in which case such loss is charged to earnings. Long-Lived Assets--Management periodically evaluates the net realizable value of long-lived assets, including property, plant and equipment and the TGN, relying on a number of factors including 50 operating results, business plans, economic projections and anticipated future cash flows. We wrote-off a significant portion of Construction in progress--TGN and the entire amount placed in service, and management continues to monitor developments in the fiberoptic capacity markets. It is possible that the assumptions underlying the impairment analysis will change in such a manner that a further impairment in value may occur in the foreseeable future. Goodwill--Effective October 1, 2001, the beginning of Tyco's fiscal 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets," for all of Tyco and its subsidiaries. Since adoption of SFAS No. 142, goodwill is no longer amortized but instead is assessed annually and as triggering events occur. In making this assessment, management relies on a number of factors including operating results, business plans, economic projections, anticipated future cash flows, and transactions and market place data. We have determined that there is no impact of adopting this new standard under the transition provisions of SFAS No. 142. However, during the quarter ended March 31, 2002, circumstances developed that could potentially impair the value of goodwill with respect to our Tyco Telecommunications reporting unit and Tyco Capital. During the quarter ended March 31, 2002, the Electronics segment recorded a charge of $2,181.4 million related to the impairment of the TGN, as a result of the fiberoptic capacity available in the market place continuing to significantly exceed overall market demand, creating sharply declining prices and reduced cash flows. For additional information on the impairment charge, see Note 8 to the Consolidated Financial Statements. Since the TGN represents a significant asset group within the Telecommunications reporting unit, an updated valuation was completed as of March 31, 2002 for Tyco Telecommunications. The valuation was completed using an income approach based upon the present value of future cash flows of the reporting unit as of March 31, 2002. However, this first step analysis resulted in no impairment of goodwill at that date. Additional impairments in value of the TGN or other significant asset groups within this reporting unit, among other factors, could result in a charge for goodwill in future periods. For additional information regarding our current analysis of the goodwill of Tyco Capital, see "Tyco Capital--Accounting Policies" below. Revenue Recognition--Contract sales for the installation of fire protection systems, underwater cable systems and other construction related projects are recorded on the percentage-of-completion method. Profits recognized on contracts in process are based upon estimated contract revenue and related cost to completion. 51 TYCO CAPITAL The following table sets forth the operating results for the Company's Tyco Capital segment ($ in millions):
FOR THE QUARTER ENDED MARCH 31, 2002 -------------- Finance income.............................................. $ 1,106.7 Interest expense............................................ 352.0 --------- Net finance income.......................................... 754.7 Depreciation on operating lease equipment(1)................ 310.2 --------- Net finance margin.......................................... 444.5 Provision for credit losses(2).............................. 195.0 --------- Net finance margin, after provision for credit losses....... 249.5 Other income................................................ 232.0 --------- Operating margin............................................ 481.5 Selling, general, administrative and other costs and expenses except for depreciation on operating lease equipment(1).............................................. 234.2 Goodwill impairment......................................... 4,512.7 --------- Income (loss) before income taxes and minority interest..... $(4,265.4) ========= Average earning assets ("AEA")(3)........................... $36,006.6 Net finance margin as a percent of AEA (annualized)......... 4.94%
- ------------------------------ (1) Depreciation on operating lease equipment has been included within selling, general, administrative and other costs and expenses in the Consolidated Statements of Operations. (2) Includes a charge of $95.0 million related to economic reforms instituted by the Argentine government that converted Tyco Capital's dollar-denominated receivables into peso-denominated receivables. (3) Average earning assets is the average of finance receivables, operating lease equipment, finance receivables held for sale and certain investments, less credit balances of factoring clients. Tyco Capital's revenues were $1,338.7 million for the quarter ended March 31, 2002 consisting of finance income of $1,106.7 million and other income of $232.0 million. As a percentage of AEA, finance income was 12.30%. For the quarter ended March 31, 2002, Tyco Capital's loss before income taxes and minority interest was $4,265.4 million. Net finance margin as a percentage of AEA for the quarter ended March 31, 2002 was favorably impacted primarily by the effect of fair value adjustments in new basis of accounting to reflect market interest rates on debt and assets, including liquidating receivables. Other factors favorably impacting AEA were the following: (1) exits from non-strategic and under-performing businesses; (2) the decline in short term interest rates and (3) lower leverage. These positive factors were partially offset by the increased cost of bank line borrowings and excess cash maintained for liquidity purposes during the quarter ended March 31, 2002. Interest expense totaled $352.0 million for the quarter ended March 31, 2002. As a percentage of AEA, interest expense was 3.91%. We expect Tyco Capital's interest expense as a percentage of AEA to increase as a result of higher costs associated with the drawn down on its bank credit facilities to repurchase outstanding commercial paper at scheduled maturities and the higher levels of excess liquidity that will be maintained for the near term following the recent market events. Net finance margin during the quarter ended March 31, 2002 reflects the favorable impact of the sale and liquidation of under-performing assets and the effect of fair value adjustments in new basis of accounting to reflect market interest rates on debt and assets including liquidating receivables. 52 Other income for Tyco Capital was $232.0 million for the quarter ended March 31, 2002 as set forth in the following table ($ in millions): Fees and other income....................................... $160.8 Factoring commissions....................................... 37.5 Gains on securitizations.................................... 34.7 Gains on sales of leasing equipment......................... 4.3 Losses on venture capital investments....................... (5.3) ------ Total....................................................... $232.0 ======
Included in fees and other income are miscellaneous fees, syndication fees and gains from receivable sales. During the quarter ended March 31, 2002, Tyco Capital recorded an unusual charge of $95.0 million relating to the economic reforms instituted by the Argentine government that converted Tyco Capital's dollar-denominated receivables into peso-denominated receivables. The $95.0 million charge has been included in the provision for credit losses. The provision for credit losses was $195.0 million, or 2.17% of AEA, for the quarter ended March 31, 2002. Financing and leasing portfolio assets totaled $37.3 billion (including $3.4 billion in securitized trade receivables managed by Tyco Capital) at March 31, 2002 as compared to $40.7 billion at September 30, 2001, while managed assets totaled $48.1 billion at March 31, 2002 as compared to $50.9 billion at September 30, 2001. Managed assets include finance receivables, operating lease equipment, finance receivables held for sale, certain investments, and finance receivables previously securitized and still managed by Tyco Capital. The reduced asset levels reflect the sale and liquidation of under-performing assets in industries expected to continue to have low margins coupled with lower origination volumes due to the soft economic environment and funding constraints arising from Tyco Capital's increased costs of borrowing. In addition, during the quarter ended March 31, 2002, Tyco Capital recorded an estimated goodwill impairment charge of $4,512.7 million. For additional information, see "Accounting Policies" below. ACCOUNTING POLICIES The preparation of consolidated financial statements in conformity with GAAP requires management to use judgment in making estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. The following accounting policies for Tyco Capital include inherent risks and uncertainties related to judgments and assumptions made by management. Management's estimates are based on the relevant information available at the end of each period. Charge-off of Finance Receivables--Finance receivables are reviewed periodically to determine the probability of loss. Charge-offs are taken after considering such factors as the borrower's financial condition and the value of underlying collateral and guarantees (including recourse to dealers and manufacturers). Investments--Investments for which Tyco Capital does not have the ability to exercise significant influence and for which there is not a readily determinable market value are accounted for under the cost method. Management uses judgment in determining when an unrealized loss is deemed to be other than temporary, in which case such loss is charged to earnings. Impaired Loans--Loan impairment is defined as any shortfall between the estimated value and the recorded investment in the loan, with the estimated value determined using the fair value of the collateral, if the loan is collateral dependent, or the present value of expected future cash flows discounted at the loan's effective interest rate. Retained Interests in Securitizations--Significant financial assumptions, including loan pool credit losses, prepayment speeds and discount rates, are utilized to determine the fair values of retained 53 interests, both at the date of the securitization and in the subsequent quarterly valuations of retained interests. Any resulting losses, representing the excess of carrying value over estimated fair value, are recorded in current earnings. However, unrealized gains are reflected in shareholder's equity as part of other comprehensive income, rather than in earnings. Lease Residual Values--Operating lease equipment is carried at cost less accumulated depreciation and is depreciated to estimated residual value using the straight-line method over the lease term or projected economic life of the asset. Direct financing leases are recorded at the aggregated future minimum lease payments plus estimated residual values less unearned finance income. Management performs periodic reviews of the estimated residual values, with impairment, other than temporary, recognized in the current period. Reserve for Credit Losses--The reserve for credit losses is periodically reviewed by management for adequacy considering economic conditions, collateral values and credit quality indicators, including historical and expected charge-off experience and levels of past-due loans and non-performing assets. Management uses judgment in determining the level of the consolidated reserve for credit losses and in evaluating the adequacy of the reserve. Goodwill--As previously discussed, all of Tyco and its subsidiaries including Tyco Capital adopted SFAS No. 142, "Goodwill and Other Intangible Assets," effective October 1, 2001, the beginning of Tyco's fiscal 2002. Since adoption of SFAS No. 142, goodwill is no longer amortized but instead is assessed annually and as triggering events occur. In making this assessment, management relies on a number of factors including operating results, business plans, economic projections, anticipated future cash flows, and transactions and market place data. We have determined that there is no impact of adopting this new standard under the transition provisions of SFAS No. 142. During the quarter ended March 31, 2002, Tyco experienced disruptions to its business surrounding its announced break-up plan, a downgrade in its credit rating, 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. We prepared valuations of our CIT subsidiary, utilizing a discounted cash flows approach updated for current information and considering various marketplace assumptions, which indicated a range of values from impairment of $750 million to excess fair value of $1.5 billion. Based on management's belief that CIT would be separated from Tyco, receive an increase in its credit ratings, and regain access to the unsecured credit markets, we initially concluded that CIT had an excess of fair market value over net book value of approximately $1.5 billion. Accordingly, management did not believe that there was an impairment of goodwill of CIT as of March 31, 2002. However, market-based information used in connection with our preliminary consideration of the potential initial public offering for 100% of CIT indicated that CIT's book value exceeded its estimated fair value as of March 31, 2002. As a result, we have performed a step 1 SFAS 142 impairment analysis as of March 31, 2002 and concluded that an impairment charge was warranted at that date. Accordingly, management's objective in performing the SFAS 142 step 1 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 our financial advisors regarding the range of price to earnings multiples and market condition discounts applicable to CIT as of March 31, 2002 and applied this 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. Our Consolidated Financial Statements for the quarter ended March 31, 2002 reflect an impairment for the decline in the estimated fair value of CIT resulting in an estimated $4.5 billion impairment charge as of March 31, 2002. 54 SFAS 142 requires a second step analysis whenever the reporting unit book value exceeds estimated fair value. This analysis requires the Company to estimate the fair value of each reporting unit's individual assets and liabilities to complete the analysis of goodwill as of March 31, 2002. The Company has not yet completed this analysis due to the recently revised fair value of CIT. The Company will complete this second step analysis in the quarter ending June 30, 2002 for CIT to determine if any adjustment to the estimated goodwill impairment charge previously recorded is needed. Subsequent to March 31, 2002, CIT experienced further downgrades and the business environment and other factors continue to negatively impact the value for the proposed IPO of CIT. As of June 11, 2002, based on further analysis, including market related data, we believe the estimated range of IPO proceeds for CIT is between $5.0 and $5.8 billion. If the proposed IPO closes on or prior to June 30, 2002, the Company expects to record the difference between the IPO proceeds and the $6.5 billion carrying value, adjusted for the completion of the March 31, 2002 step 2 analysis referred above, as a loss on disposal. If the IPO is not completed prior to June 30, 2002, the Company will assess remaining goodwill for potential additional impairment based on the indicators of further decline in value. CONSOLIDATED ITEMS CONSOLIDATED INCOME TAX EXPENSE The effective income tax rate, excluding the impact of impairment, restructuring and other unusual charges and loss on the write-off of investments, was 15.3% during the quarter ended March 31, 2002, as compared to 24.8% in the quarter ended March 31, 2001. The decrease in the effective income tax rate was primarily due to lower earnings in tax jurisdictions with higher income tax rates and due to goodwill (which was not deductible for tax purposes) no longer being amortized. EXTRAORDINARY ITEMS Tyco has repurchased some high interest rate debt of companies acquired prior to their scheduled maturities. In the quarter ended March 31, 2002, the Company recorded extraordinary items totaling $0.7 million, net of tax, as compared to $10.3 million, net of tax, in the quarter ended March 31, 2001, which represents the excess of payments made to debtholders over the recorded book value of the debt repurchased. SIX MONTHS ENDED MARCH 31, 2002 COMPARED TO SIX MONTHS ENDED MARCH 31, 2001 TYCO INDUSTRIAL REVENUE AND OPERATING (LOSS) INCOME AND MARGINS ELECTRONICS The following table sets forth revenue and operating (loss) income and margins for the Electronics segment ($ in millions):
FOR THE SIX MONTHS ENDED MARCH 31, ----------------------- 2002 2001 --------- -------- (UNAUDITED) Revenue................................................ $ 5,966.3 $8,025.8 Operating (loss) income................................ $(1,976.5) $1,796.2 Operating margins...................................... (33.1)% 22.4% Restructuring and other unusual charges................ $ (377.5) $ (91.5) Inventory charges...................................... (237.5) (42.2) Impairment of property, plant and equipment............ (2,351.7) (14.2) --------- -------- Total charges included in operating income............. $(2,966.7) $ (147.9) ========= ========
55 The 25.7% decrease in revenue in the six months ended March 31, 2002 compared with the six months ended March 31, 2001 for the segment resulted from continued softness in demand in the telecommunications, power systems, communications, printed circuit, and computer and consumer electronics end markets across all geographic regions. The Electronics segment is comprised of the electronics components group, as well as Tyco Telecommunications and Tyco Electrical and Metal Products. Revenue at the electronics components group decreased $1,492.2 million, or 23.9% reflecting softness in demand in certain end markets. Revenue at Tyco Electrical and Metal Products decreased $45.6 million, or 6.5% both as a result of lower sales volume in certain end markets and lower sales prices (reflecting lower raw material prices). Revenue at the segment's Telecommunications business declined approximately $521.7 million, or 47.9% due to lack of demand for new cable construction and very weak demand for capacity sales on the TGN. Excluding the $96.4 million decrease from foreign currency exchange fluctuations, the acquisitions of CIGI in October 2000, LPS in December 2000, Century in October 2001, Transpower Technologies in November 2001, and CII in January 2002, and all other acquisitions with a purchase price of $10 million or more, pro forma revenue (calculated in the manner described above in "Overview") for the segment decreased an additional 8.3%. Although there has been some quarterly sequential growth in some of the industries in which the segment operates, we expect our Electronics segment to continue to experience softness in demand during the current downturn in these end markets, particularly in our Telecommunications business, where the market is not expected to begin to show signs of recovery in the near term. As evidenced by the current quarter's restructuring charges, management has begun to implement plans within this segment to reduce the number of manufacturing plants and sales offices, along with the related employees, to a size appropriate for the current business environment, while attempting to maintain the flexibility needed for a potential upturn in these markets. The significant decrease in operating income and operating margins in the six months ended March 31, 2002 compared with the six months ended March 31, 2001 was primarily due to the decrease in revenue, decreased sales prices and lower manufacturing volume, which increased per unit costs, and the charges discussed below. The operating loss and margins in the six months ended March 31, 2002 include, restructuring and other unusual charges of $615.0 million, of which inventory write-downs, primarily raw materials, of $237.5 million are included in cost of revenue, primarily related to facility closures. Of the $237.5 million, $6.2 million of inventory has been scrapped as of March 31, 2002. The remaining $231.3 million of written-off inventory will be scrapped in the next three to twelve months. There were no significant sales of previously written-down or written-off inventory during the six months ended March 31, 2002. Also included are charges of $2,351.7 million for the impairment of property, plant and equipment, primarily related to the TGN. Operating loss and margins in the six months ended March 31, 2001, include restructuring and other unusual charges of $133.7 million primarily related to severance associated with the closure of facilities. Included within the charges of $133.7 million are inventory write-downs of $28.2 million and charges of $14.0 million related to the write-up of inventory under purchase accounting, both of which are included in cost of revenue. Operating loss and margins for the six months ended March 31, 2001 also include a charge for the impairment of property, plant and equipment of $14.2 million associated with the facility closures. As a result of the charges recorded within the Electronics segment during the six months ended March 31, 2002, we estimate that our overall cost structure will be reduced due to the impact of these charges by approximately $358.0 million (approximately $249.0 million cash and $109.0 million non-cash) on an annualized basis, of which $263.6 million relates to cost of sales, $6.2 million to depreciation expense and $88.2 million to other selling, general and administrative expenses. However, since business conditions do not remain constant the actual reductions in cost may significantly differ from these amounts. 56 The following table provides additional information about the restructuring and other unusual charges recorded during the six months ended March 31, 2002 related to the Electronics segment:
SEVERANCE FACILITIES INVENTORY OTHER TOTAL --------- ---------- --------- --------- -------- Fiscal 2002 charges....................... $117.5 $260.0 $ 237.5 $ -- $ 615.0 Fiscal 2002 utilization................... (31.1) (65.4) (6.2) -- (102.7) ------ ------ ------- --------- ------- Balance at March 31, 2002................. $ 86.4 $194.6 $ 231.3 $ -- $ 512.3 ====== ====== ======= ========= =======
FIRE AND SECURITY SERVICES The following table sets forth revenue and operating income and margins for the Fire and Security Services segment ($ in millions):
FOR THE SIX MONTHS ENDED MARCH 31, ------------------------ 2002 2001 ---------- -------- (RESTATED) (UNAUDITED) Revenue................................................. $6,567.6 $4,597.4 Operating income........................................ $ 950.0 $ 726.2 Operating margins....................................... 14.5% 15.8% Restructuring and other unusual charges................. $ (37.5) $ (32.4) Inventory charges....................................... (19.6) -- Impairment of property, plant and equipment............. -- (1.3) -------- -------- Total charges included in operating income.............. $ (57.1) $ (33.7) ======== ========
The 42.9% increase in revenue in the six months ended March 31, 2002 over the six months ended March 31, 2001 resulted primarily from higher sales volume and increased service revenue in both the worldwide fire protection businesses and the worldwide electronic security services business and, to a lesser extent, due to increased revenue at Tyco Valves and Controls and Tyco Infrastructure Services. The increases were due primarily to acquisitions and, to a lesser extent, a higher volume of recurring service revenues from our worldwide security business and increased sales of fire safety products. Acquisitions included Simplex Time Recorder Co. in January 2001, Pyrotenax in March 2001, Scott in May 2001, IMI in June 2001, Security Link and Sentry S.A. in July 2001, Edison Select in August 2001, Smith Alarm in October 2001, DSC Group, Water & Power and Sensormatic in November 2001, and Clean Air Systems in February 2002. Excluding the $76.1 million decrease from foreign currency exchange fluctuations, our dealer program, the impact of the acquisitions listed above, and all other acquisitions with a purchase price of $10 million or more, pro forma revenue (calculated in the manner described above in "Overview") for the segment increased an estimated 4.1%. We expect that the continued awareness of the need for fire and security products should offset any general market softness experienced by the segment. The 30.8% increase in operating income before certain charges in the six months ended March 31, 2002 over the six months ended March 31, 2001 was primarily due to acquisitions and partially due to increased service volume in our worldwide fire protection and electronic security services business. Operating margins decreased primarily due to increased sales volume and service revenue in worldwide fire protection, offset by decreased margins at Tyco Valves and Controls and Tyco Infrastructure Services, lower margins on newly acquired businesses and the business distractions that took place during the quarter ended March 31, 2002. Operating income and margins in the six months ended March 31, 2002 reflect restructuring and other unusual charges of $37.5 million, primarily related to severance associated with the closure of facilities. Also included are charges of $13.8 million related to the write-up of inventory under purchase accounting, and inventory write-downs of $5.8 million, both of which are included in cost of revenue. Operating income and margins in the six months ended March 31, 2001, include restructuring and other unusual charges of $32.4 million, primarily related to the closure of facilities in the valves and 57 controls business and an environmental remediation project and charges of $1.3 million for the impairment of property, plant and equipment associated with the facility closures. As a result of the charges recorded within the Fire and Security segment during the six months ended March 31, 2002, we estimate that our overall cost structure will be reduced due to the impact of these charges by approximately $63.3 million (substantially all cash-related) on an annualized basis, $11.6 million of which relates to cost of sales and $51.7 million to other selling, general and administrative expenses. However, since business conditions do not remain constant, the actual reductions in cost may significantly differ from these amounts. The following table provides additional information about the restructuring and other unusual charges recorded during the six months ended March 31, 2002 related to the Fire and Security Services segment:
SEVERANCE FACILITIES INVENTORY OTHER TOTAL --------- ---------- --------- -------- -------- Fiscal 2002 charges....................... $31.5 $ 1.3 $ 19.6 $ 4.7 $ 57.1 Fiscal 2002 utilization................... (7.8) (0.3) (19.6) (4.3) (32.0) ----- ----- ------ ----- ------ Balance at March 31, 2002................. $23.7 $ 1.0 $ -- $ 0.4 $ 25.1 ===== ===== ====== ===== ======
HEALTHCARE AND SPECIALTY PRODUCTS The following table sets forth revenue and operating income and margins for the Healthcare and Specialty Products segment ($ in millions):
FOR THE SIX MONTHS ENDED MARCH 31, ---------------------- 2002 2001 -------- -------- (UNAUDITED) Revenue................................................. $4,656.2 $4,215.6 Operating income........................................ $1,059.4 $ 686.6 Operating margins....................................... 22.8% 16.3% Restructuring and other unusual charges................. $ (8.7) $ (4.8) Inventory charges....................................... -- (29.2) Write-off of purchased in-process research and development........................................... -- (184.3) Impairment of property, plant and equipment............. -- (9.6) -------- -------- Total charges included in operating income.............. $ (8.7) $ (227.9) ======== ========
The 10.5% increase in revenue in the six months ended March 31, 2002 over the six months ended March 31, 2001 was primarily the result of acquisitions. Excluding the $50.0 million decrease from foreign currency exchange fluctuations, the acquisitions of Mallinckrodt in October 2000, InnerDyne, Inc. in December 2000, Linq in December 2001, and Paragon in January 2002, and all other acquisitions with a purchase price of $10 million or more, pro forma revenue (calculated in the manner described above in "Overview") for the segment remained flat. The healthcare market has not been significantly impacted by the current economic downturn, and we do not expect a lessening of demand for the products we offer. The increase in operating income and margins in the six months ended March 31, 2002 compared to the six months ended March 31, 2001 was due primarily to a decrease in charges as discussed below, acquisitions, favorable product mix as sales of higher margin products increased and operating efficiencies realized from cost reductions at Mallinckrodt, partially offset by decreased margins at Plastics and Adhesives as a result of volume shortfalls and unfavorable manufacturing variances. Operating income and margins in the six months ended March 31, 2002 reflect unusual charges of $8.7 million related to the write-off of legal and other deal costs associated with acquisitions that were not completed. The entire $8.7 million was utilized during the six months ended March 31, 2002. Operating income and margins in the six months ended March 31, 2001 include restructuring and other unusual charges of $34.0 million related to the closure of two manufacturing plants. Included within the $34.0 million of charges are charges of $25.0 million for the write-up of inventory under purchase 58 accounting and inventory write-downs of $4.2 million, both of which are included in cost of revenue. Operating income and margins for the six months ended March 31, 2001 also include a charge of $184.3 million for the write-off of purchased in-process research and development associated with the acquisition of Mallinckrodt and charges for the impairment of property, plant and equipment closure of $9.6 million primarily related to the closure of the manufacturing plants. FOREIGN CURRENCY The effect of changes in foreign exchange rates for the six months ended March 31, 2002 compared to the six months ended March 31, 2001 was a decrease in revenue of approximately $222.5 million and a decrease in operating income of approximately $54.5 million. CORPORATE ITEMS Corporate expenses were $278.2 million and corporate income was $461.2 million for the six months ended March 31, 2002 and 2001, respectively. Corporate expenses were $97.6 million (excluding an unusual charge of $141.0 million due to a loss on the write-off of investments and a loss on the sale of common shares of a subsidiary of $39.6 million.) in the six months ended March 31, 2002 as compared to $108.7 million (excluding a net gain on the sale of businesses of $410.4 million and an unusual net credit of $159.5 million primarily for the settlement of litigation) in the six months ended March 31, 2001. The decrease in the six months ended March 31, 2002 as compared to the six months ended March 31, 2001 was primarily due to lower compensation expense under equity-based compensation plans, which was somewhat offset by higher costs during fiscal 2002 associated with supporting and monitoring our expanded businesses and operations. INTEREST EXPENSE, NET Net interest expense was $410.0 million in the six months ended March 31, 2002, as compared to $395.4 million in the six months ended March 31, 2001. The increase is a result of an adjustment to capitalized interest to reflect a lower average interest rate, somewhat offset by lower interest rates in the current year, substantially offset by higher average debt balances associated with borrowing to finance acquisitions and higher rates on debt assumed in acquisitions. We expect our interest expense to increase slightly for our third fiscal quarter due to the effect of higher rate bank debt outstanding for the entire quarter. TYCO CAPITAL The following table sets forth the operating results for the Company's Tyco Capital segment ($ in millions):
FOR THE SIX MONTHS ENDED MARCH 31, 2002 -------------- Finance income.............................................. $ 2,304.7 Interest expense............................................ 725.0 --------- Net finance income.......................................... 1,579.7 Depreciation on operating lease equipment(1)................ 648.7 --------- Net finance margin.......................................... 931.0 Provision for credit losses(2).............................. 307.9 --------- Net finance margin, after provision for credit losses....... 623.1 Other income................................................ 477.1 --------- Operating margin............................................ 1,100.2
59
FOR THE SIX MONTHS ENDED MARCH 31, 2002 -------------- Selling, general, administrative and other costs and expenses except for depreciation on operating lease equipment(1).............................................. 472.8 Goodwill impairment......................................... 4,512.7 --------- Income (loss) before income taxes and minority interest..... $(3,885.3) ========= Average earning assets ("AEA")(3)........................... $37,114.1 Net finance margin as a percent of AEA (annualized)......... 5.02%
- ------------------------------ (1) Depreciation on operating lease equipment has been included within selling, general, administrative and other costs and expenses in the Consolidated Statements of Operations. (2) Includes a charge of $95.0 million related to economic reforms instituted by the Argentine government that converted Tyco Capital's dollar-denominated receivables into peso denominated receivables. (3) Average earning assets is the average of finance receivables, operating lease equipment, finance receivables held for sale and certain investments, less credit balances of factoring clients. Tyco Capital's revenues were $2,781.8 million for the six months ended March 31, 2002 consisting of finance income of $2,304.7 million and other income of $477.1 million. As a percentage of AEA, finance income was 12.42%. For the six months ended March 31, 2002, Tyco Capital's loss before income taxes and minority interest was $3,885.3 million. Net finance margin as a percentage of AEA for the six months ended March 31, 2002 was primarily favorably impacted by the effect of fair value adjustments in new basis of accounting to reflect market interest rates on debt and assets, including liquidating receivables. Other factors favorably impacting AEA were the following: (1) exits from non-strategic and under-performing businesses; (2) the decline in short term interest rates and (3) lower leverage. These positive factors were partially offset by the increased cost of bank line borrowings and excess cash maintained for liquidity purposes during the six months ended March 31, 2002. Interest expense totaled $725.0 million for the six months ended March 31, 2002. As a percentage of AEA, interest expense was 3.91%. We expect Tyco Capital's interest expense as a percentage of AEA to increase as a result of higher costs associated with the drawn down on its bank credit facilities to repurchase outstanding commercial paper at scheduled maturities and the higher levels of excess liquidity that will be maintained for the near term following the recent market events. Net finance margin during the six months ended March 31, 2002 reflects the favorable impact of the sale and liquidation of under-performing assets and the effect of fair value adjustments in new basis of accounting. Other income for Tyco Capital was $477.1 million for the six months ended March 31, 2002 as set forth in the following table ($ in millions): Fees and other income....................................... $334.3 Factoring commissions....................................... 75.8 Gains on securitizations.................................... 62.7 Gains on sales of leasing equipment......................... 7.0 Losses on venture capital investments....................... (2.7) ------ Total....................................................... $477.1 ======
Included in fees and other income are miscellaneous fees, syndication fees and gains from receivable sales. During the six months ended March 31, 2002, Tyco Capital recorded an unusual charge of $95.0 million relating to the economic reforms instituted by the Argentine government that converted Tyco Capital's dollar-denominated receivables into peso-denominated receivables. The $95.0 million charge has been included in the provision for credit losses. The provision for credit losses was $307.9 million, or 1.66% of AEA, for the six months ended March 31, 2002. In addition, during the six months ended March 31, 2002, Tyco Capital recorded an estimated goodwill impairment charge of $4,512.7 million. For additional information, see "Accounting Policies--Goodwill", in the quarterly discussion above. 60 CONSOLIDATED ITEMS CONSOLIDATED INCOME TAX EXPENSE The effective income tax rate, excluding the impact of purchased in-process research and development, restructuring and other unusual charges, charges for the impairment of long-lived assets and net loss on investments and gain on the sale of businesses, was 18.7% during the six months ended March 31, 2002, as compared to 25.3% in the six months ended March 31, 2001. The decrease in the effective income tax rate was primarily due to lower earnings in tax jurisdictions with higher income tax rates and due to goodwill (which was not deductible for tax purposes) no longer being amortized. EXTRAORDINARY ITEMS Tyco has repurchased some high interest rate debt of companies acquired prior to their scheduled maturities. In the six months ended March 31, 2002, the Company recorded extraordinary items totaling $3.5 million, net of tax, as compared to $10.3 million, net of tax, in the six months ended March 31, 2001, which represents the excess of payments made to debtholders over the recorded book value of the debt repurchased. CUMULATIVE EFFECT OF ACCOUNTING CHANGES In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), in which the SEC Staff expressed its views regarding the appropriate recognition of revenue in a variety of circumstances, some of which are relevant to us. As required under SAB 101, we modified our revenue recognition policies with respect to the installation of electronic security systems. In addition, in response to SAB 101, we undertook a review of our revenue recognition practices and identified certain provisions included in a limited number of sales arrangements that delayed the recognition of revenue under SAB 101. During the fourth quarter of fiscal 2001, we changed our method of accounting for these items retroactive to the beginning of the fiscal year to conform to the requirements of SAB 101. This was reported as a $653.7 million after-tax ($1,005.6 million pre-tax) charge for the cumulative effect of change in accounting principle in the Consolidated Statement of Operations for the first quarter of fiscal 2001. In addition, during the first quarter of fiscal 2001, we recorded a cumulative effect adjustment, a $29.7 million loss, net of tax, in accordance with the transition provisions of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." LIQUIDITY AND CAPITAL RESOURCES TYCO INDUSTRIAL The following table shows the sources of our cash flow from operating activities and the use of a portion of that cash in our operations for the quarters and six months ended March 31, 2002 and 2001. We refer to the net amount of cash generated from operating activities, less capital expenditures and dividends, as "free cash flow." Management believes operating cash flow and free cash flow are important measures of operating performance for the manufacturing and service businesses included within Tyco Industrial, but not as important for Tyco Capital due to the nature of the financial services business. This is because the sources and uses of balance sheet items are completely different for an industrial manufacturing and service company versus a financial services company. Consequently, the following table presents such information for Tyco Industrial only. Free cash flow as determined below is not a measure of financial performance under GAAP, should not be considered a substitute for cash 61 flows from operating activities as determined in accordance with GAAP as a measure of liquidity, and may not be comparable to similarly titled measures reported by other companies.
FOR THE QUARTERS FOR THE SIX MONTHS ENDED MARCH 31, ENDED MARCH 31, --------------------- --------------------- 2002 2001 2002 2001 ---------- -------- ---------- -------- ($ IN MILLIONS) (RESTATED) (RESTATED) (UNAUDITED) (UNAUDITED) Tyco Industrial operating income..................... $(1,654.0) $1,719.3 $ (286.7) $3,015.3 Non-cash restructuring and other unusual charges, net................................................ 316.2 32.4 322.0 33.1 Charges for the impairment of long-lived assets...... 2,351.7 17.7 2,351.7 25.1 Write-off of purchased in-process research and development........................................ -- -- -- 184.3 Charges related to prior years (see Note 1).......... -- -- 222.0 -- Depreciation and amortization(1)..................... 506.7 408.4 987.4 775.1 Net increase (decrease) in deferred income taxes..... (2.2) (112.8) (135.9) 80.0 Less: Net decrease (increase) in working capital(2)...... 520.5 42.5 (163.0) (568.5) Expenditures relating to restructuring and other unusual charges(3)............................... (91.1) (44.3) (182.0) (55.6) Interest and other financial charges, net.......... (221.9) (227.3) (410.0) (395.4) Income tax expense................................. (24.9) (366.0) (219.2) (891.0) Other, net......................................... 25.3 149.1 180.2 330.9 --------- -------- -------- -------- Tyco Industrial cash flow from operating activities......................................... 1,726.3 1,619.0 2,666.5 2,533.3 Less: Capital expenditures(4)............................ (418.9) (513.3) (988.3) (910.6) Dividends paid..................................... (25.3) (22.1) (49.7) (43.6) Construction of Tyco Global Network................ (255.7) (439.1) (817.4) (707.8) --------- -------- -------- -------- Free cash flow(5).................................... $ 1,026.4 $ 644.5 $ 811.1 $ 871.3 ========= ======== ======== ========
- ------------------------------ (1) This amount is the sum of depreciation of tangible property ($371.9 million and $322.6 million for the quarters ended March 31, 2002 and 2001 and $731.5 million and $619.1 million for the six months ended March 31, 2002 and 2001, respectively) and amortization of intangible assets other than goodwill ($134.8 million and $85.8 million for the quarters ended March 31, 2002 and 2001 and $255.9 million and $156.0 million for the six months ended March 31, 2002 and 2001, respectively). (2) This amount excludes cash paid out for restructuring and other unusual charges. (3) This amount is cash paid out for restructuring and other unusual charges. (4) This amount is net of proceeds of $11.7 million and $134.8 million for the quarters ended March 31, 2002 and 2001 and $40.0 million and $251.2 million for the six months ended March 31, 2002 and 2001, respectively, received in sale-leaseback transactions. (5) This amount is before cash payments for purchase accounting and holdback/earn-out liabilities of $157.7 million and $146.1 million for the quarters ended March 31, 2002 and 2001 and $376.4 million and $317.4 million for the six months ended March 31, 2002 and 2001, respectively. 62 The following table shows cash flow from operating activities and free cash flow by segment for the six months ended March 31, 2002 (restated).
HEALTHCARE FIRE AND AND SECURITY SPECIALTY ELECTRONICS SERVICES PRODUCTS CORPORATE TYCO INDUSTRIAL ----------- -------- ---------- --------- --------------- Operating income........................ $(1,976.5) $ 950.0 $1,059.4 $(319.6) $ (286.7) Non-cash restructuring and other unusual charges, net.......................... 298.2 22.9 0.9 -- 322.0 Charges for the impairment of long-lived assets................................ 2,351.7 -- -- -- 2,351.7 Charges related to prior years (see Note 1)............................... -- -- -- 222.0 222.0 Depreciation............................ 281.6 310.6 132.8 6.5 731.5 Intangible assets amortization.......... 33.4 176.6 45.9 -- 255.9 --------- -------- -------- ------- -------- Depreciation and amortization........... 315.0 487.2 178.7 6.5 987.4 Deferred income taxes................... -- -- -- (135.9) (135.9) Net decrease (increase) in working capital and other(1).................. 386.7 (284.2) (168.3) 83.0 17.2 Expenditures relating to restructuring and other unusual charges............. (135.8) (23.9) (21.9) (0.4) (182.0) Interest and other financial charges, net................................... -- -- -- (410.0) (410.0) Income tax expense...................... -- -- -- (219.2) (219.2) --------- -------- -------- ------- -------- Cash flow from operating activities..... 1,239.3 1,152.0 1,048.8 (773.6) 2,666.5 Capital expenditures.................... (299.6) (502.1) (161.3) (25.3) (988.3) Dividends paid.......................... -- -- -- (49.7) (49.7) Construction of Tyco Global Network..... (817.4) -- -- -- (817.4) --------- -------- -------- ------- -------- Free Cash Flow.......................... $ 122.3 $ 649.9 $ 887.5 $(848.6) $ 811.1 ========= ======== ======== ======= ========
- ------------------------------ (1) These amounts exclude cash paid out for restructuring and other unusual charges. During the six months ended March 31, 2002, we paid out $376.4 million in cash that was charged against purchase accounting reserves and holdback/earn-out liabilities established in connection with acquisitions. This amount is included in "Cash paid for purchase accounting and holdback/earn-out liabilities" in the Consolidated Statement of Cash Flows. During the six months ended March 31, 2002, we recorded restructuring and other unusual charges of $667.0 million, of which charges of $243.3 million are included in cost of revenue, related primarily to the write-down of inventory and the closure of facilities within the Electronics segment. In addition, we incurred an unusual charge of $13.8 million related to the sale of inventory, which had been written-up under purchase accounting, and has been included in cost of revenue. At September 30, 2001, there existed reserves for restructuring and other unusual charges of $340.2 million. During the six months ended March 31, 2002, we paid out $182.0 million in cash and incurred $93.5 million (including the $13.8 million related to the sale of inventory, which had been written up under purchase accounting) in non-cash charges that were charged against these reserves. At March 31, 2002, there remained $745.5 million of reserves for restructuring and other unusual charges on Tyco Industrial's Consolidated Balance Sheet, of which $613.3 million is included in accrued expenses and other current liabilities and $132.2 million is included in other long-term liabilities. During the six months ended March 31, 2002, Tyco Industrial purchased businesses for $3,723.8 million and customer contracts for electronic security services through its dealer program for $678.2 million. The aggregate cost of $4,402.0 million consists of $2,342.7 million paid in cash, net of 63 $155.3 million of cash acquired, $1,911.4 million paid in the form of Tyco common shares, and assumed stock options and pre-existing put option rights with a fair value of $147.9 million ($22.2 million of which put option rights has been paid in cash). Also during the six months, we completed our amalgamation with TyCom, and TyCom shares not already owned by Tyco were converted into approximately 17.7 million Tyco common shares valued at $819.9 million. Debt of acquired companies aggregated $775.7 million. During fiscal 2001, we entered into an agreement to acquire C.R. Bard, Inc., a healthcare products manufacturer. On February 6, 2002, Tyco and C.R. Bard, Inc. mutually terminated the merger agreement. Each party bore its own costs, and no break up fee was paid. At the beginning of fiscal 2002, purchase accounting reserves were $732.1 million as a result of purchase accounting transactions in prior years. In connection with fiscal 2002 acquisitions, we established purchase accounting reserves of $182.2 million for transaction and integration costs. In addition, purchase accounting liabilities of $355.7 million and a corresponding increase to goodwill and deferred tax assets were recorded during the six months ended March 31, 2002 relating to fiscal 2001 acquisitions. These reserves related primarily to revisions associated with finalizing the exit plans of LPS, Tyco Capital and SecurityLink, all acquired during fiscal 2001. During the six months ended March 31, 2002, we paid out $318.4 million in cash for purchase accounting liabilities, plus $58.0 million relating to holdback/earn-out liabilities, and incurred $26.3 million in non-cash charges and reclassifications (including $2.3 million relating to earn-out liabilities) against the reserves established during and prior to this six-month period. In addition, during the six months ended March 31, 2002, we assumed pre-existing put option rights of $105.9 million, of which $22.2 million has been paid in cash. Holdback liabilities represent a portion of the purchase price that is withheld from the seller pending finalization of the acquisition balance sheet. Certain acquisitions have provisions which require Tyco to make additional "earn-out" payments to the sellers if the acquired company achieves certain milestones subsequent to its acquisition by Tyco. Also, in the six months ended March 31, 2002, we determined that $47.3 million of purchase accounting reserves related to acquisitions prior to fiscal 2002 were not needed and reversed that amount against goodwill. At March 31, 2002, there remained $880.2 million in purchase accounting reserves on Tyco Industrial's Consolidated Balance Sheet, of which $600.2 million is included in accrued expenses and other current liabilities and $280.0 million is included in other long-term liabilities. In addition, $270.7 million of holdback/earn-out liabilities remained on our Consolidated Balance Sheet, of which $136.6 million are included in accrued expenses and other current liabilities and $134.1 million are included in other long-term liabilities at March 31, 2002. The net change in total working capital, net of the effects of acquisitions and divestitures, was an increase of $265.9 million in the six months ended March 31, 2002, including cash paid out for restructuring and other unusual charges of $182.0 million. The components of this change are set forth in detail in Tyco Industrial's Consolidated Statement of Cash Flows. We focus on maximizing the cash flow from our operating businesses and attempt to keep the working capital employed in the businesses to the minimum level required for efficient operations. During the six months ended March 31, 2002, we decreased our participation in our sale of accounts receivable program by approximately $90.2 million, and increased our participation in our sale of accounts receivable program with Tyco Capital by approximately $62.2 million. The $62.2 million increase switched a portion of our financing source from third parties to Tyco Capital with no impact in our changes in working capital. Acquisitions have been an important part of Tyco's growth in recent years. While we will continue to make selected complementary acquisitions, we anticipate reducing the number of acquisitions we complete prospectively, and, therefore expect that our growth rate from acquisitions will be reduced as compared to prior quarters. Goodwill and other intangible assets were $33,755.3 million at March 31, 2002, compared to $28,740.9 million at September 30, 2001. 64 During the six months ended March 31, 2002, we received proceeds of $181.3 million from the exercise of common share options and used $765.8 million of cash to repurchase our own common shares. We ceased repurchasing our common shares in February 2002, and will not consider implementing future repurchases until our short-term debt levels are significantly reduced. Shareholders' equity was $28,843.3 million, or $14.44 per share, at March 31, 2002, compared to $31,737.4 million, or $16.40 per share, at September 30, 2001. The decrease in shareholders' equity was due primarily to: (i) a net loss of $(5,178.6) million for the six months ended March 31, 2002, and (ii) the repurchase of our common shares discussed above. This decrease was partially offset by the following: (i) the issuance of approximately 47.6 million common shares valued at $1,911.4 million for the acquisition of Sensormatic, (ii) the conversion of TyCom shares not already owned by Tyco into 17.7 million Tyco common shares valued at $819.9 million in connection with the amalgamation with TyCom, (iii) $235.6 million for the fair value of shares issued and options assumed in connection with the fiscal 2001 acquisition of Mallinckrodt, (iv) the issuance of 44,139 common shares valued at $2.3 million related to an earn-out payment, and (v) $42.0 million for the fair value of options assumed. Total debt as a percent of total capitalization (total debt and shareholders' equity) was 49% at March 31, 2002 and 41% at September 30, 2001. Net debt (total debt less cash and cash equivalents) as a percent of total capitalization was 42% at March 31, 2002 and 37% at September 30, 2001. The source of the cash used for acquisitions in fiscal 2002 was primarily proceeds from the issuance of debt. At March 31, 2002, Tyco Industrial's total debt was $27,376.7 million, as compared to $21,619.0 million at September 30, 2001. Our cash balance increased to $4,034.4 million at March 31, 2002, as compared to $1,779.2 million at September 30, 2001. The following summarizes Tyco Industrial's change in net debt for the six months ended March 31, 2002 ($ in millions): Total debt at September 30, 2001....................... $21,619.0 Less: cash and cash equivalents at September 30, 2001................................................. 1,779.2 --------- NET DEBT BALANCE AT SEPTEMBER 30, 2001................. 19,839.8 Operating cash flow.................................... (2,666.5) Purchase of property, plant and equipment.............. 988.3 Dividends.............................................. 49.7 Construction in progress--TGN.......................... 817.4 --------- Free cash flow......................................... (811.1) Acquisition of businesses.............................. 2,719.1 Proceeds from exercise of options...................... (181.3) Repurchase of common shares............................ 765.8 Debt of acquired companies............................. 775.7 Net cash payments to Tyco Capital...................... 238.3 Other items............................................ (4.0) --------- NET DEBT BALANCE AT MARCH 31, 2002..................... 23,342.3 Plus: cash and cash equivalents at March 31, 2002...... 4,034.4 --------- Total debt at March 31, 2002........................... $27,376.7 =========
In October 2001, Tyco International Group S.A. ("TIG"), a wholly-owned subsidiary of Tyco, sold $1,500.0 million 6.375% notes due 2011 under its $6.0 billion shelf registration statement in a public offering. The notes are fully and unconditionally guaranteed by Tyco. The net proceeds of approximately $1,487.8 million were used to repay borrowings under TIG's commercial paper program. In November 2001, TIG sold E500.0 million 4.375% notes due 2005, E685.0 million 5.5% notes due 2009, L200.0 million 6.5% notes due 2012 and L285.0 million 6.5% notes due 2032, utilizing capacity 65 available under TIG's European Medium Term Note Programme established in September 2001. The notes are fully and unconditionally guaranteed by Tyco. The net proceeds of all four tranches were the equivalent of $1,726.6 million and were used to repay borrowings under TIG's commercial paper program. In January 2002, TIG entered into a $1.5 billion bridge loan, which is fully and unconditionally guaranteed by Tyco, with a variable LIBO-based rate, which was 3.70% as of March 31, 2002. TIG repaid $645.0 million in April 2002. The remaining balance is due in June 2002. In February 2002, TIG borrowed the available $2.0 billion of capacity under its 5-year unsecured revolving credit facility, which had been maintained as liquidity support for its commercial paper program. The facility, which expires in February 2006, is fully and unconditionally guaranteed by Tyco and has a variable LIBO-based rate, which was 3.53% as of March 31, 2002. Also, in February 2002, TIG borrowed $3.855 billion under its 364-day unsecured revolving credit facility and exercised its option to convert this facility into a term loan expiring on February 6, 2003. The loan, which is fully and unconditionally guaranteed by Tyco, has a variable LIBO-based rate, which was 3.52% as of March 31, 2002. Proceeds from the bridge loan and credit facilities were used to pay off maturing commercial paper at the scheduled maturities and to provide additional available capital for Tyco Industrial. The following table details our debt rating at September 30, 2001, March 31, 2002 and May 14, 2002. Following the borrowings in February 2002, Standard & Poor's and Fitch downgraded our long-term debt and commercial paper ratings, while Moody's confirmed its ratings, resulting in the ratings shown in the March 31, 2002 column in the table below. In April 2002, Moody's downgraded and Fitch further downgraded our ratings as shown in the May 14, 2002 column in the table below. The April downgrade was primarily the result of Tyco's revision of its plan to separate into four independent public companies and the weak economic environment of the electronics and telecommunications industries.
AT SEPTEMBER 30, 2001 AT MARCH 31, 2002 AT MAY 14, 2002 ---------------------- ---------------------- ---------------------- SHORT TERM LONG TERM SHORT TERM LONG TERM SHORT TERM LONG TERM ---------- --------- ---------- --------- ---------- --------- Moody's....................... P2 Baa1 P2 Baa1 P2 Baa2(1) Standard & Poor's............. A1 A A3 BBB A3 BBB Fitch......................... F1 A F2 A- F3 BBB
- ------------------------------ (1) At May 14, 2002, Moody's differentiated the ratings between Tyco's and TIG's outstanding debt. The Moody's debt rating on Tyco's convertible debentures was downgraded to a Baa3 rating. THE SECURITY RATINGS STATED ABOVE ARE NOT A RECOMMENDATION TO BUY, SELL OR HOLD SECURITIES AND MAY BE SUBJECT TO REVISION OR WITHDRAWAL BY THE ASSIGNING RATING ORGANIZATION. EACH RATING SHOULD BE EVALUATED INDEPENDENTLY OF ANY OTHER RATING. If rating agencies downgrade Tyco Industrial's debt to below investment grade status, Tyco Industrial may be required to repurchase its Y30 billion (U.S.$223 million) 3.5% notes due 2030 and receivables previously sold under our third party sale of accounts receivables program. Amounts outstanding under these receivables programs aggregated $530 million as of March 31, 2002, which is a decrease of approximately $36 million from December 31, 2001. The value of the Y30 billion 3.5% notes due 2030 and amounts sold under our sale of accounts receivables program has not changed significantly through May 14, 2002. In January 2002, the Company issued a $200 million guarantee that can be exercised by a customer if the Pacific component of the TGN is not completed by March 2003. The Company does not anticipate any problems with meeting this deadline. 66 We believe that our cash flow from Tyco Industrial's operations, together with proceeds of the borrowings under our existing credit facilities is adequate to fund Tyco Industrial's operations. However, a decrease in demand for the Company's products and services, further debt rating downgrades or deterioration in the Company's financial ratios could negatively impact the Company's accessibility to financing and cost of funds. We do not anticipate a need to issue new debt until sometime after December 2002. In February 2001, TIG issued $3,035,000,000 principal amount at maturity of zero coupon convertible debentures due 2021 for aggregate net proceeds of $2,203,400,000. The debentures, which are guaranteed by Tyco, accrete interest at a rate of 1.5% per annum. TIG may be required to repurchase these securities at the option of the holder at the accreted value of approximately $2.3 billion in February 2003. TIG may elect to repurchase these debentures for cash, Tyco common shares, or some combination thereof. The table below includes our projected cash flows through March 2003 ($ in millions). This table does not include potential cash proceeds from the sale of CIT, and assumes that the convertible debentures described above are retired for cash.
FY 2002 FY 2003 ------------------------------ -------------------- FISCAL QUARTER Q2 Q3 Q4 Q1 Q2 - -------------- -------- -------- -------- -------- --------- ACT. EST. EST. EST. EST. -------- -------- -------- -------- --------- BEGINNING CASH BALANCE................................. $1,866 $4,034 $2,884 $2,672 $ 2,549 Free Cash Flow(1)...................................... 1,026 900 1,289 400 1,200 Acquisitions, including Purchase Accounting Spending... (1,448) (550) (450) (450) (450) Net Share Repurchases.................................. (120) -- -- -- -- Refinancings(2)........................................ -- -- -- -- 3,250(2) Expected Divestitures Proceeds......................... -- -- -- -- -- Other.................................................. 64 -- -- -- -- Net Increase (Decrease) in Debt........................ 2,646 (1,500) (1,051) (73) (6,218)(3) ------ ------ ------ ------ --------- ENDING CASH BALANCE.................................... $4,034 $2,884 $2,672 $2,549 $ 331 ====== ====== ====== ====== =========
- ------------------------------ (1) Total Free Cash Flow is estimated between $3.0 billion to $3.5 billion for fiscal 2002 and is shown in the table at $3.0 billion. (2) Refinancings may occur at any time during the period but are shown in the table as occurring in the second quarter of fiscal 2003. If the convertible debentures are not retired for cash, but instead for common shares, then the amount needed for refinancing would be $2.3 billion less. (3) Of this amount, $2.3 billion is attributable to the redemption at the option of the holder of the convertible debentures issued in February 2001, which by the terms of the debentures could be satisfied through the issuance of Tyco common shares. TYCO INDUSTRIAL BACKLOG At March 31, 2002, Tyco Industrial had a backlog of unfilled orders of approximately $11,134.3 million. Total backlog increased, as compared to a backlog of $11,094.9 million at December 31, 2001 and $10,999.1 million at September 30, 2001. Backlog by industry segment is as follows ($ in millions):
MARCH 31, SEPTEMBER 30, 2002 2001 --------- ------------- (UNAUDITED) Electronics.......................................... $ 2,545.7 $ 2,809.8 Fire and Security Services........................... 8,383.9 8,010.9 Healthcare and Specialty Products.................... 204.7 178.4 --------- --------- $11,134.3 $10,999.1 ========= =========
67 The decrease in backlog within the Electronics segment reflects the continued softness in demand in the communications, telecommunications, printed circuit, and computer and consumer electronics end markets. Within the Fire and Security Services segment, backlog increased in part due to the acquisition of Sensormatic, which resulted in an addition of approximately $57.0 million to backlog. Backlog in the Healthcare and Specialty Products segment represents unfilled orders, which, in the nature of the business, are normally shipped shortly after purchase orders are received. We do not view backlog in the healthcare industry to be a significant indicator of the level of future sales activity. TYCO CAPITAL LIQUIDITY RISK MANAGEMENT This section should be read in connection with "Tyco Capital-Liquidity Risk Management" within "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Tyco's Form 10-K for the year ended September 30, 2001. In February 2002, Tyco Capital drew down on its $8.5 billion unsecured bank credit facilities, which have historically been maintained as liquidity support for its commercial paper programs. The proceeds are continuing to be used to satisfy Tyco Capital's outstanding commercial paper obligations, of which approximately $710 million remains outstanding at March 31, 2002. The credit facilities are made up of four variable-rate instruments. Two of the instruments mature in March 2003, with one totaling $3.72 billion at LIBOR plus 28 basis points and the other is $0.5 billion (Canadian dollar) at Prime plus 5 basis points as of March 31, 2002. The remaining two variable rate credit instruments consist of $3.72 billion at LIBOR plus 30 basis points that matures in March 2005 and $0.765 billion at LIBOR plus 45 basis points that matures in April 2005 as of March 31, 2002. This draw down followed a similar draw down of bank lines by Tyco. As set forth below, on April 1, 2002 Tyco completed a $2.5 billion public unsecured bond offering. The proceeds created substantial liquidity and will be used to repay other term debt at maturity. Following the credit ratings downgrade of Tyco in February 2002, Tyco Capital's ratings were downgraded by Standard & Poor's and Fitch, while Moody's confirmed Tyco Capital's ratings, resulting in the ratings shown in the following table:
AT DECEMBER 31, 2001 AT MARCH 31, 2002 ---------------------- ---------------------- SHORT TERM LONG TERM SHORT TERM LONG TERM ---------- --------- ---------- --------- Moody's............................................ P-1 A2 P-1 A2 Standard & Poor's.................................. A-1 A+ A-2 A- Fitch.............................................. F1 A+ F2 A-
THE SECURITY RATINGS STATED ABOVE ARE NOT A RECOMMENDATION TO BUY, SELL OR HOLD SECURITIES AND MAY BE SUBJECT TO REVISION OR WITHDRAWAL BY THE ASSIGNING RATING ORGANIZATION. EACH RATING SHOULD BE EVALUATED INDEPENDENTLY OF ANY OTHER RATING. The contractual maturities of Tyco Capital's commercial paper and term debt from April 1, 2002 to December 31, 2002 are shown in the following table ($ in millions):
JULY- OCTOBER- APRIL MAY JUNE SEPTEMBER DECEMBER TOTAL -------- -------- -------- --------- --------- -------- Commercial paper maturities.............................. $ 469 $ 154 $ 55 $ 32 $ -- $ 710 Term debt maturities..................................... 1,446 1,104 817 2,032 1,677 7,076 ------ ------ ---- ------ ------ ------ Totals................................................. $1,915 $1,258 $872 $2,064 $1,677 $7,786 ====== ====== ==== ====== ====== ======
Tyco Capital's short-term liquidity plan is focused on the funds required to meet scheduled maturities of the remaining commercial paper and term debt. The plan assumes that the remaining commercial paper will be substantially paid with the proceeds from the bank lines and that funds 68 required to meet term debt maturities will be paid via securitizations, including existing commercial equipment vehicles and the additional securitization facilities and the $2.5 billion raised from the recent debt offering. Proceeds from paydowns on Tyco Capital's existing receivables are expected to be used to fund new portfolio volume. Tyco Capital expects over time to have its ratings reviewed by the rating agencies to regain more cost-effective access to the public debt markets. From time to time, Tyco Capital files registration statements for debt securities, which it may sell in the future. At April 30, 2002, Tyco Capital had $12.2 billion of registered, but unissued, debt securities available under a shelf registration statement. In addition, Tyco Capital had $5.4 billion of registered, but unissued, securities available under public shelf registration statements relating to its asset-backed securitization program. Separately, during the quarter ended March 31, 2002, Tyco Capital completed $2.2 billion in private securitization facilities. In April 2002, Tyco Capital completed a $2.5 billion public unsecured bond offering as part of the previously announced strategy to strengthen its liquidity position. This debt offering was comprised of $1.25 billion aggregate principal amount of 7.375% senior notes due April 2, 2007 and $1.25 billion aggregate principal amount of 7.750% senior notes due April 2, 2012. The proceeds will be used to repay a portion of Tyco Capital's existing term debt at maturity. SECURITIZATION AND JOINT VENTURE ACTIVITIES Tyco Capital utilizes joint ventures and special purpose entities (SPE's) in the normal course of business to execute securitization transactions and conduct business in key vendor relationships. Securitization Transactions--SPE's are used to achieve "true sale" and bankruptcy remote requirements for these transactions in accordance with SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities." Pools of assets are originated and sold to independent trusts (the SPE's), which in turn issue securities to investors solely backed by asset pools. Accordingly, Tyco Capital has no legal obligations to repay the investment certificates in the event of a default by the Trust. Tyco Capital retains the servicing rights and participates in certain cash flows of the pools. The present value of expected net cash flows that exceeds the estimated cost of servicing is recorded in other assets as a "retained interest." Assets securitized are shown in Tyco Capital's managed assets and Tyco Capital's capitalization ratios on managed assets. Joint Ventures--Tyco Capital utilizes joint ventures to conduct financing activities with certain strategic vendor partners. Receivables are originated by the joint venture entity and purchased by Tyco Capital. These distinct legal entities are jointly owned by the vendor partner and Tyco Capital, and there is no third-party debt involved. These arrangements are accounted for on the equity method, with profits and losses distributed according to the joint venture agreement. Commitments and Contingencies--In the normal course of business, Tyco Capital grants commitments to extend additional financing and leasing asset credit and Tyco Capital has commitments to purchase commercial aircraft for lease to third parties. Tyco Capital also enters into various credit-related commitments, including letters of credit, acceptances and guarantees. These financial arrangements generate fees and involve, to varying degrees, elements of credit risk in excess of the amounts recognized on the Consolidated Balance Sheet. To minimize potential credit risk, Tyco Capital generally requires collateral and other credit-related terms from the customer. CONSOLIDATED ITEMS In December 2001, a subsidiary of Tyco entered into an agreement to acquire McGrath RentCorp, a leading rental provider of modular offices and classrooms and electronic test equipment, for cash and Tyco common shares. The transaction is valued at approximately $370 million. It is subject to customary regulatory review. 69 In April 2002, we terminated our previously announced plan to separate into four independent, publicly traded companies. In addition, we announced that we plan to divest of CIT Group Inc. through an initial public offering ("IPO") of all of CIT's outstanding shares, although we are considering other alternatives, including the sale of CIT. We will retain the remaining Tyco businesses. Subsequent to the end of the quarter, CIT Group Inc. (Del) filed a registration statement on Form S-1 with the SEC relating to the sale of all of CIT's common shares through an IPO. Tyco will receive the proceeds from the offering. If the underwriters exercise their over-allotment option, CIT will receive the proceeds from that sale. Except as disclosed elsewhere in this document, our contractual obligations, contingencies and commitments for minimum lease payment obligations under non-cancelable operating leases have not changed materially from September 30, 2001. ACCOUNTING PRONOUNCEMENTS In June 2001, the FASB issued 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. This statement is effective for fiscal years beginning after June 15, 2002. We are currently assessing the impact of this new standard. In July 2001, the FASB issued 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. We are currently assessing the impact of this new standard. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections," which is effective for fiscal years beginning after May 15, 2002. This statement rescinds the indicated statements and amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. We are currently assessing the impact of this new standard. FORWARD-LOOKING INFORMATION Certain statements in this report are "forward-looking statements" within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. All forward-looking statements involve risks and uncertainties. All statements contained herein that are not clearly historical in nature are forward-looking, and the words "anticipate," "believe," "expect," "estimate," "project" and similar expressions are generally intended to identify forward-looking statements. Any forward-looking statement contained herein, in press releases, written statements or other documents filed with the Securities and Exchange Commission, or in Tyco's communications and discussions with investors and analysts in the normal course of business through meetings, webcasts, phone calls and conference calls, regarding the consummation and benefits of future acquisitions, as well as expectations with respect to future sales, earnings, cash flows, operating efficiencies, product expansion, backlog, financings and share repurchases, are subject to known and unknown risks, uncertainties and contingencies, many of which are beyond our control, which may cause actual results, performance or achievements to differ materially from anticipated results, performances or achievements. Factors that might affect such forward-looking statements include, among other things, overall economic and business conditions; - the demand for Tyco's goods and services; - competitive factors in the industries in which Tyco competes; changes in government regulations; - changes in tax requirements (including tax rate changes, new tax laws and revised tax law interpretations); 70 - results of litigation; - interest rate fluctuations and other changes in borrowing costs; other capital market conditions, including foreign currency rate fluctuations; - economic and political conditions in international markets, including governmental changes and restrictions on the ability to transfer capital across borders; - Tyco Capital's ability to access funding sources on a cost-effective basis, its credit loss experience and the adequacy of its credit loss reserve; - the timing of construction and the successful operation of the Tyco Global Network; - the ability to achieve anticipated synergies and other cost savings in connection with acquisitions; - the timing, impact and other uncertainties of future acquisitions; the timing and other uncertainties with respect to Tyco's recently announced plan to sell CIT; - potential further impairment of our goodwill; - the impact of fluctuations in the share price of Tyco common shares; - changes in U.S. and non-U.S. government regulations in general, and in particular changes in rules and regulations regarding the safety, efficacy, sales, promotions, insurance reimbursement and pricing of Tyco's disposable medical products and other specialty products, and regarding Tyco's ability to operate and set prices with respect to its undersea cable communications systems; - results of significant litigation adverse to Tyco, including product liability claims, intellectual property claims, antitrust claims, securities law claims and other claims detailed from time to time in Tyco's SEC filings; - and the potential continuing disruption to our business and related distraction costs associated with negative publicity and recent announcements. ITEM 3--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's exposure to market risk from changes in interest rates, foreign currency exchange rates and commodity prices has not changed materially from our exposure during the year ended September 30, 2001, except for possible additional interest rate exposure discussed in liquidity above. ITEM 4--CONTROLS AND PROCEDURES Not applicable. 71 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TYCO INTERNATIONAL LTD. By: /s/ DAVID J. FITZPATRICK ----------------------------------------- David J. FitzPatrick EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER (PRINCIPAL ACCOUNTING AND FINANCIAL OFFICER) Date: December 30, 2002
72 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Edward D. Breen, certify that: 1. I have reviewed this quarterly report on Form 10-Q/A of Tyco International Ltd.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. December 30, 2002 /s/ EDWARD D. BREEN ------------------------------------ Edward D. Breen CHIEF EXECUTIVE OFFICER
73 CERTIFICATION OF CHIEF FINANCIAL OFFICER I, David J. FitzPatrick, certify that: 1. I have reviewed this quarterly report on Form 10-Q/A of Tyco International Ltd.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. December 30, 2002 /s/ DAVID J. FITZPATRICK ------------------------------------ David J. FitzPatrick CHIEF FINANCIAL OFFICER
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