ADT 1999 Annual Report Download - page 27

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management’s discussion and analysis
Results of Operations
Information for all periods presented below reflects the grouping of the
Company’s businesses into four business segments consisting of
Telecommunications and Electronics, Healthcare and Specialty Prod-
ucts, Fire and Security Services and Flow Control Products.
In September 1997, the Company changed its fiscal year end
from December 31 to September 30. References to Fiscal 1999, Fis-
cal 1998 and Fiscal 1997 are to the twelve month fiscal years ended
September 30, 1999 and 1998, and the transitional nine-month fiscal
period ended September 30, 1997, respectively. The discussion below
of the results of operations compare Fiscal 1999 to Fiscal 1998 and
Fiscal 1998 to the twelve months ended September 30, 1997 (unau-
dited).
In Fiscal 1999, the Company consummated two mergers that
were accounted for under the pooling of interests method of account-
ing. The merger with United States Surgical Corporation closed on
October 1, 1998, and the merger with AMP Incorporated closed on
April 2, 1999. As required by generally accepted accounting princi-
ples, the Company restated its financial statements as if USSC and
AMP had always been a part of the Company. The Company recorded
as expenses during Fiscal 1999 costs directly associated with the
USSC and AMP mergers and the costs of terminating employees and
closing or consolidating facilities as a result of the mergers. The Com-
pany also expensed in Fiscal 1999 the costs of staff reductions and
facility closings that AMP undertook as part of a plan to improve its
profitability unrelated to the Company’s merger with AMP. In Fiscal
1998, the Company expensed charges for staff reductions and facility
closings under the AMP profit improvement plan and charges that
USSC incurred to exit certain of its businesses. These are discussed
in more detail under “Liquidity and Capital Resources” below.
Overview
Sales increased 18.0% during Fiscal 1999 to $22,496.5 million from
$19,061.7 million in Fiscal 1998. Sales in Fiscal 1998 increased 14.4%
compared to the twelve months ended September 30, 1997. Income
(loss) before extraordinary items and cumulative effect of accounting
changes was $1,031.0 million in Fiscal 1999, as compared to
$1,168.6 million in Fiscal 1998 and ($300.5) million in the twelve
months ended September 30, 1997. Income before extraordinary
items for Fiscal 1999 included an after-tax charge of $1,341.5 million
($1,596.7 million pre-tax) related to the mergers with USSC and AMP
and costs associated with AMP’s profit improvement plan. Income
before extraordinary items for Fiscal 1998 included an after-tax charge
of $192.0 million ($256.9 million pre-tax) primarily related to AMP’s
profit improvement plan and costs incurred by USSC to exit certain
businesses. Loss before extraordinary items and cumulative effect of
accounting changes for the twelve months ended September 30, 1997
included an after-tax charge of $1,485.5 million ($1,670.4 million pre-
tax) for merger and transaction costs, write-offs and integration costs
primarily associated with the mergers of ADT, Former Tyco, Keystone
and Inbrand.
The following table details the Company’s sales and earnings in
Fiscal 1999, Fiscal 1998 and the twelve months ended September 30,
1997.
(unaudited)
Twelve
Months Ended
September 30,
(in millions) Fiscal 1999 Fiscal 1998 1997
Net sales $22,496.5 $19,061.7 $16,657.3
Operating profit, before certain
charges(1) $ 3,949.6(2) $ 2,336.8 $ 2,013.7
Merger, restructuring and other
non-recurring charges (1,261.7) (256.9) (1,283.3)
Impairment of long-lived assets(335.0)
— (148.4)
Write-off of purchased
in-process research
and development —— (361.0)
Amortization of goodwill (216.1) (131.8) (90.0)
Operating income 2,136.8 1,948.1 131.0
Interest expense, net (485.6) (245.3) (170.4)
Other income —— 118.4(3)
Pre-tax income before
extraordinary items and
cumulative effect of
accounting changes 1,651.2 1,702.8 79.0
Income taxes (620.2) (534.2) (379.5)
Income (loss) before
extraordinary items and
cumulative effect of
accounting changes 1,031.0 1,168.6 (300.5)
Extraordinary items,
net of taxes (45.7) (2.4) (60.9)
Cumulative effect of
accounting changes,
net of taxes —— 15.5
Net income (loss) $ 985.3 $ 1,166.2 $ (345.9)
(1) This amount is the sum of the operating profits of the Company’s four business seg-
ments set forth in the segment discussion below less certain corporate expenses, and is
before merger, restructuring and other non-recurring charges, impairment of long-lived
assets, write-off of purchased in-process research and development and amortization of
goodwill.
(2) Restructuring charges in the amount of $78.9 million related to the write-down of inven-
tory have been deducted as part of cost of sales in the Consolidated Statement of Oper-
ations for Fiscal 1999. However, they have not been deducted as part of cost of sales for
the purpose of calculating operating profit before certain charges in this table. These
charges are instead included in the total merger, restructuring and other non-recurring
charges.
(3) Amount consists of $65.0 million related to a litigation settlement and $53.4 million
related to the disposal of an equity investment by ADT.
The operating profits and margins for the Company’s four busi-
ness segments that are presented in the following discussion are
stated before deductions for merger, restructuring and other non-
recurring charges related to business combinations accounted for
under the pooling of interests method of accounting, charges for
impairment of long-lived assets, in-process research and develop-
ment charges and goodwill amortization. This is consistent with how
management views the operating results of the individual segments.
Operating profits improved in all segments in each of Fiscal 1999
and Fiscal 1998, with the exception of the Healthcare and Specialty
Products segment in Fiscal 1998 for reasons that are discussed
below. The operating improvements are the result of both increased
revenues and enhanced margins. Increased revenues result from
organic growth and from acquisitions that are accounted for under the
purchase method of accounting. The Company enhances its margins