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TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
16. Goodwill and Intangible Assets (continued)
Under the transition provisions of SFAS No. 142, our transitional benchmark analysis concluded
that there was no goodwill impairment at October 1, 2001. However, during the quarter ended
March 31, 2002, the Electronics segment recorded a charge of $2,218.4 million related to the
impairment of the TGN (fixed asset), 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 TGN impairment charge, see Note 6. An updated
goodwill 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.
During the quarter ended June 30, 2002, additional circumstances developed that indicated a
potential impairment of the value of goodwill with respect to the Company’s reporting units. Tyco
experienced disruptions to its business surrounding the termination of its previously announced
break-up plan, the resignation of its chief executive officer, further downgrades in its credit ratings and
an additional decline in its market capitalization. Updated valuations were completed for all reporting
units as of June 30, 2002 using an income approach based on the present value of future cash flows of
each reporting unit. An additional discount factor was then applied to reflect a decrease in reporting
unit valuations for recent disruptions at the Company’s corporate offices and negative publicity about
Tyco, as evidenced by the decline in the Company’s total market capitalization. This resulted in an
estimated goodwill impairment of $844.4 million, $607.7 million relating to Tyco Telecommunications
and $236.7 million relating to Tyco Infrastructure, a reporting unit within the Engineered Products and
Services segment.
During the quarter ended September 30, 2002, step two analyses, as prescribed by SFAS 142 were
completed for the Tyco Telecommunications and Tyco Infrastructure reporting units. This resulted in an
incremental goodwill impairment on continuing operations of $162.0 million ($79.5 million relating Tyco
Telecommunications and $82.5 million relating to Tyco Infrastructure).
During the quarter ended September 30, 2002, circumstances associated with the restructuring
charges related to the Telecommunications reporting unit indicated potential further impairment of the
value of goodwill of this reporting unit. An updated valuation using an income approach based on the
present value of future cash flows was completed as of September 30, 2002. The valuation resulted in
an additional estimated goodwill impairment on continuing operations of $337.3 million.
During fiscal 2002 we curtailed, and in certain markets terminated, the ADT dealer program. Due
to a decrease in projected purchases of customer contracts through the ADT dealer program, an
updated valuation using an income approach based on the present value of future cash flows as of
September 30, 2002 was performed for the Security Services reporting unit. The valuation results
indicated that the fair value of the reporting unit exceeded the book value of the reporting unit
resulting in no impairment of the Security Services reporting unit’s goodwill at that date.
Further disruptions to Tyco’s business such as end market conditions and protracted economic
weakness, unexpected significant declines in operating results of reporting units, continued downgrades
in Tyco’s credit ratings, and additional market capitalization declines may result in the Company having
to perform another SFAS 142 first step valuation analysis for all of its reporting units prior to the
required annual assessment. These types of events and the resulting analysis could result in additional
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