ADT 2003 Annual Report Download - page 108

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Following is a roll forward of the Company’s warranty
accrual for the year ended September 30, 2003 ($ in millions):
Balance at September 30, 2002 $«493.6
Accruals for warranties issued during the year 40.7
Changes in estimates related to pre-existing warranties 11.4
Settlements made (166.0)
Additions due to acquisitions 0.6
Balance at September 30, 2003 $«380.3
Settlements made include spending of $103.5 million by the
Engineered Products and Services segment in connection with
a Voluntary Replacement Program (“VRP”) associated with the
acquisition of Central Sprinkler. The VRP was initiated in fiscal
2001 and relates to the recall of certain Model GB fire sprinkler
heads which were originally manufactured by Central Sprinkler.
Identification and investigation of problems with the sprinkler
heads commenced prior to Tyco’s acquisition. All affected
sprinkler heads are replaced over a 5
– 7 year period free of
charge to property owners.
21.
Financial Instruments
The Company’s financial instruments consist primarily of cash
and cash equivalents, accounts receivable, long-term investments,
accounts payable, debt and derivative financial instruments.
The fair value of cash and cash equivalents, accounts receivable,
long-term investments and accounts payable approximated
book value at September 30, 2003 and 2002. See Note 19 for the
fair value estimates of debt.
In accordance with SFAS No. 133, as amended, all derivative
financial instruments are reported on the Consolidated Balance
Sheet at fair value, and changes in a derivative’s fair value are
recognized currently in earnings unless specific hedge criteria
are met. While it is not the Company’s intention to terminate
its derivative financial instruments, based on their estimated
fair values, the termination at September 30, 2003 would have
resulted in proceeds of $44.2 million for forward and option
foreign currency exchange contracts, no proceeds for forward
commodity contracts, and proceeds of $20.9 million for interest
rate swaps. The termination at September 30, 2002 would have
resulted in proceeds of $34.0 million for forward and option
foreign currency exchange contracts, payments of $1.2 million
for forward commodity contracts, and proceeds of $2.5 million
for interest rate swaps. At September 30, 2003 and 2002, the
book values of derivative financial instruments recorded on the
Consolidated Balance Sheets approximate fair values.
INTEREST RATE EXPOSURES
The Company uses interest rate swaps to hedge its exposure to
interest rate risk by exchanging fixed rate interest on certain of
its debt for variable rate amounts. These interest rate swaps are
designated as fair value hedges. Certain of the Company’s interest
rate swaps entered into during fiscal 2003, as assessed using the
short-cut method under SFAS No. 133, were highly effective.
The ineffective element of the gains and losses on certain other
interest rate swaps during fiscal 2002, totaling a net gain of
$116.1 million, has been recognized in interest expense, net,
along with the effective element of the changes in fair value of
the interest rate swaps and the related hedged debt.
OTHER
Tyco uses various options, swaps and forwards not designated
as hedging instruments under SFAS No. 133 to hedge the impact
of the variability in the price of raw materials, such as copper
and other commodities, and the impact of the variability in
foreign exchange rates on accounts and notes receivable, accounts
payable, intercompany loan balances and forecast transactions
denominated in certain foreign currencies.
22.
Commitments and Contingencies
The Company has facility, vehicle and equipment leases that
expire at various dates through the year 2050. Rental expense
under these leases was $861.8 million, $848.9 million and
$634.7 million for fiscal 2003, fiscal 2002 and fiscal 2001,
respectively. At September 30, 2003, the minimum lease pay-
ment obligations under non-cancellable operating leases were
as follows: $714.2 million in fiscal 2004, $563.2 million in fiscal
2005, $421.4 million in fiscal 2006, $303.1 million in fiscal
2007, and $227.8 million in fiscal 2008 and an aggregate of
$1,030.1 million in fiscal years 2009 through 2050. These pay-
ments include obligations under an off-balance sheet leasing
arrangement for five cable laying sea vessels. Upon expiration of
this lease in fiscal 2007, a subsidiary of the Company has the
option to buy these vessels for approximately $280 million, or
return the vessels to the lessor and, under a guarantee, pay any
shortfall in sales proceeds from a third party in an amount not
to exceed $235 million.
At September 30, 2003, the Company had a contingent
liability of $80 million related to the fiscal 2001 acquisition of
Com-Net by the Electronics segment. The $80 million is the
maximum amount payable to the former shareholders of
Com-Net only after the construction and installation of a
TYCO INTERNATIONAL LTD.
Notes to Consolidated Financial Statements