ADT 2003 Annual Report Download - page 33

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systems implementation project. As a result of these decisions,
inventory and other asset balances were written down to their
net realizable value.
The impact of the $388.7 million of net charges recorded in
the second quarter and included in the Consolidated Statement
of Operations for fiscal 2003, is as follows:
Cost of sales $(110.5)
Selling, general and administrative expense (243.1)
Restructuring and other credits (charges), net 59.6
Charges for the impairment of long-lived assets (10.2)
Operating income (304.2)
Other expense, net (84.5)
Income from continuing operations before taxes
and minority interest $(388.7)
The net charges of $388.7 million include $139.6 million related
to asset reserve valuations, $95.4 million of increased cost
estimates for insurance accruals ($49.3 million for workers’
compensation accruals and $46.1 million for product and general
liability insurance accruals), $84.1 million related to an other
than temporary decline in the value of investments, $62.3 mil-
lion for other accounting estimate changes described below,
environmental accruals of $18.0 million, legal accruals of $20.0
million, other various accruals of $15.2 million, $16.4 million
for account write offs included primarily in selling, general and
administrative expenses, where we concluded that the recover-
ability of various asset balances had become doubtful and
$10.2 million write off representing capitalized external costs of
a European financial computer system based on the Company’s
decision in the second quarter to discontinue the new system
under development and continue to use the existing system. The
above charges are partially offset by credits of $72.5 million, of
which $12.9 million is included in cost of sales, related to restruc-
turing charge reversals (see Note 5 to the Consolidated Financial
Statements) that arose during the second quarter of fiscal 2003.
The $139.6 million of adjustments for asset valuations
includes a $76.4 million write down of inventories, $51.9 mil-
lion increase for allowance for doubtful accounts and $11.3
million write off of subscriber systems. The inventory charge of
$76.4 million was primarily due to the finalization of plans
regarding the disposition of inventory in connection with cur-
tailed programs and product lines and the Company’s decision
during the second quarter to exit certain product lines in our
fire and security business. The increase in the allowance for
doubtful accounts of $51.9 million and the write off of sub-
scriber systems of $11.3 million was primarily due to the further
deterioration in the accounts receivable aging and increased
customer cancellations in certain non-strategic European security
businesses during the second quarter. The inventory charge and
subscriber systems adjustments are included in cost of sales and
the allowance for doubtful accounts is included in selling, general
and administrative expenses. We do not expect these changes to
have an adverse impact on future operations.
The workers’ compensation and product and general liability
changes in estimate are based on third-party actuarial reviews
of insurance liabilities. The charge of $95.4 million is included
in selling, general and administrative expenses ($65.2 million),
and cost of product sales ($30.2 million). This adjustment
relates to changes in facts and circumstances occurring during
the quarter ended March 31, 2003 which necessitate a change in
assumptions and estimates. In particular, the Company identi-
fied trend data which required the Company to revise its
assumptions as a result of an unanticipated increase in the
number and changes in the nature of claims incurred and the
rate of increase of medical costs, as well as the emergence of
previously unanticipated new claims. In addition, the Company
experienced an increase in workers’ compensation expense,
particularly in California, as a result of adverse legal develop-
ments toward employers.
The $84.1 million investment write down, included in other
(expense) income, net, primarily consists of a $75.6 million loss
on various equity investments. It became evident in the quarter
ended March 31, 2003 that the declines in the fair values of
the investments were other than temporary, primarily due to
depressed economic conditions. Factors that management con-
sidered in making their assessment included investees’ inability
to raise funds during the quarter, bankruptcy, continued losses
by the investees, lack of sufficient future expected cash flows,
and lower entity valuations based on recent private financing
activity. During the quarter ended March 31, 2003, the Company
also recognized other expense of $8.5 million in connection with
a bank guarantee on behalf of an equity investee (see Note 20
to the Consolidated Financial Statements). It is possible that
the Company may have additional write downs on other invest-
ments if market conditions continue recent negative trends.
The $62.3 million for other accounting estimates includes a
charge to selling, general and administrative expenses of $17.3
million resulting from the Company’s revision in the second
quarter of deferred commissions related to long-term contracts,
$12.1 million to write down company-owned properties based
on real estate assessments and purchase offers received in the
second quarter for assets held for sale, $11.5 million of addi-
tional severance related to terminated executives, and $21.4
million of other accounting estimate changes, none of which
TYCO INTERNATIONAL LTD.