ADT 2003 Annual Report Download - page 34

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are individually significant, that were included primarily in
selling, general and administrative expenses.
An increase of $18.0 million due to increased environmental
accruals resulting from the finalization of the Company’s plan to
remediate one of its manufacturing sites in the second quarter,
$20.0 million to establish an accrual related to the estimated set-
tlement amount for contractual disputes and other legal matters
based on our determination that such amounts became both
probable and estimable in the second quarter, and $15.2 million
of other miscellaneous increased accrual estimates are primarily
included in selling, general and administrative expenses.
SEGMENT REVENUE, OPERATING INCOME AND MARGINS
Fire and Security The following table sets forth net revenues
and operating income and margins for the Fire and Security
segment ($ in millions):
FISCAL 2003 FISCAL 2002 FISCAL 2001
Revenue from
product sales $««5,124.1 $««4,955.5 $3,494.4
Service revenue 6,168.7 5,683.5 3,978.6
Net revenues $11,292.8 $10,639.0 $7,473.0
Operating income $÷÷«360.2 $÷÷«904.7 $÷«883.2
Operating margins 3.2% 8.5% 11.8%
Net revenues in the Fire and Security segment increased 6.1%
in fiscal 2003 over fiscal 2002, including a 3.4% increase in
product revenue and an 8.5% increase in service revenue. The
increase in net revenues was due to favorable changes in foreign
currency exchange rates ($519.7 million) and fiscal 2002 acqui-
sitions ($213.8 million calculated in the manner described
above in “Overview”). Acquisitions included SBC/Smith Alarm
Systems in October 2001, DSC Group and Sensormatic in
November 2001, and all other acquisitions with a purchase
price of $10 million or more. In addition, an increase in net
revenues due to customer contracts purchased through the
ADT dealer program ($371.2 million) and generated through
our internal sales force offset a decline in revenue due to
increased attrition rates in worldwide security. The overall
increase was also partially offset by a decline in net revenues at
worldwide fire protection due to continued softness in the
commercial construction market.
Operating income and margins decreased significantly in
fiscal 2003 over fiscal 2002 due to charges totaling $512.4 million
recorded during fiscal 2003. Included within the $512.4 million
are charges of $266.7 million related to changes in estimates
recorded during the quarter ended March 31, 2003 (includes
charges of $127.6 million primarily related to adjustments to
accrual balances such as workers’ compensation, professional
fees, and environmental exposure, a charge of $98.1 million pri-
marily due to adjusting reserves for doubtful accounts and slow
and non-moving inventory, as well as a write off of subscriber
systems, charges of $34.5 million for other accounting adjust-
ments primarily related to deferred commissions, and charges
of $6.5 million related to reconciling items in the current period)
in connection with the Company’s intensified internal audits,
detailed controls and operating reviews and as a result of apply-
ing management’s judgments and estimates. Also included
within the $512.4 million are impairment charges of $143.0
million primarily related to the impairment of intangible assets
associated with the ADT dealer program mostly as a result of
increased attrition rates (discussed below), and to the impair-
ment of property, plant and equipment of subscriber systems
and other fixed assets; net restructuring and other charges of
$9.7 million, of which charges of $3.5 million are included in
cost of sales and $2.8 million is for the write off of non-current
assets, related to streamlining the business; and other charges of
$93.0 million, of which $34.0 million is included in cost of sales
and $59.0 million is included in selling, general and adminis-
trative expenses, primarily related to uncollectible receivables,
product warranty and the dismantlement of customers’ ADT
security systems. Included within the $143.0 million impair-
ment charge and the $9.7 million net restructuring charge is a
charge of $10.2 million and a credit of $2.0 million, respec-
tively, also related to changes in estimates recorded during the
quarter ended March 31, 2003. The decrease in operating
income and margins was also due to increased depreciation
and amortization expense in the security business due to
growth in the subscriber asset and dealer asset base as well as
the impact of the acquisitions of Sensormatic Electronics
Corporation (“Sensormatic”) and DSC Group (“DSC”) in fiscal
2002; decline in operating income in the continental European
security business; and a weaker worldwide fire and contracting
environment. The Fire and Security segment expects to incur
additional restructuring charges in future periods related to
the comprehensive cost reduction program announced on
November 4, 2003.
Attrition rates for customers in our global electronic security
services business averaged 15.9% on a trailing twelve-month
basis for fiscal 2003, as compared to 13.2% for fiscal 2002. This
increase relates to attrition in customer accounts acquired
through our worldwide dealer program, as well as internally
generated commercial customer accounts in continental Europe
and internally generated residential customer accounts in the
United States (both of which were partly driven by increased
management and control of delinquent accounts). For those
TYCO INTERNATIONAL LTD.
Management’s Discussion and Analysis of Financial Condition and Results of Operations