ADT 2003 Annual Report Download - page 36

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The increase in operating income and margins in fiscal 2003
as compared to fiscal 2002 was due to operating losses in the
prior year, primarily as a result of charges totaling $5,679.7 mil-
lion (discussed below) that were recorded in fiscal 2002.
Operating income and margins for fiscal 2003 include net
charges totaling $881.8 million. The $881.8 million includes
charges for the impairment of long-lived assets of $665.1 mil-
lion primarily related to the Company’s intended sale of the
TGN which was entirely written off; charges for the impair-
ment of goodwill of $278.4 million in Power Systems, Electrical
Contracting Services and the Printed Circuit Group; and
restructuring credits of $90.5 million, of which $19.9 million is
included in cost of sales, related to changes in estimates of sev-
erance and facilities-related charges recorded in prior years.
The net restructuring credit of $90.5 million includes $54.8
million of credits which were changes in estimates recorded
during the quarter ended March 31, 2003. Also included within
the $881.8 million are charges of $14.1 million related to
adjusting asset reserves, $6.2 million related to the adjustments
to accrual balances, $8.5 million of reconciliation and other
accounting adjustments, which were also changes in estimates
recorded during the quarter ended March 31, 2003.
Net revenues for the Electronics segment decreased 22.7%
in fiscal 2002 compared with fiscal 2001, including a 23.6%
decrease in product revenue and a 4.3% increase in service rev-
enue, as a result of a severe decline in demand for undersea
telecommunications systems and surplus capacity available and
a decline in demand for our electronic components group prod-
ucts in the communications, computer and consumer electron-
ics industries across all geographic regions. Net revenues at the
electronic components group (which consists of Electronic
Components, Wireless, Electrical Contracting Services, Power
Systems and Printed Circuit Group) decreased $1,931.3 mil-
lion, or 16.5%, reflecting a significant decrease in demand in
certain end markets. Sales were impacted mostly by the market
decline in the telecommunications and computer industries
and, to a lesser extent, the industrial/commercial industry. The
market decreases were partially offset by growth in our product
sales into the automotive industry. Net revenues at Tyco
Submarine Telecommunication’s business declined $1,150.2
million, or 62.6%, due to lack of demand for new cable con-
struction and very weak demand for capacity sales on the TGN.
Excluding the $16.7 million decrease from foreign currency
fluctuations and the acquisitions of CIGI Investment Group,
Inc. in October 2000, Lucent Technologies’ Power Systems
business in December 2000, Transpower, CII, and all other
acquisitions with a purchase price of $10 million or more, pro
forma revenues (calculated in the manner described above in
“Overview”) for the segment decreased an estimated 29.6%.
The operating loss in fiscal 2002 was primarily due to the
impairment of long-lived assets and goodwill as well as the
restructuring and other charges in addition to the decrease in
revenue. In the electronic components business, the significant
decrease in demand related to the telecommunications, com-
puter, consumer electronics, and the industrial machinery and
commercial aerospace industries. The overall decrease in
demand resulted in much lower manufacturing volumes which
increased per unit costs. In the Submarine Telecommunications
business, margins were impacted significantly by the lack of
capacity sales on the TGN and a significant reduction in third
party system builds.
Operating loss and margins for fiscal 2002 include net
restructuring and other charges of $1,504.5 million. The
$1,504.5 million net charge includes charges totaling $1,530.8
million, of which inventory reserves of $608.2 million are
included in cost of sales and a bad debt provision of $115.0 mil-
lion is included in selling, general and administrative expenses.
These charges primarily relate to initiatives taken to reduce
fixed costs, due to the significant downturn in the telecommu-
nications business and certain electronics end markets, including
facility closures, headcount reductions, inventory reserves and
purchase commitment cancellations. These charges were
slightly offset by a restructuring credit of $26.3 million primarily
relating to a revision in estimates of current and prior years’
severance and facilities charges. Total inventory charges of
$943.6 million include $608.2 million of inventory write downs
and $335.4 million of supplier contract termination fees. In
fiscal 2002, $19.9 million was originally included in the inven-
tory written down and was recorded as a restructuring credit to
cost of sales in fiscal 2003. To the extent that any of the bad debt
provisions are not utilized the excess amounts will be reversed
as a credit to the selling, general and administrative expenses
line in the Consolidated Statements of Operations and will be
separately disclosed as a credit. Also included within operating
loss and margins for fiscal 2002 are charges of $3,150.7 million
for the impairment of property, plant and equipment, primarily
related to the TGN, and goodwill impairment charges of
$1,024.5 million related to Tyco Submarine Telecommunica-
tions. For additional information regarding our accounting for
goodwill impairments, see “Critical Accounting Policies
—
Goodwill” below.
The significant restructuring charges recorded in fiscal 2002
were primarily related to the restructuring of the Submarine
Telecommunications business to address the significant
TYCO INTERNATIONAL LTD.
Management’s Discussion and Analysis of Financial Condition and Results of Operations