ADT 2003 Annual Report Download - page 39

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Flow Control and cost reduction projects; and other costs of
$13.6 million included within selling, general and adminis-
trative expenses primarily related to the reorganization and
consolidation of a manufacturing facility and certain business
offices. Operating income and margins were also negatively
effected by the lower sales discussed above; competitive condi-
tions in major markets for valves and controls, thermal controls,
and electrical and metal products; and increased raw material
costs, mostly steel. The Engineered Products and Services
segment expects to incur additional charges in future periods
related to the comprehensive cost reduction program announced
on November 4, 2003.
Net revenues increased 12.9% in fiscal 2002 over fiscal 2001
including a 13.1% increase in product revenue and a 12.0%
increase in service revenue, primarily as a result of acquisitions
and, to a much lesser extent, increased revenues at Flow Control,
which was largely due to increased demand of industrial valve
and control and thermal control products. However, offsetting
this increase in demand of valve and control products was the
decline in general economic conditions, as well as a slow-down
in the commercial construction market. Acquisitions included
Pyrotenax in March 2001, IMI Bailey Birkett in June 2001,
Century, Water & Power, and Clean Air. Excluding the $9.2 mil-
lion decrease from foreign currency exchange and the impact of
the acquisitions listed above, 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 were level with the prior year.
The 64.2% decrease in operating income and the decrease in
operating margins in fiscal 2002 over fiscal 2001 were primarily
due to goodwill impairment charges in addition to the impact
of lower margins at Electrical and Metal Products and Flow
Control, decreased royalty and licensing fee income from
divested businesses and reduced market activity due to contin-
ued softness in demand and worldwide competitive pressures.
This overall decrease was slightly offset by the results of acqui-
sitions and by savings realized from cost-cutting initiatives at
Flow Control and Infrastructure Services.
Operating income and margins for fiscal 2002 reflect
restructuring and other charges of $50.8 million, of which
inventory write downs of $6.2 million are included in cost of
sales, primarily related to severance and facility-related costs
associated with streamlining the business and charges of $9.5
million for the impairment of property, plant and equipment
associated with the closure of facilities. Also included are good-
will impairment charges of $319.2 million relating to Tyco
Infrastructure Services. For additional information regarding
our accounting for goodwill impairments, see “Critical
Accounting Policies
— Goodwill” below.
Operating income and margins for fiscal 2001 include restruc-
turing and other charges of $57.3 million, of which inventory
write downs of $9.7 million are included in cost of sales, and
charges for the impairment of property, plant and equipment
of $3.4 million, primarily related to the closure of facilities.
Plastics and Adhesives The following table sets forth net rev-
enues and operating income and margins for the Plastics and
Adhesives segment ($ in millions):
FISCAL 2003 FISCAL 2002 FISCAL 2001
Revenue from
product sales $1,897.2 $1,878.3 $1,747.4
Operating income $«««167.4 $«««209.2 $«««300.9
Operating margins 8.8% 11.1% 17.2%
Net revenues at Tyco Plastics and Adhesives increased slightly
in fiscal 2003 over fiscal 2002 due to the effect of favorable
changes in foreign currency exchange rates ($29.3 million) and
acquisitions ($21.0 million calculated in the manner described
above in “Overview”), which included LINQ Industrial Fabrics,
Inc. (“LINQ”) in December 2001 and all other acquisitions
with a purchase price of $10 million or more. Sales increases
were achieved by higher selling prices as a result of higher raw
material costs, increased sales volume of plastic sheeting and
duct tape products as a result of the heightened level of security
related to the potential likelihood of terrorist attacks, and a
strong residential construction market for Ludlow Coated
Products. These increases were more than offset by increased
competition and decreases in our Corrosion Protection business,
which has been negatively impacted by a slowdown in the oil
and gas pipeline construction markets created by uncertainty
in the Middle East and Venezuela, and a decline in hanger sales
due to weak demand in the retail garment industry.
The significant decrease in operating income and decrease in
operating margins in fiscal 2003 over fiscal 2002 were primarily
due to increased raw material costs (mostly polyethylene) and
increased pricing competition driven by excess production
capacity and an increase in lower priced imported goods. During
fiscal 2003, we recorded net credits totaling $1.4 million.
Included within the $1.4 million are charges of $5.6 million
related to changes in estimates recorded in connection with the
Company’s intensified internal audits, detailed controls and
operating reviews and as a result of applying management’s
judgments and estimates (including $3.2 million for adjustments
to accrual balances, $2.6 million related to asset reserves for
TYCO INTERNATIONAL LTD.