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44
July 8, 2002 and the period June 2 through September 30, 2001,
respectively. Financing and leasing portfolio assets totaled
$40.7 billion at September 30, 2001, while managed assets
totaled $50.9 billion at September 30, 2001. Managed assets
include finance receivables, operating lease equipment, finance
receivables held for sale, certain investments, and finance
receivables previously securitized and still managed by Tyco
Capital. The reduced asset levels reflect the sale and liquidation
of under-performing assets in industries expected to continue
to have low margins coupled with lower origination volumes
due to the soft economic environment and funding constraints
arising from Tyco Capital’s increased costs of borrowing.
During the quarter ended March 31, 2002, we experienced
disruptions to our business surrounding our announced break-
up plan, a downgrade in our credit ratings, and a significant
decline in our market capitalization. During this same time
period, CIT also experienced credit downgrades and a disrup-
tion to its historical funding base. Further, market-based
information used in connection with our preliminary consid-
eration of the proposed IPO of CIT indicated that CIT’s book
value exceeded its estimated fair value as of March 31, 2002. As
a result, we performed a SFAS No. 142 first step impairment
analysis as of March 31, 2002 and concluded that an impairment
charge was warranted at that time.
Management’s objective in performing the SFAS No. 142
first step analysis was to obtain relevant market-based data to
calculate the estimated fair value of CIT as of March 31, 2002
based on its projected earnings and market factors expected to
be used by market participants in ascribing value to CIT in the
planned separation of CIT from Tyco. Management obtained
relevant market data from financial advisors regarding the range
of price to earnings multiples and market condition discounts
applicable to CIT as of March 31, 2002 and applied these market
data to CIT’s projected annual earnings as of March 31, 2002 to
calculate an estimated fair value and any resulting goodwill
impairment. The estimated fair value was compared to the corre-
sponding carrying value of CIT at March 31, 2002. As a result, we
recorded a $4,512.7 million impairment charge as of March 31,
2002, which is included in discontinued operations.
SFAS No. 142 requires a second step analysis whenever a
reporting unit’s book value exceeds estimated fair value. This
analysis requires that we estimate the fair value of the reporting
unit’s individual assets and liabilities to complete the analysis of
goodwill as of March 31, 2002. We completed this second step
analysis for CIT during the quarter ended June 30, 2002 and, as
a result, recorded an additional goodwill impairment of $132.0
million. During the June 30, 2002 quarter, CIT experienced
further credit downgrades and the business environment and
other factors continued to negatively impact the likely proceeds
of the IPO. As a result, we performed another first step and
second step analysis as of June 30, 2002 in a manner consistent
with the March 2002 process described above. Each of these
analyses was based upon updated market data at June 30, 2002
and through the period immediately following the IPO, including
the IPO proceeds. These analyses resulted in a goodwill impair-
ment of $1,867.0 million, which is also included in discontinued
operations. We also recorded an additional impairment charge
of $126.4 million in order to write down its investment in CIT
to fair value for a total CIT goodwill impairment charge of
$2,125.4 million. This write down was based upon net IPO pro-
ceeds of approximately $4.4 billion, after deducting estimated
out-of-pocket expenses, and is included in the $6,282.5 million
loss from discontinued operations. During the fourth quarter
of fiscal 2002, Tyco recorded a loss on the sale of Tyco Capital
of $58.8 million.
TYCO INTERNATIONAL LTD.
Management’s Discussion and Analysis of Financial Condition and Results of Operations