ADT 2003 Annual Report Download - page 97

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11.
Discontinued Operations of Tyco Capital
(CIT Group Inc.)
On July 8, 2002, the Company divested of Tyco Capital through
the sale of 100% of CIT’s common shares in an IPO.
Accordingly, the results of Tyco Capital are presented as dis-
continued operations for all periods. Prior year amounts
include Tyco Capital’s operating results after June 1, 2001, the
date of acquisition of CIT by Tyco.
Operating results from the discontinued operations of Tyco
Capital through July 8, 2002 were as follows ($ in millions):
FOR THE PERIOD
FOR THE PERIOD JUNE 2 (DATE OF
OCTOBER 1, 2001 ACQUISITION)
THROUGH THROUGH
JULY 8, 2002 SEPTEMBER 30, 2001
Finance income $«3,327.6 $1,676.5
Interest expense 1,091.5 597.1
Net finance income 2,236.1 1,079.4
Depreciation on operating
lease equipment 944.4 448.6
Net finance margin 1,291.7 630.8
Provision for credit losses 665.6 116.1
Net finance margin, after
provision for credit losses 626.1 514.7
Other income 741.1 335.1
Operating margin 1,367.2 849.8
Selling, general, administrative
and other costs and expenses 687.8 398.7
Goodwill impairment 6,638.1 —
Operating expenses 7,325.9 398.7
(Loss) income before income
taxes and minority interest (5,958.7) 451.1
Income taxes (316.1) (195.0)
Minority interest (7.7) (3.6)
(Loss) income from
discontinued operations $(6,282.5) $«««252.5
During the quarter ended March 31, 2002, Tyco experienced
disruptions to its business surrounding its announced break-up
plan, a downgrade in its credit ratings, and a significant decline
in its market capitalization. During this same time period, CIT
also experienced credit downgrades and a disruption to its
historical funding base. Further, market-based information
used in connection with the Company’s 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, the Company 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 corresponding
carrying value of CIT at March 31, 2002. As a result, the
Company 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 the Company to estimate the fair value of the
reporting unit’s individual assets and liabilities to complete the
analysis of goodwill as of March 31, 2002. The Company com-
pleted this second step analysis for CIT during the quarter
ended June 30, 2002 and, as a result, recorded an additional
goodwill impairment charge of $132.0 million. During the
June 30, 2002 quarter, CIT experienced further credit down-
grades 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 impairment of $1,867.0
million, which is also included in discontinued operations. Tyco
also recorded an additional impairment charge of $126.4 mil-
lion in order to write down its investment in CIT to fair value
for a total CIT goodwill impairment of $2,125.4 million. This
write down was based upon net IPO proceeds 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.
During fiscal 2003, Tyco recorded income from discontinued
operations of $20.0 million. The $20.0 million represented a
restitution payment made by Frank E. Walsh Jr. (see Note 18).
ACCOUNTING POLICIES OF DISCONTINUED OPERATIONS
Financing and Leasing Assets Tyco Capital provided funding
for a variety of financing arrangements, including term loans,
lease financing and operating leases. The amounts outstanding
TYCO INTERNATIONAL LTD.