ADT 2005 Annual Report Download - page 134

Within Electronics, backlog increased primarily due to stronger orders from improving business
conditions across the majority of its end markets. Backlog in Healthcare represents unfilled orders,
which, in the nature of the businesses, are normally shipped shortly after purchase orders are received.
We do not view backlog in Healthcare to be a significant indicator of the level of future sales activity.
Off-Balance Sheet Arrangements
Sale of Accounts Receivable
Tyco utilized several programs under which it sold participating interests in accounts receivable to
investors who, in turn, purchased and received ownership and security interests in those receivables. As
collections reduced accounts receivable included in the pool, the Company sold new receivables. The
Company retained the risk of credit loss on the receivables and, accordingly, the full amount of the
reserve was retained on the Consolidated Balance Sheets. The proceeds from the sales were used to
repay short-term and long-term borrowings and for working capital and other corporate purposes and
were reported as operating cash flows in the Consolidated Statements of Cash Flows. The sale
proceeds were less than the face amount of accounts receivable sold by an amount that approximated
the cost that would have been incurred if commercial paper had been issued backed by these accounts
receivable. The discount from the face amount is accounted for as a loss on the sale of receivables and
has been included in selling, general and administrative expenses in the Consolidated Statements of
Income. Such discount aggregated $18 million and $29 million, or 3.1% and 3.5% of the weighted-
average balance of the receivables outstanding, during 2004 and 2003, respectively. The Company
retained collection and administrative responsibilities for the participating interests in the defined pool.
During 2004, the Company reduced outstanding balances under its accounts receivable programs
by $929 million, of which $812 million related to three of its corporate accounts receivable programs
which were terminated in 2005. No amounts were utilized under these programs at September 30, 2004
and through the date of termination. The remaining reduction of $117 million related to certain of the
Company’s international businesses selling fewer accounts receivable as a short-term financing
mechanism. These transactions qualify as true sales. The aggregate amount outstanding under
international accounts receivable programs was $80 million and $99 million at September 30, 2005 and
2004, respectively.
Variable Interest Entities
The Company has programs under which it sells machinery and equipment to investors who, in
turn, purchase and receive ownership and security interests in those assets. As such, the Company may
have certain investments in those affiliated companies whereby it provides varying degrees of financial
support and where the investors are entitled to a share in the results of those entities but do not
consolidate these entities. While these entities may be substantive operating companies, they have been
evaluated for potential consolidation under FIN No. 46.
The Company had three synthetic lease programs utilized, to some extent, by all of the Company’s
segments to finance capital expenditures for manufacturing machinery and equipment and for ships
used by Tyco Submarine Telecommunications. During 2003 the Company restructured one of the
synthetic leases to meet the requirements of FIN No. 46 for off-balance sheet accounting. In 2003 in
conjunction with adopting FIN No. 46, the Company also evaluated other investments and concluded
that four joint ventures that were previously accounted for under the equity method of accounting
within Tyco Infrastructure Services, in which we own a minority interest, met the consolidation criteria
set forth in FIN No. 46. Accordingly, these ventures were consolidated onto the Company’s balance
sheet effective July 1, 2003, and were subsequently deconsolidated as of March 31, 2004 upon the
adoption of FIN No. 46R.
58 2005 Financials