ADT 2007 Annual Report Download - page 147

favorably affected by $213 million due to changes in foreign currency exchange rates while the net
impact of acquisitions and divestitures unfavorably impacted net revenue by $3 million.
North America is the most profitable geographic area for ADT Worldwide with 2007 and 2006
operating margin of 17.1% and 16.6%, respectively. ADT EMEA, while profitable with 2007 and 2006
operating margin of 3.1% and 6.3%, respectively, has strong future prospects but is not performing to
the level we believe is attainable. As part of our long term program to improve profitability in ADT
EMEA, several specific actions have been started, including the appointment of new general
management and initiation of an estimated $90 million restructuring program to improve field
efficiency, operations and consolidate certain administrative functions. We incurred charges of
$69 million related to this restructuring program in 2007 which negatively impacted operating margins.
Attrition rates for customers in our ADT Worldwide business continued to improve, declining to
an average of 12.3% on a trailing 12-month basis for 2007, as compared to 14.2% for 2006 and 15.0%
in 2005. As a result of our ongoing review of attrition rates and other pertinent factors affecting the
related patterns in which revenues are expected to be earned, management reassessed amortization and
depreciation methods and lives for its company-owned security systems and dealer intangible assets and
made adjustments in 2007 (see Note 1).
Operating income of $842 million in 2007 decreased $65 million from $907 million in 2006. Factors
that positively impacted operating income included increased volume, operational efficiencies and
reductions to depreciation and amortization expense, of $26 million. The decrease to depreciation and
amortization expense resulted from changes to the depreciation method and estimated useful lives for
pooled subscriber assets and changes to the estimated useful lives of dealer intangible assets. These
increases were more than offset by a goodwill impairment charge of $46 million, due to the
reorganization of our management and segment reporting structure, as well as increased investment in
selling and marketing in Americas and Asia. In addition, results for 2007 included net restructuring and
asset impairment charges of $83 million, which were primarily related to actions to improve field
efficiencies and consolidating certain administrative functions in Europe, and an impairment of certain
indefinite lived intangible assets. Net restructuring, asset impairment and divestiture charges were
$5 million in 2006.
During the fourth quarter of 2007, ADT Worldwide began converting certain North American
customers to digital backup services in advance of the February 2008 analog-to-digital signal transition
for wireless cellular carriers. Given the Company’s experience with this conversion in the fourth
quarter, we estimate that the cost of the conversion will negatively impact operating income by
approximate $40 million to $50 million in the first half of 2008.
Net revenue for ADT Worldwide increased 1.4% during 2006, with product revenue up 3.0%
compared to 2005. Revenue grew 10.6% in the Rest of World geographies, driven primarily by strong
growth in Asia and Latin America. Revenue in North America was up slightly, while revenue in the
EMEA region declined due to the continued high attrition of the legacy account base in Continental
Europe. Net revenue was unfavorably affected by $35 million due to changes in foreign currency
exchange rates while the net impact of acquisitions and divestitures unfavorably impacted net revenue
by $19 million.
Operating income decreased $45 million in 2006 from 2005. Results for 2006 included net
restructuring, asset impairment and divestiture charges of $5 million as compared to net restructuring,
asset impairment and divestiture charges of $13 million in 2005. Operating income for 2006 was
negatively affected by slightly lower gross margin, due largely to margin pressures in commercial
contracting coupled with a slightly higher mix of lower-margin contracting revenue. These effects were
partially offset by cost savings related to operational excellence initiatives. In addition, 2006 was
unfavorably affected by incremental stock option charges of $14 million required under SFAS
No. 123R.
2007 Financials 55