ADT 2012 Annual Report Download - page 133

Operating Income
Operating income of $722 million increased by $29 million, or 4.2%, for the year ended September 28, 2012
as compared with the year ended September 30, 2011. Operating margin was 22.4% for the year ended
September 28, 2012 compared with 22.3% for the year ended September 30, 2011. The increase in operating
income was due primarily to an $80 million increase resulting from growth in recurring customer revenue at a
higher average revenue per customer. During the second half of fiscal year 2012, we implemented a change in
our direct channel to increase the mix of our gross additions toward more ADT-owned systems, which results in
the deferral of a higher proportion of upfront installation revenue and related costs. This shift in mix increased
operating income for fiscal year 2012 by approximately $6 million and is expected to increase operating income
for fiscal year 2013 by approximately $15 million.
The increase in operating income for fiscal year 2012 was partially offset by higher selling related expenses
of approximately $36 million, which resulted from investments to grow our business, including expansion of our
internal sales force and other lead generating activities. We also incurred charges related to legal matters of $15
million during the fourth quarter of fiscal year 2012, which unfavorably impacted operating income for the year.
We do not expect to incur similar legal related costs in fiscal year 2013. As a result of the separation of our
business from the commercial security business of Tyco, we recognized dis-synergies which resulted in
incremental operating expenses of approximately $5 million during the second half of the year ended
September 28, 2012. We expect annual dis-synergy expenses to total approximately $40 million in fiscal year
2013.
Operating income for the years ended September 28, 2012 and September 30, 2011 includes integration
costs related to the acquisition of Broadview Security of $14 million and $28 million, respectively. Additionally,
restructuring related expenses were approximately $4 million higher in fiscal year 2012 as compared to fiscal
year 2011. Operating income for the year ended September 28, 2012 also includes $7 million of costs incurred
related to the Separation. For fiscal year 2013, we expect to incur operating expenses of approximately $30
million related to the Separation.
Interest Expense, net
Net interest expense was $92 million for the year ended September 28, 2012 compared with $89 million for
the year ended September 30, 2011. Interest expense for the years ended September 28, 2012 and September 30,
2011 include allocated interest expense related to Tyco’s external debt of $64 million and $87 million,
respectively. Also included in net interest expense for the year ended September 28, 2012 was approximately $22
million of interest on our unsecured notes and $3 million of financing costs incurred in connection with a bridge
facility. The bridge facility which we entered into on June 22, 2012, was subsequently terminated on July 5, 2012
in connection with the issuance of our unsecured notes.
For fiscal year 2013, we expect interest expense to increase to $120 million - $125 million as a result of
additional debt that we expect to issue in conjunction with the share repurchase program approved by our board
of directors on November 26, 2012. See discussion included in “—Liquidity & Capital Resources —Liquidity.”
Income Tax Expense
Income tax expense of $236 million increased $8 million for the year ended September 28, 2012 as
compared with the year ended September 30, 2011, while the effective tax rate fell slightly to 37.5%. The
effective tax rate can vary from period to period due to permanent tax adjustments, discrete items such as the
settlement of income tax audits and changes in tax laws, as well as recurring factors such as changes in the
overall effective state tax rate.
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