ADT 2014 Annual Report Download - page 112

FORM 10-K
Our ending number of customers, net of attrition, grew by 115,000, or 1.8%, during fiscal year 2013. Our
annualized customer unit attrition and annualized customer revenue attrition as of September 27, 2013 were
13.3% and 13.9%, respectively, compared with 12.9% and 13.5%, respectively, as of September 28, 2012. The
increase in customer unit and revenue attrition from September 28, 2012 was due primarily to relocation
disconnects as a result of the continued recovery of the housing market. We continue to focus on high quality
service and our disciplined customer selection process in order to limit customer attrition.
Operating Income
Operating income increased by $13 million, or 1.8%, to $735 million for fiscal year 2013 as compared with
fiscal year 2012. Operating margin was 22.2% for fiscal year 2013 compared with 22.4% for fiscal year 2012.
Operating expenses for fiscal year 2013, which included $23 million of costs related to the Separation,
totaled $2.6 billion, up 2.7% or $68 million as compared to fiscal year 2012. The increase in operating expenses
includes $83 million in higher depreciation and amortization expense primarily related to our subscriber system
assets and dealer generated accounts. Cost to serve expenses totaled $1.0 billion for fiscal year 2013 as compared
to $961 million for fiscal year 2012. Cost to serve expenses for fiscal year 2012 include integration costs related
to the acquisition of Broadview Security of $14 million and restructuring related expenses of approximately $4
million. After considering these items, cost to serve expenses increased by $58 million which was primarily a
result of higher corporate costs and dis-synergies associated with the separation of our business from the
commercial security business of Tyco and increased customer service and maintenance expenses driven by
investments to improve customer retention. The increase was partially offset by a reduction in legal-related
charges as certain costs incurred in fiscal year 2012 did not recur in fiscal year 2013. The increases in
depreciation and amortization and cost to serve expenses were partially offset by a $75 million reduction in gross
subscriber acquisition cost expenses, which resulted from the deferral of a higher proportion of upfront
installation costs associated with the mix shift toward more ADT-owned systems.
Interest Expense, net
Interest expense, net was $117 million for fiscal year 2013 compared with $92 million for fiscal year 2012.
Interest expense for fiscal year 2013 is comprised primarily of interest on our long-term debt, which reflects an
increase in borrowings related to the issuance of $700 million in notes during January 2013. Interest expense for
fiscal year 2012 includes $64 million of allocated interest expense related to Tyco’s external debt, approximately
$22 million of interest on our unsecured notes and $3 million of financing costs incurred in connection with a
bridge facility.
Other (Expense) Income
During fiscal year 2013, we recorded $24 million of other income, which is comprised primarily of $23
million of non-taxable income recorded pursuant to the 2012 Tax Sharing Agreement. See Note 6 to the
Consolidated and Combined Financial Statements for more information.
Income Tax Expense
Income tax expense was $221 million for fiscal year 2013 compared with $236 million for fiscal year 2012,
and the effective tax rate fell slightly to 34.4% from 37.5%. The effective tax rate for fiscal year 2013 reflects the
favorable impact of an adjustment to the state tax rate at which we expect to settle our net deferred tax liabilities.
This adjustment resulted in a tax benefit of $7 million during the period. The effective tax rate for fiscal year
2013 also reflects the favorable impact resulting from $23 million in non-taxable other income. These favorable
items were partially offset by the impact of discrete charges of approximately $7 million due to legislative
changes in certain states.
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