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Tyco International 10-Q 2005

Documents found in this filing:

  1. 10-Q
  2. Ex-10.1
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32.1
  6. Ex-32.1

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

 

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended July 1, 2005

OR

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

001-13836

(Commission File Number)


TYCO INTERNATIONAL LTD.

(Exact name of Registrant as specified in its charter)

 

Bermuda

98-0390500

(Jurisdiction of Incorporation)

(I.R.S. Employer Identification Number)

 

Second Floor, 90 Pitts Bay Road, Pembroke, HM 08, Bermuda

(Address of Registrant’s principal executive offices)

441-292-8674

(Registrant’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x  No o

The number of common shares outstanding as of July 26, 2005 was 2,023,872,373.

 




TYCO INTERNATIONAL LTD.

INDEX TO FORM 10-Q

Page

Part I Financial Information:

 

Item 1. Financial Statements

 

Consolidated Statements of Income (Unaudited) for the quarter and nine months ended July 1, 2005 and June 30, 2004

1

Consolidated Balance Sheets (Unaudited) as of July 1, 2005 and September 30, 2004

2

Consolidated Statements of Cash Flows (Unaudited) for the nine months ended July 1, 2005 and June 30, 2004

3

Consolidated Statements of Shareholders’ Equity (Unaudited) for the nine months ended July 1, 2005 and June 30, 2004

4

Notes to Consolidated Financial Statements (Unaudited)

5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

32

Item 3. Quantitative and Qualitative Disclosures About Market Risk

60

Item 4. Controls and Procedures

60

Part II Other Information:

 

Item 1. Legal Proceedings

62

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

68

Item 6. Exhibits

69

Signatures

70

 




PART I. FINANCIAL INFORMATION

Item 1.                      Financial Statements

TYCO INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in millions, except per share data)

 

 

Quarter Ended

 

Nine Months Ended

 

 

 

July 1,
2005

 

June 30,
2004

 

July 1,
2005

 

June 30,
2004

 

Revenue from product sales

 

$

8,614 

 

$

8,206

 

$

25,260

 

$

23,660

 

Service revenue

 

1,948

 

2,019

 

5,823

 

6,051

 

Net revenue

 

10,562

 

10,225

 

31,083

 

29,711

 

Cost of product sales

 

5,776

 

5,247

 

16,931

 

15,435

 

Cost of services

 

1,191

 

1,306

 

3,585

 

3,858

 

Selling, general and administrative expenses

 

2,015

 

2,090

 

6,019

 

6,174

 

Goodwill impairment

 

 

 

162

 

 

Restructuring and long-lived asset impairment charges, net

 

2

 

54

 

54

 

134

 

(Gains) losses and impairments on divestitures, net

 

(301

)

(3

)

(284

)

82

 

Operating income

 

1,879

 

1,531

 

4,616

 

4,028

 

Interest income

 

24

 

16

 

92

 

56

 

Interest expense

 

(199

)

(224

)

(626

)

(715

)

Other expense, net

 

(179

)

(36

)

(915

)

(38

)

Income from continuing operations before income taxes and minority interest

 

1,525

 

1,287

 

3,167

 

3,331

 

Income taxes

 

(326

)

(359

)

(1,002

)

(886

)

Minority interest

 

(2

)

(3

)

(6

)

(11

)

Income from continuing operations

 

1,197

 

925

 

2,159

 

2,434

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

Loss from discontinued operations, net of income taxes

 

(2

)

(2

)

(7

)

(9

)

Loss on sale of discontinued operations, net of income taxes

 

(2

)

 

(58

)

 

Net income

 

$

1,193

 

$

923

 

$

2,094

 

$

2,425

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.59

 

$

0.46

 

$

1.07

 

$

1.22

 

Loss from discontinued operations

 

 

 

 

(0.01

)

Loss on sale of discontinued operations

 

 

 

(0.03

)

 

Net income

 

$

0.59

 

$

0.46

 

$

1.04

 

$

1.21

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.56

 

$

0.43

 

$

1.02

 

$

1.13

 

Loss from discontinued operations

 

 

 

 

 

Loss on sale of discontinued operations

 

 

 

(0.03

)

 

Net income

 

$

0.56

 

$

0.43

 

$

0.99

 

$

1.13

 

Weighted-average number of shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

2,015

 

2,002

 

2,011

 

1,999

 

Diluted

 

2,149

 

2,222

 

2,179

 

2,222

 

1

See Notes to Consolidated Financial Statements.

1




TYCO INTERNATIONAL LTD.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in millions, except share data)

 

 

July 1,
2005

 

September 30,
2004

 

Assets

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

2,666 

 

 

$

4,467

 

 

Accounts receivable, less allowance for doubtful accounts of $465 and $524, respectively

 

7,155

 

 

6,463

 

 

Inventories

 

4,565

 

 

4,365

 

 

Prepaid expenses and other current assets

 

2,589

 

 

2,635

 

 

Assets held for sale

 

28

 

 

615

 

 

Total current assets

 

17,003

 

 

18,545

 

 

Property, plant and equipment, net

 

9,475

 

 

9,635

 

 

Goodwill

 

25,234

 

 

25,510

 

 

Intangible assets, net

 

5,092

 

 

5,335

 

 

Other assets

 

4,773

 

 

4,642

 

 

Total Assets

 

$

61,577

 

 

$

63,667

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Loans payable and current maturities of long-term debt

 

$

1,129

 

 

$

2,116

 

 

Accounts payable

 

2,943

 

 

2,698

 

 

Accrued and other current liabilities

 

5,686

 

 

5,815

 

 

Liabilities held for sale

 

3

 

 

523

 

 

Total current liabilities

 

9,761

 

 

11,152

 

 

Long-term debt

 

12,002

 

 

14,617

 

 

Other liabilities

 

7,710

 

 

7,538

 

 

Total Liabilities

 

29,473

 

 

33,307

 

 

Commitments and Contingencies (Note 8)

 

 

 

 

 

 

 

Minority interest

 

59

 

 

68

 

 

Shareholders’ Equity:

 

 

 

 

 

 

 

Common shares, $0.20 par value, 4,000,000,000 shares authorized; 2,022,625,736 and 2,009,867,009 shares outstanding, net of 4,152,563 and 12,864,837 shares owned by subsidiaries, respectively

 

404

 

 

402

 

 

Capital in excess:

 

 

 

 

 

 

 

Share premium

 

8,486

 

 

8,315

 

 

Contributed surplus, net

 

15,437

 

 

15,319

 

 

Accumulated earnings

 

7,256

 

 

5,740

 

 

Accumulated other comprehensive income

 

462

 

 

516

 

 

Total Shareholders’ Equity

 

32,045

 

 

30,292

 

 

Total Liabilities and Shareholders’ Equity

 

$

61,577

 

 

$

63,667

 

 

 

See Notes to Consolidated Financial Statements.

2




TYCO INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in millions)

 

 

Nine Months Ended

 

 

 

July 1,
2005

 

June 30,
2004

 

Cash Flows From Operating Activities:

 

 

 

 

 

Net income

 

$

2,094

 

$

2,425

 

Loss from discontinued operations

 

65

 

9

 

Income from continuing operations

 

2,159

 

2,434

 

Adjustments to reconcile net cash provided by operating activities:

 

 

 

 

 

Non-cash restructuring and long-lived asset impairment charges, net

 

25

 

21

 

(Gains) losses and impairments on divestitures, net

 

(281

)

78

 

Goodwill impairment

 

162

 

 

Depreciation and amortization

 

1,606

 

1,643

 

Deferred income taxes

 

102

 

224

 

Provision for losses on accounts receivable and inventory

 

194

 

246

 

Loss on the retirement of debt

 

908

 

43

 

Other non-cash items

 

91

 

105

 

Changes in assets and liabilities, net of the effects of acquisitions and divestitures:

 

 

 

 

 

Accounts receivable, net

 

(757

)

(707

)

Inventories

 

(293

)

(260

)

Accounts payable

 

228

 

(35

)

Accrued and other liabilities

 

(44

)

192

 

Other

 

8

 

(25

)

Net cash provided by operating activities

 

4,108

 

3,959

 

Cash Flows From Investing Activities:

 

 

 

 

 

Capital expenditures, net

 

(935

)

(673

)

Acquisition of customer accounts (ADT dealer program)

 

(227

)

(187

)

Acquisition of businesses, net of cash acquired

 

(15

)

(14

)

Purchase accounting and holdback/earn-out liabilities

 

(30

)

(83

)

Divestiture of businesses, net of cash retained by businesses sold

 

303

 

145

 

(Increase) decrease in investments

 

(153

)

393

 

Decrease in restricted cash

 

5

 

303

 

Other

 

(27

)

(12

)

Net cash used in investing activities

 

(1,079

)

(128

)

Cash Flows From Financing Activities:

 

 

 

 

 

Net repayment of short-term debt

 

(2,006

)

(2,649

)

Proceeds from issuance of long-term debt

 

 

2,225

 

Repayment of long-term debt, including debt tenders

 

(2,516

)

(3,596

)

Proceeds from exercise of share options

 

171

 

125

 

Dividends paid

 

(427

)

(75

)

Other

 

(20

)

(21

)

Net cash used in financing activities

 

(4,798

)

(3,991

)

Effect of currency translation on cash

 

33

 

26

 

Cash flows from discontinued operations

 

(65

)

(30

)

Net decrease in cash and cash equivalents

 

(1,801

)

(164

)

Cash and cash equivalents at beginning of period

 

4,467

 

4,186

 

Cash and cash equivalents at end of period

 

$

2,666

 

$

4,022

 

 

See Notes to Consolidated Financial Statements.

3




TYCO INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
Nine Months Ended July 1, 2005 and June 30, 2004
(in millions)

 

 

Number of
Common
Shares

 

Common
Shares
$0.20 Par
Value

 

Share
Premium

 

Contributed
Surplus

 

Accumulated
Earnings

 

Accumulated
Other
Comprehensive
(Loss) Income

 

Total

 

Balance at September 30, 2003

 

 

1,998

 

 

 

$

400

 

 

 

$

8,161

 

 

 

$

15,120

 

 

 

$

2,961

 

 

 

$

(273

)

 

$

26,369

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,425

 

 

 

 

 

2,425

 

Currency translation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

569

 

 

569

 

Unrealized loss on derivative instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6

)

 

(6

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

2,988

 

Dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(75

)

 

 

 

 

(75

)

Share options exercised, including tax benefit of $163

 

 

7

 

 

 

1

 

 

 

123

 

 

 

163

 

 

 

 

 

 

 

 

287

 

Compensation expense

 

 

3

 

 

 

1

 

 

 

 

 

 

25

 

 

 

 

 

 

 

 

26

 

Exchange of convertible debt due 2010

 

 

 

 

 

 

 

 

 

 

 

5

 

 

 

 

 

 

 

 

5

 

Balance at June 30, 2004

 

 

2,008

 

 

 

$

402

 

 

 

$

8,284

 

 

 

$

15,313

 

 

 

$

5,311

 

 

 

$

290

 

 

$

29,600

 

 

 

 

Number of
Common
Shares

 

Common
Shares
$0.20 Par
Value

 

Share
Premium

 

Contributed
Surplus

 

Accumulated
Earnings

 

Accumulated
Other
Comprehensive
Income

 

Total

 

Balance at September 30, 2004

 

 

2,010

 

 

 

$

402

 

 

 

$

8,315

 

 

 

$

15,319

 

 

 

$

5,740

 

 

 

$

516

 

 

$

30,292

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,094

 

 

 

 

 

2,094

 

Currency translation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(31

)

 

(31

)

Unrealized loss on marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2

)

 

(2

)

Minimum pension liability, net of tax benefit of $8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(21

)

 

(21

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

2,040

 

Dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(604

)

 

 

 

 

(604

)

Share options exercised, including tax benefit of $36

 

 

9

 

 

 

2

 

 

 

169

 

 

 

36

 

 

 

 

 

 

 

 

207

 

Compensation expense

 

 

2

 

 

 

 

 

 

 

 

 

57

 

 

 

 

 

 

 

 

57

 

Exchange of convertible debt due 2010

 

 

2

 

 

 

 

 

 

 

 

 

24

 

 

 

 

 

 

 

 

24

 

Reporting calendar alignment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

26

 

 

 

 

 

26

 

Other

 

 

 

 

 

 

 

 

2

 

 

 

1

 

 

 

 

 

 

 

 

3

 

Balance at July 1, 2005

 

 

2,023

 

 

 

$

404

 

 

 

$

8,486

 

 

 

$

15,437

 

 

 

$

7,256

 

 

 

$

462

 

 

$

32,045

 

 

See Notes to Consolidated Financial Statements.

4




TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.   Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation—The unaudited Consolidated Financial Statements include the consolidated accounts of Tyco International Ltd., a company organized under the laws of Bermuda, and its subsidiaries (Tyco and all its subsidiaries, hereinafter collectively referred to as the “Company” or “Tyco”).

The financial statements have been prepared in United States Dollars and in accordance with the instructions to Form 10-Q under the Securities Exchange Act of 1934, as amended, and do not include all of the information and note disclosures required by Generally Accepted Accounting Principles in the United States (“GAAP”). These financial statements should be read in conjunction with the Consolidated Financial Statements and accompanying notes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2004 (the “2004 Form 10-K”).

The Consolidated Financial Statements included herein are unaudited, but in the opinion of management, such financial statements include all adjustments, consisting only of normal recurring adjustments, necessary to summarize fairly the Company’s financial position and results of operations for the interim period. The results reported in these Consolidated Financial Statements should not be taken as indicative of results that may be expected for the entire year.

Change in Fiscal Year and Reporting Calendar Alignment—Effective October 1, 2004, Tyco changed its fiscal year end from a calendar fiscal year ending September 30 to a “52-53 week” year ending on the last Friday of September, such that each quarterly period will be 13 weeks in length. For fiscal years in which there are 53 weeks, the fourth quarter reporting period will be 14 weeks, with the first such occurrence taking place in fiscal 2011. In addition, certain of the Company’s subsidiaries had consistently closed their books up to one month prior to the Company’s fiscal period end. These subsidiaries now report results for the same period as the reported results of the consolidated Company. The impact of this change was not material to the Consolidated Financial Statements. This change is also consistent with the Company’s ongoing efforts to enhance controls and improve the transparency of its reporting, as this change better aligns the Company’s external reporting with the Company’s internal operational processes. Net income for the transition period related to this change was $26 million and was reported within Shareholders’ Equity.

5




TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

1.   Basis of Presentation and Summary of Significant Accounting Policies (Continued)

Employee Share Option Plans—Tyco measures compensation cost in connection with employee share option plans using the intrinsic value based method and accordingly does not recognize compensation expense for the issuance of options with an exercise price equal to or greater than the market price at the date of grant. Had the fair value based method been applied, the effect on net income and earnings per share would have been as follows ($ in millions, except for per share data):

 

 

Quarter Ended

 

Nine Months Ended

 

 

 

   July 1,   
2005

 

 June 30, 
2004

 

   July 1,   
2005

 

June 30,
2004

 

Net income, as reported

 

 

$

1,193

 

 

 

$

923

 

 

 

$

2,094

 

 

$

2,425

 

Add: Employee compensation expense for share options included in reported net income, net of income taxes

 

 

2

 

 

 

3

 

 

 

9

 

 

7

 

Less: Total employee compensation expense for share options determined under fair value method, net of income taxes(1)

 

 

(39

)

 

 

(66

)

 

 

(122

)

 

(173

)

Net income, pro forma

 

 

$

1,156

 

 

 

$

860

 

 

 

$

1,981

 

 

$

2,259

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic—as reported

 

 

$

0.59

 

 

 

$

0.46

 

 

 

$

1.04

 

 

$

1.21

 

Basic—pro forma

 

 

0.57

 

 

 

0.43

 

 

 

0.99

 

 

1.13

 

Diluted—as reported

 

 

0.56

 

 

 

0.43

 

 

 

0.99

 

 

1.13

 

Diluted—pro forma

 

 

0.55

 

 

 

0.40

 

 

 

0.94

 

 

1.06

 


(1)                 No new grants were made for the quarter ended July 1, 2005. The estimated weighted-average fair value of Tyco options previously granted was calculated using the Black-Scholes option-pricing model with an expected stock price volatility of 46%, a risk free interest rate of 3.32%, expected annual dividend per share of $0.05 and an expected option life of 4.0 years for the quarter ended June 30, 2004; a volatility of 35%, a risk free interest rate of 3.89%, expected annual dividend per share of $0.40 and an expected option life of 4.1 years for the nine months ended July 1, 2005; and a volatility of 47%, a risk free interest rate of 2.54%, expected annual dividend per share of $0.05 and an expected option life of 3.9 years for the nine months ended June 30, 2004.

Reclassifications—Certain prior period amounts have been reclassified to conform with current period presentation.

Accounting Pronouncements—In September 2004, the Emerging Issues Task Force (“EITF”) of the Financial Accounting Standards Board (“FASB”) reached a consensus on EITF No. 04-8, “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share.” This EITF requires that contingently convertible debt securities with a market price trigger be included in diluted earnings per share, regardless of whether the market price trigger has been met. EITF No. 04-8 became effective for Tyco on October 1, 2004 and required retroactive restatement of previously reported earnings per share. The adoption of this EITF reduced diluted earnings per share for the nine months ended June 30, 2004 by $0.01 per share. There was no impact on any other period presented.

In November 2004, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4.” SFAS No. 151 amends Accounting Research Bulletin (“ARB”) No. 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current-period charges. In addition, SFAS No. 151 requires that allocation of fixed production overhead to inventory be based on the normal capacity of the production facilities. SFAS No. 151 will be effective in the first quarter of fiscal 2006 for

6




TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

1.   Basis of Presentation and Summary of Significant Accounting Policies (Continued)

Tyco. The adoption of SFAS No. 151 is not expected to have a significant impact on the Company’s results of its operations, financial position or cash flows.

In December 2004, the FASB issued SFAS No. 123 (Revised 2004), “Share-Based Payment,” (“SFAS No. 123R”) that will require compensation costs related to share-based payment transactions to be recognized in the financial statements. The compensation cost will be measured based on the grant-date fair value and will be recognized over the service period. SFAS No. 123R replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Pro-forma disclosure regarding the effect on net income and earnings per share as if the Company had applied the fair value method of accounting for stock-based compensation is presented in the Employee Share Option Plans section above. In April 2005, the Securities and Exchange Commission (“SEC”) delayed the effective date for SFAS No. 123R so that it will become effective in the first quarter of fiscal 2006 for Tyco. The Company is currently assessing the impact that the new standard will have on the results of its operations, financial position or cash flows.

In March 2005, the SEC issued Staff Accounting Bulletin (“SAB”) No. 107 regarding the Staff’s interpretation of SFAS No. 123R. This interpretation provides the Staff’s views regarding interactions between SFAS No. 123R and certain SEC rules and regulations and provides interpretations of the valuation of share-based payments for public companies. The interpretive guidance is intended to assist companies in applying the provisions of SFAS No. 123R and investors and users of the financial statements in analyzing the information provided. The Company will follow the guidance prescribed in SAB No. 107 in connection with its adoption of SFAS No. 123R.

In March 2005, the FASB issued Interpretation (“FIN”) No. 47, “Accounting for Conditional Asset Retirement Obligations—an interpretation of FASB Statement No. 143.” This Interpretation clarifies the timing of liability recognition for legal obligations associated with an asset retirement when the timing and (or) method of settling the obligation are conditional on a future event that may or may not be within the control of the entity. FIN No. 47 is effective no later than the end of fiscal years ending after December 15, 2005. The Company is currently assessing the impact that FIN No. 47 will have on the results of its operations, financial position or cash flows.

In June 2005, the FASB issued Staff Position (“FSP”) No. 143-1, “Accounting for Electronic Equipment Waste Obligations,” which provides guidance on accounting for historical waste obligations associated with the Directive on Waste Electrical and Electronic Equipment (the “WEEE Directive”), which was adopted by the European Union. FSP No. 143-1 is effective the first reporting period ending after June 8, 2005 or the date of the adoption of the WEEE Directive into law by the applicable European Union member country. Currently, the Directive has not yet been fully adopted into law by European Union member countries in which the Company has significant operations. The Company is currently assessing the impact that FSP No. 143-1 will have on its results of operations, financial condition or cash flows.

7




TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

2.   Restructuring and Long-lived Asset Impairment Charges, Net

Restructuring and long-lived asset impairment charges, net are as follows ($ in millions):

 

 

Nine Months Ended

 

 

 

July 1, 2005

 

June 30, 2004

 

Fire and Security

 

 

$

11

 

 

 

$

66

 

 

Electronics

 

 

(4

)

 

 

(31

)

 

Healthcare

 

 

8

 

 

 

11

 

 

Engineered Products and Services

 

 

4

 

 

 

13

 

 

Plastics and Adhesives

 

 

41

 

 

 

65

 

 

Corporate and Other

 

 

(2

)

 

 

13

 

 

 

 

 

58

 

 

 

137

 

 

Less: Inventory-related charges recorded in cost of sales

 

 

4

 

 

 

3

 

 

Restructuring and long-lived asset impairment charges, net

 

 

$

54

 

 

 

$

134

 

 

 

2005 Charges

During the nine months ended July 1, 2005, the Company recorded net restructuring and long-lived asset impairment charges of $54 million, which is comprised of impairment of long-lived asset charges of $42 million primarily in the Plastics and Adhesives business and net restructuring charges of $12 million. See Note 6 for further discussion of the long-lived asset impairment charges. For the nine months ended July 1, 2005, the Company recorded $46 million of charges related to various restructuring initiatives. These charges consisted of $23 million of severance, $13 million of facility exit charges and $10 million of other charges. In addition, the Company recorded restructuring credits totaling $16 million, primarily related to completing certain restructuring activities announced in prior years for amounts less than originally anticipated and $18 million of credits resulting from the sale of certain assets that were previously written down to their net realizable value for amounts greater than originally estimated.

2004 Charges

During the nine months ended June 30, 2004, the Company recorded net restructuring and long-lived asset impairment charges of $134 million. These charges include $53 million for the impairment of long-lived assets primarily in the Plastics and Adhesives business related to the decision to exit certain facilities. The Company also recorded net restructuring charges of $81 million. Restructuring charges during the nine months ended June 30, 2004 totaled $142 million related to various restructuring activities. These charges consisted of $106 million for employee severance and benefits, $28 million for facility exit costs and $8 million for other related costs. Additionally, the Company recorded restructuring credits totaling $61 million related to completing certain restructuring activities announced in prior years for amounts less than originally estimated and the sale of certain assets that were previously written-down to their net realizable value for amounts greater than originally estimated.

8




TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

2.   Restructuring and Long-lived Asset Impairment Charges, Net (Continued)

Restructuring Reserves

The following is a roll forward of restructuring reserves from September 30, 2004 to July 1, 2005 by the year in which the restructuring action was initiated ($ in millions):

 

 

Year of Restructuring Action

 

 

 

2005

 

2004

 

2003

 

2002 and
Prior

 

Total

 

Balance at September 30, 2004

 

$

 

$

161

 

 

$

2

 

 

 

$

74

 

 

$

237

 

Charges

 

21

 

18

 

 

 

 

 

7

 

 

46

 

Credits

 

 

(11

)

 

 

 

 

(5

)

 

(16

)

Utilization

 

(11

)

(93

)

 

(2

)

 

 

(21

)

 

(127

)

Transfer from held for sale

 

4

 

 

 

 

 

 

39

 

 

43

 

Currency translation

 

 

1

 

 

1

 

 

 

 

 

2

 

Balance at July 1, 2005

 

$

14

 

$

76

 

 

$

1

 

 

 

$

94

 

 

$

185

 

 

Restructuring liabilities of the Tyco Global Network (“TGN”) were classified as held for sale on the Consolidated Balance Sheet as of September 30, 2004. During the quarter ended July 1, 2005, the Company completed the sale of the TGN and certain restructuring liabilities were assumed by the buyer. The Company also retained $43 million of liabilities, primarily long-term lease obligations, and has reclassified these liabilities from held for sale into restructuring reserves accordingly. These reserves are reflected in Corporate below. See Note 3 for further discussion of the TGN sale.

The following table reflects the ending balances of restructuring reserves by segment ($ in millions):

 

 

 July 1, 
2005

 

September 30,
2004

 

Fire and Security

 

 

$

56

 

 

 

$

102

 

 

Electronics

 

 

63

 

 

 

74

 

 

Healthcare

 

 

3

 

 

 

10

 

 

Engineered Products and Services

 

 

17

 

 

 

36

 

 

Plastics and Adhesives

 

 

3

 

 

 

10

 

 

Corporate and Other

 

 

43

 

 

 

5

 

 

 

 

 

$

185

 

 

 

$

237

 

 

 

At July 1, 2005, $185 million of restructuring reserves remained on the Consolidated Balance Sheets, of which $89 million are included in accrued and other current liabilities and $96 million are included in other liabilities. At September 30, 2004, $237 million of restructuring reserves remained on the Consolidated Balance Sheets, of which $171 million are included in accrued and other current liabilities and $66 million are included in other liabilities.

3.   Divestitures and Acquisitions

In May 2005, Tyco announced its intent to explore the divesture of its Plastics and Adhesives business segment. Plastics and Adhesives is a global manufacturer of plastic film, specialty tapes and adhesives, coated products and garment hangers. During the third quarter, the Company continued to actively pursue the divestiture, however, the criteria for held for sale were not met. Net revenue and operating income

9




TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

3.   Divestitures and Acquisitions (Continued)

for fiscal 2004 for this business were $1.7 billion and $69 million, respectively. During the nine months ended July 1, 2005, the Company recorded $202 million ($181 million after tax) of goodwill and long-lived asset impairment charges in the A&E Products business unit of Plastics and Adhesives. See Note 6 for further discussion of the impairment charges.

Divestitures

In November 2004, Tyco agreed to sell the TGN, its undersea fiber optic telecommunication network. The sale was consummated on June 30, 2005. As part of the sale transaction, Tyco received gross cash proceeds of $130 million, and the purchaser assumed certain liabilities. In connection with this sale, Tyco recorded a $305 million pre-tax gain which is reflected in (gains) losses and impairments on divestitures in the Consolidated Statements of Income for the nine months ended July 1, 2005. The Company has presented the operations of the TGN in continuing operations as the criteria for discontinued operations were not met.

During the nine months ended July 1, 2005, the Company divested nine other businesses that were reported as continuing operations in Fire and Security, Healthcare and Engineered Products and Services for aggregate proceeds of $34 million in cash, net of $9 million of cash retained by businesses sold. The Company recorded net losses and impairments on divestitures of $24 million, including a $3 million charge reflected in cost of sales, in connection with the divestiture and liquidation of these businesses, as well as the write-down to estimated fair value of certain held for sale businesses. Total assets and total liabilities of these divested businesses were $114 million and $67 million, respectively.

Net revenue and operating loss for the nine months ended July 1, 2005 related to these businesses were $115 million and $51 million, respectively. Net revenue and operating loss for the nine months ended June 30, 2004 were $637 million and $77 million, respectively, related to businesses divested during fiscal 2004 and 2005.

Discontinued Operations

During the nine months ended July 1, 2005, the Company divested eight businesses that were reported as discontinued operations within Fire and Security, Plastics and Adhesives and Engineered Products and Services for aggregate proceeds of $156 million in cash, net of $1 million of cash retained by businesses sold. The Company recorded net losses on the sale of discontinued operations of $66 million ($58 million after tax) to reflect the net losses on sale, including costs to sell, and to write down the carrying value of such assets to their estimated fair value. Total assets and total liabilities of the divested businesses were $423 million and $240 million, respectively. Net revenue from discontinued operations for the nine months ended July 1, 2005 and June 30, 2004 was $202 million and $661 million, respectively. Pre-tax operating loss from discontinued operations for the nine months ended July 1, 2005 and June 30, 2004 was $11 million for both periods.

10




TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

3.   Divestitures and Acquisitions (Continued)

Assets and Liabilities Held for Sale

The following table presents balance sheet information for discontinued operations and other businesses held for sale ($ in millions):

 

 

July 1,
2005

 

September 30,
2004

 

Accounts receivable, net

 

 

$

3

 

 

 

$

209

 

 

Inventories

 

 

9

 

 

 

95

 

 

Prepaid expenses and other current assets

 

 

1

 

 

 

95

 

 

Property, plant and equipment, net

 

 

14

 

 

 

96

 

 

Other assets

 

 

1

 

 

 

120

 

 

Total assets

 

 

$

28

 

 

 

$

615

 

 

Accounts payable

 

 

$

 

 

 

$

155

 

 

Accrued and other current liabilities

 

 

3

 

 

 

243

 

 

Other liabilities

 

 

 

 

 

125

 

 

Total liabilities

 

 

$

3

 

 

 

$

523

 

 

 

Acquisition Liabilities

At July 1, 2005, $80 million of acquisition liabilities remained on the Consolidated Balance Sheets, of which $28 million are included in accrued and other current liabilities and $52 million are included in other liabilities. These acquisition liabilities relate primarily to facility exit costs. At September 30, 2004, $123 million of acquisition liabilities remained on the Consolidated Balance Sheets, of which $29 million are included in accrued and other current liabilities and $94 million are included in other liabilities.

 

4.   Earnings Per Share

The reconciliations between basic and diluted earnings per share were as follows (in millions, except per share data):

 

 

Quarter Ended July 1, 2005

 

Quarter Ended June 30, 2004

 

 

 

Income

 

Shares

 

Per Share
Amount

 

Income

 

Shares

 

Per Share
Amount

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

1,197

 

2,015

 

 

$

0.59

 

 

 

$

925

 

 

2,002

 

 

$

0.46

 

 

Share options, restricted shares and deferred stock units

 

 

14

 

 

 

 

 

 

 

 

17

 

 

 

 

 

Exchange of convertible debt

 

16

 

120

 

 

 

 

 

 

27

 

 

203

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations, giving effect to dilutive adjustments

 

$

1,213

 

2,149

 

 

$

0.56

 

 

 

$

952

 

 

2,222

 

 

$

0.43

 

 

 

11




TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

4.   Earnings Per Share (Continued)

 

 

 

Nine Months Ended
July 1, 2005

 

Nine Months Ended
June 30, 2004

 

 

 

Income

 

Shares

 

Per Share
Amount

 

Income

 

Shares

 

Per Share
Amount

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

2,159

 

2,011

 

 

$

1.07

 

 

$

2,434

 

1,999

 

 

$

1.22

 

 

Share options, restricted shares and deferred stock units

 

 

18

 

 

 

 

 

 

14

 

 

 

 

 

Exchange of convertible debt

 

61

 

150

 

 

 

 

 

86

 

209

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations, giving effect to dilutive adjustments

 

$

2,220

 

2,179

 

 

$

1.02

 

 

$

2,520

 

2,222

 

 

$

1.13

 

 

 

The computation of diluted earnings per common share for the quarter and nine months ended July 1, 2005 excludes the effect of the potential exercise of options to purchase approximately 76 million and 73 million shares, respectively, because the effect would be anti-dilutive.

The computation of diluted earnings per common share for the quarter and nine months ended June 30, 2004 excludes the effect of the potential exercise of options to purchase approximately 67 million shares and 86 million shares, respectively, because the effect would be anti-dilutive.

5.   Sale of Accounts Receivable

During the quarter ended July 1, 2005, the Company terminated both of its corporate accounts receivable programs. No amounts were utilized under these programs as of September 30, 2004, and through the date of termination. The aggregate amount outstanding under international accounts receivable programs was $82 million at July 1, 2005 and $99 million at September 30, 2004.

6.   Goodwill and Intangible Assets

The changes in the carrying amount of goodwill were as follows ($ in millions):

 

 

Nine Months Ended July 1, 2005

 

 

 

Fire and
Security

 

Electronics

 

Healthcare

 

Engineered
Products and
Services

 

Plastics and
Adhesives

 

Total

 

Balance at September 30, 2004

 

$

8,075

 

 

$

7,486

 

 

 

$

6,074

 

 

 

$

3,166

 

 

 

$

709

 

 

$

25,510

 

Purchase accounting adjustments(1)

 

(8

)

 

(28

)

 

 

(84

)

 

 

1

 

 

 

 

 

(119

)

Acquisitions and divestitures

 

(4

)

 

2

 

 

 

 

 

 

 

 

 

 

 

(2

)

Impairment

 

 

 

 

 

 

 

 

 

 

 

 

(162

)

 

(162

)

Currency translation

 

11

 

 

(3

)

 

 

(1

)

 

 

(1

)

 

 

1

 

 

7

 

Balance at July 1, 2005

 

$

8,074

 

 

$

7,457

 

 

 

$

5,989

 

 

 

$

3,166

 

 

 

$

548

 

 

$

25,234

 


(1)      The net decrease in goodwill is primarily related to the finalization of income tax matters from previous acquisitions.

During the nine months ended July 1, 2005, as a result of consideration for potential sale and deteriorating operating results in the A&E Products business, the Company performed an interim

12




TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

6.   Goodwill and Intangible Assets (Continued)

assessment of the recoverability of both goodwill and long-lived assets in the Plastics and Adhesives segment. Estimated fair values of the reporting units and long-lived assets at Plastics and Adhesives were developed based on probability-weighted expected future cash flows of these assets. As a result of this assessment, the Company determined that the book value of certain long-lived assets in the A&E Products reporting unit of Plastics and Adhesives was greater than their estimated fair value and consequently recorded a long-lived asset impairment of $40 million. The Company also determined that the book value of the A&E Products reporting unit was in excess of its estimated fair value which resulted in a goodwill impairment charge of $162 million.

The following table sets forth the gross carrying amount and accumulated amortization of the Company’s intangible assets ($ in millions):

 

 

July 1, 2005

 

September 30, 2004

 

 

 

Gross
 Carrying 
Amount

 

Accumulated
Amortization

 

Weighted Average
Amortization
Period

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Weighted Average
Amortization
Period

 

Amortizable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contracts and related customer relationships

 

 

$

4,883

 

 

 

$

(2,526

)

 

 

12 years

 

 

 

$

4,613

 

 

 

$(2,161

)

 

 

12 years

 

 

Intellectual property

 

 

2,871

 

 

 

(952

)

 

 

20 years

 

 

 

2,899

 

 

 

(837

)

 

 

20 years

 

 

Other

 

 

215

 

 

 

(71

)

 

 

26 years

 

 

 

217

 

 

 

(68

)

 

 

26 years

 

 

Total

 

 

$

7,969

 

 

 

$

(3,549

)

 

 

16 years

 

 

 

$

7,729

 

 

 

$(3,066

)

 

 

17 years

 

 

Non-Amortizable: