ITEM 1. BUSINESS
Tyco International (US) Inc., formerly known as Tyco International Ltd., (the "Company" or "Tyco"), through its divisions and operating subsidiaries, engages in the manufacture and distribution of disposable medical supplies and other specialty products, the design, manufacture, installation and service of fire detection and suppression systems, and the manufacture and distribution of flow control products and electrical and electronic components. The Company maintains a strong leadership position in each of its segments of these markets. See Notes 12 and 13 to the Consolidated Financial Statements for certain consolidated segment and geographic financial data relating to the Company's businesses.
As more fully described in Notes 1 and 17 to the Consolidated Financial Statements, subsequent to June 30, 1997 the Company merged with and became a wholly owned subsidiary of ADT Limited (subsequently renamed Tyco International Ltd.). Additionally, on July 1, 1997 the Company completed the acquisition of AT&T's submarine systems business. The merger with ADT Limited was accounted for as a pooling of interests. The information presented in this Form 10-K reflects only the historical information related to Tyco as of and for the period ended June 30, 1997. No adjustment or restatement has been reflected for the transactions described in Note 17.
I. DISPOSABLE AND SPECIALTY PRODUCTS
Tyco's Disposable and Specialty Products Group consists of Kendall International ("Kendall"), Ludlow Laminating and Coating, Armin Plastics ("Armin"), Carlisle Plastics, Inc. ("Carlisle"), Twitchell, and Accurate Forming. Kendall manufactures and distributes medical supplies, disposable medical products and adhesive products and tapes. Ludlow Laminating and Coating manufactures laminated and coated products. Armin manufactures polyethylene film and packaging products. Carlisle manufactures specialty packaging materials and garment hangers. Twitchell manufactures extrusion coated polyester yarns and woven fabrics and Accurate Forming manufactures deep-drawn metal parts.
Kendall
Kendall conducts its operations through four business units: Kendall Healthcare, Kendall International, Kendall-Polyken and Ludlow Technical Products. In each of its business units, Kendall competes with numerous companies, including a number of larger, well-established companies. Kendall relies on its reputation for quality and dependable service, together with its low cost manufacturing and innovative products, to compete in its markets.
The Kendall Healthcare business unit markets a broad range of wound care, vascular therapy, urological care, incontinence care, anesthetic care and other products to U.S. and Canadian hospitals and alternate site health care customers. Kendall Healthcare is the industry leader in gauze production with its Kerlix(R) and Curity(R) brands. Kendall Healthcare's other core domestic product category consists of its vascular therapy products, principally anti-embolism stockings, marketed under the T.E.D.(R) brand name, sequential pneumatic compression devices sold under the SCD(TM) brand name and a venous plexus foot pump. Kendall Healthcare pioneered the pneumatic compression form of treatment and continues to be the dominant participant in the pneumatic compression and elastic stocking segments of the vascular therapy market.
Kendall Healthcare also offers a range of other patient care products, including incontinent care products marketed primarily to nursing homes and other institutional providers of long term care, urological, wound care, surgical care and respiratory care products, a broad line of disposable medical supplies including respiratory, urology, nursing care products, airway management, temperature monitoring and specialty products serving patients in anesthesia, critical care and emergency medicine.
Kendall Healthcare distributes its products both directly through its sales force and through a network of over 250 independent distributors. Kendall Healthcare's sales force is divided into three groups: one promoting its vascular therapy products, one promoting its wound care and other health care products and one selling all
of its products into the alternate site markets. Most of the U.S. distributors also sell similar products made by Kendall's competitors, a practice common in the industry.
Kendall International is responsible for the manufacturing, marketing, distribution and export of Kendall products in numerous countries worldwide. Kendall International's operations are organized primarily into three geographic regions -- Europe, Latin America and the Far East. Kendall International generally markets a range of products similar to those of Kendall Healthcare, although the mix of product lines varies from country to country. Kendall International markets directly to hospital and medical professionals and through independent distributors.
The Kendall-Polyken division manufactures and markets specialty adhesive products and tapes for industrial applications, including external corrosion protection tape products for oil, gas and water pipelines. Other industrial applications include tapes used in the automotive industry for wire harness wraps, sealing and other purposes, and tapes used in the aerospace and heating and air conditioning (HVAC) industries. Kendall-Polyken also produces duct, foil, strapping, packaging and electrical tapes and spray adhesives for industrial and consumer markets worldwide and manufactures bandages and medical tapes for Kendall Healthcare and for others. Kendall's Betham division develops and markets pressure sensitive adhesives and coatings, principally for the automotive, medical and specialty markets.
Kendall-Polyken generally markets its pipeline products directly, working with local manufacturers' representatives, international engineering and construction companies, and the owners and operators of pipeline transportation facilities. Kendall-Polyken sells its other industrial products either directly to major end users or through diverse distribution channels, depending on the industry being served.
The Ludlow Technical Products division manufactures and sells a variety of disposable medical products, specialized paper and film products. These products include transcutaneous electrical nerve stimulation electrodes and related products which are used primarily in physical therapy and other forms of rehabilitative medicine, medical electrodes for EKGs and similar diagnostic tests, gels which are used with medical electrodes for testing and other monitoring purposes, hydrogel wound care products, neonatal electrodes, diagnostic and monitoring electrodes, electrotherapy electrodes and cable and lead wire. Ludlow Technical Products also produces adhesive tapes, pressure sensitive coated papers and films used for business forms and in printing applications, high quality facsimile paper and recording chart papers for medical and industrial instrumentation.
These products are marketed primarily by the division's internal sales force. Competitors vary from small regional firms to larger firms that compete with Ludlow Technical Products on a national basis. Competition is on the basis of price and quality.
Ludlow Laminating and Coating
Ludlow Laminating and Coating produces protective packaging and other materials made of coated or laminated combinations of paper, polyethylene and foil. Coated packaging materials provide barriers against grease, oil, light, heat, moisture, oxygen and other contaminants that could damage the contained products. The division produces structural coated and laminated products such as plastic coated kraft, linerboard and bleached boards for rigid urethane insulation panels, automotive components and wallboard panels. Other applications include packaging for photographic film, frozen foods, health care products, electrical and metallic components, agricultural chemicals, cement and specialty resins.
Ludlow markets its laminated and coated products through its internal sales force and through independent manufacturers' representatives. The Company competes with many large manufacturers of laminated and coated products on the basis of price, service, marketing coverage and custom application engineering. There are numerous specialized competitors which tend to differ from market to market.
Armin
Armin manufactures polyethylene film and packaging products in a wide range of size, gauge, construction strength, stretch capacity, clarity and color. Armin extrudes low density, high density and linear
low density polyethylene film from resin purchased in pellet form, using such additives as coloring, slip and anti-block chemicals. Armin's products include plastic supermarket packaging, greenhouse sheeting, shipping covers and liners and a variety of other packaging configurations for the aerospace, agricultural, automotive, construction, cosmetics, electronics, food processing, healthcare, pharmaceutical and shipping industries. Armin also manufactures a number of other polyethylene products, such as reusable plastic pallets, transformer pads for electric utilities, and a large variety of disposable gloves for the cosmetic, medical, foodhandling and pharmaceutical industries. A majority of sales are generated through Armin's internal sales force. Armin serves over 6,000 customers in the United States.
Armin competes with a wide range of manufacturers, including some vertically integrated companies and companies that manufacture polyethylene resins for their own use. Armin competes in many market segments by emphasizing product innovation, specialization and customer service.
Carlisle
Carlisle is a leading producer of industrial and consumer plastic products. Carlisle's products include trash bags, flexible packaging, sheeting and garment hangers. Carlisle's trash bag products include institutional lines, as well as Carlisle's own national consumer brands. Sales are primarily in North America.
Carlisle supplies plastic trash bags to mass merchants, grocery chains, and institutional customers. Carlisle manufactures Ruffies(R), a national brand consumer trash bag, for mass merchants and other retail stores. Carlisle also provides heavy duty trash can liners for institutional customers, such as food service distributors, janitorial supply houses, restaurants, hotels and hospitals.
In the consumer trash bag market, Carlisle competes primarily with two nationally advertised brands. Carlisle has historically concentrated on mass merchants as the primary market for its branded Ruffies trash bags, while the other major national brands are marketed primarily through food retailers.
Film-Gard(R), Carlisle's leading plastic sheeting product, is sold to consumers and professional contractors through do-it-yourself outlets, home improvement centers and hardware stores. A wide range of Film-Gard products are sold for various uses, including painting, renovation, construction, landscaping and agriculture. Carlisle's industrial packaging film is sold through distributors and manufacturers for use as shrink wrap and for other packaging requirements.
Carlisle sells molded plastic garment hangers to garment manufacturers, national retailers, regional or local retailers, and mass merchants. Garment manufacturers place their clothes on Carlisle's hangers before shipping to retail outlets. Carlisle creates, manufactures and sells customized hanger designs to national retailers. Regional or local retailers buy standard Carlisle hanger lines for retail clothing displays. Carlisle also supplies mass merchants with consumer plastic hangers for sale to the general public.
Carlisle operates in a competitive marketplace where success is dependent upon price, service and quality.
Twitchell
Twitchell manufactures extrusion coated polyester yarns and woven PVC-coated yarn fabrics and woven and knit paper fabrics. These fabrics are sold by Twitchell's internal sales force and through distributors to manufacturers for use principally in outdoor furniture, wall coverings, window screening, awnings, housewares and other specialty products. Non-woven fabric is coated and sold for use as disposable medical clothing. Competition is on the basis of price, quality and service. Twitchell competes with a number of U.S. and foreign manufacturers in the sale of woven fabrics and coated products.
Accurate Forming
Accurate Forming manufactures deep-drawn metal parts, primarily barrels, caps and clips for pens and pencils and containers, caps and closures for cosmetics, pharmaceutical packaging and automotive applications. Accurate Forming sells its products on a direct basis through its internal sales force and also utilizes manufacturers' representatives. The Company competes with many small, independent deep-drawn metal
manufacturers and plastic extruders, several of which have manufacturing locations in the Far East. Competition is on the basis of price.
II. FIRE AND SAFETY SERVICES
The Company is the largest contractor in the world for the design and installation of fire detection, suppression and sprinkler systems, and for the servicing of such systems. The Company is also a leading manufacturer and distributor of fire detection and suppression products.
The Company's Grinnell subsidiary ("Grinnell"), which was founded in 1850, is the largest installer, manufacturer and supplier of automatic fire sprinkler and fire alarm and detection systems in North America. Wormald International Limited ("Wormald"), which was founded in 1889, operates as a major fire protection company with contracting, manufacturing and distribution operations throughout Western Europe and the Asia-Pacific region. Grinnell and Wormald, in combination, is the largest fire protection company in the world, forming a network of over 300 offices on five continents. The acquisition of Thorn Security Group ("Thorn") in July 1996 further expands the Company's worldwide position in the fire detection and security systems market.
Contracting and Service
The Company designs, fabricates, installs and services automatic fire sprinkler systems, fire alarm and detection systems, special hazard suppression systems and security systems in buildings and other installations. Grinnell's fire protection contracting and service business in North America operates through a network of offices located in the United States, Canada, Mexico, Latin America and Puerto Rico. Internationally, the Company engages in fire protection contracting and service through a network of offices in the United Kingdom, Continental Europe, Saudi Arabia, United Arab Emirates, Australia, New Zealand and Asia.
The Company installs fire protection systems in both new and existing structures. Typically, the contracting businesses bid on contracts for fire protection installation which are let by owners, architects, construction engineers and mechanical or general contractors. In recent years, the business of retrofitting existing buildings in the United States and Canada has grown as a result of local and state legislation requiring installation of fire protection systems and reduced insurance premiums available on structures with automatic sprinkler systems. Revenue from the servicing, maintenance, repair and inspection of fire protection, detection and suppression systems installed by the Company and other contractors has increased in recent years.
A majority of the fire suppression systems installed by the Company are water-based, but the Company is also the world's leader in providing custom designed special hazard fire protection systems which incorporate various specialized non-water agents such as foams, dry chemicals and gases. Systems using agents other than water are suited for fire protection in certain manufacturing, power generation, petrochemical, offshore oil exploration, transportation, telecommunications, mining and marine applications. The Company holds exclusive manufacturing and distribution rights in several regions of the world for INERGEN(R) fire suppression products. INERGEN(R), an alternative to the ozone depleting agent known as halon, consists of a mixture of three inert gases designed to effectively extinguish fires without polluting the environment or damaging costly equipment.
In Australia, New Zealand and Asia, the Company, through its O'Donnell Griffin division, also engages in the installation of electrical wire and related electrical equipment in new and existing structures and offers specialized electrical contracting services in these markets for different types of construction, including applications for railroad and bridge construction.
Substantially all of the mechanical components (and, in North America, most of the pipe) used in the fire protection systems installed by the Company are manufactured by the Company. The Company also has fabrication plants worldwide that cut, thread and weld pipe, which is then shipped with other prefabricated components to job sites for installation. The Company has developed its own computer-aided-design technology that reduces the time required to design systems for specific applications and coordinates fabrication and delivery of system components. The Company also installs alarms, detection and activation
devices and centralized monitors. With Thorn, the Company is now a major manufacturer of alarms, detection and activation devices and also operates central monitoring stations.
In its fire protection contracting business, the Company employs both non-union and union employees in North America, Europe and Asia-Pacific. Many of the union employees are employed on an hourly basis for particular jobs. In North America, the largest number of union employees is represented by a number of local unions affiliated with the United Association of Plumbers and Pipefitters ("UA"). In April 1994, following lengthy negotiations, Grinnell's contracts with a number of locals of the UA were not renewed. Employees in those locations, representing 64% of those employees represented by the UA unions, went on strike. Grinnell has continued to operate with former union members who have crossed over and with replacement workers. The labor action has not had, and is not expected to have, any material adverse effect on Grinnell's business or results of operations.
Generally, competition in the fire protection business varies by geographic location. In North America, Grinnell competes with hundreds of smaller contractors on a regional or local basis for the installation of fire suppression and alarm and detection systems. Many of the regional and local competitors employ non-union labor. In Europe, the Company competes with many regional or local contractors on a country by country basis. In Australia, New Zealand and Asia, the Company competes with a few large fire protection contractors as well as with many smaller regional or local companies. The Company competes for fire protection contracts primarily on the basis of price, service and quality.
Manufacturing and Distribution
The Company manufactures most of the components used in its own fire protection contracting business, as well as a variety of products for sale to other fire protection contractors. In North America, the Company manufactures pipe and pipe fittings, fire hydrants, sprinkler heads and substantially all of the mechanical sprinkler components used in an automatic fire suppression system. In the United Kingdom, France, Germany and Asia-Pacific, the Company manufactures and sells sprinkler heads, specialty valves, fire doors and electronic panels for use in fire detection systems. In Mexico, the Company manufactures fire extinguishers, fire hose and related equipment. With the acquisition of Thorn, the Company now manufactures a complete line of alarm and detection equipment that is installed by the Company's units. Thorn's products are also sold to other alarm and detection installers.
The Company's Ansul subsidiary manufactures and sells various lines of dry chemical, liquid and gaseous portable fire extinguishers and related agents for industrial, government, commercial and consumer applications. Ansul also manufactures and sells special hazard fire suppression systems designed for use in restaurants, marine applications, mining applications, the petrochemical industry, confined industrial spaces and commercial spaces housing delicate and electronic equipment. Ansul also manufactures spill control products designed to absorb, neutralize and solidify spills of various hazardous materials.
Fire protection products are sold through the Company's flow control products distribution network discussed in "Flow Control Products," below, and through independent distributors.
Environmental Services
The Earth Technology Corporation ("Earth Tech"), is a provider of a broad range of environmental, consulting and engineering services. The principal services of Earth Tech consist of full-spectrum environmental and hazardous waste management services, infrastructure design and construction services, facilities engineering and construction management services for institutional, civic, commercial and industrial clients, and contract operations and management services for water, waste water and remediation treatment facilities for municipal and industrial clients.
Services are provided through a network of 40 offices located throughout North America. Earth Tech competes with a number of national, regional and local companies on the basis of price and breadth and quality of services.
III. FLOW CONTROL PRODUCTS
The Company's Flow Control Group manufactures and distributes flow control products in North America, Europe and Asia-Pacific. Flow control products include pipe, fittings, valves, meters and related products which are used to transport, control and measure the flow of liquids and gases. The Flow Control Group includes Grinnell, Allied Tube & Conduit ("Allied"), Mueller Co. ("Mueller") and a number of specialized manufacturers of valves, fittings and couplings.
Manufacturing
The Company manufactures and distributes a wide range of flow control products, including pipe and pipe fittings, tubing, valves, meters, couplings, pipe hangers, strut and related components. These products are used in plumbing, heating, ventilation and air conditioning (HVAC) systems, mechanical contracting, power generation, water and gas utilities, oil and gas exploration, petrochemical and numerous other industrial applications. The Company also manufactures certain related products such as steel tubing, custom iron castings, malleable iron pipe fittings and fencing materials.
Allied is the leading North American manufacturer of pipe and other tubular products. Allied manufactures a full line of steel pipe for the fire protection and construction industries and for commercial, residential and institutional markets. Its mechanical tube division offers steel tubing in a wide assortment of shapes and sizes for a variety of industrial and commercial applications. Allied's fence division is a leader in the manufacture of products for the residential and industrial/commercial fence markets. Allied also manufactures metal framing systems used in the construction, industrial and OEM markets.
Mueller, a manufacturer of water and gas distribution products, manufactures fire hydrants, iron butterfly and gate valves, service-line brass valves and fittings, gas valves and meter bars, water meters, backflow preventers and related products for sale to independent distributors and, to a lesser extent, directly to waterworks contractors, municipalities and gas companies throughout the United States and Canada.
Over the past several years, the Company has expanded its worldwide manufacturing and distribution presence through a series of acquisitions and internal growth. In North America, Grinnell manufactures forged steel fittings and valves. In Switzerland, Neotecha manufactures Teflon lined specialty valves for use in highly corrosive environments. In the United Kingdom, Charles Winn (Valves) Ltd. and Hindle Cockburns manufacture specialty high performance butterfly valves and ball valves that are used principally in the oil and gas, chemical and processing industries. In Spain, Belgicast manufactures valves used for waterworks and other industrial applications. In Germany, the Sempell Valve Group manufactures and services specialty valves used in industrial and power generation applications. In Malaysia the Company manufactures couplings, fittings, steel tubing and metal framing products.
In September 1996, the Company acquired Henry Pratt Co., James Jones Company and Edward Barber & Co. from Watts Industries, Inc. The three operations, located in the United States and the United Kingdom, are engaged in the manufacture and sale of valves, hydrants and fittings used primarily in water utility, wastewater treatment and power generation markets.
Distribution
The Company operates through a 45 branch distribution network for the sale of flow control and fire protection products in North America. Five Regional Distribution Centers ("RDC's") are strategically located in Georgia, Illinois, Pennsylvania, Texas and California to support the branches' product needs and to ship directly to customers. Each RDC stocks over 8,500 products. The Company's Worldwide Flow Control operations also stock and sell products through various distribution centers in Europe, Australia, New Zealand, the Middle East and Asia. In Europe, the Company distributes fire protection products, industrial valves and products for mechanical markets through warehouses located in the Netherlands, the United Kingdom, Germany and France. Products are sold principally to distributors and to fire protection contractors and in some instances to mechanical and industrial contractors and original equipment manufacturers. In the Asia-Pacific region, the Company distributes fire protection and flow control products through warehouses located in Australia, New Zealand and Singapore. Products are sold directly to fire protection and other
contractors as well as to mechanical and industrial contractors and independent distributors. While distribution patterns vary, most centers stock an extensive line of valves, fittings, pipe and other products for fire protection systems, components for HVAC installations and water and gas distribution, and specialized valves and piping for the chemical, food, power and beverage processing industries.
Grinnell's North American distribution network competes with independent manufacturers' representatives and other manufacturers and to a lesser extent with local and regional supply houses, all of which carry lines of other domestic or foreign manufacturers. Grinnell competes on the basis of price, the breadth of its product line, service and quality. Grinnell competes for the sale of gray iron pipe fittings, malleable and ductile iron fittings and other flow control products and fire protection sprinklers and devices principally with other domestic producers, as well as with foreign manufacturers of fittings. Grinnell uses an internal sales force for the sale of certain other iron castings sold direct to original equipment manufacturers and other end users.
Allied competes for the sale of steel pipe, which is sold through Grinnell's distribution network discussed above, with pipe from other domestic and foreign producers. Competition for the sale of pipe is based on price, service and breadth of product line. Fence and other specialized industrial tubing is sold to wholesalers, original equipment manufacturers and other distributors. Competition for the sale of fence products is principally from national and regional domestic producers and to a lesser extent from foreign companies, on the basis of price, service and distribution. The Company competes with many small regional manufacturers for sales of specialized industrial tubing on the basis of price and breadth of product line.
Mueller's water and natural gas distribution flow control products are sold through independent distributors, and, to a lesser extent, directly to utilities, municipalities and gas distribution companies. Certain of its gas distribution products are also sold through the Grinnell distribution network. The Company competes for the sale of these products on the basis of product quality, service, price, breadth of product line and conformity with municipal codes and other engineering standards. The Company competes with several other manufacturers in the United States and Canada for the sale of iron and brass flow control devices for water and natural gas distribution systems.
IV. ELECTRICAL AND ELECTRONIC COMPONENTS
The Company's Electrical and Electronic Components group consists of Simplex Technologies, Inc. ("Simplex"), Allied's Electrical Conduit division and the Company's Printed Circuit Group. Simplex manufacturers underwater communications cable and cable assemblies. Allied manufactures and distributes electrical conduit and related components used in commercial electrical installations. The Printed Circuit Group manufactures printed circuit boards and assembles backplanes for the electronics industry.
Simplex
Simplex is the largest U.S. manufacturer of undersea fiber optic telecommunications cable. Simplex also manufacturers cable and cable assemblies for the U.S. Navy, underwater electric power cable and optical ground wire for use by power authorities and utilities, and electro-mechanical cable for unique field applications. Simplex's principal customer was AT&T-SSI, which accounted for approximately 79% of its revenues in fiscal 1997.
On July 1, 1997 the Company acquired AT&T-SSI. The combination of Simplex and AT&T-SSI, to be known as Tyco Submarine Systems Ltd. ("TSSL"), will create a world leader in the design, development, manufacture, supply, installation and maintenance of underseas fiber optic telecommunications cable systems.
Simplex, and now TSSL, competes on a worldwide basis primarily against two other entities: Alcatel-Alsthom, headquartered in France and KDD, located in Japan. Alcatel is vertically integrated and produces its own cable and KDD utilizes a Japanese cable manufacturer.
Allied Electrical Conduit
Allied's electrical conduit division is one of the leading producers of steel electrical conduit in the United States. Electrical conduit is galvanized steel tubing designed to contain current-carrying electrical wires both
inside and outside building structures. The conduit also serves as an electrical ground that ensures proper operation of circuit interruptors and provides a channel into which additional wires can be inserted or removed as electrical needs change. The division manufactures a full line of electrical conduit as well as metal framing and other products.
The division's electrical conduit and related products are sold to wholesale electrical distributors through Allied's distribution facilities by an internal sales force and a network of commissioned sales agents. The division competes for the sale of electrical products primarily with several other large domestic manufacturers. Competition in the electrical conduit industry is primarily based upon price, quality, delivery and breadth of product line.
Printed Circuit Group
Tyco's Printed Circuit Group of companies is one of the largest independent manufacturers of complex multi-layered printed circuit boards and assemblers of backplanes in the United States. Printed circuit boards are used in the electronics industry to mount and interconnect components to create electronic systems. They are categorized by the number of sides or layers that contain circuitry, which could be single-sided, double-sided or multi-layer. In general, single and double-sided boards are less advanced. Multi-layer boards provide greater interconnection density while decreasing the number of separate printed circuit boards which are required to accommodate powerful and sophisticated components. Backplanes include printed circuit boards and are assemblies of connectors and other electronic components which distribute power and interconnect printed circuit boards, power supplies and other system elements.
The Group manufactures highly sophisticated double-sided, mass molded boards of up to eight layers, precision tooled, custom laminated multi-layer boards of up to 68 layers and sophisticated flex-rigid circuit boards for use in environmentally demanding conditions. The majority of the Group's sales are derived from its high-density multi-layer boards. The Company's backplanes facility produces fully assembled units utilizing press-fit or soldered connection technology, custom pin grid array sockets and surface mounted assembly. The printed circuit boards and backplanes manufactured by the Company are designed by customers and are manufactured on a job order basis to the customers' specifications.
The Group markets its products mainly through independent manufacturers' representatives and, to a lesser extent, through its own internal sales organization. The Group's customers are generally original equipment manufacturers in the telecommunications, aircraft, computer, military and other industrial and consumer electronics industries. The Company competes with several large companies which manufacture less complex single-sided and double-sided printed circuit boards in the United States, as well as with many companies that have their own in-house manufacturing capabilities. The Company believes that far fewer competitors manufacture the more complex, high-density double-sided and multi-layer boards. The Group competes on the basis of quality, price, reliability and timeliness of delivery.
BACKLOG
At June 30, 1997, the Company had a backlog of unfilled orders of approximately $1.49 billion, compared to a backlog of approximately $1.15 billion as of June 30, 1996. The Company expects that approximately 95% of its backlog at June 30, 1997 will be filled during the next year.
Backlog by industry segment is as follows (in millions of dollars):
The increase in backlog in the Fire and Safety Services segment is primarily due to increased orders in each geographic region as well as from the inclusion of Thorn in fiscal 1997. Within the Flow Control segment,
the increase was primarily due to increases in the European Flow Control operations. Within the Electrical Components segment, increases at the Printed Circuit Group were offset by a decrease at Simplex. Simplex normally sells cable under long-term multi-million dollar contracts, and the amount of its backlog as of any date is affected by contract issuance for major systems and by timing of completion of such underwater communications cable systems.
Sales to agencies of the United States government or for governmental use have been significant for Earth Tech, but are not significant for the Company as a whole.
PROPERTIES
The Company's operations are conducted in facilities throughout the world aggregating some 30 million square feet of floor space, of which approximately 19 million square feet is owned and approximately 11 million square feet is leased. These facilities house manufacturing and warehousing operations as well as sales, engineering and administrative offices.
The Company's Disposable and Specialty Products group has manufacturing facilities at locations in North America, the United Kingdom, Germany, Mexico, China, Thailand and Malaysia. 7 million square feet is owned and 3 million square feet is leased.
Within Fire and Safety Services, the fire protection contracting and service business operates through a network of offices located in North America, the United Kingdom, Ireland, France, Spain, Belgium, the Netherlands, Germany, Italy, Austria, Hungary, Switzerland, Denmark, Norway, Sweden, United Arab Emirates, Saudi Arabia, Australia, New Zealand, Hong Kong, Singapore, Taiwan, Malaysia, Thailand, Vietnam and Indonesia. Manufacturing of fire protection components occurs in North America, the United Kingdom, Germany, Australia, New Zealand and Malaysia. The environmental services business operates through a network of offices throughout North America. The Company owns 2 million square feet and leases 5 million square feet.
Flow Control products are manufactured at locations in North America, the United Kingdom, Germany, Switzerland, Spain and Malaysia. The Company distributes products in North America through a branch distribution network and 5 regional distribution centers. The Company also stocks and sells products through warehouse and distribution centers in the Netherlands, the United Kingdom, Germany, France, Australia, New Zealand and Singapore. The Company owns 8 million square feet and leases 4 million square feet.
Electrical and Electronic Components has manufacturing locations in the United States. The Company owns 1 million square feet and leases 0.1 million square feet.
In the opinion of management, the Company's properties and equipment generally are in good operating condition and are adequate for its present needs. The Company does not anticipate difficulty in renewing existing leases as they expire or in finding alternative facilities. See Notes to Consolidated Financial Statements for a description of the Company's rental obligations.
RESEARCH AND DEVELOPMENT
The amounts expended for company sponsored research and development were $32.9 million, $32.9 million and $32.0 million during fiscal 1997, 1996 and 1995, respectively. Customer funded research and development expenditures were $0.5 million, $0.6 million and $1.4 million in fiscal 1997, 1996 and 1995, respectively.
Approximately 340 full-time scientists, engineers and other technical personnel are engaged in product research and development activities.
Research activity in fire and safety services and flow control products is related to improvements in hydraulic design which controls the motion of fluids resulting in new sprinkler devices and flow control products. Activity at Simplex involves the continuing design and development of the processes for the next generation of underwater fiber optic cable with AT&T, Inc. Research and development activity at the
specialty packaging companies involves new product applications while Allied and the Printed Circuit Group are principally involved with process development. Kendall focuses on acquiring rights to new products and technologies to complement existing product lines and applying expertise to refine and successfully commercialize such products and technologies.
RAW MATERIALS
The Company is one of the largest buyers of steel and of plastic resin in the United States. Other principal materials include scrap iron of various types and grades, copper, brass, plastic, polyethylene resin and film, polypropylene, electronic components, chemicals and additives, thin and flexible copper clad materials, paper, ink, foil, adhesives, cloth, wax, pulp, cotton and latex. A portion of Fire and Safety Services and Flow Control Products' materials, principally certain valves and fittings, are purchased for distribution or for installation in fire protection systems. Materials are purchased both in the United States and abroad from a large number of independent sources. There have been no shortages in materials which have had a material adverse effect on the Company's business.
PATENTS AND TRADEMARKS
The Company owns a number of patents (principally relating to healthcare and specialty products, fire protection devices, flow control products, pipe and tubing manufacture, cable manufacture) and trademarks, and is a licensee under a number of patents. Although these have been of value and are expected to continue to be of value in the future, in the opinion of management, the loss of any single patent or group of patents would not materially affect the conduct of the business in any of the Company's segments. The patents and licenses have remaining lives of from one to seventeen years. Kendall sells certain products under tradenames owned by its suppliers and packages certain products under customer trademarks and labels.
EMPLOYEES
The Company employed approximately 51,400 persons at June 30, 1997, of whom approximately 49% were employed outside of North America. The Company has collective bargaining agreements with labor unions covering approximately 7,100 employees at certain of its domestic operations and 6,200 employees in its European and Asia-Pacific businesses. While the Company believes that its relations with the labor unions and with its employees are generally satisfactory, a number of local unions affiliated with the United Association of Plumbers and Pipefitters, representing 64% of Grinnell Fire Protection North American union employees, are on strike. See discussion under "Fire and Safety Services" above.
ENVIRONMENTAL MATTERS
Tyco makes a substantial effort to operate its facilities in compliance with federal, state and local laws relating to the protection of the environment. Compliance has not had and is not expected to have a material adverse effect upon the capital expenditures, earnings or competitive position of the Company.
The Company believes that, consistent with applicable laws and regulations, it exercises due care and takes appropriate precautions in the management of wastes. The Company has received notification from the U.S. Environmental Protection Agency and certain state environmental agencies that conditions at a number of sites where hazardous wastes were disposed of by the Company and other persons require cleanup and other possible remedial action.
The Company also has a number of projects underway at several of its manufacturing facilities in order to comply with environmental laws. In addition, the Company remains responsible for certain environmental issues at manufacturing locations sold by the Company. These projects relate to a variety of activities, including solvent and metal contamination clean up, oil spill containage and clean up, containment area upgrades, feasibility studies and equipment upgrades and replacement. These projects, some of which are voluntary and some are required under applicable law, involve both remediation expenses and capital improvements.
The ultimate cost of site cleanup is difficult to predict given the uncertainties regarding the extent of the required cleanup, the interpretation of applicable laws and regulations and alternative cleanup methods. Based upon the Company's experience with the foregoing environmental matters, the Company has concluded that there is at least a reasonable possibility that remedial costs will be incurred with respect to these issues in an aggregate amount in the range of $9.8 million to $38.0 million. At June 30, 1997 the Company has concluded that the most probable amount which will be incurred within this range is $17.8 million and such amount is included in the caption "accrued expenses" in the accompanying consolidated balance sheet. Based upon information available to the Company, at those sites where there has been an allocation of the liability for cleanup costs among a number of parties, including the Company, and such liability could be joint and several, management believes it is probable that other responsible parties will fully pay the cost allocated to them, except with respect to one site for which the Company has assumed that one of the identified responsible parties will be unable to pay the cost apportioned to it and that such party's cost will be reapportioned among the remaining responsible parties. In view of the Company's financial position and reserves for environmental matters of $17.8 million, the Company has concluded that its payment of such estimated amounts will not have a material adverse effect on its consolidated financial position or results of operations or liquidity.
ITEM 2.
ITEM 2. PROPERTIES
See "Business -- Properties" for information relating to Tyco's owned and leased property.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings. See also the discussions under Item 1 -- Environmental Matters, and Footnote 7 to the Consolidated Financial Statements -- Income Taxes.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The information required by this item is omitted pursuant to General Instruction I (2)(c) of Form 10-K.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
The Company's Common Stock was listed on the New York Stock Exchange prior to the merger with ADT Limited. The quarterly high and low sales prices of the Common Stock and the quarterly dividends per share declared on the Common Stock were as follows: (The prices and dividends below have been restated to reflect a two-for-one stock split effected in the form of a stock dividend which was distributed on November 14, 1995.)
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is omitted pursuant to General Instruction I(2)(a) of Form 10-K.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND OPERATING RESULTS
Management's Discussion and Analysis of Financial Condition and Operating Results appears on pages 39 to 41 of this Form 10-K.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and schedules are filed as part of this Annual Report:
Financial Statements:
Report of Independent Accountants
Consolidated Balance Sheets - June 30, 1997 and 1996
Consolidated Statements of Income for each of the three years in the period ended June 30, 1997
Consolidated Statements of Shareholders' Equity for each of the three years in the period ended June 30, 1997
Consolidated Statements of Cash Flows for each of the three years in the period ended June 30, 1997
Notes to Consolidated Financial Statements
Financial Statement Schedules:
Report of Independent Accountants on Financial Statement Schedule
Schedule II -- Valuation and Qualifying Accounts
All other financial statements and schedules have been omitted since the information required to be submitted has been included in the financial statements and related notes or because they are either not applicable or not required under the rules of Regulation S-X.
See Notes to Consolidated Financial Statements for Summarized Quarterly Financial Data (unaudited).
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is omitted pursuant to General Instruction I (2)(c) of Form 10-K.
ITEM 11.
ITEM 11. MANAGEMENT REMUNERATION
The information required by this item is omitted pursuant to General Instruction I (2)(c) of Form 10-K.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is omitted pursuant to General Instruction I (2)(c) of Form 10-K.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is omitted pursuant to General Instruction I (2)(c) of Form 10-K.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K
(a) (1) and (2) Financial Statements and Schedules -- see Item 8.
(a) (3) Listing of Exhibits.
(3) Articles of Organization and Bylaws.
i) Articles of Organization. (Incorporated by reference to Form 10-K for the year ended May 31, 1987.)
ii) Bylaws. (Incorporated by reference to Form 10-K for the year ended June 30, 1996.)
(4) Instruments defining the rights of security holders, including indentures.
a) Rights of common shareholders and preferred shareholders are defined in the Articles of Organization.
b) Action to Elect to Opt-Out of Requirement for Staggered Board of Directors Terms. (Incorporated by reference to Form 10-K for the year ended June 30, 1991.)
c) Indenture dated April 30, 1992 between Tyco Laboratories, Inc. and Security Pacific National Trust Company (New York). (Incorporated by reference to Form 10-Q for the period ended March 31, 1992.)
d) First Supplemental Indenture dated April 30, 1992 between Tyco Laboratories, Inc. and Security Pacific National Trust Company (New York). (Incorporated by reference to Form 10-Q for the period ended March 31, 1992.)
e) Second Supplemental Indenture, dated as of March 8, 1993, between Tyco Laboratories, Inc. and BankAmerica National Trust Company, as Trustee. (Incorporated by reference to Form 8-K filed on March 8, 1993.)
(10) Material Contracts.
Purchase Agreement dated May 28, 1990, as amended, for the purchase of substantially all the fire protection systems and related businesses conducted by Wormald International Limited. (Incorporated by reference to Form 8-K dated August 17, 1990.)
1978 Restricted Stock Ownership Plan for Key Employees. (Incorporated by reference to Shareholders' Proxy Statement for Annual Meeting of Shareholders on November 21, 1978.)
1981 Key Employee Loan Program. (Incorporated by reference to Form 10-K for the year ended May 31, 1982.)
1983 Key Employee Loan Program. (Incorporated by reference to Form 10-K for the year ended May 31, 1983.)
1983 Restricted Stock Ownership Plan for Key Employees. (Incorporated by reference to Shareholders' Proxy Statement for Annual Meeting of Shareholders on October 18, 1983.)
1983 Key Employee Loan Program, as amended December 9, 1993 (Incorporated by reference to Form 10-K for the year ended June 30, 1994.)
Tyco Incentive Compensation Plan. (Incorporated by reference to Form 10-K for the year ended June 30, 1994.)
Agreement and Plan of Merger, dated as of July 13, 1994, by and among the Company, T Acquisition Corp. and Kendall International, Inc. (Incorporated by reference to Form 8-K filed July 26, 1994).
1994 Restricted Stock Ownership Plan for Key Employees. (Incorporated by reference to Shareholders' Proxy Statement for Annual Meeting of Shareholders on October 19, 1994.)
Tyco International Ltd. Supplemental Executive Retirement Plan (Incorporated by reference to Form 10-K for the year ended June 30, 1995).
364-Day Credit Agreement, Five-Year Credit Agreement, and Bridge Credit Agreement, each dated as of June 27, 1997. (Filed herewith.)
Parent Guarantee Agreement dated as of July 2, 1997. (Filed herewith.)
(11) Earnings Per Share Computation. (Filed herewith.) (21) Subsidiaries of the registrant. (Omitted pursuant to General Instruction I(2)(b) of Form 10-K.) (27) Financial Data Schedule (Filed herewith.)
(b) Reports on Form 8-K.
The Company filed a report on Form 8-K on June 25, 1997 to put on file a revised opinion of counsel to replace Exhibit 8.1 in the ADT Limited ("ADT") Registration Statement on Form S-4 relating to the issuance of common shares of ADT in the merger of Limited Apache, Inc., a subsidiary of ADT, and Tyco.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
TYCO INTERNATIONAL(US)INC.
By /s/ MARK H. SWARTZ -------------------------------------------- MARK H. SWARTZ VICE PRESIDENT-CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) Date: September 29, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
[THIS PAGE INTENTIONALLY LEFT BLANK]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Tyco International Ltd.:
We have audited the consolidated balance sheets of Tyco International (US) Inc. (the "Company", formerly known as Tyco International Ltd.) as of June 30, 1997 and 1996 and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended June 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As described more fully in Notes 1 and 17, on July 2, 1997 subsequent to the balance sheet date, the Company merged with and became a wholly owned subsidiary of ADT Limited (subsequently renamed Tyco International Ltd.).
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Tyco International (US) Inc. as of June 30, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 1997, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts July 25, 1997
CONSOLIDATED BALANCE SHEETS
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF INCOME - --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation -- The consolidated financial statements include the accounts of Tyco International (US)Inc.("Tyco" or the "Company", formerly known as Tyco International Ltd.) and its subsidiaries. As described more fully in Note 2, on October 19, 1994 a wholly-owned subsidiary of Tyco merged with Kendall International, Inc. ("Kendall"). The merger was accounted for under the pooling of interests method of accounting and these consolidated financial statements reflect the combined financial position, operating results and cash flows of Tyco and Kendall as if they had been combined for all periods presented.
As more fully described in Note 17, subsequent to June 30, 1997 the Company completed several mergers and an acquisition, including a merger with ADT Limited which was consummated on July 2, 1997. These financial statements reflect only the historical accounts of Tyco as of and for the period ended June 30, 1997. No adjustment or restatement has been reflected for the transactions described in Note 17.
Cash equivalents -- All highly liquid investments purchased with a maturity of three months or less are considered to be cash equivalents.
Inventories and Contracts -- Inventories are recorded at the lower of cost (first-in, first-out) or market.
Contract sales for installation of fire protection systems and other construction related projects are recorded on the percentage-of-completion method. Profits recognized on contracts in process are based upon estimated contract revenue and related cost at completion. Revisions in cost estimates as contracts progress have the effect of increasing or decreasing profits in the current period. Provisions for anticipated losses are made in the period in which they first become determinable. Sales of underwater cable systems are also recorded on the percentage-of-completion method.
Accounts receivable include amounts billed under retainage provisions for fire protection contracts. Retention balances of $29.3 million at June 30, 1997 which become due upon contract completion and acceptance are expected to be substantially collected during fiscal 1998.
Property, Plant and Equipment -- Property, plant and equipment are principally recorded at cost. Maintenance and repair expenditures are charged to expense when incurred. The straight-line method of depreciation is used over the estimated useful lives of the related assets, which range from 1 to 50 years for buildings, 2 to 25 years for machinery and equipment and 1 to 50 years for leasehold improvements.
Goodwill and Other Intangible Assets -- Goodwill is being amortized on a straight-line basis over periods up to 40 years. Accumulated amortization amounted to $219.6 million at June 30, 1997 and $169.1 million at June 30, 1996. Impairment of goodwill, if any, is measured on the basis of whether anticipated undiscounted operating cash flows generated by the acquired businesses will recover the recorded goodwill balances over the remaining amortization period. At June 30, 1997 and 1996, no impairment of goodwill was indicated.
Other intangible assets include patents, trademarks and other items, which are being amortized on a straight line basis over lives ranging from 2 to 30 years. At June 30, 1997 and 1996, accumulated amortization amounted to $25.4 million and $20.4 million, respectively.
Reorganization Value in Excess of Identifiable Assets -- Reorganization value is being amortized using the straight line method over 20 years. Accumulated amortization amounted to $36.0 million and $29.6 million at June 30, 1997 and 1996, respectively.
Research and Development -- Research and development expenditures are expensed when incurred.
Translation of Foreign Currency -- Assets and liabilities of the Company's foreign subsidiaries, other than those operating in highly inflationary environments, are translated into U.S. dollars using year-end exchange rates. Revenues and expenses of foreign subsidiaries are translated at the average exchange rates effective during the year. Foreign currency translation gains and losses are included as a separate component of shareholders' equity. For subsidiaries operating in highly inflationary environments, inventories and property, plant and equipment, including related expenses, are translated at the rate of exchange in effect on
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the date the assets were acquired, while other assets and liabilities are translated at year-end exchange rates. Translation adjustments for these operations are included in net income.
Gains and losses resulting from foreign currency transactions, the amounts of which are not significant, are included in net income.
Interest Rate Swaps, Currency Options and Other Contracts -- The Company enters into a variety of interest rate swaps, currency options, and crosscurrency swaps in its management of interest costs and foreign currency exposures.
Interest rate swaps, which hedge interest rates on certain indebtedness, involve the exchange of fixed and floating rate interest payment obligations over the life of the related agreement without the exchange of the notional payment obligation. The differential to be paid or received is accrued as interest rates change and is recognized over the life of the agreement as an adjustment to interest expense.
Currency options, acquired for the purpose of hedging foreign operating income generally for periods not exceeding twelve months, are marked to market with any realized and unrealized gains or losses reflected in selling, general and administrative expense. Under the Company's cross-currency swap, which hedges certain net foreign investments, changes in valuation are recorded in the currency translation adjustment account. The interest differentials from this swap are recorded in interest expense.
Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. Significant estimates in these financial statements include allowances for doubtful accounts receivable, net realizable value of inventories, estimated contract revenues and related costs, environmental liabilities and tax valuation reserves. Actual results could differ from those estimates.
Income Per Share -- Net income per share is calculated on the basis of the weighted average number of shares outstanding plus common equivalent shares to reflect stock options and warrants using the treasury stock method, based on the number of shares outstanding prior to the merger with ADT Limited.
Accounting Pronouncements -- In February 1997, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" which is effective for fiscal years ending after December 31, 1997, including interim periods. Earlier adoption is not permitted. However, the statement permits disclosure of pro forma earnings per share amounts computed under SFAS 128 in the notes to the financial statements in periods prior to adoption. The statement requires restatement of all prior period earnings per share data presented after the effective date. SFAS 128 specifies the computation, presentation and disclosure requirements for earnings per share and is substantially similar to the standards recently issued by the International Accounting Standards Committee entitled International Accounting Standards, Earnings Per Share. The Company will adopt SFAS 128 in fiscal 1998 and has not yet determined its impact.
In June 1997, the FASB issued two additional statements. SFAS 130, "Reporting Comprehensive Income" and SFAS 131, "Disclosures About Segments of an Enterprise and Related Information" are both effective for years beginning after December 15, 1997. Adoption of these standards are not expected to impact the financial results of the Company.
2. THE KENDALL MERGER
On October 19, 1994, a wholly-owned subsidiary of Tyco merged with Kendall. Shareholders of Kendall received 1.29485 shares of Tyco common stock for each share of Kendall common stock. The transaction qualified for pooling of interests accounting treatment, which is intended to present as a single interest common shareholder interests which were previously independent. Accordingly, the historical financial
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
statements for periods prior to the consummation of the combination are restated as though the companies had been combined during such periods. Revenues and net income for the quarter ended September 30, 1994 (the most recent interim period prior to the pooling) were $827.6 million and $32.6 million, respectively, for Tyco and $226.6 million and $20.7 million, respectively, for Kendall.
All fees and expenses related to the merger and to the integration of the combined companies have been expensed as required under the pooling of interests accounting method. Such fees and expenses amounted to $37.2 million ($31.2 million after-tax) in fiscal 1995. The charge includes $18.6 million for financial advisory, legal, accounting and other direct transaction fees, $14.9 million for payments under severance and employment agreements and other costs associated with certain compensation plans, and $3.7 million for other acquisition related and integration costs.
3. ACQUISITIONS AND DIVESTITURES
During fiscal 1997 the Company acquired companies in each of its business segments for an aggregate of $1.12 billion, including $849.3 million in cash, approximately 3.1 million shares of the Company's stock valued at $116.1 million, and the assumption of approximately $155.0 million in debt. The cash portion of the acquisitions was provided by cash on hand and borrowings under the Company's credit agreement and uncommitted lines of credit. Each of the acquisitions was accounted for as a purchase and the results of operations of the acquired companies were included in the consolidated results of the Company from their respective acquisition dates. As a result of the acquisitions, approximately $923.6 million in goodwill was recorded by the Company, which reflects, for each acquisition, the excess of the purchase price, liabilities assumed and additional purchase liabilities recorded over the fair value of assets acquired. Additional purchase liabilities included approximately $30.3 million for transaction and other direct costs, $52.8 million for severance costs, and $28.2 million for costs associated with the shutdown and consolidation of certain acquired facilities. At June 30, 1997, liabilities for approximately $4.4 million in transaction and other costs, $26.7 million in severance costs and $20.3 million for facility related costs remained on the balance sheet.
The following unaudited pro forma data summarize the results of operations for the periods indicated as if these acquisitions had been completed on July 1, 1995, the beginning of the 1996 fiscal year. The pro forma data give effect to actual operating results prior to the acquisitions and adjustments to interest expense, goodwill amortization and income taxes. These pro forma amounts do not purport to be indicative of the results that would have actually been obtained if the acquisitions had occurred on July 1, 1995 or that may be obtained in the future. The pro forma data do not give effect to acquisitions completed subsequent to June 30, 1997. See Note 17 to the Consolidated Financial Statements.
During fiscal 1996, the Company acquired companies in its Disposable and Specialty Products, Fire and Safety Services, and Flow Control Products segment for an aggregate of $315.7 million, including $301.4 million in cash and 386,000 shares of the Company's common stock valued at $14.3 million. The cash acquisitions were made utilizing cash on hand as well as borrowings under the Company's uncommitted lines of credit. Each of the acquisitions was accounted for as a purchase and the results of operations of the acquired companies were included in the consolidated results of Tyco from their respective acquisition dates. As a result of the acquisitions, approximately $255 million in goodwill was recorded by the Company, which reflects the adjustments necessary to allocate the individual purchase prices to the fair value of assets acquired, liabilities assumed and additional purchase liabilities recorded. Additional purchase liabilities recorded included approximately $19 million for severance and related costs and $6 million for costs associated with the shut
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
down and consolidation of certain acquired facilities. At June 30, 1997 liabilities for approximately $6.8 million in severance costs and $2.9 million for facility related costs remained on the balance sheet. The Company expects to complete its termination of employees and consolidation of facilities in fiscal 1998.
On December 29, 1995, the Company sold certain assets, including trademarks and patents, of the Curad(R) and Futuro(R) consumer healthcare products business owned by its Kendall subsidiary. Under the agreements, Kendall will continue to manufacture certain Curad(R) and Futuro(R) products for the buyer under long-term supply agreements. The Company received net cash proceeds of $49.8 million on the sale of the brand names and certain domestic assets. The Company will continue to receive other payments, including payments under royalty and non-compete agreements, through fiscal 2001. The Company has also granted to the buyer options to acquire certain additional trademarks, patents and other international assets. The gain on the sale was not material to the Company's results of operations.
During fiscal 1995, the Company acquired five flow control products companies, three disposable and specialty products companies and two European fire and safety services companies for an aggregate of $130.3 million in cash.
4. INDEBTEDNESS
Long-term debt is as follows:
Under the Company's credit agreement with a group of commercial banks, the Company had the right to borrow $300 million or a portion thereof until December 2001 for its general corporate purposes. The weighted average interest rate for the year ended June 30, 1997 was 5.74%.
In June 1997, the Company renegotiated its credit agreement and increased it to $1.75 billion giving it the right to borrow up to $500 million until December 1997, up to $750 million until June 1998 and up to $500 million until June 2002. The principal amounts then outstanding will be due and payable at those times. Interest payable on borrowings is variable based upon the Company's option of selecting a Eurodollar rate plus margins ranging from 0.175% to 0.245%, a certificate of deposit rate plus margins ranging from 0.30% to 0.37% or a base rate, as defined. In July 1997, the Company borrowed $600 million under the new credit agreement to partially fund the acquisition of AT&T's submarine systems business. See Note 17 to the Consolidated Financial Statements. Also in July 1997, the Company borrowed under the new credit agreement to fund the debt tenders discussed below. The weighted average interest rate for these borrowings was 5.93%.
The Company's uncommitted lines of credit are borrowings from commercial banks on an "as offered" basis. The borrowings and repayments occur daily and contain no specific terms other than due dates and interest rates. The due dates generally range from overnight to 90 days, and interest rates approximate those
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
available under the Company's credit agreement. The weighted average interest rate was 5.66% for the year ended June 30, 1997.
In October 1996, the Company issued $300 million principal amount of 6.5% notes due 2001. The net proceeds were used to redeem debt assumed with the acquisition of Carlisle Plastics as well as to reduce certain amounts outstanding under the Company's credit agreement and uncommitted lines of credit.
In July 1997, the Company tendered for its $145 million 8.125% public notes due 1999 and its $200 million 9.5% public debentures due 2022. 92.8% of the 8.125% notes and 75.5% of the 9.5% debentures were tendered. The Company paid an aggregate amount, including accrued interest, of approximately $329.0 million to the noteholders, which was financed from the new credit agreement discussed above. In connection with the tender, the Company recorded an after-tax charge of approximately $26.5 million, net of related income tax benefit of $14.3 million, representing unamortized debt issuance fees and the premium paid, to be reported as an extraordinary loss during the period ended September 30, 1997.
In connection with the refinancing of Kendall's subordinated notes, the Company recorded a charge of $4.3 million ($2.6 million after-tax), representing unamortized debt issuance fees and a call premium, as an extraordinary loss during fiscal 1995.
At June 30, 1997, the Company had an interest rate swap agreement with a financial institution having a total notional amount of $50 million, which effectively converts fixed rate debt to variable rate debt. Under this agreement, the Company will receive payments at an average fixed rate of 5.555% and will make payments based on six month LIBOR, which, at June 30, 1997, was 5.91%. This agreement expires in March 1998. The impact of the Company's interest rate swap activities on its weighted average borrowing rate was a decrease of 0.1%, a decrease of 0.1% and an increase of 0.1% for fiscal 1997, 1996 and 1995, respectively. The impact on reported interest was a reduction of $1.5 million, a reduction of $0.5 million and an increase of $1.0 million for fiscal 1997, 1996 and 1995, respectively.
Under its various loan and credit agreements the Company is required to meet certain covenants, none of which is considered restrictive to the operations of the Company.
The aggregate amounts of total debt maturing during the next five fiscal years are as follows: $26.0 million in fiscal 1998, $9.5 million in fiscal 1999, $250.7 million in fiscal 2000, $1.0 million in fiscal 2001 and $300.1 million in fiscal 2002.
5. SALE OF ACCOUNTS RECEIVABLE
The Company has an agreement under which it sells a defined pool of trade accounts receivable to a limited purpose subsidiary of the Company. The subsidiary, a separate corporate entity, owns all of its assets and sells participating interests in such accounts receivable to creditors who, in turn, purchase and receive ownership and security interests in those assets. As collections reduce accounts receivable included in the pool, the Company sells new receivables. The maximum permitted by the agreement was $225 million at June 30, 1997 and at June 30, 1996 and was increased to $300 million in July 1997. The limited purpose subsidiary has the risk of credit loss on the receivables and, accordingly, the full amount of the allowance for doubtful accounts has been retained on the Company's consolidated balance sheet. At June 30, 1997, $165.0 million was utilized under the program. At June 30, 1996 the $225 million available under the program was fully utilized. The proceeds from the sales were used to reduce borrowings under uncommitted lines of credit and are reported as operating cash flows in the Company's consolidated statement of cash flows. The proceeds of sale are less than the face amount of accounts receivable sold by an amount that approximates the purchaser's financing costs of issuing its own commercial paper backed by these accounts receivable. The discount from the face amount represented a loss on the sale of receivables of $12.3 million, $12.6 million, and $8.2 million during the years ended June 30, 1997, 1996 and 1995, respectively, and has been included in selling, general and administrative expense in the Company's consolidated statement of income. The Company, as servicing
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
agent for the purchaser, retains collection and administrative responsibilities for the participating interests in the defined pool.
6. FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash in banks, temporary investments, accounts receivable and debt. The Company also has currency options (notional amount of $101.5 million), as well as interest rate swaps. At June 30, 1997 the fair value of interest rate swaps was a $0.2 million liability, ($0.6 million asset at June 30, 1996) and the fair value of long-term debt was approximately $962.1 million (book value of $919.3 million), based on current interest rates. The fair value of financial instruments included in working capital approximated book value.
None of the Company's financial instruments represent a concentration of credit risk as the Company deals with a variety of major banks worldwide and its accounts receivable are spread among a number of major industries, customers and geographic areas. None of the Company's off-balance sheet financial instruments would result in a significant loss to the Company if the counterparty failed to perform according to the terms of its agreement.
7. INCOME TAXES
Provisions for income taxes and the differences between the provisions at the United States federal statutory rate and the amounts provided are as follows:
In the normal course, the Company's United States federal income tax returns are examined by the Internal Revenue Service ("IRS") and, in connection with such examinations, significant assessments could arise. During fiscal 1995, the IRS examined the Company's 1991 and 1992 income tax returns. In connection with such examination, one item is currently under review by the IRS National Office, which could result in a significant assessment of additional taxes. Ultimate resolution of this matter is not expected to have a material adverse effect on the Company's financial position, results of operations or liquidity.
The provisions for fiscal 1997, 1996 and 1995 included $49.7 million, $29.3 million and $21.7 million, respectively, for foreign income taxes. The foreign component of income before income taxes was $98.4 million, $55.1 million and $38.7 million, for fiscal 1997, 1996 and 1995, respectively. Generally, no provision has been made for U.S. or additional foreign income taxes on the undistributed earnings of foreign subsidiaries as such earnings are expected to be permanently reinvested. A liability has been recorded for U.S. taxes attributable to certain undistributed earnings in selected jurisdictions where repatriation to the U.S. may be desirable. It is not practicable to estimate the additional taxes related to the permanently reinvested earnings.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The deferred income tax balance sheet accounts result from temporary differences between the amount of assets and liabilities recognized for financial reporting and tax purposes. The components of the net deferred income tax asset are as follows:
As of June 30, 1997 the Company had approximately $170.2 million of net operating loss carryforwards in certain foreign jurisdictions. Of these, $152.2 million have no expiration, and the remaining $18.0 million will expire in the years 1998 to 2004. Domestic operating loss carryforwards at June 30, 1997 were approximately $134.2 million and will expire in the years 2004 to 2010. A valuation allowance has been provided for operating loss carryforwards that are not expected to be utilized.
8. KEY EMPLOYEE LOAN PROGRAM
Loans are made to employees under the 1983 Key Employee Loan Program for the payment of taxes upon the vesting of shares granted under the Company's Restricted Stock Ownership Plans. The loans are unsecured and bear interest, payable annually, at a rate which approximates the Company's incremental short- term borrowing rate. Loans are generally repayable in ten years, except that earlier payments are required under certain circumstances. Loans under this program were $18.8 million and $12.3 million at June 30, 1997 and 1996, respectively.
9. CAPITAL STOCK
During the second quarter of fiscal 1996, the Board of Directors declared a two-for-one stock split effected in the form of a 100% stock dividend on the Company's common stock. Per share amounts and share data have been retroactively adjusted to reflect the stock split.
Treasury Stock
In December 1996 the Company repurchased 100,000 shares for $5.3 million. In January 1996 the Company repurchased 201,000 shares for $6.9 million. In April and May 1995 the Company repurchased 435,070 and 297,556 shares respectively, of its common stock from the President of Kendall at $26.47 and $26.22 per share, respectively, the shares then fair market value, for an aggregate purchase price of $19.3 million to provide for required income tax withholdings as permitted in the underlying Kendall restricted stock grant agreement. The total cost of reacquired shares at June 30, 1997 and 1996 was $68.7 million and $92.9 million, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Restricted Stock
The Company's 1978 Restricted Stock Ownership Plan (the "1978 Plan") provided for the award of 4,800,000 shares of common stock to key employees through November 30, 1988. Under the 1978 Plan, 4,773,700 shares were granted, net of surrenders. The 1983 Restricted Stock Ownership Plan (the "1983 Plan") provided for the award of 6,800,000 shares of common stock to key employees through October 18, 1993. Under the 1983 Plan, 5,797,516 shares were awarded, net of surrenders. The Company's 1994 Restricted Stock Ownership Plan (the "1994 Plan") provides for the award of an initial amount of shares of common stock plus an amount equal to one-half of one percent of the total shares outstanding at the beginning of each fiscal year. At June 30, 1997, there were 2,929,134 shares available, of which 1,339,069 shares had been granted. Common shares are awarded subject to certain restrictions with vesting varying over periods of up to ten years.
For grants that vest through passage of time, the fair market value of the shares at the time of the grant is amortized (net of tax benefit) to expense over the period of vesting. The unamortized portion of deferred compensation expense is recorded as a reduction of shareholders' equity. For grants which vest based on certain specified performance criteria, the fair market value of the shares at the date of vesting is expensed over the period the performance criteria are measured. Recipients of all restricted shares have the right to vote such shares and receive dividends. Income tax benefits resulting from the vesting of restricted shares, including a deduction for the excess, if any, of the fair market value of restricted shares at the time of vesting over their fair market value at the time of the grants and from the payment of dividends on unvested shares are credited to capital in excess of par value. Compensation expense of $21.9 million, $13.3 million and $8.3 million was recorded for restricted stock grant vestings during fiscal 1997, 1996 and 1995, respectively.
Kendall had a restricted stock grant agreement that provided for the issuance of up to 2,000,000 shares of its common stock to its President. As a result of the Merger, up to 2,589,700 shares of the Company's common stock became issuable under the agreement. As of June 30, 1995 all shares under the grant agreement had vested. As discussed above, the Company repurchased 732,626 of such shares. Compensation expense of $0.6 million was recorded for the grant during fiscal 1995.
Tyco and Subsidiary Stock Option Plans
Kendall maintained a number of stock incentive plans under which its officers, directors and key employees were granted options and other awards to purchase common stock, generally at prices equal to at least 100% of the market price on the date of grant. As a result of the Kendall merger, these options became exercisable for Tyco common stock. Transactions under these plans during fiscal 1997, 1996 and 1995 are included in the table below after giving retroactive effect to the conversion of Kendall shares to Tyco shares at the Tyco/Kendall merger exchange ratio.
During fiscal 1995 Tyco established a stock option plan under which certain employees, excluding officers and directors, have been granted options to purchase common stock at a price equal to fair market value on the date of grant. The options vest on a pro-rata basis over five years, with 50% becoming exercisable at the end of the third year and the remaining exercisable at the end of the fifth year. The Company has reserved 8,000,000 shares of common stock for issuance under the plan. Grants are for periods generally not in excess of ten years.
During fiscal 1996 and 1997 Tyco assumed stock options in connection with certain acquisitions, all of which immediately became exercisable.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Transactions related to the options described above during fiscal 1997, 1996 and 1995 were as follows:
The following table summarizes information about outstanding and exercisable options at June 30, 1997:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock Based Compensation
During fiscal 1997 the Company was required to adopt SFAS 123 "Accounting for Stock Based Compensation" ("SFAS 123"). SFAS 123 allows companies to measure compensation cost in connection with stock option plans using a fair value based method, or to continue to use an intrinsic value based method which generally does not result in a compensation cost. The Company has decided to continue to use the intrinsic value based method and no compensation cost has been recorded. Had the fair value based method been adopted consistent with the provisions of SFAS 123, the Company's pro forma net income and pro forma net income per share for the years ended June 30, 1997 and 1996 would have been as follows:
The estimated weighted average fair value of options granted at fair value during fiscal 1997 was $17.55 on the date of grant using the option-pricing model and assumptions referred to below. The estimated weighted average fair value of options assumed during fiscal 1997 was $18.56.
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts. SFAS 123 does not apply to awards prior to 1995 and additional awards in the future are anticipated.
Stock Warrants
The Company has outstanding warrants to purchase common stock at per share exercise prices of $5.97 (the "A Warrants") and $7.97 (the "B Warrants"), respectively (together, the "Warrants"). The Warrants expire on July 7, 1999. During Fiscal 1997, 15,229 A Warrants and 8,745 B Warrants were exercised. During Fiscal 1996, 14,047 A Warrants and 13,312 B Warrants were exercised. During Fiscal 1995, 2,599,228 A Warrants and 2,719,434 B Warrants were exercised. At June 30, 1997, 128,550 A Warrants and 87,151 B Warrants were issued and outstanding.
Dividends
Tyco paid cash dividends of $0.20 per share in fiscal 1997, 1996, and 1995.
10. COMMITMENTS AND CONTINGENCIES
The Company occupies certain facilities under leases that expire at various dates through the year 2021. Rental expense under these leases and leases for equipment was $105.1 million, $85.7 million and $71.3 million for fiscal 1997, 1996 and 1995, respectively. At June 30, 1997 the minimum lease payment obligations under noncancellable leases were as follows: $91.4 million in fiscal 1998, $60.0 million in fiscal 1999, $45.1 million in fiscal 2000, $32.2 million in fiscal 2001, $22.7 million in fiscal 2002 and an aggregate of $98.6 million in fiscal years 2003 through 2021.
In the normal course of business, the Company is liable for contract completion and product performance. In the opinion of management, such obligations will not significantly affect the Company's financial position or results of operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is involved in various stages of investigation and cleanup related to environmental remediation matters at a number of sites. The ultimate cost of site cleanup is difficult to predict given the uncertainties regarding the extent of the required cleanup, the interpretation of applicable laws and regulations and alternative cleanup methods. Based upon the Company's experience with the foregoing environmental matters, the Company has concluded that there is at least a reasonable possibility that remedial costs will be incurred with respect to these sites in an aggregate amount in the range of $9.8 million to $38.0 million. At June 30, 1997, the Company has concluded that the most probable amount that will be incurred within this range is $17.8 million, and such amount is included in the caption "accrued expenses" in the accompanying consolidated balance sheet. Based upon information available to the Company, at those sites where there has been an allocation of the liability for cleanup costs among a number of parties, including the Company, and such liability could be joint and several, management believes it is probable that other responsible parties will fully pay the cost allocated to them, except with respect to one site for which the Company has assumed that one of the identified responsible parties will be unable to pay the cost apportioned to it and that such party's cost will be reapportioned among the remaining responsible parties. In view of the Company's financial position and reserves for environmental matters of $17.8 million, the Company has concluded that its payment of such estimated amounts will not have a material adverse effect on its financial position, results of operations or liquidity.
11. RETIREMENT PLANS
The Company has a number of noncontributory defined benefit retirement plans covering certain of its domestic and foreign employees. The Company's funding policy is to make annual contributions to the extent such contributions are tax deductible as actuarially determined. The benefits under the defined benefit plans are based on years of service and compensation.
The net periodic pension cost for all defined benefit pension plans includes the following components:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accrued (prepaid) pension cost at June 30, 1997 for defined benefit plans is as follows:
Accrued (prepaid) pension cost at June 30, 1996 for defined benefit plans is as follows:
Pursuant to the provisions of SFAS 87, "Employers" Accounting for Pensions," the Company recorded, in other liabilities, an additional minimum pension liability adjustment of $7.0 million and $9.4 million as of June 30, 1997 and 1996, respectively, representing the amount by which the accumulated benefit obligation exceeded the fair value of plan assets plus accrued amounts previously recorded. The additional liability has been offset by an intangible asset, included in goodwill and other intangible assets, to the extent of previously unrecognized prior service cost. The amount in excess of previously unrecognized prior service cost is recorded, net of the related deferred tax benefit, as a reduction of shareholders' equity in the amount of $1.9 million and $2.5 million at June 30, 1997 and 1996, respectively.
In fiscal 1997, 1996 and 1995, the Company terminated certain defined benefit pension plans and distributed the plans' assets to the participants. Gains and losses resulting from the above were not material.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Of the total plan obligations, 48% relate to domestic plans and 52% relate to foreign plans. The average discount rate used in determining the actuarial present value of the projected benefit obligation, weighted in relation to plan obligations, was 8.0% and 8.0%, respectively, at June 30, 1997 and 1996. The average rate of increase in future compensation levels was 5.0% at June 30, 1997 and 5.1% at June 30, 1996. The weighted average long-term rate of return on assets was 9.7% and 10.0%, respectively, at June 30, 1997 and 1996. Plan assets are invested principally in equity and fixed income instruments.
The Company also has several defined contribution plans. Pension expense for the defined contribution plans is computed as a percentage of participants' compensation and was $30.0 million, $23.0 million and $18.0 million for fiscal 1997, 1996 and 1995, respectively. During fiscal 1995, the Company established an unfunded Supplemental Executive Retirement Plan ("SERP"). This plan is nonqualified and restores the employer match that certain employees lose due to Internal Revenue Service limits on eligible compensation under the defined contribution plans. Expense related to the SERP was $1.6 million, $1.7 million and $0.4 million in fiscal 1997, 1996 and 1995, respectively. The Company also participates in a number of multi-employer defined benefit plans on behalf of certain employees. Pension expense related to multi-employer plans was $1.8 million, $2.0 million and $2.5 million for fiscal 1997, 1996 and 1995, respectively.
The Company generally does not provide post- retirement benefits other than pensions for its employees. Certain of the Company's acquired operations provide these benefits to employees who were eligible at the date of acquisition.
Net periodic post-retirement benefit cost reflects the following components:
The components of the accrued post-retirement benefit obligation, all of which are unfunded are as follows:
For measurement purposes, in fiscal 1997 a 9.6% composite annual rate of increase in the per capita cost of covered health care benefits was assumed. The rate was assumed to decrease gradually to 5.0% by the year 2008 and remain at that level thereafter. The health care cost trend rate assumption may have a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by one percentage point would increase the accumulated post-retirement benefit obligation as of June 30, 1997 by $2.5 million and the aggregate of the service and interest cost component of net periodic post-retirement benefit cost for the year then ended by $0.2 million. The weighted average discount rate used in determining the accumulated post-retirement benefit obligation was 7.75%, 8.25% and 7.5% at June 30, 1997, 1996 and 1995, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In fiscal 1994 the Company amended certain of its post-retirement health care programs, principally to adjust the cost-sharing provisions. The amendment resulted in a reduction of the Company's accumulated post-retirement benefit obligation of $27.8 million, which created an unrecognized prior service benefit. The unrecognized prior service benefit is being amortized over approximately 16 years.
12. CONSOLIDATED SEGMENT DATA
Selected information by industry segment is presented below.
- ---------------
(1) Includes a charge of $37.2 million for merger and transaction related costs associated with the Kendall merger. See Notes 1 and 2 to the Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. CONSOLIDATED GEOGRAPHIC DATA
Selected information by geographic area is presented below.
14. SUPPLEMENTARY BALANCE SHEET INFORMATION
15. SUPPLEMENTARY INCOME STATEMENT INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
(1) Income per share has been restated for all periods presented to give effect to a two-for-one stock split. See Note 9 to the Consolidated Financial Statements.
17. SUBSEQUENT EVENTS (UNAUDITED)
On July 2, 1997, a wholly owned subsidiary of ADT Limited ("ADT") merged with Tyco, in a stock-for-stock transaction valued at approximately $5.6 billion. ADT is a leading installer and servicer of electronic security systems with annual revenues of approximately $2.0 billion. Upon consummation of the merger, ADT (the surviving corporation) changed its name to Tyco International Ltd. Shareholders of ADT, through a reverse stock split, received 0.48133 shares of the new Company's common stock for each share of ADT common stock outstanding, and Tyco shareholders received one share of the new Company's common stock for each share of Tyco common stock outstanding. At the closing, Tyco shareholders owned approximately 64% and ADT shareholders owned approximately 36% of the outstanding shares of the combined company. The transaction qualifies for pooling of interests accounting treatment, which is intended to present, as a single interest, common shareholder interests which were previously independent. All fees and expenses related to the merger and to the integration of the combined companies will be expensed as required under the pooling of interests accounting method. These expenses have not been reflected in the Consolidated Statement of Operations, but will be reflected in the Consolidated Statement of Operations of the combined company for the period ended September 30, 1997.
In July 1997, ADT tendered for its 8.25% senior notes due 2000 and its 9.25% senior subordinated notes due 2003. 96.2% of the 8.25% notes and 95.2% of the 9.25% notes were tendered. The Company paid an aggregate amount, including accrued interest, of approximately $571.8 million to the noteholders, which was financed, in part, from the new credit agreement discussed in Note 4. In connection with the tender, the combined company recorded an after-tax charge of approximately $26.6 million, net of related income tax benefit of $14.3 million, representing unamortized debt issuance fees and the premium paid, to be reported as an extraordinary loss during the period ended September 30, 1997.
In April 1997 the Company entered into an agreement with AT&T to acquire its submarine systems business ("SSI") for approximately $850 million in cash. SSI is a world leader in the design, development, manufacture, supply, installation and maintenance of underseas fiber optic telecommunications cable systems,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
with expected calendar 1997 revenues of approximately $1 billion. The acquisition, which was completed in July 1997, will be accounted for as a purchase. The Company increased its bank credit facilities which were used to partially fund the acquisition of SSI. See Note 4 to the Consolidated Financial Statements.
In May 1997, the Company entered into a definitive merger agreement for the acquisition of INBRAND Corporation ("INBRAND"), a producer of adult incontinence products, feminine hygiene products and baby diapers. The merger agreement provided for the issuance to INBRAND shareholders of shares of Tyco International Ltd. in exchange for their INBRAND shares. The INBRAND transaction was approved by the INBRAND shareholders at a meeting held on August 27, 1997, and was consummated on that date.
In May 1997, the Company entered into a definitive merger agreement for the acquisition of Keystone International, Inc. ("Keystone") which designs, manufactures and markets, on a world-wide basis, industrial values, actuators and accessories used to control the flow of liquids, gases and solid materials. The merger agreement provided for the issuance to Keystone shareholders of shares of Tyco International Ltd. in exchange for their Keystone shares. The Keystone transaction was approved by the Keystone shareholders at a meeting held on August 28, 1997, and was consummated on August 29, 1997.
A charge to operations is expected to occur subsequent to the transactions described above to reflect transaction costs and the combination of the companies. Such charges, which have not yet been estimated, may include amounts with respect to the elimination of excess facilities, the write-off of certain goodwill, other intangibles and fixed assets, severance costs and the satisfaction of certain liabilities. The effects of these costs have not been reflected in these financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND OPERATING RESULTS
RESULTS OF OPERATIONS
Information for all periods presented below reflects the grouping of the Company's businesses into four business segments consisting of Disposable and Specialty Products, Fire and Safety Services, Flow Control Products, and Electrical and Electronic Components.
OVERVIEW
Net income was $419.0 million, or $2.61 per share, for fiscal 1997 compared with $310.1 million, or $2.03 per share, for fiscal 1996. The increase was attributable to margin improvements and strong earnings in each of the Company's business segments.
SALES
Sales increased 30% during fiscal 1997 to $6.60 billion from $5.09 billion in fiscal 1996. Sales of the Disposable and Specialty Products group increased $532.4 million to $1.99 billion, or 36%, due to increased sales at Kendall, Ludlow and Armin, as well as the inclusion of Carlisle Plastics ("Carlisle") from September 1996. The increase in sales resulted principally from the Carlisle acquisition. Sales at Kendall increased primarily due to increased volume in both the Healthcare and Polyken businesses. Armin's sales increases were principally due to higher selling prices. Sales of the Fire and Safety Services group increased $593.7 million to $2.58 billion, or 30%, due to increased sales in the contracting business in each geographic region, primarily due to an increase in the volume of service business, as well as the inclusion of Thorn Security Group ("Thorn"), acquired in July 1996 and Earth Technology ("Earth Tech"), acquired in January 1996. Sales of the Flow Control Products group increased $295.6 million to $1.45 billion, or 26%, reflecting higher volume at European Flow Control, primarily from businesses acquired in the second and third quarters of fiscal 1997, from Mueller, including businesses acquired in the first quarter of fiscal 1997, as well as increased volume in existing businesses, and Grinnell's distribution operations, where sales increased due to price increases. Sales of the Electrical and Electronic Components group increased $86.0 million to $566.7 million, or 18%, resulting principally from increased sales at the Printed Circuit Group operations, largely due to the acquisition of ElectroStar in January 1997. Sales were also up at Allied's electrical conduit operations and at Simplex, where the acquisition of Rochester Wire & Cable offset a decrease at Simplex due to a decrease in kilometers of cable shipped.
Sales increased 12% during fiscal 1996 to $5.09 billion from $4.53 billion in fiscal 1995. Sales of the Disposable and Specialty Products group increased $72.6 million to $1.46 billion, or 5%. Increased sales at Kendall and, to a lesser extent, at Ludlow were partially offset by decreased sales at Armin, due to reduced raw material pricing, and by Kendall's sale of Futuro in the second quarter of fiscal 1996. Kendall's sales include the sales of Professional Medical Products, Inc. which was acquired during the third quarter of fiscal 1996. Sales of the Fire and Safety Services group increased $287.5 million to $1.99 billion, or 17%, due to increased sales in the North American, European and Asia-Pacific regions contracting businesses, as well as sales resulting from the acquisition of Earth Tech in the third quarter of fiscal 1996. Sales of the Flow Control group increased $144.6 million, or 14%, to $1.16 billion, reflecting higher volume at Allied, including businesses acquired by Allied in the second half of fiscal 1995 as well as from Grinnell's distribution operations, Mueller and European Flow Control. Sales of the Electrical and Electronic Components group increased $50.5 million to $480.6 million, or 12%, resulting principally from higher sales of underwater communications cable systems at Simplex as well as at the printed circuit businesses and at Allied's electrical conduit operations.
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM
Pre-tax income was $687.9 million in fiscal 1997 and $523.9 million in fiscal 1996.
Operating profits of the Disposable and Specialty Products group increased $72.7 million to $364.4 million, or 25%, reflecting higher earnings at Kendall, resulting from the volume increases noted above, and
Ludlow, as well as the inclusion of Carlisle from September 1996. Operating profits of the Fire and Safety Services group increased $70.8 million to $198.9 million, or 55%, due to higher margins at fire protection operations in each geographic region, as well as the inclusion of Thorn and Earth Tech. The higher margins in fire protection were the result of a higher mix of service work within the contracting businesses. The operating profits of the Flow Control Products group increased $42.1 million to $156.3 million, or 37%, resulting principally from increased earnings at Allied, Mueller and European Flow Control, including businesses acquired in fiscal 1997. Increases in European Flow Control were primarily the result of acquisitions. Increases at Allied and Mueller were a combination of the operating profits resulting from acquisitions and the result of margin increases and the impact of cost reductions. Operating profits of the Electrical and Electronic Components group increased $20.8 million to $109.3 million, or 23%, due to increased earnings at Simplex, the Printed Circuit Group and Allied's electrical conduit operations. The increases at Simplex and the Printed Circuit group were principally due to acquisitions.
The impact on the consolidated sales and results of operations from changes in foreign exchange rates relative to the value of the U.S. dollar for fiscal 1997 as compared to fiscal 1996 was not material.
Corporate and other expenses rose to $50.3 million in fiscal 1997 from $39.8 million in fiscal 1996 due principally to higher compensation expense under the Company's incentive compensation plans.
Pre-tax income before extraordinary item was $523.9 million in fiscal 1996 and $384.9 million in fiscal 1995. Pre-tax income increased 24% excluding the $37.2 million charge for merger and transaction related costs in fiscal 1995.
Operating profits of the Disposable and Specialty Products group increased $30.5 million to $291.7 million, or 12%, reflecting higher earnings at Kendall and Ludlow partially offset by decreased earnings at Armin, where profits were adversely affected by changes in raw material costs. Operating profits of the Fire and Safety Services group rose $41.6 million to $128.1 million, or 48%, due to higher margins at fire protection operations in each geographic region, as well as the inclusion of earnings from Earth Tech, which was acquired during the third quarter of fiscal 1996. Operating profits of the Flow Control group increased $23.7 million to $114.1 million, or 26%, resulting from increased earnings principally at Allied and Mueller and, to a lesser extent, at the group's other operating units. Operating profits of the Electrical and Electronic Components group increased $12.1 million to $88.5 million, or 16%, due to increased earnings at Simplex, the printed circuit businesses and at Allied's electrical conduit operations.
The impact on the consolidated sales and results of operations from changes in foreign exchange rates relative to the U.S. dollar for fiscal 1996 as compared to fiscal 1995 was not material.
Corporate and other expenses rose to $39.8 million from $29.0 million in fiscal 1995 (excluding merger and transaction related costs) due principally to an increase in expense associated with the Company's accounts receivable financing program. Under the program, the discount on accounts receivable is included in selling, general and administrative expense and is excluded from interest expense. See Note 5 to the Consolidated Financial Statements.
INTEREST EXPENSE
Interest expense increased $31.9 million to $90.8 million during fiscal 1997 due to higher average debt balances as a result of monies borrowed to make acquisitions. Interest expense decreased $4.5 million to $58.9 million during fiscal 1996 due to lower average interest rates partially offset by higher average debt levels.
INCOME TAX EXPENSE
Income tax expense was $268.9 million in fiscal 1997 and $213.8 million in fiscal 1996. An analysis of income taxes and the effective income tax rate is presented in Note 7 to the Consolidated Financial Statements.
ACCOUNTING AND TECHNICAL PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" which is effective for fiscal years ending after December 31, 1997, including interim periods. Earlier adoption is not permitted. However, the statement permits disclosure of pro forma earnings per share amounts computed under SFAS 128 in the notes to the financial statements in periods prior to adoption. The statement requires restatement of all prior period earnings per share data presented after the effective date. SFAS 128 specifies the computation, presentation and disclosure requirements for earnings per share and is substantially similar to the standards recently issued by the International Accounting Standards Committee entitled International Accounting Standards, Earnings Per Share. Company will adopt SFAS 128 in fiscal 1998 and has not yet determined its impact.
In June 1997, the FASB issued two additional statements. SFAS 130, "Reporting Comprehensive Income" and SFAS 131, "Disclosures About Segments of an Enterprise and Related Information" are both effective for years beginning after December 15, 1997. Adoption of these standards are not expected to impact the financial results of the Company.
Financial Reporting Release No. 48, issued by the Securities and Exchange Commission requires certain quantitative and qualitative disclosures about market risks in derivative financial instruments. Potential near term losses in cash flows and earnings from derivative financial instruments held by the Company at June 30, 1997 would not have a material impact on the Company's financial position, results of operations or liquidity.
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders of TYCO INTERNATIONAL LTD.
Our report on the consolidated financial statements of Tyco International (US) Inc. (formerly Tyco International Ltd.) for the three years ended June 30, 1997 is included in this Form 10-K. In connection with our audits of such financial statements, we have also audited the related consolidated financial statement schedule for the three years ended June 30, 1997.
In our opinion, the financial statement schedule for the three years ended June 30, 1997 referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Boston Massachusetts July 25, 1997
TYCO INTERNATIONAL (US) INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
- ---------------
(1) Deducted from assets.
(2) Write-off of accounts receivable considered uncollectible.