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Tyco Takes Another $1.36B in Pretax Accounting Charges

May 1, 2003 | Wall Street Journal

Tyco International Ltd. posted a much narrower net loss in its fiscal second quarter despite taking $1.36 billion in pretax charges related to its ongoing accounting review.

For the quarter ended March 31, the conglomerate late Wednesday reported a net loss of $467.9 million, or 23 cents a share, compared with a year-earlier net loss of $6.38 billion, or $3.20 a share. Revenue rose 4.3% to $8.98 billion from $8.61 billion on foreign-currency fluctuations.

Free cash flow surged 47% to $833 million. In a statement, Chairman and Chief Executive Ed Breen said the figure "was well ahead of what we projected, demonstrating the underlying strength of our businesses, as well as improvements in the collection of receivables and the management of inventory."

Following The Wall Street Journal's report Wednesday that Tyco was expected to report roughly $1.2 billion in fresh accounting problems when it released its second-quarter results, the company issued a brief statement Wednesday morning saying it would post a loss of 23 cents a share and take charges of 55 cents a share related to its ongoing internal audits.

Tyco said its latest results included $1.37 billion in "notable items," with $ 936.8 million at the fire-and-security segment and $178.3 million at the engineered-products segment.

On a pretax basis, Tyco recorded $997.4 million in charges related to its ongoing internal audit, with nearly 52% of the amount being the result of management changing estimates of reserves, accruals and valuations of investments. The rest is made up of "account-reconciliation discrepancies, inappropriate capitalization of expenses and other accounting adjustments, of which 44% relate to prior periods from 1997 through the first quarter of fiscal 2003," the company said.

The $997.4 million total includes the $265 million to $325 million in pretax charges that Tyco last month said it would take to reflect standardizing accounting policies across a number of fire-and-security businesses in Europe.

Approximately 60% of the $997.4 million in charges were at fire and security, with 20% at engineered products, Tyco noted.

The firm also recorded a $364.5 million pretax charge to reflect accounting changes at its ADT home-security business. Critics have long said Tyco has been writing off over too long a period its investment in security-alarm systems installed in customers' premises, failing to reflect the high rate at which ADT customers have been canceling service, the Journal reported.

The year-earlier period included a loss of $4.32 billion, or $2.17 a share, from Tyco's former finance subsidiary, CIT Group Inc. and $2.96 billion in charges and goodwill write-downs at its electronics segment.

"I am disappointed that our intensified internal audit and review efforts have identified additional charges, but I believe at this point we have identified all, or nearly all, legacy accounting issues," said Mr. Breen. "We have completed balance-sheet reviews for all of our 2,154 accounting entities and completed onsite verification of these reviews covering the vast majority of our assets."

He added the accounting problems that have been found "are almost entirely noncash."

Tyco said it and its external auditors don't believe a restatement of results because of the latest charges is warranted because they "are not material individually or in the aggregate to any prior year." However, discussions with the Securities and Exchange Commission on the matter aren't complete.

The company added it hopes to wrap up all outstanding issues with the SEC in the current quarter, which ends June 30.

In addition to accounting problems, Tyco has been buffeted in the past year by criminal charges against its two former top executives, who have been accused of looting $600 million from the company in unauthorized compensation and illicit stock sales. Both have pleaded not guilty.

Tyco operates in electronics, fire-and-security services, medical supplies and numerous other businesses.

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